Despite escalating Middle East conflicts pushing oil prices higher, long-term Treasury yields climbing, and growing expectations of a Federal Reserve interest rate hike, a majority of Wall Street strategists remain confident that the bull market can persist, provided the pace of rate increases is measured, corporate earnings stay robust, and inflation remains anchored.

So, why does Wall Street remain optimistic in the face of these macroeconomic headwinds? Oil prices briefly surged to nearly $109 per barrel last week amid heightened geopolitical tensions, while long-term US Treasury yields hit multi-decade highs. Concurrently, the probability of a Fed rate hike in September has soared. US stocks have been volatile since hitting a record high in mid-August, as investors worry that rising oil prices could exacerbate inflationary pressures. The 10-year Treasury yield briefly approached 5%, a level often viewed as a warning sign for equity markets. Swap traders are currently pricing in an approximately 87% chance of a rate hike on Wednesday, which would be the first in three years. The tech-heavy Nasdaq 100 futures fell 1.6% on Monday. However, the S&P 500 remains less than 2% below its peak, supported by strong corporate earnings.

Wall Street institutions including Morgan Stanley, JPMorgan, and Goldman Sachs predict that any selloff triggered by Fed hike expectations is likely to be short-lived, given the healthy state of corporate profits. Ben Snider, Chief US Equity Strategist at Goldman Sachs, noted that while stocks typically struggle when the Fed begins its tightening cycle, the bull market is expected to continue. He pointed out that the market has already priced in more than three rate hikes over the next year, yet corporate earnings and balance sheets remain solid.

Michael Wilson, strategist at Morgan Stanley, acknowledged the risk of a market correction—defined as a 10% drop from recent highs—if an inflation shock proves stronger than anticipated. With Middle East geopolitical tensions persisting, oil prices have resumed their upward trajectory. However, Wilson added that the economic outlook is paramount. He suggested that if robust nominal economic growth is the primary driver, the stock market can tolerate higher back-end yields. In other words, over the medium to long term, equities still serve as an effective inflation hedge.

JPMorgan strategists noted that oil market direction may dictate risk appetite in the short term. They pointed out that seasonal trends suggest stocks typically underperform in September, but investors should not assume this volatility will continue indefinitely. A team led by Mislav Matejka wrote in a report that as long as the Fed's rate hikes are moderate and occur against a backdrop of strong earnings growth and anchored inflation, the stock market should be able to withstand the pressure.

An analysis indicates that the real threat to the bull market is not a single rate hike, but an entire cycle of tightening. Since 1945, the S&P 500 has experienced 12 bear markets with declines exceeding 20%, and four near-bear markets with drops between 18% and 20%. Six of these episodes directly followed rate-hike cycles that led into recessions. Only two pullbacks were not triggered by these factors.

Diverging Views on S&P 500 Targets: Bulls Stand Firm, BofA and Citi Warn of Short-Term Risks

In a report, Yardeni Research stated that despite rising oil prices, bond yields, and Fed hike expectations, the S&P 500 has not reacted drastically to these macro headwinds. The firm has reaffirmed its year-end S&P 500 target of 8400 points. However, Yardeni Research noted that market dynamics have shifted. Over recent weeks, the forward price-to-earnings ratio for major indices has declined, as forward earnings per share growth has outpaced stock price gains. Since the start of the year, the S&P 500's forward earnings have risen 28.1%, while the forward P/E ratio has fallen 12.9%, indicating that investors are unwilling to pay the high valuations they did in January. Yardeni Research has raised its 2027 earnings per share estimate from $415 to $425, while lowering its forward P/E assumption from 20.2 times to 19.7 times.

Meanwhile, over the past week, several firms have reaffirmed or raised their S&P 500 targets. Last week, HSBC lifted its year-end target from 7650 to 8100, citing stronger corporate earnings, continued AI investment, and US economic resilience. HSBC projects the S&P 500's earnings growth rate to approach 40% in the first half of 2026, with at least 25% growth in the second half. While technology remains the primary driver, HSBC noted that resilient consumer spending and strong performance in healthcare, industrials, and consumer goods companies are underpinning overall profit growth. However, HSBC also cautioned that autumn seasonal weakness, economic data, regulatory changes, and geopolitical tensions could cause short-term volatility, while emphasizing that strong corporate fundamentals should support further gains in the S&P 500.

Barclays also raised its 2026 S&P 500 target from 7800 to 7950, citing better-than-expected second-quarter earnings, and lifted its EPS forecast from $337 to $365. The bank noted that over 86% of companies beat earnings expectations, with core EPS growing more than 50% year-over-year. Barclays expects AI-driven investment to continue and predicts hyperscaler capital expenditure to exceed $1.1 trillion in 2027, a 67% increase. Despite high bond yields increasing the cost of earnings misses, the bank maintained its 2027 index target at 8800.

BofA also joined the upgrade camp, but with a more cautious stance. Savita Subramanian, BofA's equity and quantitative strategist, raised the year-end S&P 500 target from 7100 to 7400, but the new target still implies roughly a 3% downside from current levels, highlighting the firm's caution on the near-term outlook. Subramanian stated that stocks are entering a "seasonally weak period" and may be overdue for a correction. She pointed out that the S&P 500 has only experienced one 5% pullback this year, compared to an average of about three per year according to BofA's data; corrections of at least 10% typically occur once a year, but the last such decline was in the spring of 2025. Below are the 2026 S&P 500 targets from several major Wall Street firms.

It is worth noting that not all institutions are equally optimistic. Last Friday, Citi warned that its S&P 500 year-end target may be too high, as rising oil prices and bond yields cast a shadow over the US equity outlook. Strategist Scott Chronert stated that Citi's current 8100 target for the S&P 500 at the end of 2026 looks "aggressive" given that macro factors have shifted over the past few weeks. Chronert still believes third-quarter earnings should be strong, but achieving the target will now rely more heavily on a year-end rally amid current uncertainties. The analyst also noted that despite the complex economic landscape, "a Fed rate hike next is not a done deal," but reiterated that persistent inflation concerns could mean a hike would ease uncertainty, and if the Fed does tighten, there could be two hikes this year rather than one.

AI Carrying the Rally Alone; Yardeni Says Slowdown Calls Won't Derail the Capex Cycle

Most of the S&P 500's gains this year are attributable to the AI boom. Stocks like Micron Technology, Intel, and AMD have posted triple-digit gains in 2026. Meanwhile, the Global X Artificial Intelligence & Technology ETF (AIQ) has also outperformed the S&P 500 this year. The Kobeissi Letter commented on X that given how weak the bond market has been, it is remarkable that the S&P 500 is just a step away from record highs. The firm added that "without AI, the S&P 500 would be at least 50% lower. Without the oil spike, the S&P 500 would be above 9000. AI is single-handedly supporting the global economy."

However, diverging opinions within the industry regarding the pace of AI development are starting to dampen investor sentiment. Anthropic CEO Dario Amodei over the weekend proposed slowing down AI development to allow more time to address safety concerns. OpenAI's Sam Altman and SpaceX's Elon Musk expressed support for stronger regulation. Conversely, the CEOs of Microsoft and Meta oppose slowing development. Altman also stated that OpenAI will not go public this year. Meanwhile, former President Donald Trump downplayed the risks, suggesting that AI risks can be managed with guardrails.

Ed Yardeni, President of Yardeni Research, sought to downplay these concerns on Monday. He stated that while the market worries tech companies might slow AI development, it is unlikely to disrupt the broader infrastructure buildout. "The reality is there are already constraints on building data centers and such. I don't think infrastructure construction is going to slow down," he said. He maintained his year-end S&P 500 target of 8400 points. Yardeni believes the weekend calls to slow AI development may be more about establishing safety protocols rather than reducing capital expenditure. He argued that as technology becomes more powerful, stronger guardrails may become necessary, but this does not necessarily weaken the investment cycle. He also pointed to productivity data supporting the AI-driven growth narrative, stating that the economy is still in a "productivity-driven technology boom."

Yardeni also raised the possibility of enhanced US-China cooperation on AI regulation, suggesting both countries face similar challenges in advancing the technology and may have incentives to establish rules around its development. For the market, Yardeni's view is that AI concerns may cause short-term volatility, but they are unlikely to halt the infrastructure investment needed to support the technology's continued expansion.