Could the Stock Market Be in a Bubble? The Fed Might Keep It Floating
So, there’s been a lot of talk lately about whether the stock market—especially those AI-related stocks—is in a bubble. And honestly, the numbers are high, the enthusiasm is wild, and skepticism is starting to creep in. But here’s the interesting twist: even if we are in a bubble, many experts say it might not matter all that much right now. Why? Because the Federal Reserve is cutting interest rates—and that changes everything.
Historically, when interest rates drop, investors start moving their money out of safer, short-term places like Treasury bills or CDs. Instead, they look for better returns in stocks. That naturally pushes stock prices higher. Lower rates also tend to support the economy and jobs, so in a way, it’s a win-win—at least in the short run.
Katie Klingensmith, the chief investment strategist at Edelman Financial Engines, summed it up perfectly when she said, “I would definitely not fight the Fed in this case.” Her point was that the Fed isn’t necessarily worried about stock prices right now—it’s more focused on keeping the labor market and broader economy stable.
Also Read:- Purpose Investments Adjusts Risk Ratings for Key Funds
- Heidi Klum and Tom Kaulitz Stun as Medusa and Her Stone Man This Halloween
And she’s not alone in that thinking. Jeff DeGraaf from Renaissance Macro Research pointed out something really important: bubbles usually burst when rates are rising, not when they’re falling. When the Fed starts an easing cycle—meaning they’re cutting rates—it’s generally not the time when markets collapse.
Backing that up, research from Piper Sandler shows that in the past 28 market corrections of 10% or more since 1965, more than half were caused by rising interest rates. Other causes were rising unemployment or big external shocks. So history suggests that as long as rates keep going down, the market might stay inflated—but not necessarily pop.
Of course, it’s not all smooth sailing. Lauren Goodwin at New York Life Investments warned that if inflation starts flaring up again, even without rate hikes, it could shake investor confidence. We saw a glimpse of that recently when Fed Chair Jerome Powell said that future rate cuts aren’t guaranteed—the S&P 500 immediately dipped around 0.7%.
And then there’s the growing doubt around all this AI spending. Companies like Meta and Microsoft reported higher spending plans for 2026, but investors weren’t thrilled—Meta’s stock dropped over 10%, and Microsoft’s fell more than 2.6%. People are beginning to ask: when will all this AI investment actually pay off?
So yes, maybe we are in a bit of a bubble. But as long as the Fed keeps cutting rates and the economy stays relatively stable, investors might just keep riding the wave—for now.
Read More:
0 Comments