What Happened Last Week
- AI Selloff and Bond Rally: Concerns about the sustainability of the AI buildout and frontier lab revenue saw yields fall and semiconductor stocks decline sharply.
- Rotational Price Action: Rather than exit stocks, investors rotated from popular semiconductor positions into more defensive sectors.
- Oil and Inflation: Oil prices climbed as tensions continued and inflation surprised to the upside, but the move in AI stocks ultimately mattered more for yields.
What We’re Watching This Week
- Earnings Week Two: AI earnings begin with SpaceX and Meta, and additional looks at the industrial and consumer sectors throughout the week.
- AI Sentiment: AI stocks finished the week on a sour note, but sentiment may stabilize and prompt a sharp reversal, as we have seen in recent AI-led selloffs.
- Europe: As violent riots accelerate ahead of a budget vote in France, we continue to keep an eye on European debt markets.
Investment Management Team’s Views
Concerns around the AI investment cycle overtook inflation and interest rates as the market’s primary source of anxiety last week. CoreWeave, one of the clearest expressions of the AI infrastructure buildout, fell roughly 25% as yields on its debt moved into distressed territory, while U.S. semiconductor stocks declined more than 10%. Importantly, however, the pressure remained concentrated rather than turning into broad equity selling. Value outperformed growth by more than 5%, while the average large-cap stock actually gained even as the Nasdaq-100 Index fell sharply. That kind of rotation can create uncomfortable volatility as crowded positioning unwinds, but investors’ willingness to move elsewhere in equities remains a constructive sign for the medium-term outlook.
The bond market offered another signal that investors are reassessing the economic implications of the AI buildout. September inflation came in hotter than expected and initially pushed yields higher, but that move quickly reversed, and Treasury yields declined through the remainder of the week. We think the unusual reaction was at least partly connected to the selloff in AI infrastructure. Expectations of enormous capital spending have been a key contributor to the market’s stronger growth outlook and, in turn, higher interest rates. As investors question how much of that spending can be sustained, especially as it increasingly relies on debt, some of the growth premium embedded in long-term yields has begun to fade. It is too early to declare a lasting turn in rates, but tighter financial conditions may finally be beginning to constrain growth.
This week’s earnings calendar should better test whether last week’s AI concerns are purely financial, fundamental, or a mix of both. Meta, Tesla, Lam Research, Texas Instruments, and IBM all report Wednesday, alongside a broader slate of industrial and consumer companies throughout the week. For AI-related names, we believe investors are likely to focus less on headline spending commitments and more on revenue growth, margins, cash generation, and evidence that returns can justify an increasingly capital-intensive buildout. With the economic calendar relatively light until Friday’s preliminary purchasing manager surveys, corporate results should weigh heavily on whether last week’s technology selloff continues or begins to stabilize.