What Happened Last Week
- Democratic Sweep: The Democrats took control of both Houses of Congress in a resounding victory.
- AI Infra Under Pressure: The success of several candidates favoring restrictions on data-center development pressured popular positions in the AI theme.
- Steady Macro: Friday’s strong payrolls report reinforced that the macro backdrop remains resilient.
What We’re Watching This Week
- Earnings Week Five: CoreWeave will report earnings Tuesday, but the most important corporate news is a possible public offering roadshow from Anthropic.
- Inflation Report: Tuesday’s Consumer Price Index inflation report will be in focus, with the Fed expected to hike in December.
- Energy Price Relief: Oil prices and the energy sector fell last week despite ongoing tension in the Middle East, but energy supply remains an important inflation input.
Investment Management Team’s Views
Last week ended with the biggest drop for the S&P 500 Index since last April. The tech-heavy Nasdaq-100 Index took the brunt of the selling and closed the week in official correction territory, down 13.5% from its all-time highs just over a month ago. Sentiment around the sustainability of the earnings boom was already deteriorating, and the surprising magnitude of the Democratic sweep in the midterm elections, coupled with the success of anti-data-center candidates in state and local races across the country, caused investors to further reduce exposure to the AI theme. Investors are right to reassess the earnings outlook for AI capex beneficiaries if political and regulatory barriers make future investment more difficult. At the same time, year-end positioning, extreme factor volatility, and the prospect of additional capital needs are amplifying the selloff and argue against stepping back into the theme too aggressively. In our view, however, Tuesday’s election changes the near-term setup for AI investment, not the underlying case for the buildout itself.
Investors continue to rotate into the rest of the market when AI infrastructure names come under pressure, and last week that included some of the top names in the U.S. market. Last week, the average S&P 500 stock was down only a little more than 1%, while dividend payers and 5 sectors advanced. High-quality bond prices also rose as yields fell across the curve, even as the pace of job growth in the U.S. accelerated and the unemployment rate fell. While odds of a December rate hike from the Federal Reserve fell slightly last week, we think it will continue to hike gradually, even if this week’s inflation report comes in light. Regardless, the Fed is not the main driver for equities; instead, we’re focused on the AI earnings trajectory in 2027 and 28 and positioning into year-end.
Earnings reports are slowing, but investors will be paying close attention to the fundamentals. We think Anthropic’s potential roadshow ahead of its planned IPO is the most important barometer of AI sentiment; a successful capital raise, regardless of valuation, could help stabilize the broader ecosystem. NeoCloud CoreWeave’s earnings report on Tuesday will also be closely watched, as its credit has become a bellwether for the health of the AI infrastructure trade. We are also watching energy prices and the Middle East. The energy sector declined 12% last week as crude prices fell, but rising tensions and the prospect of renewed pressure on energy supplies remain a relevant risk for inflation and equity sentiment.