The Era of Expensive Growth

In recent weeks, there has not been a single development that completely broke market optimism. On the contrary, the U.S. economy continues to look strong in many areas. Employment is rising, consumption has not fully weakened, and technology companies are still offering a growth story.

But that is exactly where the problem begins.

The stronger the economy remains, the lower the likelihood that the Fed will cut interest rates. As inflation moves up again instead of easing, bond yields rise. As oil prices fluctuate, pressure increases on companies’ costs and consumers’ purchasing power.

That is why markets are no longer discussing growth alone. They are also discussing the interest rate at which that growth should be priced.

The May employment data showed that the U.S. economy was more resilient than expected. Nonfarm payrolls increased by 172,000, while the unemployment rate remained unchanged at 4.3%. Market expectations had pointed to a much weaker increase in employment.

Under normal circumstances, this would have been received positively. But in the current market environment, strong employment has a second meaning: the Fed does not need to rush into rate cuts. In fact, futures markets have started to price in the possibility of a rate hike toward year-end more seriously again.

Inflation data also supports this picture. In April, the PCE price index rose 3.8% year over year. Core PCE increased 3.3%, remaining well above the Fed’s 2% target.

That is why the market reaction in recent weeks is understandable: bond yields rose, the dollar strengthened, and technology stocks came under pressure. The main question for investors is no longer “When will the Fed cut rates?” but “How long will the Fed have to keep rates high?”

This distinction matters. In an environment where interest rates remain elevated, stocks priced on future earnings expectations become more sensitive.

Energy risk stemming from the Middle East remains at the center of the market agenda. Although oil prices have pulled back from time to time, uncertainty around U.S.-Iran talks and tensions in the region have kept prices elevated. Brent crude traded above $90 at the beginning of June.

The issue here is not only the oil price. When energy costs rise, the impact spreads across many areas, from transportation and production to food and services. This makes the job of central banks more difficult. If the price increase remains a short-term fluctuation, the Fed and the ECB can afford to wait. But if energy costs change corporate pricing behavior, inflation can become more persistent.

This risk is more visible in Europe. Annual inflation in the euro area rose to 3.2% in May. Energy prices increased 10.9% year over year, while services inflation rose to 3.5%.

This puts the European Central Bank in a difficult position. The economy is weak, but inflation is still high. According to a Reuters poll, economists largely expect the ECB to raise rates at its June meeting.

For investors, the conclusion is clear: energy prices are no longer an issue that only affects oil companies’ profits. They are influencing rate expectations, consumer confidence, corporate margins, and currency markets at the same time.

Technology stocks have been one of the main areas supporting the market recently. Nvidia’s results showed that demand for artificial intelligence chips remains strong. This suggests that AI-related spending is not ending in the short term.

But investors are becoming more selective. After Broadcom’s statements, semiconductor stocks came under selling pressure. Around the same time, stronger expectations for higher interest rates increased the valuation sensitivity of technology stocks.

The key question here is not whether there is demand for AI. There is. The question is whether these investments will generate sufficiently high returns for companies.

According to the Financial Times, major technology companies’ AI investments are putting pressure on free cash flow. This shows that investors are no longer looking only at growth rates; they are also looking at how much capital that growth requires.

That is why the new distinction in technology is becoming clearer. Investors will not price companies with strong revenue growth in the same way as companies that constantly need to spend more in order to grow.

In short, the AI story is not over. But markets are now reading that story more carefully.

The Beijing meetings between the U.S. and China were important, but not because they solved all the market’s problems. They mattered because investors wanted to see whether geopolitical tensions would rise further.

Reuters reported that Trump left Beijing with warm messages from Xi, but with limited concrete gains. The talks covered trade, Iran, Taiwan, and rare earth elements. But the clear reset that the market was hoping for did not arrive.

This picture has two sides for investors. Softer diplomatic language reduces short-term risks. However, uncertainty around Taiwan, supply chains, tariffs, and Iran continues.

For this reason, supply chain security remains an important investment theme for semiconductors, autos, defense, energy, and industrial companies.

Strong employment and high inflation data in the U.S. have strengthened the message that the Fed is not moving closer to rate cuts. This does not affect only American markets. As U.S. rates remain high, the dollar finds support, global capital becomes more selective, and policy space narrows, especially in energy-importing economies.

Europe is feeling this pressure through weak growth. The euro area economy contracted by 0.2% quarter over quarter in the first quarter of 2026. In the same period, inflation rose to 3.2% in May. In other words, unlike the U.S., the European Central Bank is not operating in a strong growth environment; but because of inflation, it still finds it difficult to ease policy.

This divergence matters for investors. The U.S. economy appears strong enough to withstand high rates, while Europe is facing the same rate pressure under weaker growth conditions. This creates a more complicated outlook for euro-denominated assets: on one side, the possibility of tighter monetary policy because of inflation; on the other, fragility on the growth side.

For Turkey, the impact is more direct. Consumer inflation rose 32.61% year over year in May. Volatility in oil prices and a stronger dollar make the disinflation process more fragile. When U.S. rates remain high, capital inflows into emerging markets become more difficult; when the dollar stays strong, energy and import costs create additional pressure.

For this reason, it is more useful to read Europe and Turkey in this issue not as separate local stories, but as examples of how U.S.-centered financial conditions are affecting other markets. The Fed’s decision to wait means more expensive financing, a stronger dollar, and narrower policy space not only for Wall Street, but also for Frankfurt, London, Istanbul, and emerging market portfolios.

For investors, the conclusion is this: if expectations for U.S. rate cuts are pushed further out, the effect will not be limited to Nasdaq or Treasury bonds. In Europe, the balance between growth and interest rates becomes more difficult. In high-inflation economies such as Turkey, currency and price stability become more sensitive. In emerging markets, selectivity increases.

The overall picture in markets has not completely deteriorated. The U.S. economy continues to remain strong, corporate earnings do not yet appear to have seriously weakened, and AI investments remain an important growth area for major technology companies.

However, the period in which investors could move comfortably is fading. Expectations for rapid rate cuts are weakening, while volatility in oil prices keeps inflation concerns alive. This creates a more difficult pricing environment for both stocks and bonds.

This pressure is not limited to the U.S. As American interest rates remain high, the dollar finds support, global financing conditions tighten, and policy space narrows across many markets, from Europe to Turkey. Europe feels this pressure through weak growth and high inflation, while in high-inflation economies such as Turkey, a strong dollar and energy costs make the disinflation process more fragile.

In this environment, the companies that stand out will not only be the fastest-growing ones. Companies that can protect their balance sheets, manage rising costs, turn investment spending into real profits, and generate strong cash flow in a high-rate environment will attract more attention.

Markets continue to offer opportunities. But these opportunities now require greater selectivity, stronger balance sheets, and more realistic valuation discipline.