Weekly Investment Perspective

U.S. stocks posted mixed performance last week as continued pressure on the AI trade offset gains across much of the broader market. The Dow Jones Industrial Average rose 0.4%, while the S&P 500 declined 0.5% and the tech-heavy Nasdaq Composite fell 0.7%. Meanwhile, the small-cap Russell 2000 gained 2.0% and the equal-weighted S&P 500 rose 1.1% with support from falling rates and the rotation out of AI stocks. The contrast was also visible within technology as semiconductor shares fell -3.2%, while software stocks gained 6.0%. Despite strong results from both major AI spenders and the companies supplying the buildout, investors remained focused on the rising cost of financing that investment.

The shift away from AI-linked shares coincided with a rally in the bond market, as Treasury yields declined across maturities. The 10-year Treasury yield ended the week just below 5%, down from roughly 5.08% the prior Friday and well below its early-October high of 5.31%. Some of that demand reflected a move toward traditional safe-haven assets as AI stocks weakened and political unrest intensified in France. Investors also considered whether slower data center investment could temper economic growth and inflation, reducing the need for additional Federal Reserve tightening.

The latest company earnings reports reinforced both sides of the AI debate. Meta said AI-driven improvements were accelerating advertising conversions and lifting engagement to record levels. SpaceX raised its target to more than 13 gigawatts of computing capacity by the end of 2027, up from 1.7 gigawatts today, nearly an eightfold increase. UBS estimates that reaching the target could require approximately $350 billion of capital spending, placing SpaceX’s buildout in the same spending tier as the largest cloud-computing companies. Lam Research, a leading supplier of chip-manufacturing equipment, also indicated that worldwide spending on such equipment could exceed $200 billion next year.

The concern is increasingly about how that growth will be funded. The sheer scale of investment ambitions is now outstripping the operating cash flows of even the most profitable tech giants, requiring a growing proportion of the buildout to be financed by debt or equity issuance. As a result, credit markets are showing increased concern, with credit spreads rising sharply for several AI-linked borrowers. Those concerns gained further support Monday when Meta announced plans to raise as much as $95 billion in equity, while SpaceX raised $40 billion in debt to purchase Nvidia GPUs. Shortages of chips, power, cooling and data-center capacity are also encouraging companies to commit capital early, increasing the consequences if construction is delayed or the expected revenue arrives more slowly.

Stepping back from the AI-specific debate, third-quarter earnings have remained broadly constructive. S&P 500 earnings are tracking toward 29.5% year-over-year growth based on consensus analyst forecasts, with 83% of the companies reporting so far exceeding earnings expectations. Upward revisions have been concentrated in technology and energy, but commentary from airlines, industrial companies and consumer businesses has generally pointed to resilient demand. This week marks the busiest stretch of earnings season, with 179 S&P 500 companies scheduled to report, including Alphabet, Microsoft and Amazon. Together, the companies reporting represent more than one-third of the index’s market value, placing particular attention on cloud growth, AI backlogs and future capital-spending plans.

Last week’s decline in U.S. yields was not solely about a flight to safety from the tech stock sell-off. Political unrest and fiscal concerns in France also contributed. Government support that shielded households from high energy prices helped widen an already-concerning budget deficit, while plans to restrain spending contributed to recent protests. France’s 10-year government-bond yield moved above 5%, and its spread over comparable German bonds widened to a record 1.75 percentage points. The pressure has so far remained largely concentrated in France, but the uncertainty contributed to demand for U.S. Treasuries.

The resulting decline in U.S. interest rates creates an interesting backdrop for Wednesday’s Federal Reserve meeting, less than a week before the midterm elections. Markets assign only about a 10% probability to a rate increase this week, although the odds of at least one increase by December are closer to three in four. With no new economic projections scheduled, investors will focus on Chair Kevin Warsh’s assessment of inflation and whether the recent decline in longer-term rates affects the Fed’s outlook.

This week will also include a few important economic readouts including the first estimate of third-quarter gross domestic product and September’s Personal Consumption Expenditures inflation report on Thursday. Economists expect GDP growth of roughly 3.0% at an annual rate, up from 2.2% in the second quarter, supported by resilient consumer spending and strong business investment. Headline PCE inflation is expected to rise to 3.6% year-over-year from 3.4%. Together with a heavy earnings calendar, those reports should provide a clearer view of whether the Fed can remain patient while inflation is still running above target.