The U.S. stock market keeps setting records. The S&P 500 closed above 7,600 for the first time on June 2, its 24th record high of 2026, with the Nasdaq and Dow notching records the same day.
The funds most people use to own the market have ridden the move. The two giant S&P 500 trackers — the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) — sit near all-time highs, as does the tech-heavy Invesco QQQ Trust (NASDAQ: QQQ). The S&P 500 is up about 11% year to date, a striking recovery from a fear-driven pullback earlier this year that briefly pushed it into the red.
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But there’s a risk brewing, and it’s arguably not getting enough attention: Inflation has started to reheat just as many of the companies powering the market have been piling debt onto their balance sheets to fund the artificial intelligence (AI) build-out.
If prices keep climbing and the Federal Reserve has to raise interest rates rather than cut them, this could leave companies — and the funds that hold them — in a tough situation.
Inflation is heating up at the wrong moment
The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose 3.8% year over year in April, up from 3.5% in March and 2.9% in January, marking the highest reading in nearly three years. Core inflation, which excludes food and energy, reached 3.3%. Much of the pressure stems from higher energy costs tied to the conflict over the Strait of Hormuz.
How quickly things have changed.
Six months ago, the question was how many times the Fed would cut in 2026. Now it is whether the central bank will have to hike, with another policy meeting due this month. The Fed has held its benchmark rate at 3.50% to 3.75% since the start of the year, and traders now see roughly even odds of at least one increase before 2026 is out.
That shift cuts deeper than usual because of how this rally has been financed.
The largest cloud companies building AI data centers have moved from paying for that spending out of cash flow to borrowing for it. Amazon, Alphabet, Meta, Microsoft, and Oracle issued about $121 billion in U.S. corporate bonds in 2025 — more than four times their average over the prior five years. And the pace has quickened: Alphabet sold $20 billion in U.S.-dollar bonds in February, and a rare 100-year sterling bond was part of a broader global offering, and Amazon followed with a near-record $54 billion deal in March.
