Jefferies has warned that the ongoing surge in artificial intelligence (AI)-related spending could keep inflation elevated in the United States and force interest rates to remain higher for longer. The financial services firm's latest Greed & Fear report highlights that strong capital expenditure by major technology companies on AI infrastructure is supporting economic growth but also adding to inflationary pressures, complicating the outlook for monetary policy.
Inflation Stickiness and Nominal Growth
According to the report, one consequence of the stickiness of inflation in America is that nominal growth has been running at 5.9% year-on-year in the first quarter of 2026, driven primarily by the still accelerating AI capex arms race. Headline CPI inflation is currently at its highest level in three years, the report noted.
Jefferies indicated that financial markets are increasingly factoring in the possibility of further rate hikes as inflation remains persistent. The report referenced the new Federal Reserve Chairman Kevin Warsh, who has presided over a more hawkish message than expected during his first Federal Open Market Committee (FOMC) meeting this week.
Market Expectations of Tighter Policy
Investors are now expecting tighter monetary policy over the coming months. As a result, money markets are pricing in 36 basis points of rate hikes by the end of 2026. Importantly, the two-year Treasury yield had its biggest one-day move in 14 months, rising by 13 basis points to 4.18% yesterday, the report stated.
Jefferies also pointed to rising inflation expectations among businesses, suggesting that price pressures remain broad-based across the economy. While the five-year forward measure by the Fed remains well anchored, surveys of business price expectations—whether prices paid or prices received—are rising, the report said.
Equity Markets Focus on AI-Driven Earnings
Despite concerns over inflation and higher bond yields, the report argued that equity investors remain focused on strong earnings growth driven by AI investments. “So long as the AI capex focus is ongoing, and the returns are not questioned, the American stock market will continue to focus on the positive earnings revisions,” Jefferies said.
The report highlighted that earnings expectations for US companies have improved sharply over the past several months. The LSEG I/B/E/S consensus data as of June 12 now shows that S&P 500 second-quarter 2026 earnings are expected to rise by 22.8% year-on-year, up from 12.8% growth expected last October.
Narrow Market Dependence on AI Stocks
However, Jefferies cautioned that the market's dependence on a narrow group of AI-linked technology stocks is becoming increasingly evident, even as investors continue to reward companies benefiting from the AI investment cycle. The report underscores the paradox where AI spending fuels both economic growth and inflationary pressures, creating a challenging environment for policymakers and investors alike.
