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.
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.
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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