By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
Panelists debate the sustainability of current equity valuations and market resilience in the face of higher-for-longer rates. They agree that earnings growth is crucial but disagree on the impact of rising discount rates on equity risk premiums and the risk of stagflation.
Risk: Rising discount rates compressing equity risk premiums and potentially leading to a liquidity crunch if the Fed refuses to monetize the debt.
Opportunity: Earnings growth outpacing multiple expansion and potential widening of equity risk premiums if nominal GDP growth accelerates with inflation.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Despite a brief period of heightened volatility in March, it's shaping up to be another stellar year for Wall Street and investors. The iconic Dow Jones Industrial Average (DJINDICES: ^DJI) blasted to an all-time high earlier this month, while the benchmark S&P 500 (SNPINDEX: ^GSPC) and growth-stock-propelled Nasdaq Composite (NASDAQINDEX: ^IXIC) accomplished similar feats in early June.
But things may not be as rosy as the stock market's major indexes imply. The U.S. economy is contending with two concurrent price shocks, both courtesy of decisions made by President Donald Trump, and investors are dealing with ongoing strife between the president and the Federal Reserve.
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Although Trump has repeatedly pushed the Federal Open Market Committee (FOMC) -- the 12-person body, including Fed Chair Kevin Warsh, responsible for setting the nation's monetary policy -- to slash interest rates, a recent statement by Fed Governor Christopher Waller all but dashed the president's demands (with a catch).
Shortly after Trump's inauguration for his second non-consecutive term on Jan. 20, 2025, he and now-former Fed Chair Jerome Powell began publicly squabbling over interest rates.
Though Trump nominated Powell as Fed Chair during his first term, he was vocal about Powell's (and the FOMC's) unwillingness to rapidly bring down interest rates. Despite the FOMC voting to lower the federal funds target rate six times between September 2024 and December 2025, to a current range of 3.50% to 3.75%, President Trump opined that interest rates should be slashed to 1% or lower.
The president likely has three primary motivations behind his ongoing calls for lower interest rates:
However, Trump's continual calls for lower interest rates come amid a surge in U.S. inflation, which hit a three-year high of 4.2% in May.
BREAKING: May CPI inflation rises to 4.2%, the highest level since April 2023.
-- The Kobeissi Letter (@KobeissiLetter) June 10, 2026
Core CPI inflation also rises to 2.9%, the highest since September 2025.
Inflation in the US is officially back above 4% and more than double the Fed's target.
Odds of Fed rate hikes are rising.
Part of the blame can be assigned to the president's tariff and trade policy. Even though the U.S. Supreme Court invalidated many of Trump's tariffs in February 2026, sweeping global tariffs continue to modestly lift prices in the goods sector.
The other and far more significant concurrent price shock has been the Iran war. Not long after the U.S. commenced military operations, Iran closed the Strait of Hormuz to virtually all commercial vessels. This action disrupted the transport of approximately a fifth of the world's crude oil supply and sent energy commodity prices skyrocketing.
Despite crude oil prices falling over the last two months, Trumpflation (i.e., Trump-driven inflation) has entered a new phase, with sectors and industries outside of energy being affected by Iran-war-driven price hikes.
Not only has the FOMC not lowered interest rates fast enough to appease President Trump, but several members of the FOMC are indirectly jabbing back at the president's calls for rate cuts.
For example, Fed Chair Kevin Warsh has stated several times, in one form or another, that the central bank will deliver price stability. Warsh's voting record as an FOMC member has historically been hawkish, suggesting he favors higher interest rates as a tool to suppress inflation. In other words, Warsh's statements speak to the growing prospect of higher, not lower, interest rates.
Fed Governor Christopher Waller also had some indirect but choice words on interest rates at a recent conference. Waller proclaimed,
We are not going to keep rates down just to help the government finance its deficits... Monetary policy must remain independent, focused on our economic objectives.
The silver lining here, from President Trump's perspective, is that Waller and his peers aim to uphold the dual mandate of maximum employment and price stability. If the economic data calls for rate cuts, Waller won't hesitate to push for a lower federal funds target rate. At the moment, rising Core Personal Consumption Expenditures point to the possibility of higher interest rates.
WALLER: FED WILL NOT KEEP RATES DOWN FOR THE PURPOSE OF HELPING THE U.S. GOVERNMENT FINANCE ITS DEFICITS
-- *Walter Bloomberg (@DeItaone) July 6, 2026
But there's a very high likelihood that Trump's push for lower interest rates stems from years of runaway federal deficits and the higher cost of servicing the nation's outstanding debt. While federal deficits have grown under both parties and virtually all presidents since 1970, the magnitude of federal deficits in the 2020s has become impossible to ignore.
Waller has made it clear that the FOMC isn't going to accommodate political persuasions aimed at helping the government service its debts.
For the stock market, concerns over national debt are nothing new. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have been climbing this wall of worry for decades, with corporate earnings growth and innovation leading the charge.
But Waller's commentary that the Fed has no intention of adjusting its monetary policy to accommodate the U.S. Treasury, coupled with Kevin Warsh's insistence that the Fed "stay out of the fiscal business," sets the stock market up for a potentially bumpy ride in the coming years.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"The Fed's refusal to accommodate fiscal deficits while inflation remains above 4% creates an unavoidable collision course between monetary policy and equity market valuations."
The market is currently pricing in a 'soft landing' fantasy that ignores the structural shift in inflation caused by the Strait of Hormuz blockade and persistent tariff-driven supply chain friction. With CPI at 4.2% and the Fed under Kevin Warsh signaling a hawkish, independence-first stance, the 'higher-for-longer' reality is morphing into 'higher-forever.' Equities are trading at historically elevated multiples that assume a pivot that Waller has explicitly taken off the table. Investors are underestimating the fiscal dominance risk; if the Fed refuses to monetize the $39.4 trillion debt, we could see a liquidity crunch that forces a sharp repricing of risk assets, particularly in high-growth tech sectors reliant on cheap capital.
If the conflict in the Strait of Hormuz resolves quickly, the resulting collapse in energy prices could disinflate the economy rapidly enough to allow the Fed to cut rates without sacrificing its credibility.
"N/A"
[Unavailable]
"Waller's 'dagger' is rhetorical theater; the real test is whether inflation actually falls—if it does, rate cuts follow regardless of Trump's demands; if it doesn't, equities face genuine margin compression, not just political noise."
The article conflates two separate issues: Fed independence (legitimate) with market risk (overstated). Waller's statement is boilerplate—central banks have always rejected fiscal accommodation. The real tension isn't new; it's the *magnitude* of the deficit ($39.4T) meeting higher-for-longer rates. Core PCE at 2.9% is elevated but not crisis-level; if it rolls over by Q3, the Fed has room to cut without political pressure. The market's all-time highs already price in this friction. What's missing: earnings growth is still outpacing multiple expansion—the 'wall of worry' has historically been climbed when fundamentals hold.
If Core PCE stays sticky above 2.8% through 2026-2027, the Fed genuinely cannot cut without credibility damage, forcing the Treasury to refinance $39.4T at 4%+ rates indefinitely—that's a structural headwind to corporate margins and multiples that no earnings growth offsets.
"Policy risk is unsettled; inflation and debt dynamics could force a pivot in policy sooner or later."
The article frames Waller as a hawk resisting Trump's rate-cut push, but the real signal is policy uncertainty rather than a one-way tilt. Inflation remains sticky, deficits are rising, and the Fed could pivot if data weakens or if financial conditions loosen unexpectedly. Markets may remain resilient on earnings and AI-related capex, even with higher rates, but a surprise uptick in core inflation or a sharper debt-service surge could quickly shift the path back toward restrictive policy. The piece underplays cross-asset risks and geopolitics that could spark volatility in rates and equities alike.
If inflation continues to surprise to the upside or if fiscal dynamics force higher debt-service costs faster than expected, the Fed may need to raise or keep rates higher for longer, making the resilience in equities driven by earnings less durable.
"The compression of the equity risk premium due to higher discount rates will negate earnings growth, triggering a valuation multiple contraction."
Claude, your reliance on earnings growth outpacing multiple expansion ignores the denominator effect of rising discount rates. As Treasury yields climb, the equity risk premium compresses, making high-multiple tech vulnerable regardless of earnings. You’re assuming a linear relationship between growth and valuation that breaks when the risk-free rate exceeds 4.5% sustainably. We aren't just climbing a wall of worry; we are walking into a trap where debt-service costs cannibalize the very capex driving those earnings.
[Unavailable]
"Higher rates compress multiples only if nominal growth doesn't rise with them; stagflation is the actual tail risk, not just 'higher-for-longer' with intact earnings."
Gemini's discount-rate math is sound, but conflates two scenarios. Yes, rising Treasury yields compress equity risk premiums—that's mechanical. But the *magnitude* depends on whether nominal growth accelerates with inflation or stalls. If nominal GDP grows 5-6% while rates settle at 4.5%, the equity risk premium actually widens relative to a 2% nominal-growth, 2% rate regime. The real trap isn't higher rates per se; it's stagflation (high rates + weak growth). We haven't seen that yet. Earnings revisions are still positive.
"Higher-for-longer rates do not simply compress multiples; if growth stays sticky and fiscal dynamics worsen, credit spreads widen, choking corporate financing and capex even as yields rise."
Gemini, your denominator-rate argument is important, but it risks oversimplifying equity risk premia. Elevated rates don't automatically compress ERP in a linear fashion; if nominal growth accelerates with inflation, ERP could stay elevated or even widen. The bigger blind spot: a sustained higher-for-longer regime could widen credit spreads and tighten corporate financing conditions, not just trim equity multiples. That double drag—rates and financing costs—could sap capex and earnings resilience sooner than the market anticipates.
Panelists debate the sustainability of current equity valuations and market resilience in the face of higher-for-longer rates. They agree that earnings growth is crucial but disagree on the impact of rising discount rates on equity risk premiums and the risk of stagflation.
Earnings growth outpacing multiple expansion and potential widening of equity risk premiums if nominal GDP growth accelerates with inflation.
Rising discount rates compressing equity risk premiums and potentially leading to a liquidity crunch if the Fed refuses to monetize the debt.