The Federal Reserve’s rate cuts may sustain elevated stock valuations as investors historically justify higher valuations with lower interest rates. However, skepticism grows around AI spending possibly creating a stock market bubble. Despite bubble concerns, the Fed’s rate cuts could still support the market.

Lower interest rates encourage investors to move from short-term assets to stocks, historically justifying higher valuations and supporting economic growth. The Fed’s easing cycle could prevent a burst in the market, as historically, bubbles burst during tightening cycles due to higher interest rates.

While the Fed may not need rate hikes to affect Wall Street, any indication of rising inflation could disrupt the market. Stocks fell after Fed Chair Powell suggested future rate cuts aren’t guaranteed. Investors are still banking on rate cuts, but if that changes, stocks could suffer.

Meta and Microsoft earnings reports raised concerns about AI spending, leading to investor skepticism. Both companies announced increased spending plans in 2026, causing share prices to drop. Investors are now looking for a return on AI investments, which could impact stock performance in the future.

Read more at Yahoo Finance: 4 investing pros say there’s only one thing on the radar that could pop the AI bubble