Financial markets could face a sharp correction if the Federal Reserve raises interest rates this week, according to economist David Woo.
Woo warned that current conditions resemble the setup that preceded the 1987 stock market crash in an interview with David Lin published on September 15.
The economist argued that surging energy costs have increased inflation risks, leaving the Fed with little room to remain accommodative.
In his view, higher oil prices have become a key driver of market expectations for another rate hike, adding pressure to an already stretched financial system.
According to Woo, the current environment bears similarities to the period before the 1987 market crash, when investors feared additional monetary tightening after an initial rate increase.
He argued that the combination of rising bond yields and expectations for further Fed action could create conditions for a sudden sell-off.
“The Fed raised rates once, and then when the market thought they going to raise rates again, that’s when the stock market crashed in ’87.<…> They know anything happens to this thing, it’s game over. Basically collapse and then, you know, it’s the end,” he said.
Concerns from Treasury yields
The concern is particularly acute as the U.S. 10-year Treasury yield has climbed toward 5%, a level that increases borrowing costs across the economy and reduces the appeal of risk assets.
Woo suggested that policymakers may be underestimating the impact of higher rates on financial markets, especially as valuations remain elevated following a prolonged rally.
A central part of Woo’s bearish outlook is the growing dependence of the U.S. stock market on artificial intelligence-related spending and investment.
He described the AI trade as the primary force supporting current market valuations and warned that higher long-term interest rates could eventually undermine the sector’s growth narrative.
Rising yields increase financing costs and can reduce investor appetite for high-growth companies whose valuations rely heavily on future earnings.
The economist also claimed that the Trump administration and Treasury Secretary Scott Bessent are seeking to prevent long-term rates from rising too far because a sustained increase could threaten the AI investment boom that has become a major pillar of market performance.
He warned that if the 10-year Treasury yield continues climbing toward 5.3%, pressure on technology stocks could intensify and trigger a broader market downturn.
Geopolitical risks
Beyond monetary policy, Woo highlighted several geopolitical risks that could amplify market volatility.
He pointed to disruptions in global energy markets and ongoing tensions in the Middle East as factors supporting higher oil prices. At the same time, he warned that escalating technology tensions between the United States and China could create additional economic stress.
Woo specifically cited the possibility of restrictions on Chinese AI models, arguing that any retaliatory measures from Beijing involving critical minerals or supply chains could weigh on U.S. industries and further damage investor sentiment.
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