AI Remains Resilient As Rate Expectations Rise

US equities ended a volatile week lower despite a strong Friday rebound. The principal pressure came from an increasingly difficult macro combination: oil prices surged above US$100, inflation remained persistent and Treasury yields climbed as investors sharply increased expectations for another Federal Reserve rate increase. Friday brought some relief as crude prices retreated and equities recovered, but it was insufficient to erase losses accumulated during the preceding four sessions.

Inflation Strengthens the Case for a September Rate Increase

Friday’s Consumer Price Index was the week’s most important economic release.

US consumer prices increased 0.4% in August, while headline inflation remained at 3.4% year-on-year. Core CPI rose 0.3% month-on-month and 2.4% year-on-year. Energy was a major contributor, with gasoline prices increasing 3.9% during the month.

The report followed Thursday’s Producer Price Index, which also increased 0.4% in August, while annual producer inflation accelerated to 5.4% from 4.8% in July. Energy costs were again a significant contributor.

Taken together with last week’s stronger-than-expected employment report, the data have materially changed expectations for the Federal Reserve.

Interest-rate futures ended the week implying close to a 90% probability of a 25-basis-point rate increase at next week’s meeting, compared with approximately 72% before the CPI release.

The important distinction is that inflation is no longer being driven solely by energy. Core prices are also proving persistent, giving the Fed less room to dismiss the recent increase in headline inflation as a temporary consequence of geopolitical developments.

Oil Above US$100 Changes the Equation

Energy was arguably the most consequential market variable during the week.

Brent crude surged above US$100 and reached as high as US$107.63 on Thursday, while WTI climbed to US$102.48 as escalating attacks on tankers and energy infrastructure intensified concerns over Middle Eastern supply.

Prices retreated on Friday on indications of possible diplomatic discussions involving Iran and the Strait of Hormuz, but Brent still finished around US$104.61, gaining more than 8% for the week. WTI settled around US$100.05.

The significance extends beyond crude itself.

US diesel prices have risen above US$6 per gallon, while disruptions have affected shipping through both the Strait of Hormuz and other regional routes.

Higher energy prices can feed through transportation, manufacturing and consumer costs. This means the geopolitical situation is now directly influencing the Federal Reserve’s inflation problem.

There is also less room for policymakers to cushion the energy shock. US crude inventories in the Strategic Petroleum Reserve have fallen to approximately 285 million barrels, the lowest level since 1982, following continuing releases.

Treasury Yields Approach a Critical Level

The inflation and oil combination produced another significant sell-off in government bonds.

The US 10-year Treasury yield approached 5%, while longer-duration yields moved towards multi-decade highs.

This is increasingly important for equity markets.

At current levels, investors can obtain considerably higher risk-free returns from government securities than they could during much of the post-pandemic period. At the same time, higher yields raise financing costs and reduce the present value of future corporate earnings.

That creates particular pressure for highly valued growth companies.

The market therefore faces a difficult combination: corporate earnings remain strong, but the discount rate being applied to those earnings is rising.

AI Remains Strong But the Market Is Becoming More Selective

Technology produced contrasting signals.

Early in the week, software stocks came under significant pressure amid concerns that advances in generative AI could disrupt existing software business models. Salesforce and ServiceNow were among the companies affected as investors reconsidered which businesses are likely to benefit from AI and which may ultimately face greater competition from it.

Later in the week, attention shifted back towards AI infrastructure.

Oracle exceeded quarterly revenue expectations as demand for cloud computing and AI infrastructure continued to expand. Its contracted revenue backlog increased by approximately US$26 billion, reinforcing evidence of substantial demand for AI computing capacity.

The market reaction, however, was mixed. Oracle’s shares initially rallied but subsequently weakened as investors focused on the enormous capital expenditure and financing requirements associated with expanding its data-centre infrastructure.

Oracle expects to raise approximately US$40 billion through debt and equity this fiscal year, illustrating how capital-intensive the next phase of the AI build-out has become.

The read-through for hardware was more favourable. Dell, Hewlett Packard Enterprise and HP all advanced strongly on Friday as investors anticipated continued demand for AI-related infrastructure.

This reinforces a theme that is becoming increasingly important: AI demand remains strong, but investors are paying much closer attention to the capital required to monetise that demand.

What to Watch Next (Beginning 14 September 2026)

The Federal Reserve meeting on 15 – 16 September will dominate the coming week.

Markets now strongly expect a 25-basis-point increase. The decision itself may therefore be less important than Chair Kevin Warsh’s press conference and the Fed’s updated economic and interest-rate projections. Investors will be looking for guidance on whether September represents a one-off response to persistent inflation or the beginning of another tightening cycle.

The Fed will also receive another important economic signal immediately before its decision. August retail sales are due on 16 September, providing evidence of whether higher energy costs and softer real wage growth are beginning to affect household spending. Housing starts and building permits follow on 17 September, while industrial production is due on 18 September.

Oil remains the largest geopolitical variable. Any credible progress towards reopening or normalising traffic through the Strait of Hormuz could remove some inflation pressure relatively quickly. Further escalation would have the opposite effect.

The equity backdrop therefore remains unusually finely balanced.

Corporate earnings remain strong and AI investment continues to support technology. But US$100 oil, persistent inflation and Treasury yields approaching 5% are raising the hurdle for equity valuations.

For the coming week, the central question is no longer whether the Fed will respond.

It is how much further the Fed believes it may need to go.