Weekly Investment Perspective

U.S. stocks finished a volatile week with unusually wide performance gaps as investors moved away from crowded artificial intelligence trades and toward Treasuries and areas less connected to the data center buildout. The Nasdaq Composite fell 4.5% and the S&P 500 lost 2.0%, while the Dow Jones Industrial Average gained 0.7%. The equal-weighted S&P 500 rose slightly and outpaced the capitalization-weighted index by more than two percentage points, its widest margin since November 2020. The rotation coincided with a sharp reversal in the bond market. The 10-year Treasury yield initially climbed to 5.33% following Wednesday’s hot inflation report before closing the week at 5.08%.

Last week’s inflation data strengthened the case for additional Federal Reserve rate hikes. Headline consumer inflation accelerated to 3.7% year-over-year in September from 3.5%, while core inflation excluding food and energy rose to 2.6% from 2.5%. More concerning was the breadth of the increase. Core inflation accelerated for a third consecutive month, and measures designed to remove unusually large price swings also moved higher. Producer prices reinforced that message, rising 1.3% in September (6.3% year-over-year), more than twice the expected increase, while core producer prices gained 0.5% (5.6% year-over-year). Retail sales also appeared strong at first glance, rising 0.8%, but gasoline accounted for most of the increase and inflation-adjusted sales declined slightly.

Despite the hotter inflation data, Treasury yields actually reversed lower as several offsetting forces pulled rates in the opposite direction. The probability of an October rate hike briefly rose above 50% before ending the week near 17%, while markets continued to assign nearly a 90% chance of a hike by December. Fed officials acknowledged that inflation remains too high without signaling urgency to act this month. Meanwhile, the prospect of tighter monetary policy can also weigh on the longer-term growth outlook, tempering long-term yields even as expectations for near-term policy rates rise. Treasury yields had climbed rapidly over the past several months, attracting buyers at levels not seen in roughly two decades, while the flight to safety associated with the AI sell-off added to demand.

AI stocks experienced a sharp reassessment of whether future revenue will justify the scale of investment and how the infrastructure buildout will be financed. Semiconductor stocks fell more than 11% last week, while a basket of newer AI-focused cloud providers lost nearly 24%. Recent revenue disclosures from Anthropic, one of the leading AI model developers, still showed rapid growth but fell short of more bullish expectations, raising questions about how quickly end demand can grow into the industry’s enormous spending commitments. Visibility remains limited because the major AI labs are private and disclose relatively little financial information. Financing concerns were most visible at CoreWeave, a specialized cloud provider that relies heavily on borrowing to fund AI chips and data-center capacity. The yield on bonds it issued in June at about 9.7% climbed toward 15% to 16%, illustrating how quickly the economics of debt-funded expansion can deteriorate when borrowing costs rise.

Those concerns about end revenue and financing overshadowed still-strong results from two important beneficiaries of AI capital spending. Taiwan Semiconductor raised its 2026 revenue-growth outlook to approximately 44%, while ASML increased its full-year sales forecast and said its currently planned production capacity for 2027 and 2028 may not be sufficient to meet customer demand. The underlying demand for AI computing capacity remains strong, but investors are placing greater scrutiny on financing costs, project execution and the path from infrastructure spending to sustainable revenue and returns.

Outside of AI, large banks opened third-quarter earnings season with results that were strong in absolute terms but mixed relative to elevated expectations. Credit quality remained healthy and net interest income generally held up well. However, JPMorgan posted a rare earnings miss as fixed-income trading and investment-banking activity came in below expectations, while Goldman Sachs also reported softer bond-trading results despite strength in equities. Bank executives remained constructive on capital-markets pipelines and the broader economy, but acknowledged that higher rates have slowed mortgage activity and caused some businesses to delay transactions.

Earnings season accelerates this week, with Meta and Tesla providing the first major tests of Big Tech sentiment following the sharp AI sell-off. Netflix, GE Aerospace and American Express are among the other notable reporters. The economic calendar is comparatively quiet, with housing data, preliminary business activity readings and the final October consumer sentiment report in focus. Perhaps the most important market question will be whether long-term Treasury yields can stabilize after their relentless rise over the past several months. A period of stability near current levels would ease some pressure on equity valuations, while another move higher could keep volatility elevated even if corporate earnings remain strong. .