There's a 35% Chance That the Fed Hikes Rates at Least 4 Times by September 2027, Which Can Decimate the AI-Driven Bull Market

Earlier this week, investors celebrated the fourth anniversary of Wall Street's artificial intelligence (AI)-driven bull market. Despite an occasional speed bump or pothole along the way, we've witnessed the time-tested Dow Jones Industrial Average (DJINDICES:^DJI), benchmark S&P 500 (SNPINDEX:^GSPC), and growth-stock-powered Nasdaq Composite (NASDAQINDEX:^IXIC) blast to several record highs this year.

But sustaining Wall Street's nearly parabolic bull market may prove impossible due to persistently elevated inflation.

Last month, the Federal Reserve kicked off its first rate hike under Fed Chair Kevin Warsh, and only the fourth rate-hiking cycle of the 21st century. Based on one prediction tool, interest rate hikes are just getting started, which may prove disastrous for a historically pricey, AI-driven stock market.

Interest rates could meaningfully rise, courtesy of Trumpflation

Although there's no perfect predictor of the Federal Reserve's monetary policy, the CME Group's (NASDAQ:CME) FedWatch Tool has a solid track record of forecasting changes in the federal funds target rate.

While the odds of a Federal Open Market Committee (FOMC) rate hike in October have plunged, the probability of at least four quarter-point rate hikes by the September 2027 FOMC meeting has soared. As of Oct. 11, there was a combined 34.7% probability that the FOMC would lift the federal funds target rate (currently 3.75%-4.00%) by between 100 and 175 basis points over the next 11 months.

Trumpflation (inflation directly driven by President Donald Trump's policies) is the primary catalyst fueling this projection.

New from the New York Fed: "By February 2026, tariffs had contributed 2.9 pp to goods price inflation, and without them goods prices would have fallen slightly." About one quarter of every point in higher tariff rates shows up in consumer prices within one year. • A 10% across-the-board tariff yields a 2.6% rise in consumer goods prices after one year. • About two thirds of the increase comes from pricier imports, which get passed through quickly. • Another third comes from U.S. made goods, as producers face higher input costs and less import competition. This takes longer, about 6-12 months, to filter through.

— Nick Timiraos (@NickTimiraos) October 6, 2026

According to new research from several New York Federal Reserve economists writing for Liberty Street Economics ("How Fast Do Tariffs Pass Through into Consumer Prices"), Trump's tariffs lifted consumer goods prices by 2.9 percentage points by February 2026.

Meanwhile, the Trump-led Iran war has spurred the largest energy supply disruption in modern history, courtesy of Iran closing the Strait of Hormuz to most commercial vessels. The result has been skyrocketing fuel prices and persistently elevated inflation.

An aggressive Fed rate-hiking cycle could prove disastrous for the AI revolution

Fed Chair Warsh has made it crystal clear that "removing a dose of accommodation" in September was the right decision. But given how entrenched Trumpflation has become, both the CME Group's FedWatch Tool and the bond market agree that several additional rate hikes are needed.

The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have soared on the heels of the AI infrastructure build-out. The enormous amount of capital being spent on the data center build-out has increased corporate growth rates and sent stock valuations into the stratosphere.

The issue for Wall Street is that AI infrastructure purchases are being financed, in part, with debt. If borrowing costs rise by one or more percentage points over the next 11 months, there's a good chance it'll slow the data center build-out and/or adversely affect growth projections.

Stock Market Shiller PE Ratio on the verge of taking out its Dot Com Bubble all-time high 🚨 🤯 👀 https://t.co/CtCmSgWnLt

— Barchart (@Barchart) July 11, 2026

When the stock market is priced for perfection, as it is now, there's essentially no margin for error. If growth rates slow, even marginally, it could decimate the AI-driven bull market.

Historically, premium stock valuations haven't been sustainable over extended periods. An aggressive Fed rate-hiking cycle might be just the catalyst needed to send the stock market past its tipping point.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.