What Happened Last Week
- Treasury Yield Stability: Treasury yields were largely unchanged last week, leaving room for equity market breadth to improve.
- AI Infrastructure Trade Takes a Pause: Conflicting headlines around the model providers’ revenue run rates weighed on AI Infrastructure stocks.
- Energy in Focus: Oil and other commodity prices rose as the Administration attempts to increase energy supply ahead of the upcoming midterm elections.
What We’re Watching This Week
- Earnings Week One: Earnings season kicks off this week, with the large banks and several healthcare names reporting Q3 results.
- Consumer Price Index (CPI): Wednesday’s CPI report is unlikely to prompt a Fed rate hike at its October meeting, but it will help set the tone for rate expectations in the months ahead.
- Bond Markets: Further signs of stability in long-term government bonds are an important precursor to improved equity breadth.
Investment Management Team’s Views
Stability in Treasury yields helped the S&P 500 Index and the Nasdaq-100 Index reach fresh all-time highs last week amid improving market breadth. Notably, nine of the eleven S&P 500 Index sectors rose, with only Technology and Industrials finishing lower. However, small-cap and international equities did not join the broader rally. While it is too early to call a turning point in the trend of higher yields, signs of stabilization are beginning to emerge. Strong demand at last week’s ten- and thirty-year Treasury auctions, particularly from end investors, suggests that higher yields are increasingly attracting capital. In our view, continued stabilization in Treasury yields could further support a broadening trade.
AI infrastructure and semiconductor names took a breather in their market leadership as concerns emerged over conflicting reports about large-language model providers’ revenue run rates. This puts the broader group of model providers under more scrutiny, as any revenue shortfalls relative to expectations could raise concerns about the sustainability of AI infrastructure CapEx and create an overhang for the AI trade. We believe positioning in this part of the market is meaningfully lower than it was earlier in the summer. Regardless, this scrutiny heightens focus on hyperscaler CapEx intentions ahead of earnings season.
The week ahead contains a mix of macro and fundamental catalysts. Wednesday’s September inflation report and Thursday’s retail sales will help set the tone for Fed expectations over the next few months. Meanwhile, conflicting headlines about a potential deal with Russia to increase energy supply and weekend news of attacks on a Saudi airport show that energy-price inflation remains top of mind. Turning to fundamentals, the third-quarter earnings season officially begins Tuesday morning. This week is dominated by banks and healthcare firms. Continued strength in fundamentals is necessary for a broadening market amid well-known macro headwinds: higher rates, elevated energy prices, and a stronger dollar.