by Gavyn Jensen-Schneider, Research Associate

Capital continued to rotate out of AI-related names this week even after some strong earnings showings. The S&P 500 finished the week down -0.47%, while the Nasdaq fell -0.71%. The 10-Year Treasury yield, an interest rate indicator, closed at 4.99%, down -10 basis points (bps) from last week. The 6-Month US Treasury, a favorite of our US Treasury strategy, closed at 4.31%, down -3 bps from last week.

Rotation out of AI has been the trade of the week; while the S&P 500 and Nasdaq both fell, the equal weight S&P 500 index (SPXEW) and Russell 2000 (RUT) were up +1.13% and +2.00% on the week. The S&P 500 is weighted by market cap, with the top 10 companies—all of which are AI-related names—representing 41% of the index. In our view, this rotation is a realization by investors that opportunities abound outside of AI; while big tech and the AI infrastructure buildout get the headlines and move the major indices, innovation in smaller industries should not be overlooked as earnings growth has been broad-based across public markets.

Meta was one of those heavyweights that jostled indices around this week. In its Wednesday earnings report, Meta topped Wall Street expectations nearly across the board. Improvements to ad algorithms enabled by Meta’s internal AI models drove growth in ad impressions (+10%), average price per ad (+14%), and topline revenues (+26%). Though AI is driving improvement, uncertainty surrounding the costs of FY27 capital expenditures for the AI buildout has ultimately pressured the stock.

Technology heavyweights Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN) headline as Q3 earnings season crescendos next week. Wednesday sees the 7^th FOMC meeting of the year, in which the Fed is expected to leave interest rates unchanged. Q3 GDP and September PCE inflation data headline the macroeconomic data releases as we close out the month of October.

by Gavyn Jensen-Schneider, Research Associate

Treasury yields and equity indices fell this week as market sentiment rotated away from AI technology names. The S&P 500 finished the week down -1.95%, while the Nasdaq fell -4.48%. The 10-Year Treasury yield, an interest rate indicator, closed at 5.09%, down -15 basis points (bps) from last week. The 6-Month US Treasury, a favorite of our US Treasury strategy, closed at 4.34%, up +1 bp from last week.

A swing in AI-related sentiment hit semiconductors and neocloud providers this week, lowering the PHLX Semiconductor index (SOX) by -11% and neoclouds CoreWeave (CRWV) and Nebius (NBIS) by around -15%. Scrutiny focused on the financing underpinning the AI buildout, as some analysts fret over its long-term health. These antsy swings in AI sentiment have been occurring throughout the year, typically in the weeks leading up to an earnings report; a similar move happened the week of July 17, with SOX falling around -10% when concerns of “irrational exuberance” emerged during the first week of the Q2 earnings season.

A beneficiary of this week’s risk-off sentiment in equities was fixed income. The rotation of funds into long-dated bonds halted the month-long rise we’ve seen in yields, instead reversing course and bringing 10-Year and 30-Year Treasury yields down by 15 bps each.

The alleviation of some long-term yield pressures was surprising given the September Consumer Price Index and Producer Price Index inflation reports from Wednesday and Thursday. Topline and core CPI inflation were ahead of Wall Street expectations at 3.7% and 2.6%, respectively. Topline PPI inflation was 90 bps ahead of expectations at 6.3%, while core PPI was 60 bps ahead at 5.0%. Elevated fuel and energy prices increase production costs, translating into price inflation for consumer goods and services. This might be what caused the hotter-than-expected September inflation, though, as Chairman Warsh would say, it’s the underlying trends that matter, not just one data point.

Earnings season keeps rolling next week, with Facebook’s parent company Meta, Netflix, Capital One Financial and T-Mobile among the notable reports. Economic data releases are less prevalent, with Thursday’s leading indicators and weekly jobless claims, followed by Friday’s final reading of the University of Michigan Consumer Sentiment index for October.

by Gavyn Jensen-Schneider, Research Associate

The AI trade continues to push ahead, with AI-exposed industrial names the latest space to benefit. The S&P 500 finished the week up +1.15%, while the Nasdaq rose +0.64%. The 10-Year Treasury yield, an interest rate indicator, closed at 5.24%, down -3 basis points (bps) from last week. The 6-Month US Treasury, a favorite of our US Treasury strategy, closed at 4.33%, up +3 bps from last week.

Power producers and industrial conglomerates were given a boon this week when Constellation Energy signed a deal with Alphabet (Google’s parent company) to provide 3.59 gigawatts of nuclear power for AI and data center use. The megadeal has been interpreted as a sign that power- and compute-hungry companies like Google will take energy from any source, including up-and-coming energy producers. A number of “second-order beneficiaries” that provide parts for nuclear power plants and other critical AI infrastructure, such as Mirion Technologies (MIR), saw a bounce off this announcement as well. We continue to see the broad-based impact of AI as a tailwind for some otherwise sleepy industrial names.

Yields on the 10-Year Treasury have seemingly stopped their ascent, hovering this week between 5.22% and 5.35%. The respite follows a series of speeches from Fed Governors this week, as well as the FOMC minutes, which outlined the views of the committee. Policymakers are in agreement that combating inflation is still their first priority and see another rate hike before year end as likely. The timing of that hike, however, remains up for debate. It is likely that the Fed leaves rates unchanged in October as it awaits additional data and avoids a rate hike a week before the midterm elections. Most market analysts seem to agree; there is currently an 83% chance of a hold according to CME FedWatch.

Q3 corporate earnings kick off next week with earnings reports from the big banks starting on Tuesday. Leading into the season, earnings growth for the S&P 500 is estimated at +29.6% according to FactSet. If it comes to fruition, it will mark the third consecutive quarter of +25% growth for the index. Wednesday’s release of core and topline CPI inflation marks the highlight of the economic calendar, with PPI inflation to follow on Thursday.

by Gavyn Jensen-Schneider, Research Associate

Treasury yields continued to climb, though a positive inflation report stemmed some of the bleeding. The S&P 500 finished the week down -0.27%, while the Nasdaq rose +0.45%. The 10-Year Treasury yield, an interest rate indicator, closed at 5.27%, up +10 basis points (bps) from last week. The 6-Month US Treasury, a favorite of our US Treasury strategy, closed at 4.29%, down -7 bps from last week.

Yields on long-dated US Treasuries jumped in September, with the 10-Year rising nearly 50 bps over the course of the month. The sudden move in Treasury rates has centered on sticky inflation and expectations of future interest rate policy. Early this week, markets were pricing in four interest rate hikes through 2026 and 2027 as investors seemed to be growing increasingly worried about inflation.

Commentary from Fed Governors this week has been mixed, with Kashkari, Barr, Logan, and others espousing the hawkish view that more work needs to be done to combat inflation. Members of the FOMC leadership—Vice Chair Jefferson and New York Fed President Williams—expressed more dovish outlooks, suggesting that more time and economic data would be needed to determine the next policy adjustment.

This week’s Core PCE inflation and employment reports give credence to the “wait and see” view. The August Core PCE inflation reading surprised to the downside at 3.0%, 30 bps lower than Wall Street expected, while the September employment report of +29k net new jobs was well below the +90k analysts expected. The unemployment rate, which crept up to 4.2% in September, hasn’t materially changed since March of this year. It remains range-bound between 4.1% and 4.3%, adding more weight to the wait-and-see approach.

Chairman Warsh has repeatedly emphasized that trends in data are more important than any single data point, and trends across inflation and employment have yet to materially change. The 3-month average Core PCE inflation remains at 3.0%, above the Fed’s 2% target, while 3-month net new jobs average remains steady at around +51k. Still, this week’s fresh data points have quelled some market woes, as Fed Funds Futures are pricing in only three hikes as of Friday.

Some additional clarity on the Fed Board’s thinking might arrive in next Wednesday’s release of the FOMC minutes. Quantitative economic data releases will otherwise be limited, with Services PMI on Tuesday and the University of Michigan Consumer Sentiment index on Friday representing the week’s most important prints. Corporate earnings will be similarly quiet as we wait for the big banks to kick off Q3 earnings season on October 13.