Schwab Market Perspective

Artificial intelligence (AI) and the Federal Reserve rate hike have dominated headlines recently—and investors might be wondering how these things will affect them.

While there are many existential questions that come along with the AI question, we're going to leave those for the philosophers and instead tackle what we do best: analyzing and breaking down the data. This month, we dive into how AI might be affecting the labor market, what rising rates might mean for global equities, and why corporate bonds might be worth a second look.

Read more from our experts:

• AI has yet to cause broad labor-market disruption, but hiring remains choppy and job losses are concentrated in AI-exposed industries, such as information and finance.
• AI investment appears to be boosting productivity and corporate profits more than payrolls, reinforcing narrow market leadership and the divide between capital and labor.
• AI-related job creation remains limited and uneven, while import-heavy capital spending may limit the technology buildout's near-term benefit to U.S. growth and employment.

• Higher interest rates do not automatically mean lower stock prices. The reasons rates are rising, the speed of the move, and the strength of earnings matter more. Inflation, energy shocks, fiscal concerns, and sudden increases in yields pose greater risks than a gradual rise tied to stronger growth.
• Higher rates could impact market leadership. Companies with strong balance sheets, pricing power, and stronger cash flow growth have historically tended to perform better. Financials and selected energy, materials, and industrial companies may benefit, while heavily indebted and rate-sensitive businesses may face pressure.
• Cyclical sectors and high-growth stocks have tended to be less sensitive to rising interest rates, although expensive valuations might be vulnerable should higher discount rates reduce the value of future profits. But that doesn't guarantee weaker returns. Earnings growth can offset price impacts from falling valuation multiples, particularly when demand and profit growth remain strong.
• We believe the recent rise in interest rates has generally been for constructive reasons tied to firmer economic growth. As such, we suggest investors remain invested in line with strategic asset allocations, but also consider diversification across regions, sectors, and investment styles.

• Rising Treasury yields are not just a Treasury story—corporate bond yields have risen as well. We continue to have a more favorable view of investment-grade corporate bonds, high-yield corporate bonds, and preferred securities.
• Higher starting yields can provide more income to help offset potential price declines if Treasury yields rise further.
• Spreads are low, but for good reasons: corporate profits are strong and balance sheets generally appear to be in good shape.