What Happened Last Week
- Nasdaq Correction: The Nasdaq-100 Index entered correction territory last week, falling over 10% from its peak.
- AI CapEx Woes: Last week’s hyperscaler earnings revealed investor discomfort with AI spending as earnings growth decelerates.
- The Fed Holds: The Fed held borrowing rates constant last week and gave little by way of forward guidance.
What We’re Watching This Week
- Earnings Week Four: On deck this week are more reads for the AI theme, the consumer, and software.
- Midterm Elections: America heads to the polls on Tuesday, and investors will watch key races for indications of how AI-regulatory and fiscal policy may evolve.
- Economic Data: Friday’s October nonfarm payrolls report will be the main event, with job openings and Institute for Supply Management (ISM) business surveys adding to the mosaic.
Investment Management Team’s Views
Investors are grappling with an unfamiliar slowdown in earnings growth and AI capital spending. With more than half of the S&P 500 having reported, third-quarter earnings are still on pace for another double-digit increase, an exceptionally strong result this far into an economic expansion. Expectations are extremely elevated after several astounding quarters. Earnings growth is decelerating, positive surprises are shrinking, and good results are increasingly met with selling rather than rewarded with further upside. That dynamic has been most visible in technology, with the Nasdaq-100 Index underperforming the S&P 500 for a fourth straight week and finishing nearly 10% below its highs. However, small- and mid-cap stocks, dividend strategies, and nine of eleven S&P 500 sectors advanced last week. We continue to view that rotation as healthier than the headline index performance suggests.
Last week’s macro data did little to change the broader picture, while the Fed reinforced just how divided policymakers have become. Third-quarter Gross Domestic Product (GDP) growth was strong, while inflation and wage growth were broadly consistent with expectations. The Fed left rates unchanged, with two members dissenting in favor of another hike, but Chair Warsh offered little guidance on what comes next, and the yield curve steepened after the meeting. Our read remains that inflation is still too high, but the committee appears unlikely to tighten as aggressively as markets have periodically feared. That backdrop leaves us increasingly interested in cyclical areas of both equities and fixed income that have cheapened as volatility has risen, particularly if economic growth remains resilient.
This week brings another crowded mix of earnings, economic data, and political risk. Apple and Palantir report Monday, followed by Advanced Micro Devices (AMD) Tuesday and Qualcomm Wednesday, giving investors several more opportunities to test whether expectations around technology and AI have reset far enough. Tuesday’s midterm elections could also drive sector-level volatility as investors assess the implications for fiscal, AI-regulatory, energy, and healthcare policy. The economic calendar then culminates with Friday’s October employment report, offering another read on whether strong economic growth is translating into labor-market-driven inflationary pressure. With expectations becoming more realistic across technology while participation continues to broaden elsewhere, the next several weeks should help determine whether the recent rotation develops into a more durable expansion of market leadership.