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.
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.
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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