Why The Stock Market Is Up After The Fed Rate Hike

Rate hikes are supposed to hurt bonds. Instead, on Thursday the bond market rallied the day after the Federal Reserve raised rates and told everyone it was not finished. The 10-year Treasury yield fell 7 basis points to 4.95 percent, dropping back below the 5.04 percent level it touched Tuesday, its highest since July 2007. The 2-year fell 6 basis points to 4.68 percent, the 5-year dropped 9 basis points to 4.80 percent, and the 30-year eased 6 basis points to 5.31 percent. That single move is the reason the stock market is having its best day in weeks. The S&P 500 is up around 1.1 percent, the Nasdaq is leading with a 1.65 percent gain, and the biggest winners are the highest-multiple names in the market, Tesla up more than 3 percent, Amazon up over 2.5 percent, and Nvidia up around 2.35 percent. Higher long-term yields make future earnings worth less today, and they make the enormous AI infrastructure buildout more expensive to finance. When yields fall, that pressure reverses, and the highest-multiple corners of the market get the biggest relief. The clearest evidence of what is really happening sits in the inflation-protected market. The 10-year TIPS yield fell only 2 basis points on Thursday compared with 7 on the nominal note. The gap between them, the breakeven rate or the inflation compensation investors demand, narrowed to roughly 2.30 percent from about 2.36. Nominal yields did not fall because growth expectations cracked. They fell because the inflation premium embedded in them came out. That is the textbook definition of a central bank regaining credibility. Bank of America economist Aditya Bhave summed it up, noting the Fed's statement removed the language around inflation being partly due to supply shocks. No more excuses. Short rates went up because the Fed is hiking. Long rates did not, because the market decided the hiking works. The FOMC voted 12-0 to lift the federal funds rate by a quarter point to a target range of 3.75 to 4 percent, the first hike since 2023. Peter Williams of 22V Research argued the most hawkish element of the day was not the hike itself but rather the fact that only two dots suggested that the hiking cycle would be one and done. The updated projections point to one more quarter-point increase in 2026 to a median of about 4.1 percent, with 12 of 18 officials seeing a single additional hike and four seeing two. Bank of America maintains its call for two more 25-basis-point hikes, in October and December. Thursday's data reinforced the picture. Initial jobless claims approached a 60-year low. The Atlanta Fed's GDPNow tracker had already lifted its third-quarter real GDP estimate to 5.1 percent from 4.4, driven by consumer spending now tracking at 4.1 percent. August retail sales rose 1.2 percent against 0.8 percent expected, with the control group up 1.4 versus 0.5, the strongest in nearly two years and broad-based across 12 of 13 categories. This is the perfect setup for high-multiple tech, growth staying strong while inflation expectations come out of long-end yields. The two-day move has not repaired the year for bonds. iShares 20+ Year Treasury Bond ETF trades near $80.88, close to its 52-week low of $80.46 and well below its $92.19 high. iShares 7-10 Year Treasury Bond ETF and iShares Core U.S. Aggregate Bond ETF are both within pennies of their own 52-week lows. Sources: Benzinga, Bloomberg, Reuters, Bank of America, 22V Research, the Federal Reserve, and the Atlanta Fed. $NVDA. $TSLA.