Weekly Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

Last week ended on a sour note, with broad-based losses on Friday. Throughout the week the main topic of conversation was the Tech Wreck as financing concerns hit the AI complex. Chip and memory stocks were down >10% while neoclouds were off >20%, closing around the late July Situational Awareness lows. After hitting a new all-time high in the previous week, the S&P 500 fell nearly 2%, breaking below its 50d ma. The index also broke a 53-session streak without a 1% decline on Wednesday, only to follow that up with a second on Friday as the downside momentum picked up with the VIX jumping from ~16 to ~20. However, rotational activity helped to offset some of that weakness with 7 of 11 sectors in the S&P 500 ending the week higher. That strength was mostly in defensive sectors with energy, staples and healthcare all up >3%. The equal-weight version of the index managed to end the week up 0.5%, outperforming for the second consecutive week. Despite some hot economic data Treasury yields fell driven by a flight to safety and as investors recalibrated growth assumptions should there be a slowdown in AI investment. Oil prices were on the move higher again as tensions increased in the Middle East and between Russia/Ukraine, despite Trump claiming an “energy ceasefire”. The price action in oil and the VIX heading into the weekend helped fueled speculation of imminent military strikes. In addition, Monday was also the 39th Anniversary of Black Monday evoking some pre-Halloween spookiness.

With a light economic calendar and the Federal Reserve in its Blackout Window we were hoping the focus would shift away from the macro. The MAC Desk’s focus had already shifted as we awaited Banner night at the Garden on Tuesday. The defending champion NY Knicks lost their season opener, to the new look 76ers, a downer, but the evening was really all about raising the championship banner to the MSG rafters, the giant 22-carat, 800 diamond championship rings (complete with a replica of the Garden) and the gold-accented unis. As the kids say, "Fire".

There were no calamitous events over the weekend. After last week’s relentless selloff, tech bounced to start the week, helped by some positive analyst commentary. However, there wasn’t a lot of conviction in the trading or arguably much of the research as most of the ratings increases were accompanied by significant PT cuts. The AI complex ultimately turned lower again this week which we’ll discuss more below. Oil prices have continued to move higher as more tankers have been attacked in the Strait and Russia/Ukraine continue to exchange fire. The US State Department has ordered non-emergency personnel to leave Saudi Arabia and other areas in the Middle East. All of which is adding to speculation that the US and Israel will unleash another round of airstrikes soon. However, as we highlighted the correlation between higher oil prices and Treasury yields started to break last week and that continued with Treasury yields falling this week. Once again, the equal-weight version of the S&P 500 outperformed ending the week up a little more than 1% with the pullback in yields helping to take some pressure off the small caps which were up >1.5%.

The early cycle tech earnings this week continued to showcase the strong AI related demand. However, the group turned sharply lower again as companies highlight the large sums of money necessary to fund this investment cycle, adding to the growing concerns about capital constraints.

Recently, there have been a string of companies that have pushed the timing of IPO’s or had disappointing debuts including a flop this week in South Korea. As markets await Anthropic’s S1 filing, OpenAI is reportedly looking to raise $30B at a 1.25T valuation below recent valuations floated in the press. We’ve been highlighting the widening of credit spreads and it is clear the competition for capital is getting more difficult. Here is a snip from a Meta SEC filing:

The AI complex has been repricing since hitting their highs during the May/June time frame with memory, semis, infrastructure and neoclouds down between 20% - 60% from their YTD highs. Despite those declines most of those stocks are still up YTD. To highlight the point at the lows yesterday the ICE Semiconductor index tested its 200d ma after an >25% drawdown. The last time it was within ~5% of that moving average in March when the index was >50% below its current level. 

This week there have been more concerns brewing about the security of SI. Axios reported that banks have been under siege by unauthorized AI agents. Banks are investing to prevent worst case scenarios they are also preparing for a “day after” event. AI models have also discovered vulnerabilities in PHP, a programming language that powers ~70% of the world’s websites causing multiple government portals around the globe to be taken offline. This has helped cybersecurity stocks rally sharply this week. The iShare Cybersecurity ETF (IHAK) was up 10% this week, hitting a new high. This subgroup has been a bright spot within the software sector. Softwaree sold off sharply earlier this year on AI disruption fears but has come roaring back recently with positive earnings from SAP and IBM helping the cause this week. Below chart looking at some of the AI subgroups:

This week the flow of earnings has started to pick up, and the street is now drinking through a fire hose of reports on a daily basis, which will only get worse next week with >40% of companies in the S&P 500 set to report. As has been the case in recent quarters there’s a lot of volatility around those reports and the reaction function is not always congruent with the results. According to FactSet Earnings Insight, >80% of companies that have reported to date have beaten estimates, but the magnitude of those beats is not nearly as large as what we’ve seen over the last couple of quarters and is below historical averages (2.1% vs. 5/10yr avg of 7.5%/8%). 66% of companies are beating revenue estimates by 1.2% both metrics are below historical averages (5yr 70%/1.8%, 10yr 68%/1.6%). This is in part because the street has finally caught up but we are also still in the early days of the reporting season.

Industrials have pointed to strong demand and growing backlogs. Results from companies in the transportation sector, which are most impacted by the increase in fuel costs, have highlighted very strong demand. These companies have been pulling levers to control costs and have begun to increase prices which could start to pressure margins downstream and impact inflation going forward. Auto related companies which have been impacted by the higher interest rate environment have had a rough week as they highlight the difficult macro backdrop and increasing input costs. Housing is the other industry that has been impacted by higher rates. Not surprisingly the numbers haven’t been great here either but the stocks have been helped by the pullback in yields.

Credit card companies continued to point to a resilient consumer, broadly provisions came in better than expected though expenses were a bit higher. Elsewhere within financials earnings from exchanges, financial data and alternative asset managers were well received.

Communication services was the big downside standout sector this week falling >5% after Meta and Netflix both fell >5% after earnings. Telecom stocks were also under pressure again amidst concerns about competition from SpaceX though this did help the tower stocks. 

Indexed MTD sector performance:

Economic data was relatively light this week. US manufacturing conditions were similar to last month according to the October Flash PMIs. At 56.0, the reading is still solidly in expansion territory and remains in its uptrend.

Services PMI was basically inline, slightly lower than last month but also still well into expansion territory. Price inflation occurred across both reports.

Housing data wasn’t pretty. Homebuilder confidence fell to its lowest level since June 2012 according to the NAHB Index, and buyer traffic to April 2012. 

Housing Starts fell more than expected while Permits were about in line. Pending home sales fell sharply in September down 7.3% m/m and 11.3% y/y as mortgage rates surged.

The US Treasury proposed new rules to improve home affordability, restricting large institutional investors from purchasing single-family homes. It would implement an executive order from earlier in the year. Trump also signed new affordability EOs. One is directed at lowering mortgage and title insurance costs. Another establishes a task force to lower costs for manufactured and pre-fab housing. 

Thursday’s stampede bid for Treasuries sent yields sharply lower as tech sold off. That completely erased a modest move higher in rates earlier in the week. The curve bull flattened as 10/30 fell ~10bp for the week. Since peaking around 5.7% two weeks ago, the 30y yield has fallen about 40bp, while the 2y is down 30bp from its peak.

European rates had a very dynamic week. French OAT yields jumped another 10-20bp while German Bunds fell 5-10bp on the haven bid on Thursday. French-German CDS spreads- already historically wide- widened further. 

The risk flows had counteracting impacts on the Dollar. The greenback weakened by ~1% against the yen. The Dollar had strengthened significantly against the Swiss franc this year but began to pull back last week. Thursday saw the franc strengthen, but that move reversed Friday and the Dollar finished higher for the week. The Dollar also gained against the Euro, the heaviest weighting in the US Dollar Index. It has strengthened from $1.17 to $1.12 since mid-August.

South Korea fell 2% but it wasn’t the worst performer. Samsung and SK Hynix were around flat. The KOSPI did notch its fourth straight weekly decline, however, and is down 40% from its highs in June. The BOK kept its policy rate at 3.0% as expected. SK Hynix stopped working on a potential US IPO of its Solidigm unit following Korean regulatory issues. That is the latest issue to hit tech capital markets. Australian data center operator Firmus pulled its IPO plans recently while peer NextDC saw its stock got clobbered 40% after power delays caused by community opposition caused it to cut guidance. Singapore-based DayOne was also reported to be weighing a delay in its US IPO. That followed fellow Singaporean data center operator AirTrunk’s IPO delay.

Japan fell 4% this week. Softbank dropped >10%, Advantest and Tokyo Electron fell 5-10%. Industrial manufacturers were also lower as were Japan’s biggest banks (MUFG -5%) ahead of next week’s BOJ meeting. Other areas held up well. Flash Manufacturing PMI fell and missed estimates while Services improved versus last month. Press reports noted the BOJ is expected to keep rates on hold. JGB yields fell and the yen strengthened against the dollar on safe haven demand, producing a headwind for equities.

China was lower with Hong Kong seeing most of the pressure (Hang Seng -5%). Alibaba and Tencent fell ~10% locally while AI model developer Z.AI fell 5% and is down 83% from its closing high this year. Q3 GDP rose 4.5%, just beating consensus and up slightly from Q2’s 4.3%. Industrial production was a little better as well and September Retail Sales beat. The Plenum of the Chinese Communist Party takes place next week. Political pundits are paying extra attention to this one as it begins the process of China’s “campaign cycle” for CCP leadership changes next year. And just throwing it out there, but 2027 is the 100th anniversary of the PLA’s founding, as well as Xi Jinging’s deadline for military modernization and readiness.   

Major European indices fell ~2%. Banks were lower on the week with many of the majors seeing declines of ~5%. Industrials and miners saw some large declines (Rolls Royce -15%, Siemens -5%, Schnieder/ABB -12%, Rio Tinto -8%). Tech hardware was hit along with global peers. Biopharma was among the leaders along with most consumer stocks, Energy and software.  France was in the center of the news after domestic protests exploded and political issues joined fiscal concerns in a firestorm of turmoil. Despite the stresses, France’s CAC only slightly lagged regional peers. Germany’s DAX fell below both its 50 and 100d ma this week. 

 

The data center headwinds weren’t confined to Asia. MSFT pulled out of Nscale’s data center project in the UK, citing power supply delays. The ECB will have its rate decision next week. The Russia-Ukraine situation will be closely watched given Europe’s backing of Ukraine and the impact on gas prices. 

As we prepare for Halloween and the midterm elections we start the week with the 33rd Sports Equinox in history when the NFL, MLB, NBA and the NHL all have games on the same day. By the way and delayed congrats to all the Rays and Brewers fans out there, good luck tonight. The week includes rate decisions from the Federal Reserve, ECB and BOJ, and key economic data including our first look at Q3 GDP and the PCE report. Outside of the Middle East the big focus will be on earnings with >40% of the companies in the S&P 500 scheduled to release results, including more mega cap tech. Have a great weekend!

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