What Happened Last Week
- Government Reopens: The government reopening induced a short-lived rally in risk assets.
- Hawkish Fedspeak: Fed speakers cast doubt last week on a December rate cut with some hawkish commentary.
- Sentiment Shift: The AI theme and other high-flying market segments were hit hard amid jitters over AI spending.
What We’re Watching This Week
- Nvidia Earnings: While Nvidia’s (NVDA) update is the main event this week, some major U.S. retailers will also report earnings.
- Economic Data: Business surveys will add a forward-looking component to a delayed nonfarm payrolls report that is expected to be released this week.
- Positioning: With popular positions under pressure, we are focusing on how those parts of the market trade into NVDA’s print.
Investment Management Team’s Views
Last week’s early optimism, sparked by the government reopening, proved short-lived, as investors continued to scrutinize mega-cap tech’s AI capex spending plans and potential monetization opportunities. While the S&P 500 closed modestly higher last week, under the surface, the price action was much less constructive: small caps, speculative AI stocks, crypto, and other popular themes like quantum computing faced heavy selling pressure. Other price action last week, such as the strong outperformance of healthcare, a bid to low volatility and value stocks, and the outperformance of Europe, all point to much cleaner investor positioning after the relentless run for domestic mega-caps. This action may clear the decks for this week’s key AI catalyst – earnings from NVDA after market close on Wednesday. With the bearish crescendo of AI overinvestment now front-page news, the setup for a year-end rally looks more promising, as some of the froth has come out of the AI theme.
Beyond NVDA, several major U.S. retailers report this week as earnings season winds down. With higher-beta pockets of the market underperforming lately, the market’s response to NVDA will be an important gauge of overall risk appetite, particularly through the hyperscalers’ reactions as investors continue to debate AI spending trajectories. Retailers’ results will also serve as timely macro inputs given the slow return of backdated economic releases, offering fresh read-throughs on input inflation, consumer demand resilience, and holiday spending expectations. Against a backdrop in which parts of the consumer complex have softened and some subprime lending concerns linger, these updates may help investors recalibrate growth expectations heading into year-end.
Fed policy expectations have also shifted. After a wave of hawkish commentary last week, markets ended with December pricing slightly favoring a hold, down from near-certainty of a cut before the last meeting. With the government reopened, incoming data will clarify the economic picture, though the backlog means it may take time to assess the full impact of the shutdown and the extent of noise embedded in the delayed releases. A divided Fed could struggle to justify another cut this year, especially if the data comes in unevenly or points to lingering inflation stickiness. Still, for equities, the key stance remains unchanged: the next move is likely lower, hikes remain off the table for now, and policy continues to lean toward support rather than restraint.