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.
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.
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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