Weekly Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

AI stopped the Tech Bulls this week but couldn't stop the Milwaukee Brewers from winning their first World Series. Congratulations Wisconsin.

Last week the S&P 500 fell 0.5%. Weakness continued across the AI landscape as the need to raise huge sums of capital to fund the cycle was once again thrown into the market's face. Rising competition for that capital also became more of a story. META fell 7% in one day on those concerns. Meanwhile cybersecurity concerns remained well-entrenched. It wasn’t just pure tech under pressure. Other areas exposed to the AI build out, like construction and electricity infrastructure, also fell. Oil moved higher, but the correlation with yields continued to break down as rates fell again. This helped equities broadly, and rotational flows into non-tech areas counterbalanced the everything-AI weakness. The S&P equal-weight outperformed and was up 1%. 7 of 11 sectors finished higher for the week.   

This week started off with more AI financing news. A lot more. SpaceX announced a $40 billion finance lease for Nvidia GPUs. Meta followed up with plans for up to $95B of new equity financing. While that would seem to feed into the concerns we just noted, it also showed that capital markets were still allowing these companies to raise those huge sums they needed. After more leaks than Edmonton Oiler playoff goaltending, Anthropic’s official IPO filing was released. The growth and revenue numbers helped eased slowdown fears and addressed controversy around previously reported metrics like ARR, re-energizing the bullish demand thesis.

The earnings flood continued but didn’t change the overall narrative of a strong economy and resilient consumer, which was borne out in this week's GDP report. What it did change was the complexion of the AI narrative after Google reported Wednesday night. Up until then, the S&P 500 was up over 1% for the week with large caps and the AI trade rebounding. Tech and Industrials were the leading sectors. After 3 straight weeks of declines that took it down 20%, the NYSE Semis index was up ~8%  and NYSE 100 up over 2%. The Consumer Discretionary vs Staples ratio (equal-weight) was bouncing off its lows of the week prior as investors rotated out of the more defensive pockets of the market. Looking at the chart however, you can tell that momentum abruptly changed.

Google's earnings disappointed the Street more than Charlie Brown's trick-or-treat stash. The stock dropped 12% for its worst decline ever. The concern landed directly on the slowdown in Search- the company's golden goose. That re-ignited fears about AI and agentic activity displacing the company's cash flow machine, which funds much of its own AI investments. Google had beat back those concerns previously on its way to all-time highs in the summer, but they're proving harder to kill than Michael Myers. It was far from the only tech name to get smoked- NOW, FTNT, MRVL all came under significant post-earnings pressure on Thursday, as did stocks like CAT which have ridden the AI buildout wave. 

Thursday night was the real House of Horrors for tech earnings. Amazon guided its AWS, a $175 billon dollar business, to grow 40% in both 2027 and 2028. That would take it to around $325B, or about what Exxon or Microsoft did in sales last year. It apparently wasn't enough, as the focus landed instead on a top and bottom miss combined with negative $35B free cash flow in the quarter and a guide of "meaningfully more" capex spending in 2027. The stock fell as much as 6% but managed to cut into those losses throughout Friday's session, ending down ~2%. That was meteoric compared to other tech names. INTC was bludgeoned, down 30%, with most of the rest of the semis group down 5-15%. INTC’s personal computer business was weak, lining up with MSFT’s comments about the business. Guidance was below estimates and margins are getting hit on memory pricing and supply pressure, though Data Center and Foundry revenues looked solid. RDDT was also hit hard, down over 20%, calling out a sharp decline in search traffic, which pressured daily active user numbers. The search/internet business model may be seeing a substantial evolution. With the market already under significant pressure on Friday, reports that Anthropic may not secure an investment grade rating after its IPO just piled onto the weakness.

Oracle didn’t release earnings but did hold an Investor Day. The company guided out to 2030 and longer-term cash flow is expected to be much higher than what Wall Street had been modeling. That helped address the cash burn and credit overhang on the stock, sending it up 10%, though it sold off on Friday's weakness.

Friday's 2% plunge took the S&P 500 below both its 50 and 100d moving averages and retraced most of the post-Situational Awareness rally at the beginning of August. It did bounce into the Close, however, which is not insignificant. While it was a nightmare for Tech, the rest of the market held up well and the S&P was down less than 1% for the week. If we told you the Tech and Comm Services sectors were down 2% and 9% for the week, respectively, you'd probably take a 1% drop overall for the Index every time. Every sector except those two were higher by at least 1%. The equal-weight was up almost 1% for the week.   

Today’s ~2% decline put the S&P 500 into the red for the month of October, but it was hardly a bloodbath as the index fell 1%. It was a Nightmare on Tech Street, though, with the NYSE Semis index fell 17%. The underlying strength and rotational forces were readily apparent looking at the equal-weight, which rose 5%. Small caps ended higher as well. 

Healthcare was the big winner, as it continues to benefit when Tech staggers, along with defensively-oriented colleagues Utilities and Consumer Staples. Healthcare's results were not as strong under the surface though. Most of Med Tech finished lower along with managed care. Pharma was the source of strength as LLY rose over 10% and peers were up 1-5%. Energy rode the commodity gains.

For the month, 9 sectors were higher with only Comm Services (META, GOOG down ~15%) and Tech lower. 4 sectors- Staples, Energy, Healthcare and Utilities- were up 10%. While that’s a defensive posture the equal-weight Consumer Discretionary was up 7%, reversing September’s 8% decline. 

We've noted the big swings that have been occurring around month and quarter ends and that dynamic played out again. It was also a Friday heading into an election that could change the balance of power in the US government, along with the potential for the resumption of military strikes against Iran lingering as overhangs.

Outside of earnings, and the start of the Knicks NBA Cup defense this evening, the other major event was the FOMC Rate decision on Wednesday. As widely expected, the Committee left rates unchanged. Fed Chair Warsh painted a strong economic backdrop, resilient labor market and inflation that remained stubbornly above the Fed’s target. He acknowledged that there has been some tightening of financial conditions after the Fed’s last dose of medicine but that there was still work to do. Read our full Recap here. Heading into the meeting markets were pricing in one hike this year and an additional one in Q1 of next year, and we are pretty much in the same spot today.

This week’s economic data reaffirmed the Chair’s assessment of the economy. Durable and capital goods orders were strong bouncing back from last month. The first read of Q3 GDP came in ahead of estimates accelerating to 3.4% from 2.2% last quarter. Business investment was a big driver of this growth with non-residential fixed investment up 12.7% with a ~21% increase in equipment accounting for much of that. Meanwhile Residential investment fell 3.3%. See Chart below comparing non-res/res. Consumer consumption remained strong up 3.8% QoQ. 

Ahead of next week’s employment report claims data continued to tick lower.

PCE, the Fed’s preferred gauge of inflation, was on the screws as they say. Headline rose 0.5% m.m while core was up 0.3%, which was unchanged from last month. The annual readings were also in line with expectations but did tick up from last month’s reading to 3.6% and 3.1%, respectively.  

The Chart below from the Dallas Fed highlights the increasing portion of components with inflation rates >3%, that Chair Warsh referred to back in August. 

Treasury yields moved lower in the back half of the week with 2-10yr yields down 7-10bps. They are now down ~30bps since the start of Q4. 

Coming into today’s session corporate credit spreads had tightened from last week’s high. 

Prep your Halloween costume for Saturday. I don't want to give away any Clues for mine. The kids will get an hour longer to sleep off their candy hangover on Sunday as clocks fall back. We’ll get important updates on the labor market with monthly payrolls, JOLTS and ADP employment reports. ISM Manufacturing and Services, Factory Orders and the latest University of Michigan Sentiment survey will also be on the schedule. Maybe that sentiment report gets a pop if the Wolverines can beat Rutgers. The Treasury will release its next quarterly refunding plans. Rate decisions for the UK, Korea and Australia, Chinese PMIs and European inflation will headline international data. Earnings won’t stop, with Apple, AMD, Pfizer, McDonald’s, Uber and Qualcomm some of the big reports. And of course, Tuesday is election day in the US, and a merciful end to all the ads. Enjoy your weekend. Happy Halloween!   

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