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 (VOO 0.70%) and the SPDR S&P 500 ETF Trust (SPY 0.68%) — sit near all-time highs, as does the tech-heavy Invesco QQQ Trust (QQQ 0.24%). 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.
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.
Image source: Getty Images.
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.
Here is the catch for index-fund investors: those borrowers are — at least indirectly — the funds. The seven largest technology stocks now account for about a third of the S&P 500’s value, so VOO and SPY are far more concentrated in big tech than their broad-market names suggest. QQQ is tighter still, with its 10 largest holdings making up roughly half the fund.
Higher rates, of course, would raise the cost of future borrowing and refinancing while also pressuring the rich valuations these companies carry.
Today’s Change
Current Price
Why easing in may beat going all in
None of this would matter as much if the market seemed to be doing a good job of pricing in these risks. But it isn’t. The S&P 500 now trades at about 26 times earnings, up from about 23 times earnings 12 months ago. And the Nasdaq-100 Index currently commands a price-to-earnings ratio of about 35, up from about 30 one year ago.
With all of this said, this isn’t a case for selling.
Over long stretches, low-cost index funds like these have rewarded investors who simply stayed put. And trying to call the market’s top has historically been a losing game. The better question is how to put new money to work after a run this large, with valuations elevated and a fresh risk in plain sight.
That is where dollar-cost averaging — investing a set amount on a regular schedule instead of all at once — earns its keep. Spreading purchases across months, quarters, and years lowers the odds of committing a lump sum at a peak, and it turns a pullback into a chance to buy more shares at lower prices rather than a reason to retreat.
The AI build-out may well pay off, and inflation could potentially cool as energy prices settle. But today’s prices appear to assume that both occur in the near future — even as borrowing costs threaten to climb. For anyone tempted to chase record highs with everything they’ve got, that overlooked risk is reason enough to ease in rather than dive in.
