What Happened Last Week
- Equities Slide: The S&P 500 posted a weekly decline for the second time since August.
- AI Theme Weakness: Tech stocks led the market lower amid renewed concerns about spending and increased scrutiny of deals.
- In-line Inflation: Friday’s inflation report and strong growth prospects called into question the depth of the Fed’s cutting cycle.
What We’re Watching This Week
- Government Shutdown: Funding for the government expires Tuesday at midnight, potentially impacting the release of Friday’s jobs report.
- Jobs Report: Friday’s non-farm payroll, if it is released, will be the data highlight for the month as labor remains the key to evaluating Fed policy.
- Quarter-End: U.S. growth equities have had a strong quarter, so quarter-end rebalancing may positively impact defensive equities and bonds.
Investment Management Team’s Views
Equities experienced a rare stumble, with the S&P 500 declining for the second time since the start of August, as investors probed two key pillars that have underpinned the market rally over the past few months. First, investors are (once again) beginning to question the potential return on the massive investments being poured into AI infrastructure. Last week’s huge bond offering from Oracle has invited renewed scrutiny of capital expenditure funding sources. In addition, seemingly circular investments and quasi-related party transactions harken back to the dot-com bubble, with some seasoned money managers publicly sounding the alarm. We still feel it’s early innings for this important market theme, but some weakness could persist until the narrative resets with earnings season kicking off in a few weeks.
Investors are also beginning to reevaluate the Fed’s easing cycle as it approaches the end of the year. Last week, analysts revised the Gross Domestic Product for the second quarter meaningfully higher, and the Atlanta Fed now estimates third-quarter growth at nearly 4%. During speaking engagements last week, Powell and other Fed members took the opportunity to remind market participants of the Fed’s data-dependent stance. Friday’s in-line inflation reading did not make news on that side of the mandate, leading the market to re-price the rate path higher on stronger growth prospects. The newest board member, Stephen Miran, also failed to make a compelling case for his view of cutting aggressively, helping push front-end yields to their highest levels since late August.
U.S. equities are wrapping up a strong quarter, one in which tech and growth stocks led. As the quarter turns over, rebalancing may benefit defensive stocks and bonds. We are still a few weeks away from the start of earnings season, and a looming government shutdown may limit access to official labor and inflation data. In the meantime, private labor and sentiment data will give the market something to chew on before the shutdown is resolved. Recent AI theme questions and data uncertainty may contribute to some market weakness in the near term. At the same time, a rebound in consumer strength and growing incomes may fuel a wave of strong earnings reports from banks and airlines to kick off the season.