To The Moon

Jackson Hole 2026: Three Warsh Scenarios—and What They Mean for AI Stocks

After Nvidia’s strong earnings reinforced confidence in AI demand, the market’s attention now shifts from corporate earnings to monetary policy.

Federal Reserve Chair Kevin Warsh’s first Jackson Hole keynote could determine whether strong AI investment is viewed as:

✅ A productivity engine that allows faster, less inflationary growth

or

⚠️ An investment boom that keeps demand and inflation too strong

This distinction matters because technology companies face two opposing forces:

* Strong AI capex supports semiconductor, cloud and software revenue.

* Higher interest rates reduce technology valuations and increase financing costs.

Here are my best, base and worst-case scenarios for the speech.

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CURRENT MARKET BENCHMARK

Before assessing Warsh’s message, this is what markets are already pricing:

* Fed funds rate: 3.50%–3.75%

* Probability of September hike: approximately 34%

* Probability of a hike by December: approximately 74%

* Headline PCE inflation: 3.7%

* Core PCE inflation: 3.3%

* July FOMC decision: Rates held, with three officials preferring a hike

These figures form the benchmark.

If Warsh is more dovish than this baseline, yields could fall and technology stocks could rally. If he signals that rates must rise soon, the market would need to price a more aggressive tightening path.

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WHY AI CAPEX MATTERS TO THE FED

The AI investment boom affects inflation in two opposite ways.

In the short term, spending on chips, data centres, power generation, cooling systems, networking equipment, construction and skilled labour keeps economic demand strong.

This can contribute to:

* Higher electricity prices

* Construction bottlenecks

* Stronger demand for specialised labour

* Higher equipment and financing costs

* Greater pressure on inflation

Over the longer term, however, AI adoption could improve productivity and increase the economy’s supply capacity.

If companies can produce more with the same amount of labour and capital, the economy may be able to grow faster without generating equivalent inflation.

Therefore, the key question is:

Does Warsh view AI capex as productive supply expansion—or excessive demand arriving before the productivity benefits?

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🟢 BEST CASE: CREDIBLE GOLDILOCKS

Estimated probability: 25%

Inflation view:

Warsh acknowledges that inflation remains above target but argues that part of the pressure comes from energy, tariffs and other supply disruptions.

He sees signs that underlying inflation pressures can gradually ease.

Labour-market view:

The labour market remains balanced but is cooling gently—without a sharp increase in unemployment or widespread layoffs.

Rate outlook:

Warsh does not commit to a September hike. He argues that current policy and elevated long-term Treasury yields are already tightening financial conditions.

Further action remains dependent on upcoming inflation and employment data.

AI capex view:

Warsh recognises AI investment as productivity-enhancing capital formation that could expand future supply.

The Fed therefore does not need to restrict productive private investment unnecessarily.

Potential market reaction:

* December hike probability falls below 50%–55%

* US 2-year Treasury yield falls 10–15 basis points

* US 10-year yield falls 5–10 basis points

* S&P 500 rises approximately 1%–2%

* Nasdaq rises approximately 1.5%–2.5%

* US dollar weakens

* Gold strengthens

Technology impact:

This would support the full AI revenue progression:

Chips and infrastructure → Cloud capacity → Software monetisation → Productivity growth

Potential beneficiaries include:

* Chips: Nvidia, AMD and Broadcom

* Foundry and equipment: TSMC, ASML, Applied Materials and Lam Research

* Networking: Arista Networks, Lumentum, Coherent and Corning

* Cloud: Microsoft, Amazon, Alphabet and Oracle

* Software: Salesforce, Palantir and CrowdStrike

Lower yields would support valuations, while recognition of AI productivity would strengthen confidence that today’s heavy capex can eventually generate sustainable cloud and software revenue.

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🟡 BASE CASE: HAWKISH BUT NOT COMMITTED

Estimated probability: 55%

Inflation view:

Warsh describes inflation as sticky and still unacceptably above the Fed’s 2% target.

The recent data does not justify declaring victory, but it may not be strong enough to force an immediate hike either.

Labour-market view:

The labour market remains resilient and is cooling only gradually.

There is no major employment shock requiring the Fed to support the economy, but labour conditions are not clearly overheating.

Rate outlook:

Warsh says another hike may be necessary if inflation fails to improve, but does not explicitly support a September move.

Policy remains data-dependent.

AI capex view:

AI investment is supporting GDP, employment and corporate spending. It helps explain why the economy remains resilient despite elevated interest rates.

However, data-centre construction and electricity demand may also create near-term price pressure.

Potential market reaction:

* September hike probability remains around 35%–50%

* December hike probability stays around 70%–80%

* US 2-year yield moves between −5 and +7 basis points

* US 10-year yield is flat or slightly higher

* S&P 500 moves between approximately −0.5% and +0.5%

* Nasdaq moves between approximately −0.8% and +0.5%

* US dollar is broadly stable

* Gold remains volatile

Technology impact:

The market becomes more selective.

Strong AI demand continues to support earnings, but elevated rates limit how much investors are willing to pay for those earnings.

The focus shifts from:

“How much are companies spending on AI?”

to:

“How much revenue and free cash flow is that spending producing?”

Semiconductor and infrastructure companies with visible order books may outperform companies relying mainly on future AI expectations.

Cloud providers must demonstrate that higher capex is producing faster cloud revenue, while software companies must show actual AI monetisation rather than only new product announcements.

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🔴 WORST CASE: HAWKISH SHOCK

Estimated probability: 20%

Inflation view:

Warsh argues that inflation is broadening beyond temporary supply shocks.

He warns that inflation expectations could become less anchored if the Fed waits too long.

Labour-market view:

The labour market remains too tight to cool demand sufficiently.

With employment still resilient, the Fed has room to prioritise price stability even if tighter policy slows growth.

Rate outlook:

Warsh says current policy may not be sufficiently restrictive and that another hike could be required soon.

He may also indicate that higher long-term yields cannot substitute for direct Fed action.

AI capex view:

Warsh identifies the AI investment boom as another source of excess demand.

Data centres are increasing demand for electricity, memory, networking equipment, construction and specialised labour before the full productivity benefits have appeared.

He may also warn that markets are assuming unrealistically fast returns from AI investment.

Potential market reaction:

* September hike probability rises above 60%–70%

* December hike probability rises above 90%

* US 2-year yield rises 15–25 basis points

* US 10-year yield rises 10–20 basis points

* S&P 500 falls approximately 1.5%–3.5%

* Nasdaq falls approximately 2%–4%

* US dollar strengthens

* Gold initially weakens as real yields rise

Technology impact:

Technology stocks would face pressure from two directions:

1. Higher yields reduce valuations.

2. Investors demand clearer evidence that AI revenue can justify the capex.

Hyperscalers would face greater scrutiny over capex, free cash flow and returns on invested capital.

Highly leveraged data-centre operators would also face higher financing costs.

Even Nvidia and other infrastructure suppliers could initially fall with the market despite strong underlying demand.

The greatest pressure would likely fall on expensive technology and software companies that have not yet demonstrated meaningful AI revenue.

The historical stress benchmark is Powell’s 2022 Jackson Hole speech. After his forceful inflation warning, the S&P 500 fell 3.4% that day.

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WHAT TO LISTEN FOR

Certain phrases could reveal which scenario is developing:

“Productivity-enhancing investment”

→ Positive interpretation of AI capex

“Strong capital formation”

→ AI investment supports growth, but policy remains watchful

“Higher long-term yields are tightening financial conditions”

→ Less need for an immediate rate hike

“Persistent inflation” or “resource constraints”

→ More hawkish inflation assessment

“Excess demand”

→ Stronger case for another hike

“Policy is not sufficiently restrictive”

→ Clear warning that a hike may be approaching

“Financial excess” or “misallocation”

→ Negative signal for high-valuation AI stocks

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MY VIEW

The base case remains the most likely outcome.

Warsh probably needs to defend the Fed’s inflation credibility, especially with PCE inflation at 3.7% and three policymakers already favouring a hike.

However, explicitly committing to a September move would remove policy flexibility before the next round of inflation and employment data.

For AI investors, the most favourable outcome is not an extremely dovish speech. A speech that appears politically influenced or too tolerant of inflation could push short-term yields lower but long-term yields higher as investors demand more inflation compensation.

The true Goldilocks outcome would be:

✅ Acknowledgement that inflation remains too high

✅ Recognition that labour conditions are gradually cooling

✅ No commitment to an immediate hike

✅ Confidence that AI capex can improve future productivity

✅ Continued insistence on the Fed’s 2% inflation target

Ultimately, Jackson Hole will determine whether markets continue focusing on strong AI earnings—or begin worrying that the AI capex boom itself is giving the Fed another reason to tighten.

Scenario probabilities and market-impact ranges are my estimates, not guaranteed forecasts.

Sources: Federal Reserve July FOMC minutes, Federal Reserve policy statement, Reuters.

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