Global financial markets have recently fixed their attention on high U.S. interest rates. The U.S. bond market has moved against expectations since the start of the year. With the Federal Reserve having cut its benchmark rate three times since September 2025, most forecasts called for yields to keep falling this year. Instead, strong growth and employment data erased hopes for further cuts, and pressure on yields persisted after a war that began in late February sent oil prices soaring and stoked inflation concerns. As the Middle East conflict intensified again in August, the yield on the 10-year U.S. Treasury note climbed from 3.97% in late February to 4.99% on the 18th of this month. Stocks came under selling pressure each time yields rose more sharply.
Even so, the run-up in yields since January has not pushed U.S. equities back to where they started the year. When rate pressure mounted, the Dow Jones Industrial Average and the Standard & Poor's 500 held up relatively well. When yields steadied, the Nasdaq Composite and the Philadelphia Semiconductor Index led gains, driven by earnings and expanding capital spending at artificial intelligence companies. As of the 18th, the Dow was up 7.5% year to date, the S&P 500 up 11.8% and the Nasdaq up 14.1%. The Philadelphia Semiconductor Index, after a steep run, has fallen 18.7% from its 52-week high but still holds a gain of more than 60% for the year. It is too early to call a trend reversal.
The unexpected rise in yields slowed the pace of the U.S. market's advance and shifted leadership among sectors, but it did not alter the market's broader direction. Behind that lies expectations of a structural change powerful enough to outweigh the burden of higher rates, and AI sits at its center. Investors have placed more weight on how quickly AI demand converts into corporate revenue and profit than on the absolute level of interest rates. Nvidia is the clearest example. After posting revenue growth of more than 100% in its latest quarter, the company guided to 70% annual revenue growth next year, far above the market consensus of 44%, easing concerns that AI demand would peak within a short period.
The spread of AI is also creating new markets. Cybersecurity is a prime example. The more AI is used, the more data and systems there are to protect, and the more complex attacks become. CrowdStrike, a leading security firm, reported a 26% rise in revenue in its latest quarter, with new contracts up 51%.
AI is moving from a stage in which a handful of companies pushed the limits of the technology to one in which its applications broaden across industries. From here, the question to watch is which industries and companies will see AI-driven demand translate into revenue and profit. Interest rates can shake the market, but they may not be enough to change the speed or direction of the diffusion that AI's growth is producing.
