Wall Street institutions warn that US stocks will face more challenges in the future, and the Federal Reserve may raise interest rates three times this year.

As market expectations for the Federal Reserve to restart the rate hiking cycle continue to heat up, and investors begin to reassess the commercial prospects of artificial intelligence (AI), more and more Wall Street institutions are issuing warnings about the future trends of risk assets. Citadel Securities and PGIM, with assets under management of $1.4 trillion, have recently stated that the U.S. market is entering a more complex phase. High interest rates, stubborn inflation, and AI valuation pressure may all occur simultaneously, significantly increasing the challenges facing the U.S. stock market in the coming months. Current market exhibits characteristics of both the "dot-com bubble" and the "1970s inflation crisis" Nohshad Shah, head of fixed income sales for Citadel Securities in Europe, the Middle East, and Africa (EMEA), stated in a recent report that the current market environment exhibits some characteristics of both the dot-com bubble era in 2000 and the energy inflation crisis in the 1970s. He pointed out that the common feature of these two historical periods was that interest rates remained high. During the dot-com bubble era, the Federal Reserve continued to tighten monetary policy, combined with rising oil prices and a slowdown in economic growth, eventually leading to the bursting of the tech stock bubble. In the 1970s, soaring energy prices and high inflation severely limited the Fed's ability to stimulate the economy, ultimately triggering a prolonged bear market in stocks. Shah stated, "The most important lesson history offers to investors is that when a long-term growth story remains attractive but the macro environment begins to turn unfavorable, the market is often most vulnerable." In his view, AI is now playing a role similar to the internet revolution of the past, while high inflation, high oil prices, and potential rate hikes bear some resemblance to historical macro pressures. Fed may hike rates as early as September? Citadel Securities believes that U.S. economic data is currently driving a reassessment of market expectations for monetary policy. On one hand, the U.S. job market remains strong. On the other hand, although inflation has come down from its peak, it remains significantly above the Fed's long-term 2% target. At the same time, despite signs of easing tensions in the Middle East, oil prices remain relatively high. Shah believes that these factors indicate that the Fed may restart rate hikes as early as September. "Persistent inflation, a strong job market, and high oil prices together raise the possibility of the Fed raising rates again." In fact, since the U.S. and Israel launched military actions against Iran at the end of February this year, market expectations for the Fed's policy path have changed significantly. Before the outbreak of war, the market widely expected the Fed to cut rates more than twice this year. Now, market pricing has shifted towards rate hikes this year. AI business model facing scrutiny In addition to interest rate risks, Citadel Securities believes that the AI industry itself is facing new challenges. Shah cited research from colleague Frank Flight, indicating that investors are starting to pay more attention to whether AI business models can support the high valuations currently given by the market. Recent reports suggest that OpenAI is considering lowering prices for some AI services. In Citadel's view, this reflects a growing sensitivity of corporate clients to AI costs. If future price competition intensifies, the profitability of the AI industry may fall below market expectations. Shah stated, "Investors are reassessing whether AI applications are broad enough and whether the most advanced AI models can maintain current profit levels in the long term." He believes that if AI revenue growth falls below expectations, and high oil prices and high interest rates continue to tighten the financial environment, the valuation of some AI-related assets may come under pressure. "Historical experience shows that when investors overly concentrate on a growth theme, a rate hike cycle often becomes an important catalyst for cooling the bull market." PGIM: Fed may hike rates three times this year In contrast to Citadel Securities, PGIM's view is more aggressive. The asset management institution, a subsidiary of Prudential Financial, recently released a mid-year outlook report stating that the Fed may raise rates three times this year. It is worth noting that in April of this year, PGIM still expected the Fed to cut rates. Now, its view has shifted noticeably. PGIM believes that the U.S. economy is performing far better than market expectations. Despite the high interest rate environment, the U.S. economy has not slipped into recession, but instead has shown strong resilience. At the same time, inflation is falling much slower than expected. The team led by Robert Tipp, Global Bonds Manager and Chief Investment Strategist at PGIM, stated, "An exceptionally strong economy and stubborn inflation require investors to rethink the future path of monetary policy." The report pointed out that the Fed has been unable to stabilize inflation near its 2% target level for the past five years. Therefore, the new Fed Chairman, Powell, may need to raise rates to rebuild market confidence in the central bank's anti-inflation determination. PGIM expects the Fed to raise rates three times in the remaining time of this year. However, the institution also believes that these rate hikes are more of a "preventive measure." As the economy gradually cools in the coming years, the Fed is expected to cut rates three times in 2027 and further cut rates once in 2028. Market not fully accepting the expectation of "continued rate hikes" Although the market has shifted from expectations of rate cuts to rate hikes recently, PGIM's view remains in the minority. Current interest rate futures markets indicate that investors are pricing in about a 70% probability of a 25 basis point rate hike sometime this year, and fully pricing in expectations of rate hikes in the first quarter of 2027. Compared to this, PGIM's prediction of "three rate hikes" is significantly more hawkish. However, several institutions acknowledge that key variables for future market trends have changed. If investors were mainly focused on growth opportunities brought by AI in the past two years, the market may need to face two issues in the next few quarters: can AI commercialization fulfill high growth expectations? And will the Fed reenter a rate hiking cycle? For U.S. stocks, which are currently trading near historical highs, the answers to these two questions may determine the next phase of market trends. As summarized by Citadel Securities, "When the macro environment conflicts with the hottest growth narrative in the market, it is often when investors need to be most vigilant."