What Happened Last Week
- Friday Selloff: The return of tariff fears sent markets reeling on Friday, but markets modestly recovered in early Monday trading.
- Private Credit Concerns: Recent private credit bankruptcies have raised questions about subprime lending.
- AI Deals: Deals in the AI ecosystem have driven tech stocks higher, but concerns about circularity have given some investors pause.
What We’re Watching This Week
- Tariffs: Trump’s statement on Friday has tariffs and trade negotiations with China back in focus ahead of the planned meeting between Trump and Xi late in the month.
- Earnings: The major banks, among others, kick off earnings season on Tuesday morning.
- Shutdown Politics: Prediction markets are pushing out the expected date for a shutdown resolution.
Investment Management Team’s Views
Equity markets spent most of the week trading sideways as investors weighed the usual topics: AI capital expenditures (CapEx) and monetization, domestic and international political developments, and the state of the U.S. economy. Then, on Friday, tariffs came roaring back into the conversation. President Trump took exception to recent Chinese guidance on rare mineral exports and issued a stern statement threatening higher tariffs against China. The S&P sold off 2.7% on Friday, led lower by semiconductors, tech, and retail darlings, although price action was orderly and controlled. After the market closed, Trump stated that China would see an additional 100% higher tariffs and a range of export controls starting on November 1. Over the weekend, Trump signaled that there was room for negotiation, but this newly introduced risk could catalyze a further correction in equity markets.
Recent deterioration in riskier parts of the credit market has heightened our focus on bank earnings reports, which begin this week. There have been a few high-profile bankruptcies in private credit, and public proxies for this booming industry have been under selling pressure for weeks. Prior to Friday’s sell-off, high yield credit spreads had been slowly widening from extremely tight levels. It is too early to determine whether these growing pressures will have an impact on the broader economy. However, the news will certainly increase our scrutiny of the banks’ commentary on credit health and the state of low-income consumers. Large banks begin reporting Tuesday morning, followed by their regional peers starting later in the week.
The U.S. government remains closed, and expectations for the duration of the shutdown have been pushed out further. President Trump stated that the government had located funding to pay the military on October 15, easing one of the near-term pain points that could have helped force party leadership teams to the negotiating table. With the government shutdown likely to continue, the importance of company earnings calls is heightened. Investors will rely more heavily on reports from the banks and some consumer-facing names to update their views on the state of the economy and consumer health. In addition to the beginning of earnings season, Oracle will update tech investors on recent dealmaking in the AI space at its AI World conference on Tuesday and Wednesday.