RECAPPING LAST WEEK
U.S. equities endured a turbulent week: after markets initially welcomed decisive victories that
would leave no room for protracted court battles contesting the midterm results, investors on
Thursday reassessed the implications for the massive AI infrastructure buildout in the wake of a
number of states’ and municipalities’ anticipated opposition to data center construction. Concerns
were especially pronounced in semiconductor stocks and companies tied to data–center power,
cooling, and infrastructure, as investors questioned whether the pace of AI investment could be
sustained in an increasingly challenging political and financing environment. The Nasdaq plunged
5.5% on Thursday, while the S&P 500 fell 4.4%. The Semiconductor Index suffered one of its
largest single–day declines on record, falling 12%, more on that below. The sudden reversal in
sentiment was reflected in the VIX, which jumped to 28, its highest level of anticipated future
volatility since the early days of the Iran conflict. Treasuries benefited from the turmoil, with yields
from the 2–yr to the 10–yr portion of the curve declining 10 basis points and a more muted
response on the long end of the curve. Energy markets experienced an equally dramatic reversal,
with oil prices plunging on Wednesday in the immediate aftermath of the midterms. Brent crude
fell nearly $9 per barrel as investors anticipated that the results would increase pressure on the
administration to pursue an end to the Iranian conflict. However, the rebound on Thursday was in
response to reports that the administration is weighing options for a massive near–term offensive
escalation as a third aircraft carrier strike group makes its way towards the region. International
markets followed U.S. markets lower as the technology selloff spread across both developed and
emerging markets. Asian markets were particularly vulnerable given their substantial exposure to
the semiconductor and AI supply chains. Emerging markets faced additional pressure from the
overall decline in risk appetites, reflecting just how tied to the AI trade all equity markets have
become. Gold, under pressure for weeks as equities remained near all–time highs and “higher for
longer” returns were found in fixed income showed a bit of its former safe–haven self by catching a
bid during Thursday’s equity market selloff. Crypto, however, behaved more like a risk–asset,
rallying sharply on Wednesday before giving it all back on Thursday. October’s jobs report, in what
other months would have been the highlight of the week, was met with muted response, even as
the job growth of 165k and the unemployment rate down–ticking to 4.1% favorably exceeded the
range of economist forecasts. Expectations that the Fed will increase the Fed Funds rate by 25 bps
at their last meeting of the year increased to 77%, up from last week’s 70%.
THE WEEK AHEAD
Investors will enter the coming week looking for signs indicating whether the recent technology
selloff represents a reset in valuations or a more fundamental reassessment of the economics of
the AI investment cycle. Earnings from CoreWeave on Tuesday followed by Cisco and Applied
Materials on Thursday, should provide important signals about the health of the AI infrastructure
cycle. CoreWeave will be particularly important, given its exposure to the financing concerns
surrounding the neo–cloud business model, while Cisco and Applied Materials should offer insight
into demand for networking equipment and semiconductor manufacturing technology. Investors
have increasingly been focused on the important distinction between the hyperscalers and the
neo–cloud providers. Microsoft, Amazon, Alphabet, and Meta have substantial cash flows,
diversified businesses, and relatively easy access to debt markets that can finance their
infrastructure spending. The neo–clouds, by contrast, are far more dependent on lenders’ ongoing
willingness to extend credit, and investors are growing increasingly concerned about these
companies’ ability to handle their debt loads. The economic calendar also brings two important
inflation readings, with CPI on Tuesday and PPI on Friday. Beyond the scheduled data and
earnings releases, investors will continue to monitor developments in the Middle East and the
potential implications for energy prices and inflation. Wednesday is Veterans Day, a federal and
banking system holiday although U.S. equity markets will remain open. Thanks to all who have
served our country in the armed forces.
(Schwab)
