What Happened Last Week
- Tech Volatility: The violent swings in tech and semiconductor stocks were related to the partial liquidation of an AI-focused hedge fund.
- Hyperscaler Earnings: Reactions to megacap tech earnings indicated that investors are willing to tolerate higher AI spending when accompanied by revenue growth.
- Warsh’s Word Salad: Wednesday’s Fed decision, while dovish at first glance, led to rate volatility as the market struggled to make sense of the Chair’s presser.
What We’re Watching This Week
- Earnings Week Four: A host of tech and healthcare names are the highlights this week in earnings as investors look for signs that the nascent rally can continue.
- Positioning and Sentiment: With the underlying factors behind last week’s volatility well known, we expect strong fundamentals to support stocks from here.
- Labor Data: Investors will have a renewed look at the labor market, with job openings and payrolls reports due this week.
Investment Management Team’s Views
The S&P 500 Index’s 1.1% gain and the Nasdaq-100 Index’s 0.5% advance concealed a far more dramatic week beneath the surface. A sharp midweek decline was sandwiched between a relatively calm start to the week and a powerful rebound on Thursday and Friday. Results from hyperscalers Microsoft and Amazon, a group of stocks under substantial valuation pressure this year, showed that investors remain willing to support rising AI capital spending when it produces visible revenue growth, providing important fundamental support for the AI theme. News that a highly leveraged, AI-focused hedge fund had been forced to unwind its positioning explained much of the midweek selling and gave last week all the trappings of a clearing event. We think equities are headed higher in the weeks ahead with leadership in tech and the AI infrastructure theme.
The Fed meeting left markets with greater uncertainty about future policy but was less impactful on last week’s trading action than headlines would suggest. A decision to leave rates unchanged with three dissents appeared dovish relative to calls for a hike. Chair Warsh’s press conference only increased uncertainty about the policy path, causing a steeper curve and the highest 30-year Treasury yield since 2007. Markets are clearly demanding greater compensation for uncertainty around inflation, fiscal policy, and the Fed’s reaction function. We still expect short-term rates to remain unchanged through year-end, though with somewhat less conviction given the degree of focus on the near-term path for inflation. Despite the Fed’s lack of clarity, strong earnings growth and a bottom in tech sentiment mattered more to markets.
The week ahead will test whether last week’s rebound can become a more durable advance. Labor market data could either reinforce expectations for unchanged policy or revive the debate around another hike, while another round of technology, consumer, and healthcare earnings will provide fresh reads on AI demand and the broader economy. After several weeks in which leverage and positioning overwhelmed fundamentals, the market’s reaction may be as informative as the results themselves. A more orderly response to strong reports would suggest that much of the forced deleveraging has now run its course. For now, stronger earnings and cleaner positioning leave us optimistic heading into the new month.