RECAPPING LAST WEEK
Technology and energy markets diverged sharply this week, while the Federal Reserve’s steady hand
proved less decisive than initially suggested. Equities opened on a constructive note Monday following
news of Anthropic’s S–1 filing, but sentiment reversed by midweek as hyperscaler earnings from
Alphabet, Amazon, and Intel reignited concerns over the scale of AI–related capital expenditure. This, in
turn, dragged the Nasdaq down as much as 2.8% on Friday. The selloff was broad enough to overwhelm a
structural shift already underway in the market: correlation among the “Magnificent Seven” has fallen to
its lowest point in a decade, indicating the decline of the single–basket trade that long defined the group.
Apple was penalized in 2025 for lagging peers on AI spending and has more recently been rewarded for
that same restraint—but even it was not spared in Friday’s selloff. This suggests the drawdown reflected a
sector–wide repricing of AI–related growth and margin assumptions and not solely a verdict on company–
specific capex decisions. Friday’s $6.3 billion hack of Binance represented the largest such breach on
record, adding a significant security event to the week’s cryptocurrency–market backdrop. The FBI linked
the attack to an operation based in North Korea, while Binance said it would absorb the financial impact
of the stolen coins rather than pass the losses on to its users. Energy told a different story: Chevron and
Exxon reached all–time highs on strong refining profitability, as geopolitics drove WTI to join Brent above
$100 per barrel Friday, as Ukraine has been responding to Russia’s attacks on their energy grid by striking
Russian refining infrastructure. This, alongside the ongoing Iran conflict have added a persistent risk
premium to crude, despite the U.S. administration’s efforts to ease domestic prices through direct
negotiations with Russian producers. Wednesday’s 10–2 FOMC decision to hold rates steady added further
texture. Chair Warsh acknowledged elevated inflation but noted the Fed is awaiting an “accumulation of
more information” before acting further. He also signaled his intent to reduce the frequency of rate–
decision meetings, though he didn’t specify a timeline. The initial reaction pushed the 10–year Treasury
yield above 5%, but that move reversed later in the week as tech–driven risk aversion spurred a flight to
safe–haven instruments, pulling yields back below the threshold. This round trip indicated that equity
stress, rather than any shift in the policy outlook, was the dominant driver. Most major central banks
followed a similar path, holding rates steady despite persistent global inflation pressures. This points to a
coordinated preference for patience over preemptive action. Collectively, the week underscored a market
increasingly attuned to the sustainability of AI capex and to geopolitically driven energy–supply risk, with
rate–sensitive assets taking their cues more from equity risk appetite than from policy signals themselves.
THE WEEK AHEAD
The U.S. congressional elections are likely to command the greatest attention over this consequential
week. The elections will offer an important signal, indicating whether the current administration will face a
shift in the political landscape that could prevent it from advancing its agenda over the next two years. The
immediate market implications may depend not only on the election results themselves, but also on how
investors interpret the potential path for policy and the extent to which the outcome changes expectations
for the balance of power in Washington. Alongside the election, earnings from Apple, AMD, Palantir and
Super Micro Computer should provide additional perspective on the durability and breadth of the
technology and artificial–intelligence trade. These companies’ aggregate performance could help investors
assess the degree to which AI enthusiasm is becoming more differentiated as various companies’
earnings diverge. By the end of the week, attention should shift toward the health of the U.S. consumer,
with Friday’s unemployment–rate, hourly–earnings and consumer–credit readings helping to clarify how
well households are navigating persistent inflation and broader economic pressures. If the labor market
and wages remain strong, observers may conclude that consumers can still absorb these pressures,
while weakness in employment or credit markets could indicate the opposite. The latter scenario could
also imply that effects could extend beyond the consumer and impact growth expectations for business
that are highly exposed to household spending. The week could therefore provide investors with a more
complete picture of three important variables shaping the market outlook: the direction of U.S. policy, the
underlying strength of the technology and AI trade, and the durability of the consumer.
(Schwab)
