The week clearly laid out what is likely to be the most important discussion for financial markets in the coming months: Can the productivity boom associated with artificial intelligence continue to support Wall Street in the face of increasingly higher interest rates?
The Federal Reserve took a step this week that seemed improbable just a few months ago. On Wednesday, it raised the benchmark rate by 25 basis points, bringing it to a range of 3.75%–4.00%. This was the first increase in three years and, more importantly, the Fed made it clear that it is unlikely to be the last. Sixteen of the eighteen committee members expect at least one more increase before the end of the year. Kevin Warsh justified the decision by pointing out that the economy continues to show strength, that investment remains robust, and that inflation is not converging to 2% quickly enough.
It is important to understand what has changed. Until not too long ago, the big market debate was when the Federal Reserve would lower rates. Today we are discussing how many more times it might raise them.
And the bond market is sending an even more important signal than the Fed's own decision.
The yield curve keeps rising
One might have imagined that a more aggressive Fed, demonstrating a willingness to combat inflation, would calm the medium- and long-term bond market. That did not happen.
If we compare last Friday's close with this Thursday's, practically the entire relevant part of the U.S. yield curve ended higher.
The yield on 1-year bonds rose from approximately 4.35% to 4.44%. The 2-year yield, much more sensitive to expectations about monetary policy, increased from 4.63% to 4.76%. The 5-year yield went from 4.78% to 4.86% and the 10-year yield, from 4.96% to 5.01%. The 30-year Treasury ended around 5.34%, practically unchanged from the previous week, although it touched 5.40% during the week.
I find that data central.
The Fed raised the rate, and yet the market continued to demand higher yields to lend money to the U.S. government.
The 10-year Treasury closed again around 5%, a level that has become a true psychological barrier for the markets. Oil, meanwhile, remains above US$100 per barrel, fueling inflationary concerns. Futures are already assigning a significant probability to a new Fed increase in October.
This means that the market is starting to incorporate an uncomfortable reality: perhaps high rates are not a transient phenomenon.
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Why hasn't this hit the stock market harder yet?
Because on the other side, there is an extraordinarily powerful force: artificial intelligence.
Tech companies continue to invest gigantic amounts of capital in data centers, chips, infrastructure, and artificial intelligence models. The market's expectation is that this investment will produce a huge leap in productivity over the next few years.
And that expectation is well-founded.
If a company can produce the same output using fewer hours of labor, automate tasks, improve programming, reduce administrative costs, or dramatically increase employee productivity, its margins can grow even in a less favorable economic environment.
That argument is what continues to support tech valuations.
This week, that divergence was clearly visible. The S&P 500 ended virtually unchanged, while the Nasdaq managed to close the week up, mainly thanks to the boost from semiconductors. The Dow, much less exposed to the tech phenomenon, suffered its largest weekly drop since March. Technology now represents around 38% of the S&P 500 and has seen an increase of over 20% during 2026.
In other words: AI is still managing to neutralize much of the negative effect of the rates.
But the question is, how long will that last?
The math of rates ultimately matters
A ten-year rate around 5% completely changes the valuation of assets.
To begin with, an investor can earn approximately 5% annually by lending to the U.S. Treasury without taking on corporate risk. This means that any stock must offer a sufficiently higher expected return to justify the risk.
Moreover, tech stocks are especially sensitive to the discount rate because a significant part of their valuation depends on earnings expected far in the future.
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What ultimately wins?
I believe this will be the big discussion in the coming months.
The optimistic scenario holds that the United States is entering a new productivity cycle comparable to other major technological leaps in history. If artificial intelligence can sufficiently increase corporate profits, companies could justify high valuations even with rates close to 5%.
The problem is that the market is already paying in advance for much of that future productivity.
In contrast, the effect of rates is immediate.
A higher rate increases the cost of financing businesses, mortgages, cars, acquisitions, and investment projects. It also forces the use of a higher discount rate to value stocks and makes bonds seriously compete again with the stock market for investors' capital.
And there is another fact that should not go unnoticed: although the S&P practically did not fall this week, the market breadth was quite poor. On Friday, there were significantly more stocks declining than advancing both on the NYSE and Nasdaq. In other words, beneath the major indices, the market shows much more weakness than suggested by the leading tech companies.
My impression is that this battle will ultimately be won by the rates.
Not because the artificial intelligence revolution is false. It is probably exactly the opposite: it could become one of the largest productivity shocks of the last few decades.
But good technology and good investment are not necessarily the same thing at any price.
If the ten-year Treasury remains above 5%, if the two-year rate continues to incorporate new Fed increases, and if inflation forces a restrictive monetary policy for a longer time, the cost of capital will ultimately weigh heavily.
The stock market can ignore it for weeks or even months while tech earnings continue to grow.
But historically, there is a hard rule to avoid: when the price of money rises enough, sooner or later it changes the price of all other assets.
The question is no longer just how much artificial intelligence can improve American productivity.
The question is what interest rate Wall Street can bear while waiting for that productivity to finally appear in earnings.
And with the ten-year Treasury again around 5%, we are probably much closer to knowing the answer.
