U.S. stocks started the week higher today, with the Dow gaining 0.28%, S&P 500 rising 0.70%, Nasdaq climbing 0.82%, and Russell 2000 adding 0.38%. Technology was among the strongest areas, with semiconductors and memory stocks broadly higher. Nvidia and Tesla were notable winners, while cybersecurity, networking, industrials, financials and travel stocks also performed well.

Oil provided some help, with WTI crude falling 1.5% following renewed diplomatic efforts in the Middle East. But the biggest story remained AI and specifically how companies plan to finance the enormous infrastructure buildout underway.

AI Financing Moves Back Into Focus

Meta announced plans to raise $95 billion in equity to help finance its expanding AI investments. SpaceX, meanwhile, completed a $40 billion debt financing to fund purchases of Nvidia chips. Those are extraordinary numbers. Just last week, investors punished AI-related stocks as concerns grew about how much capital companies would need to raise and whether debt markets could comfortably absorb it.

Today’s reaction was different. Rather than treating the financing itself as bad news, investors appeared encouraged that companies are demonstrating they can actually access the capital needed to support their expansion plans. That doesn’t make the financing risk disappear. But there’s an important difference between needing enormous amounts of capital and being unable to obtain it. For now, the largest AI players continue to demonstrate access to substantial amounts of funding.

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Demand Still Appears to Be the Easier Part of the Equation

The underlying demand picture also remains remarkably strong. Amazon CEO Andy Jassy said the company’s 2026 cloud capacity is already sold out, most large blocks of capacity for 2027 are booked, and meaningful portions of 2028 capacity have already been committed. That follows strong AI demand commentary last week from companies including SpaceX, Super Micro, Lam Research, Western Digital, Bloom Energy and Comfort Systems.

The pattern is becoming increasingly clear. The market’s concern isn’t whether companies want more computing power. They clearly do. The debate is increasingly about who pays for all that capacity, how expensive the financing becomes and whether future revenue ultimately generates attractive returns on the investment.

Anthropic Offers Another Window Into the AI Boom

Anthropic’s IPO filing today provided another interesting look inside the economics of the AI industry. Revenue growth has been extraordinary, while operating losses have narrowed considerably as the business has scaled. The company also disclosed significant financing commitments from several major technology partners.

That combination, explosive growth alongside enormous capital requirements, captures much of the current AI investment story. These companies may ultimately become enormously valuable businesses. But investors are increasingly demanding evidence that rapid revenue growth can eventually translate into sustainable profits and cash flow. That’s a healthy evolution from simply rewarding companies for announcing more AI spending.

The Fed and Big Tech Now Take Center Stage

This week could provide much more clarity. The Fed announces its latest interest-rate decision Wednesday and is widely expected to leave rates unchanged. The more important question will be whether policymakers continue signaling another possible increase later this year. Oil’s 1.5% decline today provided some relief after crude climbed above $100 last week, but inflation remains a concern.

Then come the major technology earnings. Google and Microsoft report Wednesday, followed by Amazon on Thursday. Investors will be listening closely for three things: how much these companies expect to spend on AI, whether demand remains strong enough to justify that spending, and whether AI is beginning to produce measurable financial returns. Those answers could determine whether today’s AI rebound has staying power.

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Here’s Our Take

The AI debate has changed considerably over the past few weeks. Earlier this year, simply announcing more AI investment was often enough to excite investors. Today, the market is asking harder questions. Where will the money come from? What will it cost? And what return will companies ultimately earn on it? Today’s financing announcements provided one encouraging answer to the first question.

Capital remains available. And the demand side of the equation continues to look exceptionally strong, with Amazon’s comments about cloud capacity providing the latest evidence. But access to capital doesn’t guarantee attractive returns.

That’s why this week’s hyperscaler earnings may matter more than another round of financing announcements. Investors need evidence that AI is not only driving spending but also improving revenue growth, productivity, customer engagement and profitability. At the same time, the Fed remains an important part of the equation. If inflation stays elevated and rates remain higher for longer, financing hundreds of billions of dollars of AI infrastructure becomes more expensive.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks ended the week lower today, with the Dow falling 1.23%, S&P 500 losing 0.52%, Nasdaq slipping 0.21%, and Russell 2000 declining 0.29%. Unlike yesterday, when weakness was concentrated in Big Tech, today’s decline was much broader. Transportation, consumer, financial and travel-related stocks were among the laggards. Technology actually held up relatively well. Semiconductors and memory stocks stabilized after yesterday’s sharp decline, while software, cybersecurity and networking companies were among the stronger areas. The biggest story was energy. WTI crude jumped 3.8%, closing back above $100 per barrel and completing its third consecutive weekly gain.

$100 Oil Brings Inflation Back Into Focus

Oil’s resurgence is becoming increasingly important for markets. Middle East tensions remain elevated, and investors are increasingly concerned that another escalation could disrupt energy supplies. Even though oil exports from the Persian Gulf have improved recently, uncertainty surrounding shipping and the possibility of renewed conflict continue to keep a risk premium embedded in crude prices.

For consumers, higher oil eventually means higher gasoline, transportation and shipping costs. For businesses, it can mean higher freight, manufacturing and input costs. And for the Fed, it makes an already difficult inflation problem even harder. That helps explain why consumer-facing areas such as retailers, restaurants and travel companies struggled today.

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The Economy Is Strong but Inflation Is Too

Today’s economic data reinforced that tension. October’s manufacturing PMI rose to 56.0, its strongest reading since 2022, while services remained firmly in expansion territory. New orders were particularly strong, suggesting economic momentum remains healthy. That’s good news.

The problem was prices. Businesses reported the fastest increase in selling prices since August 2022, with higher energy, fuel and transportation costs contributing to the pressure. Consumers are noticing as well. University of Michigan data showed inflation expectations rising again, while overall consumer sentiment remained subdued. So the Fed continues to face the same uncomfortable combination: The economy is growing strongly enough to keep inflation pressure alive, while consumers are increasingly frustrated by high prices and borrowing costs.

AI Stabilizes After Yesterday’s Selloff

Technology provided one encouraging development today. AI-related stocks stabilized following yesterday’s sharp decline. More importantly, the underlying earnings evidence continues to look much better than recent investor sentiment.

Western Digital reported strong demand and said visibility extends several years into the future. Bloom Energy reported another strong quarter with growing backlog. Comfort Systems saw another major increase in backlog driven partly by data-center demand, while MaxLinear highlighted strong demand from AI data centers.

That continues a pattern we’ve seen throughout earnings season. The headlines surrounding AI financing have become increasingly cautious, but companies actually supplying the infrastructure continue reporting very strong demand. The market’s concern isn’t that AI demand has disappeared. It’s whether companies can finance the enormous buildout economically and whether future profits will justify the amount of capital being invested. That distinction remains crucial.

Market Breadth Is Still Worth Watching

Today also reversed some of yesterday’s encouraging market broadening. Yesterday, the equal-weighted S&P rose even as the traditional S&P fell sharply because of weakness in the largest technology companies. Today’s decline was more widespread. Still, the broader picture has improved considerably from several weeks ago.

More than half of S&P 500 companies are now trading above their 50-day moving averages, compared with only about one-fifth in late September. That suggests the market remains healthier beneath the surface than the recent volatility in AI stocks might imply. The question is whether that broader participation can survive if oil and interest rates continue rising.

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Here’s Our Take

This week highlighted two very different forces shaping the market. The first is AI. Investor sentiment has clearly become more skeptical. Financing requirements, debt levels, valuations and return on investment are receiving far more scrutiny. But the fundamental evidence still points toward extremely strong demand for computing power, data centers, chips, power infrastructure and related equipment.

That’s an important distinction. The second force is inflation. Oil above $100, rising selling prices and higher consumer inflation expectations make it harder for the Fed to declare victory. And unlike the AI correction, higher energy prices affect nearly every part of the economy.

That’s why next week’s Fed meeting and Big Tech earnings are arriving at such an interesting moment. The Fed is widely expected to leave rates unchanged, but investors will be looking for clues about whether persistent inflation and higher oil prices could force another increase later this year.

Meanwhile, major technology earnings should provide more evidence about AI spending and monetization. For markets, the ideal outcome would be strong corporate earnings, continued AI demand, broader market participation and cooling inflation. Right now, we’re getting the first three in varying degrees. Inflation remains the complication. And with oil back above $100, that may be the macro variable worth watching most closely as we head into next week.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

Stocks finished mixed today, with the Dow essentially flat, S&P 500 falling 1.21%, Nasdaq dropping 2.60%, and Russell 2000 gaining 0.11%. Those headline numbers, however, don’t tell the whole story. More stocks actually rose than fell, and the equal-weighted S&P 500 finished higher, outperforming the traditional S&P by nearly two percentage points. Consumer staples, utilities, healthcare, financials, homebuilders and transportation stocks were among the stronger areas. The weakness was concentrated in technology, particularly semiconductors, memory and the largest AI-related companies. Meanwhile, Treasury yields fell sharply, while WTI crude jumped 2.4% as Middle East tensions intensified.

Meta Captures the Market’s AI Dilemma

Meta’s earnings offered a nearly perfect example of the debate currently surrounding AI. The company’s underlying business performed well. Revenue and advertising growth exceeded expectations, fourth-quarter guidance was strong, and AI continues to improve both user engagement and the effectiveness of its advertising products.

Yet Meta shares fell 7%. Why? Investors are increasingly focused on what it will cost to sustain that growth. Meta expects to continue investing aggressively in AI infrastructure and has indicated that its future capital needs could be enormous. That creates an interesting situation. AI is already helping Meta’s business but investors are questioning how much the company must spend to keep those benefits growing. That same debate is increasingly playing out across the technology sector.

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Strong AI Demand Isn’t Enough Anymore

Recent earnings continue to suggest that underlying AI demand remains extremely strong. Texas Instruments highlighted continued data-center strength. Lam Research remains positive about AI-driven semiconductor demand despite supply constraints. SAP pointed to AI helping drive cloud migrations. Earlier this week, SpaceX and Super Micro Computer also provided strong evidence of growing demand for computing capacity.

So the recent technology selloff isn’t primarily about disappearing demand. Instead, investors are asking a different question: How much are companies going to spend to capture that demand and what return will they eventually earn on that investment? That’s a much higher standard than simply showing that AI-related revenue is growing. After the extraordinary gains many AI stocks have experienced, the market increasingly wants evidence that massive capital spending will translate into equally impressive cash flows.

The Rest of the Market Is Doing Better

Today also provided another encouraging signal underneath the headline indexes. While the Nasdaq fell sharply, the average stock performed considerably better. Consumer staples, healthcare, utilities, transportation companies and financials all found buyers. Several earnings reports reinforced that broader strength. Procter & Gamble reported better-than-expected organic growth. Railroads CSX and Union Pacific pointed to improving industrial activity. Airlines continued to report healthy travel demand despite higher fuel costs. Lockheed Martin reported a record backlog.

Initial jobless claims also fell to 194,000, the lowest level since July, suggesting the labor market remains relatively healthy. Taken together, the broader economy doesn’t appear to be experiencing the kind of deterioration that today’s Nasdaq decline might imply. This continues to look more like rotation away from crowded technology trades than investors abandoning stocks altogether.

Falling Yields Help the Broader Market

Treasury yields also declined sharply today, particularly at the shorter end of the curve. Markets now see only about a 13% probability of another Fed rate increase in October, with expectations increasingly shifting toward December. Lower yields helped rate-sensitive areas such as utilities and homebuilders.

That’s important because falling interest rates can broaden market participation beyond the cash-rich technology companies that dominated much of the year. But there is a complication. Oil rose another 2.4% as geopolitical tensions in the Middle East intensified. If crude continues climbing, higher energy costs could eventually make the Fed’s inflation problem more difficult again.

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Here’s Our Take

Today’s market looks much worse if you only look at the Nasdaq. Underneath the surface, the picture was considerably healthier. More stocks rose than fell. Small caps finished higher. The equal-weighted S&P gained. And several economically sensitive industries reported solid earnings. That tells us the market isn’t simply moving into broad risk-off mode. Instead, investors appear to be reassessing one of the year’s most crowded trades. And Meta’s earnings help explain why.

AI is producing real benefits. Demand for computing power remains enormous. Companies are seeing better engagement, advertising performance, cloud adoption and productivity. But the cost of building the infrastructure necessary to support that growth is also becoming enormous. That changes the investment question. It is no longer enough to ask, “Who benefits from AI?”

Investors increasingly need to ask, “Who benefits enough to earn an attractive return on all the capital being invested?” That’s a much more demanding test. The encouraging part is that while technology works through that adjustment, other areas of the market are beginning to participate. If that broadening continues, the market could become healthier even if some of its largest AI winners experience more volatility. For investors, the next phase may therefore be less about abandoning AI and more about becoming increasingly selective while looking beyond AI for opportunities elsewhere in the market.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished higher today, with the Dow gaining 0.69%, S&P 500 rising 0.58%, Nasdaq climbing 1.05%, and Russell 2000 adding 0.27%. Technology led the advance, with semiconductors, memory and other AI-related stocks among the strongest areas. Big Tech was also broadly higher, while cybersecurity, industrials, airlines and financials participated in the rally. Treasury yields were little changed, while WTI crude fell 0.7%. The biggest story, however, was renewed evidence that demand for AI computing infrastructure remains exceptionally strong.

Strong Compute Demand Gives AI Stocks a Lift

After last week’s sharp technology selloff, investors have been looking for evidence that the underlying AI investment cycle remains intact. Today provided some. SpaceX reported significantly stronger-than-expected results, with its AI infrastructure business becoming an increasingly important contributor to revenue. The company also substantially increased its expectations for future computing capacity.

Super Micro Computer provided another positive signal, raising its quarterly revenue outlook by nearly 27% at the midpoint and citing stronger demand for AI platforms. Nvidia also announced several new supply-chain partnerships designed to expand advanced semiconductor manufacturing and packaging capacity. Put together, the message was straightforward:

Demand for AI computing power remains extremely strong. That matters because the recent selloff wasn’t primarily driven by evidence that AI adoption was slowing. It was driven by concerns about valuations, financing and whether the enormous infrastructure buildout could ultimately generate sufficient returns. Today’s news helped reassure investors on at least the demand side of that equation.

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But the Financing Question Hasn’t Gone Away

Strong demand doesn’t eliminate the industry’s biggest challenge. Building enough data centers, chips, power infrastructure and networking capacity to satisfy AI demand requires extraordinary amounts of capital. That means investors still have to distinguish between companies benefiting from the AI buildout and companies taking significant financial risk to fund it.

We’re also beginning to see another important distinction emerge: AI can create winners while simultaneously disrupting existing businesses. Pegasystems came under pressure today following disappointing results and continued concerns about how AI could reshape parts of the traditional software industry. That’s a useful reminder that AI isn’t simply another technology spending cycle. It could also change which products customers need, how much they’re willing to pay and which existing business models remain valuable.

Earnings Paint a Mixed but Generally Healthy Picture

Outside AI, earnings continued to provide a mixed picture. Capital One reported better-than-expected results, helped by healthy credit trends and lower-than-expected losses. United Airlines also pointed to continued strength in travel demand, particularly among premium customers. Netflix was one of the notable disappointments after providing softer fourth-quarter guidance and reducing its advertising revenue outlook. AT&T and Intuitive Surgical also declined following results that included weaker-than-expected operating metrics.

So far, however, earnings aren’t pointing toward a broad deterioration in the economy. Consumers remain relatively resilient, credit conditions appear manageable and travel demand continues to hold up. That provides an important fundamental backdrop as investors navigate uncertainty around inflation and interest rates.

Investors Now Turn to Big Tech

The next major test comes from the companies actually writing some of the largest checks in the AI boom. Meta reports after today’s close, with other major technology companies following over the coming weeks. These reports matter for more than just their individual stock prices.

Investors will be listening closely for information about AI capital spending, data-center construction, computing demand and perhaps most importantly whether companies are beginning to see measurable financial returns from those investments. After the recent correction, strong spending guidance could help restore confidence across semiconductors and AI infrastructure. But investors are unlikely to be satisfied indefinitely with spending alone. Eventually, they will want evidence of monetization.

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Here’s Our Take

Today strengthened the argument that last week’s AI selloff was more about expectations and financing than a collapse in underlying demand. Compute demand still appears exceptionally strong. That is important because one of the biggest risks following a major investment boom is discovering that companies built too much capacity for demand that never materialized.

So far, that doesn’t appear to be the problem with AI. The more difficult question is whether the economics ultimately justify the spending. Strong demand doesn’t automatically guarantee strong investment returns. Companies still have to finance enormous infrastructure projects, manage rapidly changing technology and eventually convert AI adoption into sustainable profits.

That’s why the next stage of earnings season matters so much. The hyperscalers can provide evidence not only about how much they’re spending, but also about whether AI is improving revenue growth, customer engagement, productivity or profitability. If they can demonstrate both continued infrastructure demand and improving monetization, last week’s correction may ultimately look like a reset of excessive expectations rather than the beginning of something more serious. For now, today provided investors with something they badly needed after a difficult stretch for technology: confirmation that the underlying AI demand engine is still running.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished mostly higher today, with the Dow gaining 1.02%, S&P 500 rising 0.28%, Nasdaq essentially flat, and Russell 2000 jumping 1.65%. Unlike yesterday, when technology drove most of the gains, today’s rally was much broader. Banks, insurers, healthcare, airlines, homebuilders, consumer staples and other areas participated, while the equal-weighted S&P 500 significantly outperformed the traditional index.

AI-related stocks were modestly lower but stabilized as the session progressed. Meanwhile, longer-term Treasury yields fell 5–6 basis points, while WTI crude dropped 1.8% amid conflicting reports about possible progress in U.S.-Iran negotiations.

The Broader Market Takes the Lead

The most encouraging development today was what happened outside Big Tech. Small caps significantly outperformed, and gains spread across both economically sensitive and defensive sectors. That’s important because market leadership has been unusually concentrated around AI and the largest technology companies for much of the year. We’ve now seen several sessions recently when the broader market held up even as AI stocks struggled. That’s potentially healthy.

A market that can rise without depending entirely on a handful of technology companies has a stronger foundation than one where virtually all of the gains come from the same stocks. Falling long-term Treasury yields likely helped. Smaller companies tend to be more sensitive to borrowing costs than cash-rich technology giants, so some relief in rates can have an outsized impact on them.

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AI Stabilizes, but the Financing Debate Continues

AI stocks were slightly weaker today but avoided another major selloff. The recent correction has increasingly centered on financing rather than demand. A South Korean AI cloud provider, Elice, fell sharply in its public-market debut despite strong revenue growth and investor demand before the offering. The poor reception added to concerns surrounding heavily financed AI infrastructure companies.

Meanwhile, OpenAI is reportedly seeking roughly $30 billion in new funding, while Anthropic’s enormous spending requirements have also attracted scrutiny. The numbers reinforce the same question we’ve been discussing recently: Who ultimately finances the AI buildout, and at what cost?

Demand for computing capacity remains enormous. The issue is whether every company building that capacity can generate returns high enough to justify the capital required. For investors, that increasingly means separating the long-term AI opportunity from the financial structure of individual companies participating in it.

Housing Shows the Cost of Higher Rates

Today’s economic data offered another reminder that elevated interest rates are already affecting the economy. September housing starts came in below expectations and were near their slowest pace since 2020.

More strikingly, pending home sales fell 7.3% from August to a record low, as rapidly rising mortgage rates continued to weigh on affordability and demand. Private payroll growth also slowed somewhat in the latest ADP estimate. None of this necessarily signals a major economic downturn. But it does illustrate why the Fed has to be careful.

Inflation remains too high for policymakers to comfortably ease monetary policy, while high borrowing costs are already putting considerable pressure on rate-sensitive parts of the economy. That’s the difficult balance the Fed continues to navigate.

Oil Provides Some Relief

Oil moved in the opposite direction today. WTI crude fell 1.8% following reports suggesting possible diplomatic progress between the U.S. and Iran, although subsequent reports cast doubt on how much progress has actually been made. The geopolitical situation remains highly uncertain. For markets, however, the important point is that oil moved lower after seven consecutive daily gains. With inflation still running above the Fed’s target, a sustained decline in energy prices would provide some welcome relief.

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Here’s Our Take

Today was quietly one of the more encouraging market sessions we’ve seen recently, not because the S&P 500 gained much, but because investors didn’t need Big Tech to push the broader market higher. Small caps rallied. Financials participated. Healthcare, industrial and consumer-related stocks contributed. And long-term Treasury yields declined. That kind of broadening would be a positive development if it continues.

At the same time, the AI story isn’t going away. The recent correction has forced investors to distinguish between AI demand, which remains extremely strong, and AI investment economics, which are becoming more complicated. That distinction matters. OpenAI, Anthropic, neocloud providers and hyperscalers are contemplating extraordinary amounts of spending. The winners won’t necessarily be every company building AI infrastructure. They will be the companies that can ultimately translate that investment into durable cash flow and attractive returns.

The next few days should give investors considerably more information. Major technology earnings are beginning, and those reports should tell us more about AI spending, computing demand and monetization. If strong AI fundamentals can coexist with better participation from the rest of the market, that would arguably be a healthier setup than the narrow technology-led rally we’ve experienced for much of the year. For now, today offered an encouraging glimpse of what that broader market could look like.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished mostly higher today, with the Dow down 0.07%, S&P 500 gaining 0.41%, Nasdaq rising 1.11%, and Russell 2000 advancing 0.25%. Technology led the rebound. Semiconductors and memory stocks recovered after eight consecutive losing sessions, while Amazon and Tesla were among the stronger large technology companies.

But the rally was relatively narrow. More stocks fell than rose, and the equal-weighted S&P 500 significantly underperformed the traditional index. Meanwhile, Treasury yields rose 5–6 basis points across much of the curve, while WTI crude slipped 0.5%, ending a seven-session winning streak.

AI Stocks Bounce After Last Week’s Selloff

Today’s biggest story was the rebound in AI-related stocks. Last week’s decline was unusually severe. The Nasdaq 100 fell 5.5%, while baskets tracking AI beneficiaries and heavily financed AI cloud companies suffered even larger losses.

That left the sector ripe for at least some recovery. Hedge funds and other professional investors had aggressively reduced technology exposure during the selloff, leaving positioning less crowded than it had been previously.

In simple terms, a lot of investors who wanted to sell had already sold, making it easier for technology stocks to bounce when sentiment improved. The semiconductor index rose today for the first time in nine sessions. But one good day doesn’t resolve the questions that drove last week’s decline.

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The AI Demand Story Still Looks Strong

Today also brought some encouraging evidence that the underlying AI infrastructure buildout remains substantial. Industry research from SemiAnalysis forecasts a significant acceleration in global data-center capacity in 2027, supported by roughly $1 trillion of binding data-center leases signed this year.

Several analysts also defended CoreWeave after last week’s sharp selloff, arguing that demand for its computing capacity continues to exceed supply and that much of its backlog is backed by large, financially strong customers.

Those points support something we’ve emphasized recently: the AI demand story and the AI stock story aren’t necessarily the same thing. Demand for chips, computing power and data centers can remain enormous even while investors question valuations, debt levels and financing structures. That distinction remains crucial.

Financing Concerns Haven’t Disappeared

There were also reminders today that the AI buildout won’t proceed in a straight line. Microsoft reportedly pulled out of a planned UK data-center agreement with Nscale, while investors have been pushing several AI infrastructure companies toward lower valuations. Anthropic is also reportedly offering unusually high yields on debt being used to finance purchases of AI chips.

These developments don’t necessarily signal weaker AI adoption. Instead, they highlight the challenge we’ve been following for several weeks: building AI infrastructure requires extraordinary amounts of capital, and that capital is becoming more expensive.

Investors therefore have to distinguish between companies benefiting from AI demand and companies taking substantial financial risk to supply it. That debate is unlikely to disappear simply because AI stocks bounced today.

Higher Yields Keep the Pressure On

The bond market provided another reason for caution. Treasury yields rose 5–6 basis points today, giving back some of last week’s decline. The economic calendar was quiet, although housing provided another reminder of how higher borrowing costs are affecting parts of the economy. Homebuilder sentiment fell to 29 in October, its lowest level since 2012, as builders cited high mortgage rates, elevated costs and weak consumer confidence.

That illustrates the challenge facing the Fed. Inflation remains stubborn enough that policymakers can’t easily lower rates, while elevated borrowing costs are already weighing heavily on rate-sensitive areas such as housing. For stocks, that means corporate earnings will have to do more of the work if interest rates remain high.

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Here’s Our Take

Today’s rebound was encouraging, but we wouldn’t interpret it as the AI correction being over. After last week’s extraordinary selling, some rebound was almost inevitable. More importantly, the fundamental AI demand story still appears strong. Companies continue signing enormous data-center commitments, computing capacity remains scarce and demand for chips and supporting infrastructure continues growing.

But the market is asking tougher questions now. How much debt will be required? What will that financing cost? How quickly will new capacity generate revenue? And which companies ultimately earn attractive returns on the enormous amount of capital being invested? Those questions aren’t bearish on AI. They’re signs that the investment cycle is maturing. The other thing worth watching is market breadth. Last week, money rotating out of technology helped other areas of the market outperform. Today reversed some of that pattern, with Big Tech and AI stocks driving the indexes higher while the average stock lagged.

A healthier market would ideally see both groups participate rather than investors simply rotating back and forth between them. That makes this week’s earnings particularly important. The next real test for the AI trade won’t be whether beaten-down stocks can bounce. It will be whether the companies actually spending hundreds of billions of dollars on AI continue seeing enough demand and economic return to justify that spending. With major technology earnings beginning this week, including Meta and Tesla, investors should start getting some answers.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks ended the week lower, with the Dow down 0.34%, S&P 500 falling 1.09%, Nasdaq losing 2.14%, and Russell 2000 dropping 1.66%. Technology once again led the decline. Semiconductors, memory, software and networking stocks were broadly weaker, while defensive areas such as utilities, consumer staples and pharmaceuticals held up better.

The semiconductor index has now fallen for eight consecutive sessions, its longest losing streak since 2006, and is down more than 15% over that stretch. Meanwhile, WTI crude rose 2.6%, its seventh consecutive daily gain, pushing oil back toward $100 per barrel.

The AI Trade Is Going Through a Major Reassessment

The biggest story of the week was the sharp reversal in AI-related stocks. Importantly, there hasn’t been one major piece of bad news driving the selloff. Instead, investors appear to be reassessing a collection of concerns that have been building for weeks: high valuations, enormous financing needs, increasing competition, questions about AI profitability and uncertainty over how quickly companies can earn attractive returns on the billions being invested.

Anthropic provided another example this week. The company reportedly generated $16.8 billion in third-quarter revenue, up significantly from the previous quarter. Yet some prospective investors are discussing a lower valuation for its expected IPO because growth didn’t meet the exceptionally high expectations that had already been built into the story.

That captures the current challenge for AI stocks remarkably well. Strong growth may no longer be enough when investors have already priced in extraordinary growth.

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Strong AI Demand Hasn’t Disappeared

The other side of the story is equally important. There has been little evidence this week that the underlying AI investment cycle is collapsing. ASML raised its sales outlook and said demand is strong enough that it may need additional manufacturing capacity. TSMC also highlighted continued strong demand.

Companies are still scrambling for computing capacity, data centers and power. So this week’s selloff looks less like the end of the AI boom and more like the market becoming more selective about who benefits from it. Investors are increasingly distinguishing between companies selling essential equipment into the buildout and companies taking on substantial debt to finance infrastructure.

That is why heavily financed AI infrastructure companies such as CoreWeave have received so much attention recently. The next phase of the AI trade may therefore depend less on simply demonstrating demand and more on demonstrating profitable demand.

The Broader Market Is Holding Up Better Than Tech

There’s another important development underneath this week’s selloff. The equal-weighted S&P 500, which gives every company roughly the same importance rather than allowing the largest technology companies to dominate, outperformed the traditional S&P 500 throughout the week.

Healthcare and consumer staples were particularly strong. That’s encouraging because one of the biggest concerns surrounding the market has been its dependence on a relatively narrow group of technology companies. Some of what we’re seeing may therefore be rotation rather than investors abandoning stocks altogether.

That doesn’t eliminate the risks from falling technology shares, given their enormous weight in the major indexes. But a market in which other industries begin participating more consistently would ultimately be healthier.

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The Fed Looks Increasingly Likely to Wait

Inflation data complicated the picture this week. Both consumer and producer inflation came in hotter than expected, reinforcing the idea that the Fed’s inflation fight isn’t finished. Yet expectations for an October rate increase have actually declined.

Fed Chair Kevin Warsh declined to signal what policymakers will do at the October 28 meeting, while several other Fed officials have recently emphasized that higher long-term Treasury yields are already tightening financial conditions. Markets therefore increasingly expect the Fed to hold rates steady in October, while leaving another increase later in the year on the table. That has helped provide some relief in the bond market. Longer-term Treasury yields have fallen noticeably from their recent peaks despite the hotter inflation reports.

Oil Is Becoming a Risk Again

One area moving in the opposite direction is energy. WTI crude rose another 2.6% Friday and has now climbed for seven consecutive sessions. That matters because higher energy prices can eventually work their way through gasoline, transportation costs and broader inflation.

Middle East tensions remain elevated, while progress toward resolving the Russia-Ukraine conflict also remains limited. With oil approaching $100 again, energy could become an important complication for the Fed if the recent rally continues.

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Here’s Our Take

This week may mark an important transition in the AI investment story. The question is no longer simply whether AI demand is real. It clearly is. The harder questions are now coming to the forefront: How much capital will the buildout require? Who finances it? How quickly will companies earn returns on that investment? And which businesses actually have durable competitive advantages?

That doesn’t mean the AI boom is ending. It means investors are becoming less willing to treat every company connected to AI as an automatic winner. That’s probably healthy after the extraordinary gains we’ve seen across semiconductors, servers, networking and AI infrastructure. There are also encouraging developments outside technology. Broader market participation improved this week, corporate earnings are growing strongly so far, and Treasury yields have retreated from their recent highs.

But there are meaningful risks. Inflation remains stubborn, oil is climbing again and the market’s largest technology companies still have enormous influence over the major indexes. The next phase of this market may therefore depend less on expanding valuations and more on companies actually delivering the earnings necessary to justify them.

That makes next week particularly interesting. Earnings season accelerates significantly, with Meta and Tesla among the major companies reporting. Their results should provide another test of whether corporate fundamentals, and particularly AI-related spending and monetization, can restore confidence after technology’s difficult week.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks fell today, with the Dow down 0.09%, S&P 500 losing 1.10%, Nasdaq falling 1.88%, and Russell 2000 dropping 1.93%.

The decline snapped a 53-session streak in which the S&P 500 had avoided a daily loss of 1% or more.

Technology led the selloff. Semiconductors, memory, software and networking stocks were broadly weaker, while concerns around heavily indebted AI infrastructure companies added to the pressure. More defensive areas, including healthcare, consumer staples and telecom, held up considerably better.

Interestingly, Treasury yields ultimately moved lower despite a hotter-than-expected inflation report, while WTI crude rose 1%.

Inflation Comes in Hotter Than Expected

Today’s biggest economic news was the September CPI report. Headline inflation rose 0.6% from August, while core inflation, which excludes food and energy, rose 0.3%, slightly above expectations. Annual core inflation accelerated to 2.6%.

More concerning was the breadth of the increase. Prices strengthened across services as well as goods, with pressure showing up in areas including shelter, hotels, medical services, used vehicles and apparel.

That complicates the Fed’s decision. Investors had recently become more optimistic that policymakers could wait before raising rates again. Today’s report makes that argument somewhat harder because inflation isn’t cooling as quickly or consistently as the Fed would like.

But markets didn’t react in the most obvious way. Treasury yields initially jumped after the report before reversing sharply, with longer-term yields ultimately finishing lower. Expectations for an October hike also faded from their morning highs.

That suggests investors may be increasingly concerned not just about inflation, but about what higher rates could eventually do to economic growth and riskier investments.

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The AI Trade Faces a Bigger Test

That concern was particularly visible in AI-related stocks. Semiconductors fell again today, extending what has become a six-session losing streak for the group. The selloff is notable because there was little evidence that underlying AI demand itself is weakening. ASML actually raised its full-year sales outlook and said demand is strong enough that it is considering expanding production capacity beyond previously planned increases.

The problem is increasingly elsewhere: valuations, financing and return on investment. CoreWeave fell more than 15% as investors focused on the company’s debt burden and sharply higher borrowing costs. Dell, Hewlett Packard Enterprise and NetApp also fell following analyst downgrades that cited valuation or slowing growth expectations after enormous rallies. We’ve been watching this shift develop over the past several weeks.

The first question surrounding AI was whether demand would materialize. It clearly has. The next question is becoming much harder: Can companies earn enough from that demand to justify the enormous amount of capital being spent?

Financing Is Becoming Part of the AI Story

That’s particularly important because the AI buildout is increasingly dependent on outside capital. Data centers require enormous investments in chips, power generation, networking equipment and supporting infrastructure. For companies with strong balance sheets and substantial cash flow, those investments may be manageable.

For newer infrastructure providers relying heavily on debt, higher interest rates can change the economics dramatically. That doesn’t mean the AI investment cycle is ending. In fact, ASML’s results suggest demand remains exceptionally strong.

But investors are increasingly distinguishing between companies selling into the AI boom and companies borrowing heavily to build for it. That distinction may become one of the most important investment themes of the next phase of the AI cycle.

Banks Add to the Pressure

Financial stocks also struggled following another round of earnings. Bank of America’s results were hurt by a large regulatory charge and weaker trading revenue, while Morgan Stanley reported strong wealth-management and equity-trading results but softer fixed-income trading and investment banking.

The broader picture was more constructive than the stock reactions suggested. Consumer spending and credit quality remain relatively healthy, while banks continue to see significant opportunities financing the AI infrastructure buildout. But the reports also reinforced a familiar message: higher long-term interest rates create both opportunities and risks. Banks can earn more on certain loans, but volatile rates can hurt trading activity, borrowing demand and financing conditions across the economy.

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Here’s Our Take

Today’s selloff looks less like investors abandoning the AI story and more like the market beginning to demand a higher standard of proof. AI demand remains enormous. ASML’s results reinforce that point. But demand alone is no longer enough. After extraordinary gains across semiconductors, servers, networking and data-center companies, investors increasingly want to know how much capital will be required, how expensive that capital will be and what returns companies can ultimately generate from it.

That’s especially important in today’s interest-rate environment. At the same time, today’s CPI report reminds investors why those financing costs may remain high. Inflation is still proving difficult to eliminate, limiting how quickly the Fed can become more accommodative. Put those two stories together and the market’s current challenge becomes clearer.

AI can continue growing rapidly while AI stocks become more selective. Companies with strong balance sheets, pricing power and clear paths to monetization may continue benefiting from the investment cycle. Companies relying heavily on debt or aggressive assumptions about future growth could face much greater scrutiny. The fact that defensive sectors held up while technology and small caps sold off suggests investors are already becoming somewhat more cautious.

That doesn’t necessarily signal the end of the bull market. But after a long period in which enthusiasm and expanding valuations rewarded nearly everything connected to AI, the next phase may be much more about execution, financing discipline and actual returns on capital.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished mostly lower today, with the Dow down 0.35%, S&P 500 off just 0.02%, Nasdaq down 0.15%, and Russell 2000 falling 0.40%. The S&P 500 spent another session in a relatively narrow range, and more stocks actually rose than fell despite the slightly negative index finish.

Technology remained under pressure, particularly semiconductors and memory stocks. The Philadelphia Semiconductor Index has now declined for five consecutive sessions, its longest losing streak since July. Meanwhile, longer-term Treasury yields moved slightly lower and oil finished essentially flat after reversing earlier declines.

AI Stocks Continue to Cool Off

The biggest market theme remained the recent pullback in AI-related stocks. There wasn’t one major catalyst today. Instead, investors appear to be reassessing a growing list of concerns surrounding the sector. Those include increasing competition from China, enormous financing requirements for AI infrastructure, rapid improvements in competing models and questions about how quickly companies can turn massive AI spending into profits.

Investor positioning may also be contributing. Technology remains one of the most crowded areas of the market after its extraordinary run. None of this necessarily suggests that AI demand is weakening. Instead, the market may simply be shifting from “AI spending is growing” toward the more difficult question of which companies will earn attractive returns from that spending. That distinction could become increasingly important as technology companies report earnings over the next several weeks.

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Bank Earnings Kick Off on a Mixed Note

Today also marked the unofficial beginning of third-quarter earnings season, with several major banks reporting. Results were mixed. Goldman Sachs delivered stronger investment-banking and equity-trading results, while Citigroup reported better net interest income. JPMorgan and Wells Fargo had some headline disappointments, although their outlooks contained encouraging signals around future interest income and expenses.

Perhaps more importantly, consumer credit and spending trends generally remained healthy. That suggests households are still holding up reasonably well despite higher borrowing costs. Banks also highlighted another theme we’ve been following closely: financing the AI infrastructure boom is becoming a meaningful business opportunity—but also a growing source of risk.

As technology companies raise enormous amounts of debt and equity to finance data centers, chips and power infrastructure, lenders are increasingly thinking about power constraints, project economics and how much capital the AI buildout can absorb.

The Fed Sounds a Little Less Aggressive

Investors also received somewhat more reassuring comments from Federal Reserve officials. Fed Governor Christopher Waller noted that higher long-term Treasury yields are already doing some of the Fed’s work by raising borrowing costs and cooling interest-sensitive parts of the economy such as housing and autos.

New York Fed President John Williams continues to expect another rate increase this year but said he currently sees no need for additional tightening in 2027. Markets are now pricing only about a 22% probability of an October rate increase.

That’s a meaningful change from just a few weeks ago, when another near-term hike appeared considerably more likely. The reason is straightforward: if financial conditions are already tightening through higher bond yields, the Fed may not need to raise its own policy rate as aggressively.

Now All Eyes Turn to Inflation

That brings us to Wednesday’s CPI report. Recent economic data have continued to show a resilient economy, but inflation remains the biggest obstacle preventing the Fed from becoming more comfortable with interest rates.

Small-business optimism slipped in September, with business owners continuing to report pressure from rising costs, high rates and hiring challenges. Meanwhile, employment data still suggest that the labor market remains reasonably healthy.

Tomorrow’s inflation report could therefore become an important test. A cooler-than-expected CPI reading would strengthen the argument that the Fed can remain patient and could provide relief for Treasury yields and rate-sensitive stocks. A hotter reading could quickly revive expectations for another rate hike.

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Here’s Our Take

Today’s market didn’t move much, but several important themes are beginning to converge. First, the AI trade is becoming more selective. The long-term investment cycle remains powerful, but investors are increasingly asking harder questions about competition, financing and profitability. That’s a healthy evolution after a period when almost any company associated with AI infrastructure benefited.

Second, earnings season is beginning with the economy still looking reasonably resilient. The early bank reports suggest consumers remain healthy and corporate activity is holding up. If that pattern continues across other industries, strong earnings could provide an important foundation for stocks.

And third, the Fed may be getting some help from the bond market. Higher long-term yields have already tightened financial conditions, potentially reducing the need for aggressive additional Fed hikes.

That makes tomorrow’s CPI report particularly important. If inflation continues cooling while earnings remain strong, investors could begin focusing less on the next Fed hike and more on corporate fundamentals. But a hotter inflation reading would remind markets that the Fed isn’t finished yet. For now, the market appears to be waiting for confirmation and tomorrow’s inflation report could provide it.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished mixed today, with the Dow up 0.38%, S&P 500 down 0.06%, Nasdaq off 0.44%, and Russell 2000 down 0.45%. Technology was the main source of weakness, with semiconductors, memory stocks, software and cybersecurity companies generally lower. Meta was a notable exception, gaining more than 3% following new AI model announcements.

But underneath the major indexes, market breadth was actually fairly healthy. More S&P 500 stocks rose than fell for the seventh time in eight sessions, with banks, healthcare, energy, payments, telecom and consumer staples among the stronger areas. Meanwhile, WTI crude rose 2.1% as geopolitical tensions in the Middle East escalated over the weekend.

AI Stocks Pull Back as Competition Intensifies

AI-related stocks were among today’s weakest areas. Memory stocks came under particular pressure after China’s ChangXin Memory Technologies highlighted progress on technology that could allow it to fit more memory onto individual chips. Micron fell nearly 4%.

But the broader AI news remained active. Nvidia is reportedly considering acquiring or increasing its investment in Reflection AI, a developer of open-weight AI models, while Amazon is reportedly exploring a roughly $7 billion acquisition of Decart, a startup whose technology could make it easier for customers to move AI workloads between different types of chips. Meta also announced two new Muse AI models and said it plans to sell its most advanced AI capabilities directly to corporate customers.

The larger message is that the AI boom is increasingly becoming a competitive battle across the entire technology stack - models, chips, cloud infrastructure, software and financing. That is good for innovation and AI adoption, but it also means investors may have to become much more selective about which companies ultimately capture the profits.

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The Broader Market Holds Up Better

Perhaps the most encouraging development today was what happened outside technology. Even with the Nasdaq falling, more S&P 500 stocks advanced than declined. Banks, managed-care companies, hospitals, insurers, payments companies and energy stocks were among the stronger groups. That’s notable because one of the market’s biggest weaknesses recently has been its reliance on a relatively small group of large technology and AI-related companies.

A healthier market would ideally see gains spread across more industries. One day doesn’t establish a trend, but a market that can hold up while AI stocks decline is potentially a better-balanced market than one that depends entirely on technology continuing to rise. That will be worth watching as earnings season gets underway.

Oil Climbs as Middle East Tensions Escalate

Oil returned as a source of concern today. WTI crude gained 2.1% following renewed fighting in the Middle East over the weekend, including attacks on Saudi infrastructure. Negotiations surrounding the Strait of Hormuz also remain unresolved, with significant differences still separating the U.S. and Iran. At the same time, the physical oil market has generally proven more resilient than feared during earlier stages of the conflict.

That’s why the inflation implications remain uncertain. A sustained move higher in crude could once again push up gasoline, diesel and transportation costs. But if regional oil flows remain relatively stable, the economic impact could be considerably smaller than investors feared during September’s oil spike. For now, oil remains one of the market’s most important inflation risks.

A Big Week for Earnings and Inflation

Today’s session was relatively quiet economically, but that changes quickly. Major banks will begin reporting earnings, while semiconductor companies including ASML and TSMC should provide another look at the strength of AI and technology spending.

Wednesday’s CPI inflation report will be particularly important. The Fed has made clear that inflation remains its primary concern, but investors have recently reduced expectations for an immediate additional rate hike. A cooler inflation report could reinforce that view and provide some relief for bond yields. A hotter report could quickly revive concerns that the Fed will need to tighten again.

Thursday then brings producer inflation, retail sales and remarks from Fed Chair Kevin Warsh. In other words, the relatively calm market today is unlikely to stay quiet for long.

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Here’s Our Take

Today’s market offered a useful reminder that the health of the stock market can’t be judged solely by what happens to the largest technology companies. AI stocks weakened, yet the broader market held up reasonably well. That’s potentially encouraging. For much of this year, investors have worried that market gains were becoming too dependent on a relatively narrow group of companies benefiting from the AI boom. If banks, healthcare, industrials and other sectors can participate more consistently, the market would have a healthier foundation.

At the same time, the AI story itself is becoming more complicated. The question is no longer whether AI investment will continue, it almost certainly will. The more important questions are becoming which models win, which chips gain share, who controls the customer relationship, how the infrastructure gets financed and which companies ultimately turn enormous AI spending into durable profits.

This week’s earnings should start providing more answers. The macro picture matters just as much. Oil is rising again, inflation remains above the Fed’s comfort zone and Treasury yields are already elevated. That makes Wednesday’s CPI report especially important.

If inflation continues cooling while earnings remain strong, the market could have an increasingly attractive combination: solid corporate profits, a broadening rally and less pressure from interest rates. But if inflation surprises higher and oil continues climbing, the Fed could quickly return to center stage. For now, today’s improved breadth is a positive sign—but the real tests arrive later this week.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished lower today, with the Dow down 0.66%, S&P 500 off 0.22%, Nasdaq down 0.22%, and Russell 2000 falling 1.31%.

The decline came one day after the S&P 500 and Nasdaq reached new record highs. Small caps once again significantly underperformed, while more defensive areas such as consumer staples, pharmaceuticals and telecom held up better.

Technology was mixed. Semiconductors declined, while memory stocks recovered from earlier weakness. Meanwhile, WTI crude fell 1.3%, providing some relief on inflation, and Treasury yields stabilized later in the session.

Inflation Remains the Fed’s Biggest Concern

Today brought another reminder that inflation hasn’t completely gone away. The New York Fed’s survey showed consumers now expect inflation of 3.9% over the next year, the highest reading since May 2023.

The minutes from the Fed’s September meeting reinforced that concern. All participants supported September’s quarter-point rate increase, and most believed another increase would likely be appropriate before year-end. Officials generally viewed inflation risks as tilted to the upside, while the economy and labor market remained resilient.

Importantly, however, the minutes describe the economy as policymakers saw it three weeks ago. Markets currently place relatively low odds on another increase at the Fed’s October meeting.

That distinction matters. The Fed remains worried about inflation, but investors are increasingly betting that policymakers can afford to wait for more data before raising rates again.

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A Strong Treasury Auction Provides Some Relief

Bond yields initially moved higher today before reversing much of that pressure later in the day. A key catalyst was a strong auction of $39 billion in 10-year Treasury notes, which attracted considerably better demand than several weak government bond auctions in recent weeks. That matters because the Treasury market has become one of the biggest sources of uncertainty for stocks.

Investors are increasingly focused not only on where the Fed sets short-term interest rates, but also on whether there is enough demand to absorb the enormous amount of government debt being issued.

Today’s auction therefore provided some reassurance. But the broader challenge hasn’t disappeared. Long-term yields remain elevated, government borrowing remains substantial and companies are simultaneously preparing to raise enormous amounts of capital for AI infrastructure.

AI Demand Is Enormous — And So Is the Financing Need

The most striking corporate story today came from SpaceX. The company is reportedly exploring roughly $40 billion of new financing to purchase Nvidia chips, including about $10 billion of bank loans and $30 billion of investment-grade debt. Whatever the eventual structure, the scale illustrates just how extraordinary AI computing demand has become.

Other companies continue telling a similar story. Penguin Solutions raised its outlook after adding six AI infrastructure customers, while NetApp received an analyst upgrade partly on expectations that AI will accelerate demand for data storage. But the SpaceX report also brings us back to a question we’ve discussed recently: how will all of this infrastructure ultimately be financed?

The first phase of the AI boom focused primarily on demand for GPUs and data centers. Increasingly, investors also have to think about debt, power availability, project economics and whether the useful life of rapidly evolving technology will justify the enormous amounts of capital being invested. That doesn’t necessarily weaken the AI demand story. If anything, a potential $40 billion financing package demonstrates its strength. But strong demand and attractive investment returns aren’t automatically the same thing.

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Oil Keeps Moving Lower

Energy provided some welcome relief today. WTI crude fell another 1.3%, despite continued uncertainty surrounding the Middle East. The International Energy Agency also backed an expedited release of 100 million barrels from strategic reserves, adding to expectations that physical supply could remain sufficient even as geopolitical risks persist.

Diplomatic obstacles between the U.S. and Iran also remain substantial, particularly surrounding Iran’s uranium-enrichment program. U.S. officials have said meaningful reductions in enrichment capacity would be necessary for an agreement, while Iran continues to defend its right to enrichment. For markets, the most important development is that energy prices continue moving lower despite those risks. If that continues, lower fuel and transportation costs could gradually remove one of the biggest sources of inflation pressure seen earlier this year.

Here’s Our Take

Today’s modest decline doesn’t change the broader market story very much. The S&P 500 and Nasdaq are sitting near record highs, corporate earnings expectations remain strong and the AI investment cycle continues expanding. But underneath those indexes, the environment is considerably more complicated. Small caps continue struggling, inflation expectations remain elevated and financing costs are historically high.Those pressures are much easier for highly profitable technology companies to absorb than smaller businesses that depend heavily on outside financing. That helps explain why the major indexes can remain near records even while many stocks struggle.

The AI boom adds another dimension. Demand for computing capacity remains extraordinary, but the numbers are becoming enormous enough that financing itself may become part of the investment story. Data centers, chips, power generation and supporting infrastructure require hundreds of billions of dollars of capital. The question is gradually shifting from “Is there enough AI demand?” to “Who finances all of this, at what cost, and who ultimately earns an attractive return?”

Meanwhile, falling oil prices and today’s strong Treasury auction provide some welcome macroeconomic relief. If energy prices continue declining and bond yields stabilize, markets may be able to tolerate the Fed remaining cautious for longer. But with valuations high and market leadership still relatively narrow, the path forward increasingly depends on corporate earnings delivering on expectations and the enormous AI investment cycle eventually producing returns that justify the capital being committed.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks started the week higher, with the Dow up 0.18%, S&P 500 gaining 0.66%, Nasdaq climbing 1.05%, and Russell 2000 advancing 0.50%.

The Nasdaq closed at another record high, while the S&P 500 moved to within 0.3% of its record close. Technology led the gains, although strength was broader than just the largest tech companies. Software, payments, industrial metals, healthcare and energy were among the stronger areas.

Perhaps most notable, stocks rallied even as longer-term Treasury yields moved higher again. Meanwhile, WTI crude fell 1.8%, continuing its recent retreat despite ongoing Middle East tensions.

Stocks Are Becoming More Comfortable With Higher Yields

The bond market remains one of the biggest questions facing investors. Long-term Treasury yields rose again Monday, but unlike several sessions in September, stocks largely shrugged it off. Part of that may reflect greater stability in short-term interest rates. Investors have recently reduced expectations for an immediate October Fed rate hike, taking some pressure off the front end of the Treasury market.

But it may also reflect a broader shift in investor attention. With third-quarter earnings season approaching, markets are increasingly looking toward corporate profits rather than simply reacting to every move in interest rates.

That’s important because the fundamental backdrop remains strong. Economic growth has been resilient, corporate earnings have continued expanding and AI-related investment remains elevated. The question is whether earnings can remain strong enough to justify current stock valuations even with long-term borrowing costs historically high.

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Oil Falls Despite Continued Middle East Tensions

Oil prices declined Monday despite another busy weekend of Middle East developments. WTI crude fell 1.8% as regional oil supplies continued to prove more resilient than investors initially feared. Saudi Arabia’s East-West pipeline is reportedly operating normally after recent attacks, while Middle Eastern crude exports have actually risen above prewar levels in recent weeks.

At the same time, substantial geopolitical risks remain. Negotiations over reopening the Strait of Hormuz continue to face significant obstacles, while fighting around the Bab el-Mandeb shipping route has intensified. For markets, the key point is that geopolitical risk has not translated into the severe oil-supply disruption investors feared earlier in the conflict. As long as crude continues moving lower, that provides some relief for consumers, businesses and the Fed’s inflation fight.

The Economy Remains Strong but Inflation Is Still Sticky

Monday’s economic data reinforced the same mixed message investors have been hearing for several weeks. The September ISM services index came in at 54.9, indicating that the service economy continues to expand at a healthy pace.

Employment improved as well, returning to expansion for the first time in three months. But the inflation picture was less encouraging. The ISM prices index climbed to 74.0, its highest level since July 2022, with businesses continuing to cite fuel costs and tariffs as major pressures.

That leaves the Fed facing a familiar problem: economic activity remains healthy, but inflation is still running hotter than policymakers would like. The good news for markets is that falling oil prices could eventually ease some of those pressures. But Monday’s data offered little evidence that the underlying inflation problem has disappeared.

AI Remains a Tailwind, but the Story Keeps Broadening

AI stocks weren’t the dominant driver Monday, but the investment theme continues to broaden. Microsoft gained after an analyst upgrade highlighted the company’s position in enterprise AI, while Cerebras rallied after OpenAI CEO Sam Altman described the chipmaker as a close partner.

Tesla also confirmed preliminary discussions with TSMC about a potential role in its planned Texas semiconductor project, highlighting the enormous amount of advanced manufacturing capacity companies expect AI and automation to require.

At the same time, reports suggested Microsoft and Meta are reducing some spending on Anthropic’s Claude models. That is another reminder that rapid overall growth in AI doesn’t mean every company, or every model, will benefit equally. As the industry matures, competition among models, chips, cloud providers and infrastructure companies is likely to intensify even as overall AI spending continues growing.

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Here’s Our Take

Monday’s rally highlights an interesting change in the market’s behavior.

A few weeks ago, another increase in long-term Treasury yields might have been enough to send technology stocks sharply lower. Today, the Nasdaq reached another record despite higher long-term yields.

That doesn’t mean interest rates no longer matter. Instead, investors appear increasingly willing to tolerate higher rates as long as the economic and corporate earnings backdrop remains strong. And that may become the central question for the fourth quarter.

The economy continues to expand, business investment remains healthy and the AI spending cycle is still providing a powerful tailwind. Falling oil prices are also helping offset some of the inflation concerns that dominated September.

But inflation remains stubborn, Treasury yields remain elevated and stock valuations leave less room for disappointment. That puts greater importance on the upcoming earnings season.

If companies can continue delivering strong profit growth and demonstrating that AI investment is translating into real revenue and productivity gains, stocks may be able to withstand higher interest rates. If earnings begin disappointing, however, those same elevated yields could quickly become a much bigger problem. For now, investors appear willing to give corporate America the benefit of the doubt.

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U.S. stocks finished higher Friday, with the Dow up 0.93%, S&P 500 gaining 0.51%, Nasdaq up 0.48%, and Russell 2000 essentially flat with a 0.07% gain.

The S&P 500 and Nasdaq also finished the week higher, helped by continued strength in technology. Semiconductors were among Friday’s best performers, while Microsoft gained nearly 4% following new Copilot announcements.

The macro backdrop also improved somewhat. WTI crude fell 2.3%, posting its second consecutive weekly decline, while short-term Treasury yields fell about seven basis points.

Oil Falls as Diplomatic Hopes Grow

Energy prices provided one of the biggest sources of relief Friday.

WTI crude fell 2.3% as investors continued following negotiations aimed at reducing tensions between the U.S. and Iran and potentially reopening the Strait of Hormuz.

Reports suggested negotiations have moved into a more technical phase, with discussions centered on a possible accelerated plan to restore shipping through the strait in exchange for changes to U.S. restrictions on Iran. U.S. officials had not confirmed the reported progress, however.

After September’s dramatic oil surge, the recent decline matters well beyond energy markets.

Lower crude prices could eventually provide relief for gasoline, diesel, transportation costs and inflation more broadly. That, in turn, would make the Fed’s job somewhat easier.

But given the continued uncertainty surrounding negotiations and Middle Eastern supply, the recent decline in oil should still be viewed as relief rather than resolution.

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AI Demand Keeps Expanding Beyond GPUs

The AI story continued evolving Friday. Akamai jumped after announcing an $11.6 billion agreement with Anthropic to provide distributed cloud infrastructure for its AI workloads, with options potentially taking the commitment as high as $20 billion.

Importantly, much of that infrastructure will rely on CPUs rather than the GPUs that have dominated the first stage of the AI boom. That fits with a theme we’ve been highlighting throughout the week.

As AI moves from training enormous models toward actually deploying millions of AI agents and applications, computing demand is becoming broader. Running those applications requires CPUs, memory, networking, cloud infrastructure and enormous amounts of power in addition to advanced GPUs.

Microsoft reinforced the adoption side of that story Friday, unveiling new Copilot capabilities including an “Autopilot” personal agent aimed at business users.

The AI investment cycle therefore appears to be entering a new phase: less exclusively about building the most powerful model and increasingly about putting AI to work at scale.

But Building All That Infrastructure Won’t Be Easy

The other side of the AI boom also remained visible. Additional reporting on Oracle’s massive New Mexico data-center project indicated that the company could remain responsible for significant costs despite delays involving power and permitting.

The situation has reportedly caused lenders and investors to take a harder look at the financing structures behind other large data-center projects.

That doesn’t undermine the demand story. Instead, it reinforces a distinction that may become increasingly important: strong demand doesn’t automatically guarantee attractive investment returns.

AI infrastructure requires enormous amounts of capital, power, land and financing. As projects become larger, investors will increasingly need to distinguish between companies benefiting from AI demand and companies taking significant financial risk to build the infrastructure supporting it.

Economic Data Still Point to Resilience

Friday’s economic data were also generally constructive. Headline durable-goods orders were essentially unchanged in August, better than expected. More importantly, core capital-goods orders jumped 1.6%, significantly ahead of expectations.

Those orders are often viewed as an indicator of future business investment, suggesting companies remain willing to spend despite higher interest rates.

Consumer sentiment remains much weaker. The final September University of Michigan reading came in at 48.1, while consumers continued to report elevated inflation expectations.

That leaves the economy in an unusual position: business activity and investment remain strong, while consumers feel considerably less optimistic.

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Here’s Our Take

Friday offered some welcome relief after a week dominated by 5% Treasury yields, inflation concerns and volatile energy prices.

Oil moved lower. Short-term Treasury yields retreated. Stocks finished the week higher. And the underlying corporate backdrop remains remarkably strong, with third-quarter earnings growth currently expected to approach 30%.

But the most interesting development may be what’s happening inside the AI investment cycle.

The first phase was dominated by training increasingly powerful models and the GPUs required to build them.

The next phase increasingly looks like deployment - AI agents embedded in businesses, software and everyday applications. That potentially creates a much broader investment opportunity across CPUs, memory, networking, cloud infrastructure, data centers and power.

At the same time, Oracle’s data-center challenges provide an important reminder that enormous demand doesn’t eliminate execution or financing risk.

The macro environment remains the other constraint.

The Fed is still worried about inflation, Treasury yields remain historically high and geopolitical risks haven’t disappeared. But if oil continues falling and bond yields begin stabilizing, those pressures could become less dominant.

That would allow investors to focus more heavily on what remains the strongest part of the current backdrop: healthy corporate profits, resilient business investment and an AI spending cycle that continues to expand into new parts of the economy.

Next week should provide another important test, with Micron earnings, month- and quarter-end trading, ISM manufacturing and Friday’s jobs report all on the calendar.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished mixed today, with the Dow down 0.31%, S&P 500 essentially flat, Nasdaq up 0.01%, and Russell 2000 down 0.11%. Stocks had been weaker earlier in the session before recovering following reports of renewed diplomatic progress between the U.S. and Iran. Technology was mixed, with memory stocks generally lower, while energy, pharmaceuticals, airlines and hotels were among the stronger groups.

The bigger pressure remained the bond market. Longer-term Treasury yields moved higher again, extending a sharp increase that has pushed borrowing costs throughout the economy higher. Meanwhile, WTI crude rose 2.7%, reversing part of its recent decline as Middle East supply concerns resurfaced.

Bond Yields Remain the Market’s Biggest Problem

Treasury yields continued moving higher today. The increase was particularly pronounced among longer-term bonds, with the 30-year yield rising about nine basis points. A $44 billion auction of 7-year Treasury notes also received relatively weak demand, marking the third disappointing Treasury auction this week.

That comes after the 10-year yield moved above 5.10% yesterday, its highest level since 2007. Over the past month, the 10-year yield has increased roughly 35 basis points. Higher yields matter because they raise borrowing costs for consumers and businesses while simultaneously making bonds more competitive with stocks.

That pressure is already becoming visible. Mortgage rates have climbed back above 7%, even as Thursday’s housing data showed new-home sales holding up better than expected.

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The Fed Isn’t Offering Much Relief

Investors hoping the Fed might push back against the recent rise in rates received little encouragement today. Several Fed officials continued emphasizing that inflation remains too high and that additional tightening may be necessary. Markets are now assigning a substantial probability to another rate increase in October, while pricing more than one quarter-point of additional tightening by year-end.

The Fed’s problem remains the same one highlighted by Wednesday’s economic data: the economy continues to perform well enough that policymakers have room to remain aggressive on inflation. Initial jobless claims came in at just 197,000 today, while continuing claims remain near three-year lows.

That’s encouraging for workers and the economy. But for markets hoping for lower interest rates, continued economic resilience makes an early Fed retreat less likely.

Oil Jumps, but Diplomacy Provides Some Hope

Oil prices climbed sharply earlier today after renewed concerns about Saudi supply disruptions, before giving back some of those gains following reports of diplomatic progress. WTI ultimately finished 2.7% higher.

Reuters reported that U.S. and Iranian negotiators are exploring a phased framework that could eventually reopen the Strait of Hormuz in exchange for the U.S. lifting its economic blockade. No agreement has been reached, and the sequencing of concessions remains a major obstacle.

The report was enough to help stocks recover from their lows and pull oil back from its highs. The physical supply picture also remains uncertain. Saudi Arabia has restarted its East-West pipeline, but crude loadings from the Red Sea have been slower to resume than initially hoped, while attacks in the region continue to threaten infrastructure.

For markets, any credible path toward reopening the Strait of Hormuz would be significant because it could remove some of the geopolitical premium embedded in energy prices. But today’s volatile oil trading shows investors are not assuming a deal is imminent.

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AI Faces a Different Kind of Risk

The AI investment story also encountered a new concern today. Oracle fell after reports that it invoked force majeure on a massive New Mexico data-center project following permitting and infrastructure delays.

A natural-gas pipeline needed to supply power to the project has been delayed, potentially affecting the timeline for the planned 2.45-gigawatt facility. Debt associated with the development has also fallen in value.

This doesn’t suggest that demand for AI computing is weakening. Instead, it highlights a different challenge: actually building enough infrastructure to satisfy that demand.

The AI boom increasingly requires enormous amounts of capital, electricity, land, permitting and supporting infrastructure. That creates execution and financing risks even when customer demand remains exceptionally strong.

Meta provided the other side of the story, rallying after unveiling new AI hardware and emphasizing strong engagement with its Muse platform.

The AI opportunity therefore remains powerful but investors may increasingly need to distinguish between demand for AI and the economics of delivering all the infrastructure needed to support it.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished lower today, with the Dow down 1.03%, S&P 500 off 0.75%, Nasdaq down 0.69%, and Russell 2000 falling 1.28%.

The biggest pressure came from the bond market. The 2-year Treasury yield climbed above 4.90%, while the 10-year moved above 5.10%, its highest level since 2007.

Small caps, homebuilders, airlines and biotechnology stocks were among the weakest areas, while semiconductor and memory stocks also pulled back following their recent AI-driven gains. Energy stocks outperformed as oil rebounded 1.8%.

Strong Economic Data Pushes Yields Higher

Today’s selloff was driven largely by surprisingly strong economic data. The preliminary September manufacturing index jumped to 57.0, well above expectations of 53.6, while the services index climbed to 58.7. Both readings comfortably above 50 indicate that business activity is expanding.

Employment also strengthened. Normally, that would be good news. But the reports also showed that businesses are facing rising costs, particularly from fuel, transportation and supply-chain pressures.

That combination, strong growth alongside persistent inflation, is exactly what the Fed does not want to see right now. Investors responded by increasing expectations for additional rate hikes, pushing Treasury yields sharply higher.

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The 10-Year Treasury Moves Above 5.10%

The bond-market reaction was significant. The 10-year Treasury yield climbed above 5.10%, while the 2-year reached its highest level in more than two years. A weak auction of $70 billion in 5-year Treasury notes added to the pressure. Investor demand was disappointing, including relatively weak participation from foreign buyers. That matters because Treasury yields influence borrowing costs throughout the economy.

Higher yields can translate into more expensive mortgages, corporate loans and other forms of financing. They also make bonds more competitive with stocks, particularly companies whose valuations depend heavily on profits expected years into the future. That helps explain why small caps and housing-related stocks were hit especially hard today.

AI Takes a Breather as Investors Focus on Disruption

AI stocks generally pulled back after their recent run, but the underlying investment story remains active.

Microsoft is reportedly preparing discounts of 30%–50% on corporate Copilot subscriptions as it tries to accelerate adoption, while Anthropic is reportedly considering leasing up to one gigawatt of additional data-center capacity.

Worthington Enterprises also highlighted rapidly growing demand for specialized tanks used in liquid-cooling systems for AI data centers.

Those developments reinforce two themes we have been discussing recently.

First, the physical infrastructure required to support AI continues expanding. Second, the industry is increasingly focused on driving adoption by making AI tools cheaper and easier to use.

At the same time, investors continue debating which traditional businesses could be disrupted as increasingly capable AI agents take over tasks previously performed through websites, apps and intermediaries.

That means the next phase of the AI trade may be less about simply owning “AI stocks” and more about separating the companies benefiting from adoption from those whose business models may come under pressure.

Oil Rebounds After Five Straight Declines

WTI crude rose 1.8%, snapping a five-session losing streak.

Energy markets continue to balance supply improvements against significant geopolitical uncertainty.

U.S. and Iranian representatives have resumed communication through mediators around the UN General Assembly, although there is not yet evidence of a substantive agreement and both sides continue to attach conditions to further progress.

Saudi Arabia’s restart of its East-West pipeline has also helped reduce some of the immediate supply concerns that drove oil sharply higher earlier this month.

For markets, the important question remains whether crude can stabilize after September’s surge. Lower energy prices would help inflation, but another sustained increase could complicate the Fed’s job even further.

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Here’s Our Take

Today demonstrated one of the market’s more unusual challenges: sometimes good economic news can be bad news for stocks. The U.S. economy does not appear to be slipping into recession. Business activity is accelerating, employment remains healthy, consumers are still spending and corporate earnings remain strong.

The problem is that inflation is not cooling quickly enough. That combination gives the Fed both the reason and the economic room to continue raising rates. And increasingly, the bond market may matter more for stocks than the Fed itself.

With the 10-year Treasury above 5.10%, borrowing costs are rising throughout the economy and investors can earn increasingly attractive returns from government bonds without taking equity-market risk.

The AI investment cycle remains an important counterweight. Demand for computing capacity and data-center infrastructure continues to look exceptionally strong, even as investors become more selective about who ultimately benefits.

But today’s selloff is a reminder that even strong corporate fundamentals have to compete with the price of money. For the market to broaden beyond its largest technology companies, investors may ultimately need some combination of cooling inflation, stabilizing Treasury yields and lower energy prices. Until then, stronger-than-expected economic data may continue to produce an uncomfortable reaction: good news for the economy, but potentially higher rates for longer.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

Stocks finished mixed today, with the Dow down 0.36%, S&P 500 essentially flat, Nasdaq up 0.45%, and Russell 2000 gaining 0.51%. The S&P 500 managed its fourth straight gain, while the Nasdaq closed at another record high. But the market was far from uniformly strong.

Semiconductors and memory stocks led as enthusiasm around AI continued, while banks, brokerage firms, financial services, software and entertainment stocks struggled. Homebuilders, airlines, restaurants and apparel companies were among the stronger groups. Meanwhile, WTI crude fell another 2.0%, extending Monday’s roughly 4% decline and providing some welcome relief from one of the market’s biggest recent inflation concerns.

AI Keeps Broadening Beyond the Biggest Tech Companies

AI remained the market’s strongest underlying theme. Semiconductors and memory stocks rallied as investors focused on growing demand for the computing infrastructure needed to actually run AI applications.

That distinction is becoming increasingly important. The AI story is no longer just about building increasingly powerful models. Companies are now releasing less expensive versions of advanced models, which could make AI available to far more businesses and consumers.

More usage means more demand for the chips, memory, networking and data-center capacity required to run those models. Alibaba also introduced a new AI chip, while PayPal announced a partnership with Meta’s Muse AI platform. Shopify continued to benefit from its own Muse partnership.

The broader message is that AI is moving from development toward widespread adoption, potentially expanding the opportunity well beyond the handful of companies that dominated the first phase of the AI boom.

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But AI Is Also Creating New Winners and Losers

The other side of that story is disruption. Meta’s Muse platform has increased investor concern about businesses that depend on customers navigating traditional websites, marketplaces or intermediaries.

Financial companies were particularly weak today, including brokerage, wealth-management and insurance-related businesses. Charles Schwab fell more than 6% as investors considered how personal AI agents could eventually change the way consumers access financial products.

Similar questions are emerging around travel websites, media subscriptions, job boards, fitness platforms and other businesses that rely on consumers directly interacting with their services.

We are therefore entering another stage of the AI investment cycle.

The question is increasingly shifting from “Who benefits from building AI?” to “Which existing business models could AI disrupt?”

Falling Oil Prices Offer Some Relief

Energy prices continued moving in the opposite direction.

WTI crude declined for a fifth consecutive session as concerns about Middle Eastern supply eased somewhat.

Saudi Arabia restarted its East-West pipeline, which had been shut following drone attacks earlier this month. The pipeline had been rerouting roughly 4 million barrels of oil per day around the Strait of Hormuz, making its restart important for global supply.

There were also renewed diplomatic discussions surrounding the conflict and the possibility of restoring more normal shipping through the Strait of Hormuz, although substantial uncertainty remains.

For markets, the important development is simpler: oil has finally begun moving meaningfully lower after its extraordinary September surge.

If that continues, it could reduce pressure on gasoline and diesel prices, help consumers and businesses, and make the Fed’s inflation problem somewhat easier.

The Economy Sends Mixed Signals

Today’s economic data offered a mixed picture.

Private payroll estimates continued improving, suggesting the labor market remains relatively healthy.

Manufacturing was weaker. The Richmond Fed manufacturing index slipped into contraction territory, while employment weakened and businesses reported higher input and selling prices.

That combination captures the Fed’s challenge fairly well.

Parts of the economy are slowing, but inflation pressures remain stubborn. Policymakers therefore have little incentive to quickly reverse last week’s rate hike.

Treasury yields were relatively stable today, which helped prevent interest rates from becoming another major headwind for stocks.

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Here’s Our Take

Today’s market reinforces an important shift taking place beneath the surface.

The AI story is getting broader but also more disruptive.

Lower-cost AI models and rapidly expanding consumer applications could dramatically increase demand for computing infrastructure. That remains positive for semiconductors, memory, networking, data centers and other parts of the AI ecosystem.

At the same time, investors are beginning to ask harder questions about which traditional businesses could lose customers, pricing power or relevance as AI agents become capable of doing more on consumers’ behalf.

That means the next phase of the AI trade may become much more selective.

Meanwhile, falling oil prices are providing exactly the kind of macroeconomic relief markets needed after September’s energy shock. If crude continues declining and Treasury yields remain relatively stable, investors can focus more heavily on corporate earnings and AI adoption rather than inflation and interest rates.

That combination, strong AI investment, lower energy prices and stable bond yields, would be a considerably healthier backdrop for stocks.

But today’s mixed market also shows that the benefits will not necessarily be evenly distributed. AI increasingly looks capable of creating both significant winners and meaningful disruption at the same time.

For investors, understanding who benefits from AI adoption, and whose business model it threatens, may become just as important as understanding the technology itself.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished mixed Friday, with the Dow down 0.19%, S&P 500 up 0.16%, Nasdaq gaining 0.39%, and Russell 2000 falling 0.50%.

The headline indexes masked a weaker day underneath the surface. More stocks declined than advanced, and the equal-weighted S&P 500 significantly underperformed the traditional index. Semiconductors and memory stocks were among the strongest areas, helping the technology-heavy Nasdaq finish higher.

Treasury yields moved sharply higher again, particularly at the short end of the curve, while WTI crude fell 1.6%, extending the stabilization in energy prices seen later this week.

AI Strength Masks a Narrower Market

AI-related stocks continued to provide important support for the broader market.

Semiconductors and memory companies outperformed, while optimism around data-center investment remained strong following a week filled with positive corporate updates.

But beneath the major indexes, market participation has deteriorated considerably.

Only about 28% of S&P 500 companies are currently trading above their 50-day moving averages, while nearly half are below their longer-term 200-day averages.

That helps explain why the S&P 500 could finish slightly higher Friday even though many individual stocks declined.

The market is increasingly dependent on a relatively small group of large technology and AI-related companies. That does not necessarily mean the rally is ending, but narrow market leadership makes the indexes more dependent on continued strength from their largest companies.

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Treasury Yields Reverse Thursday’s Relief

Bond yields moved higher again after Thursday’s sharp decline.

Short-term Treasury yields rose 8–9 basis points, reversing much of the relief investors received following this week’s Fed meeting.

There was no single catalyst behind Friday’s move. Investors continue to digest a Fed that raised rates this week and signaled that another increase could come before year-end.

Developments in Japan also received attention. The Bank of Japan raised its policy rate by 0.25 percentage points to 1.25%, its highest level since 1995. The yen initially weakened before rallying after reports that the central bank conducted a rate check, an action sometimes associated with potential currency intervention.

For U.S. stocks, the broader issue remains straightforward: higher Treasury yields make borrowing more expensive and raise the hurdle that stocks must clear to remain attractive relative to bonds.

Oil Provides Some Relief

One encouraging development this week has been the stabilization in oil prices.

WTI crude fell another 1.6% Friday after the extraordinary surge earlier this month.

Middle East risks remain significant, but there have also been tentative signs of potential diplomatic progress and more resilient oil flows. China has reportedly encouraged Iran to help restrain Houthi activity, while diplomatic discussions are expected around next week’s UN General Assembly.

Oil’s pullback matters because rising fuel prices had quickly become one of the biggest threats to the inflation outlook.

A sustained decline would ease some pressure on consumers, transportation companies and the Fed. But with global inventories tight and geopolitical uncertainty still elevated, it is too early to assume the energy shock is over.

The Economy Cools at the Margin

Friday’s economic data were relatively quiet.

August industrial production was unchanged from July, missing expectations for a 0.3% increase. Capacity utilization also came in slightly below forecasts.

The report suggests parts of the industrial economy are losing some momentum, although this week’s broader economic data, including strong retail sales and low jobless claims, continue to point toward a resilient economy.

That combination leaves the Fed in a difficult position.

Growth remains healthy enough to tolerate tighter monetary policy, but inflation and energy prices remain elevated enough that policymakers are reluctant to ease.

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Here’s Our Take

Friday’s market tells two different stories depending on where you look.

At the index level, things appear relatively calm. The S&P 500 and Nasdaq finished higher, AI spending remains strong, corporate earnings are healthy and oil prices have finally begun to retreat.

Underneath the surface, however, fewer stocks are participating in the market’s gains, Treasury yields remain elevated and investors are becoming increasingly cautious.

That makes the continued strength of the AI investment cycle even more important.

So far, demand for chips, computing capacity, networking equipment, data centers and power infrastructure has remained remarkably resilient. As long as that continues, the largest technology companies can provide meaningful support for the major indexes.

But a healthy market eventually needs broader participation.

For the next several weeks, the key question may therefore be whether lower oil prices and stabilizing bond yields allow the rest of the market to catch up or whether rising rates continue pushing investors toward an increasingly narrow group of AI and technology winners.

Next week should provide another test, with fresh economic data and several major geopolitical and trade discussions on the calendar.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks rebounded today, with the Dow up 0.62%, S&P 500 gaining 1.14%, Nasdaq climbing 1.69%, and Russell 2000 advancing 0.55%.

It was the strongest day for the S&P 500 and Nasdaq since early August, snapping three straight declines. Technology led the rebound, with semiconductors, memory stocks and other AI-related companies among the strongest performers.

Investors also received some relief from the two forces that have been weighing most heavily on markets recently: oil and interest rates. Treasury yields fell 6–8 basis points across the curve, while WTI crude declined another 0.5%.

AI Takes the Lead Again

AI returned to center stage after several days of more cautious trading.

Generac surged more than 18% after announcing a multibillion-dollar agreement to supply backup generators for Amazon’s data centers. Vicor jumped after licensing its power technology to an AI equipment manufacturer, while Nokia announced an AI-related partnership with Microsoft.

CoreWeave also disclosed roughly $25 billion of new customer commitments during the early part of the third quarter, another indication that demand for computing capacity remains exceptionally strong.

Meanwhile, several industry executives continue to describe AI computing as supply constrained. The important point is that the AI buildout is increasingly spreading beyond semiconductor companies. Data centers require power generation, electrical equipment, cooling, networking, optical components and other infrastructure. That is creating a much broader ecosystem of companies benefiting from the investment boom.

Falling Yields Give Stocks Some Breathing Room

The bond market also provided some relief. Treasury yields fell across the curve, reversing part of their recent surge even after yesterday’s Fed meeting delivered a somewhat hawkish message. The Fed raised rates by 0.25 percentage points and signaled another increase may still be coming before year-end. Economic data today did little to weaken that case.

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Initial jobless claims fell to 196,000, while continuing claims dropped to their lowest level since early 2024. The Philadelphia Fed manufacturing index also remained firmly in expansion territory, although businesses continued reporting higher prices.

In other words, the economy still looks strong enough to withstand tighter monetary policy, for now. The decline in yields therefore gave growth stocks some welcome breathing room, helping technology outperform.

Oil Stabilizes After Its Recent Surge

Oil prices declined modestly, extending Wednesday’s pullback.

The recent surge in crude has been one of the biggest sources of concern for markets because higher energy prices threaten to push inflation higher while simultaneously squeezing consumers and corporate profits.

Today brought some signs that Middle Eastern oil flows remain more resilient than feared, including efforts to restore part of Saudi Arabia’s East-West pipeline.

That does not mean the geopolitical risk has disappeared. Energy supplies remain vulnerable, and refined-fuel markets remain tight.

But after oil’s extraordinary run higher over the past few weeks, even modest stabilization helps reduce one of the market’s biggest immediate concerns.

Housing Still Feels the Pressure

The housing market continues to tell a different story. August housing starts came in below expectations, while building permits were also soft. Pending-home sales increased just 0.3% and remained below year-ago levels.

That weakness is hardly surprising. Mortgage rates have risen alongside Treasury yields, making affordability even more difficult for prospective buyers. Lennar reinforced that message today, reporting weaker earnings and lowering its forecast for home closings.

So while consumer spending and employment remain resilient, housing continues to be one of the clearest areas where higher interest rates are having an impact.

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Here’s Our Take

Today’s rebound highlights just how quickly the market can respond when its two biggest macro pressures, oil and bond yields, stop moving higher.

Neither problem has disappeared. The Fed remains focused on inflation, another rate hike is still possible, energy prices remain elevated and housing continues to struggle with high borrowing costs.

But underneath those challenges, the corporate backdrop remains surprisingly strong.

The most important example continues to be AI. What began as a semiconductor story is increasingly becoming an infrastructure story spanning data centers, power generation, networking, memory and electrical equipment.

That broadening helps explain why technology can continue finding buyers even with Treasury yields near historically restrictive levels.

The question now is whether today represents the beginning of a more durable rebound or simply relief after several difficult sessions.

If oil stabilizes and Treasury yields retreat from the 5% area, strong earnings and AI investment could regain control of the market narrative. But if energy prices and yields resume their climb, those macro pressures will again compete with an otherwise strong corporate backdrop.

For now, today offered investors something they have not had much of recently: evidence that strong growth, easing oil prices and lower bond yields can still produce a powerful combination for stocks.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

Stocks finished lower today, with the Dow down 1.21%, S&P 500 off 0.44%, Nasdaq essentially flat, and Russell 2000 down 0.40%.

The market recovered somewhat from its worst levels after the Federal Reserve raised interest rates by 0.25 percentage points, as widely expected. Banks, financial services, software, energy, transportation and housing-related stocks were among the weakest areas, while healthcare, defense, networking and several consumer groups held up better.

Treasury yields moved higher at the short end, with the 2-year yield reaching its highest level since mid-2024. Meanwhile, WTI crude fell 3.2%, providing some relief after Tuesday’s sharp increase.

The Fed Raises Rates and Signals One More Hike

The Fed raised its benchmark interest rate by 0.25 percentage points to 3.75%–4.00%, with policymakers voting unanimously for the move.

More importantly, the Fed’s updated projections showed another quarter-point increase by the end of 2026, followed by no additional hikes in 2027.

Chair Kevin Warsh emphasized that price stability remains the Fed’s primary focus and described Wednesday’s move as removing some of the remaining support provided by lower interest rates.

The market interpreted those comments as somewhat hawkish. Short-term Treasury yields moved higher, and investors continue to price in another rate increase before year-end.

That means today’s hike was largely expected. The more important message was that the Fed does not appear ready to declare victory over inflation yet.

Strong Retail Sales Show the Consumer Is Still Spending

The economic data gave the Fed another reason to remain cautious.

August retail sales jumped 1.2% from July, easily beating expectations for a 0.8% increase and marking the strongest monthly gain since March.

The strength was broad. Online shopping, electronics, restaurants, sporting goods and gasoline stations all reported higher sales.

The closely watched control group, which feeds into GDP calculations, rose an even stronger 1.4%.

That is encouraging from an economic-growth perspective. Consumers remain willing and able to spend despite higher interest rates and rising fuel costs.

But strong spending also creates a complication for the Fed. A resilient economy gives policymakers more room to keep rates higher, or raise them further, while they continue fighting inflation.

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Oil Pulls Back as Supply Concerns Ease

Oil finally provided some relief.

WTI crude fell 3.2% as concerns about Middle Eastern supply disruptions eased somewhat. Saudi Arabia is reportedly increasing shipments through the Strait of Hormuz, while efforts are underway to restore part of the country’s damaged East-West pipeline.

Those developments reduce some of the immediate risk that the recent disruption will significantly restrict global crude supplies.

However, the broader energy picture remains complicated. Global diesel supplies are still tight, with refinery disruptions in Russia and the possibility of fuel-export restrictions from China adding to concerns.

So while today’s oil decline is welcome, the inflationary threat from energy has not disappeared.

AI Investment Shows Few Signs of Slowing

The AI investment story remained strong beneath the broader market weakness.

OpenAI is reportedly considering another funding round ahead of a potential IPO next year, with annualized revenue reportedly surpassing $40 billion following strong demand for Astra.

Intel gained on reports that SK Hynix is considering producing memory chips at Intel’s Ohio facility, while Apple is reportedly exploring a return to the server market.

GE Vernova also highlighted exceptionally strong demand for new power-generation capacity, another sign of the enormous infrastructure requirements accompanying the expansion of AI and data centers.

Taken together, the message remains consistent: AI demand is increasingly spreading beyond chips and software into data centers, networking, memory and electricity generation.

Higher Fuel Costs Are Starting to Show Up in Corporate Results

There are also growing signs that the recent energy shock is affecting companies directly.

J.B. Hunt fell sharply after warning that higher fuel, driver and insurance costs would weigh on quarterly profits, even as underlying shipping demand remains strong.

American and United Airlines also suggested they may need to reduce capacity as fuel prices increase.

These examples illustrate why energy prices matter so much for the broader economy. Even companies experiencing healthy demand can see profits squeezed when transportation and operating costs rise rapidly.

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Here’s Our Take

Today’s Fed decision reinforces an important shift in the market narrative.

Earlier this year, investors were worried that higher rates might push the economy into a meaningful slowdown. Instead, consumer spending remains strong, corporate earnings have held up and AI-related capital spending continues to accelerate.

That resilience is good news for the economy but it also gives the Fed less reason to tolerate inflation remaining above target.

The Fed’s message today was therefore relatively straightforward: one rate hike may not be enough.

The encouraging development is that oil prices finally pulled back. If energy prices continue to stabilize, inflation pressures could ease and reduce the need for additional tightening beyond what the Fed currently expects.

But if oil and diesel resume their climb while consumer spending remains strong, policymakers may have little reason to change course.

For investors, the key question is increasingly not whether the economy can withstand today’s interest rates, it has so far, but how many additional rate increases it can absorb before something begins to weaken.

That tension between strong growth and tighter monetary policy is likely to remain one of the market’s defining themes through year-end.

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DISCLAIMER: The content provided in this newsletter does not constitute investment advice, financial advice, trading advice, or any other form of personal recommendation. Nothing in this newsletter should be interpreted as a suggestion to buy, sell, or hold any investment or security. All content is for general informational purposes only and should not be relied upon for making investment decisions. Readers should conduct their own research and consult qualified financial advisors before making any investment decisions. To read our full disclaimer, click here.

U.S. stocks finished lower today, with the Dow down 0.63%, S&P 500 off 0.45%, Nasdaq down 0.78%, and Russell 2000 falling 0.76%.

The decline was broad, with more than twice as many S&P 500 stocks falling as rising. Consumer-oriented companies were particularly weak, including restaurants, retailers, apparel companies, airlines and autos. Big Tech was mostly lower, although semiconductor stocks generally held up better.

The biggest pressures remained oil and interest rates. WTI crude jumped another 4.4%, while the 10-year Treasury yield briefly reached its highest level since 2007 before settling around 5%.

Oil Keeps Climbing and Consumers Are Feeling It

Oil has now risen in 10 of the past 11 sessions and roughly 27% over that period, as concerns about Middle East supply disruptions continue to build.

Saudi Arabia reportedly suspended some oil shipments from Yanbu, while additional supply disruptions emerged from Libya and tensions involving Houthi forces remained elevated.

The result has been a sharp increase in energy and fuel costs at a time when consumers are already dealing with elevated prices.

That helps explain Tuesday’s weakness in restaurants, apparel, travel and other consumer-sensitive stocks. Higher fuel costs directly affect household budgets while also increasing transportation and shipping expenses for businesses.

The longer oil remains above $100, the greater the risk that the energy shock begins weighing on both consumer spending and inflation.

Treasury Yields Remain Near 5%

Bond yields provided another source of pressure.

The 10-year Treasury briefly moved above 5%, while a $13 billion auction of 20-year Treasury bonds received weak demand, particularly from foreign investors.

That matters because higher long-term rates affect borrowing costs throughout the economy, from mortgages and auto loans to corporate financing.

It also creates more competition for stocks. When investors can earn around 5% from government bonds, they may become less willing to pay high valuations for companies whose profits are expected far into the future.

Bond-market volatility has also begun rising, suggesting investors are becoming less comfortable with the recent move in rates.

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AI Stocks Stabilize

One relative bright spot was the AI trade. Semiconductors generally held up better than the broader technology sector, while industry executives continued to describe strong demand for computing capacity. Nvidia CEO Jensen Huang pushed back against concerns that efforts to make advanced AI safer will meaningfully slow innovation, while Broadcom CEO Hock Tan reiterated confidence that demand for AI inference and computing will remain strong.

That distinction is becoming increasingly important. The first phase of the AI boom was largely about training increasingly powerful models. The next phase is increasingly about inference, actually running those models across millions of everyday applications and AI agents. If that usage expands as expected, demand for computing infrastructure could remain strong even if the pace of building ever-larger frontier models eventually moderates.

The Economy Still Looks Resilient

Today’s economic data was mixed but did not point to a sharp slowdown.

The Empire State manufacturing index fell to 7.6 from 20.6 in August, indicating that manufacturing growth slowed. But new orders remained positive and employment improved. At the same time, businesses reported longer delivery times and accelerating input and selling prices, another reminder that inflation pressures have not disappeared.

Preliminary private-payroll data also showed continued improvement in hiring. That leaves the Fed facing essentially the same dilemma: economic activity remains resilient while inflation and energy prices remain too high for comfort.

All Eyes Turn to the Fed

The biggest event now comes tomorrow. Markets are pricing in roughly a 95% probability of another Fed rate hike, meaning the increase itself would not be much of a surprise. The more important information will come from the Fed’s updated economic projections and Chair Kevin Warsh’s press conference.

Investors will be looking for clues about whether policymakers see this as another isolated adjustment or whether persistent inflation and higher energy prices could require additional tightening later this year. That distinction could matter much more for markets than tomorrow’s rate decision itself.

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Here’s Our Take

The market’s biggest challenge has shifted noticeably over the past few weeks.

Earlier concerns centered on whether economic growth and employment were weakening too quickly. Recent data have eased much of that fear. The labor market remains healthy, corporate earnings are strong and AI investment continues at an extraordinary pace.

The problem now is that oil and interest rates are rising at the same time.

That combination can be particularly difficult for markets. Higher energy prices squeeze consumers and businesses while adding to inflation. Higher Treasury yields simultaneously increase borrowing costs and put pressure on stock valuations.

The AI investment cycle remains an important source of fundamental strength, but it cannot completely insulate the broader market from those forces.

With another Fed hike now widely expected, tomorrow’s real question is what comes next. If the Fed signals that inflation is improving enough for policymakers to pause after this move, markets could find some relief. If officials suggest that higher energy prices and persistent inflation may require additional tightening, the recent pressure from rising bond yields could continue.

For now, oil and the bond market, not corporate earnings, appear to be setting the tone for stocks.

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