RECAPPING LAST WEEK
U.S. equities delivered a mixed performance this week as investors navigated a sharp decline in
Treasury yields, escalating geopolitical risk, and growing concerns about the sustainability of the
AI investment boom. Beneath the headline indices, the divergence between technology stocks and
the broader market became increasingly pronounced as investors reassessed the valuations of
companies at the center of the AI trade. The Nasdaq was particularly weak, falling sharply on
Thursday as semiconductor stocks sold off while the Dow and Russell 2000 remained firm. One of
the week’s most significant developments was a dramatic rally in longer–dated Treasuries that
pushed the 10–year yield back below 5%. This move, combined with investors reducing their
exposure to technology stocks amid AI spending and debt concerns, marked a flight to quality.
Corporate earnings, which in prior quarters had justified the lofty valuations of companies at the
center of the AI buildout, were overshadowed by concerns over capital expenditures. Perhaps the
best example was META: it posted a strong “beat” and raised earnings guidance, yet the stock sold
off sharply on news that the company was raising the low end of their capex spending plans by
$5B. Energy markets remained a major source of uncertainty. Brent crude oil prices, the world
benchmark, climbed to over $116 per barrel–nearing the price spike highs from the early days of
the Iranian conflict, after renewed attacks on commercial shipping and Saudi energy infrastructure,
as well as reports that the U.S. and Israel plan to resume military strikes after the November
midterm elections. Gold, meanwhile, behaved more like a risk asset than a safe haven, selling off
on Thursday to a price near its summer lows of around $4000 per ounce. While typically
geopolitical turmoil provides support for the precious metal, the broader theme this week was
investors seeking yield, as investors piled into not just Treasuries but high–dividend–yielding
stocks and various ETFs holding them. In S&P sectors, Energy was the top performer while
Communication Services the worst. While one might assume that SpaceX’s ambitions to acquire a
land–based cellular network was behind the Communications Sector selloff, it’s worth noting that
the big 3 cellular service providers (T, VZ, and TMUS) each only account for a little over 4%
weighting in the sector, while META and GOOGL together account for over 40%. Always good to
know what’s under the hood of various indices and ETFs!
THE WEEK AHEAD
This is shaping up to be one of the most consequential weeks of the quarter, with a packed
calendar of mega–cap earnings, central bank rate decisions and the first look at 3rd quarter GDP.
For equities, investors will focus on a key question: whether strong corporate earnings can offset
growing concerns about escalating AI infrastructure spending and the potential for higher energy
prices to keep inflation elevated. Microsoft, Alphabet and Amazon will provide a critical test of
whether the AI investment cycle continues to justify the extraordinary capital commitments.
Monetary policy will provide the other major catalyst, with the Federal Reserve widely expected to
leave the Fed Funds target rate unchanged. Fed Funds futures pricing reflects an only 10%
probability of a 25–bps hike for Wednesday’s meeting, but an 80% chance for higher rates at their
next and final meeting for the year in December. Thursday offers our first look at 3rd Quarter GDP,
along with September’s PCE data; being that the latter is “The Fed’s preferred inflation gauge”, the
FOMC committee members will certainly have access to it a day early to help inform and guide
their decision and statement. Internationally, we’ll hear from a number of central banks: The
Reserve Bank of New Zealand and Bank of Canada are widely expected to raise rates on
Wednesday, while the European Central Bank and Bank of Japan are expected to hold rates
steady following their recent tightening. With roughly one–third of S&P 500 companies reporting
during the week, the combination of earnings announcements, forward guidance surrounding cap
ex spending, and central bank announcements will offer investors plenty of news to digest
alongside whatever geopolitical surprises may be in store.
(Schwab)
