Weekly Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

Last week, the month of October came to an end with a spooky selloff on Friday ahead of Halloween. Heading into the weekend with the S&P 500 fell nearly 2%. The index did bounce nearly 1% off the lows in the final hour of trade after holding above 7,500, which had been the low end of the range (7,500 - 7,800) since the Situational Awareness bottom at the end of July. There was broad based weakness, but tech was a House of Horrors, which pretty much summarized the month of October. Tech earnings disappointed the street and there was more AI related supply coming to market. Adding to the negative sentiment was the largest crypto hack in history and oil prices hitting new highs amidst speculation that the administration was preparing for fresh military strikes. 

Friday’s selloff left the S&P 500 down 1% for the month though as we’ve been highlighting, rotational activity softened the blow at the index level with the equal-weight up nearly 5%. The NYSE 100 tech index was down 8% while semis/memory indices were down >15%. Energy outperformed up 14% in the month, while defensives like staples, utilities and healthcare all ended the month up ~10%.

It was a somewhat quiet start to this week with tech remaining under pressure after Oracle announced that it would raise $20B between debt and equity. Oil prices were on the move lower as there were headlines suggesting diplomatic efforts in Iran were underway. The tech earnings after the close (APPL/PLTR) were met with some disappointment. However, as Americans headed to the polls there was a bounce in the tech trade, but the real fireworks began on Tuesday night.

As polls started to close there was a sea of red, but not the kind Republicans were hoping for, as equity futures came under pressure. There was a Blue Wave which is now being called a Tsunami given how decisive it was. Democrats flipped both the House and Senate. A Congressional Blue Sweep wasn’t really out of the, uhhh Blue, as that outcome had been trading between 65% - 75% in prediction markets for the last month, but the magnitude was a surprise.

However, this election was not only about who controls Congress. Data centers became a real campaign issue and voters voices were heard loud and clear. CNBC reported there were 41 data center related ballot measures across 10 states and voters backed restrictions or rejected pro-development measures in all but one contest. Democrats won multiple governor races in “data center” states, which have historically been red, including TX, GA, OH and PA amongst others. The election results will clearly have an impact on the AI investment cycle with a more difficult regulatory and permitting environment on top of the financing issues we’ve discussed previously, and this will only add to those strains with higher costs and longer timelines for project completion. Citadel suggests that in the four states I mentioned earlier that 45GW of compute across 350 projects are at risk.

So let’s talk about how markets have responded. On Tuesday night, S&P futures were down ~1.5% at the lows but did start to bounce around midnight east coast time as President Trump began making comments saying he would accept the outcome and suggested he’d be willing to work with Democrats. He also downplayed the prospects of re-starting military strikes against Iran. By the time US markets opened S&P futures were up ~1% with oil falling sharply.

The S&P continued to rally throughout the day closing up >1.5% filling Friday’s gap. But there were extreme cross currents beneath the surface. The AI trade was under pressure with semi and memory stocks down over 3% but the weakness was even more pronounced elsewhere. Independent power producers, neoclouds and energy/data center infrastructure stocks were down >10%. However, the mega cap tech hyperscalers were up sharply as this would hypothectically slow the pace of cash burn and need for additional financing. These companies would also theoretically be best positioned going forward to bring new capacity online given their deep pockets and they would also benefit as the slower buildout would add to the value of operational assets. The heavily weighted mega-cap tech stocks helped to offset a lot of the other AI related weakness beneath the surface.

Outside of tech there was an aggressive rotation again and other election related cross currents as well. Healthcare rallied, with hospitals and insurers rising on expectations that Democrats could try to restore ACA subsidies and soften Medicaid cuts. Alternative energy jumped on hopes for stronger federal support for solar and clean power. While financials and consumer related stocks also moved higher. Defense stocks fell as the $1.5T budget looked harder to pass and Musk related companies were under pressure given political ties. Surprisingly, crypto rallied despite Democratic opposition to the current regulatory push.  

On Wednesday the VIX fell from >20 to below 17 as  traders monetized hedges, with the theoretical clearing event that everyone had been waiting for behind us. The positive seasonal patterns post Mid-Term elections had also been beaten into everyone’s brains (the MAC Desk pleads the fifth).

Just when you thought it was safe to go back in the water………Investors took the evening to rethink the potential ramifications of an AI capex peak which has been such a driver of economic activity, earnings growth and obviously US market performance. The selling started early with retail heavily involved. According to Vanda Research analytics it was the third heaviest day of retail single stock selling, behind only two days during March 2020. That selling spread and as traders began reaching for hedges this sent the VIX into the high 20’s. Ultimately triggering the indiscriminate selling from the ABC’s of quantitative investment strategies that we often refer to during these bouts of volatility with Leveraged ETFs the cherry on top. This Bloomberg story discusses how the day played out in a bit more detail.

It was an ugly risk off day with broad based weakness. The S&P 500 fell 4.4% with >80% of companies ending in the red as correlations jumped. The index swiftly broke below the low end of the recent range (7,500 - 7,800) and traded within 1% of its 200d ma (7,325) a level we haven’t sniffed since reclaiming it at the start of Q2. From a technical perspective the measured move on the range break targets ~7,200 which is just under the June lows. If those levels break there is some more support between 6,800 - 7,000 where we spent some time consolidating in Q4 of last year/Q1 before pushing to new ATH's. 

The blood bath in the AI complex continued with the ICE Semi index, memory stocks and neoclouds all down >10%.  The hyperscalers which bailed out the market on Wednesday gave back those gains falling 5%. There was some outperformance in defensives but there was really nowhere to hide outside of Treasuries. Yields fell in a flight to safety and as markets began to think about the path of monetary policy should economic growth slow and the potential impact of easing of AI, tariff and conflict related inflationary pressures.

The price action in tech was similar to the end of July, and the Situational Awareness blowup, causing rumors of forced liquidations to swirl, adding to a steady stream of negative headlines. It also made hedge fund manager Paul Singer look like Nostradamus as he warned in his October letter, “So many factors have lined up to cause this great boom that it might take disruption in only one or two of them to shift this momentum into reverse, leading to a cascading, self-reinforcing unwind of this bull market and an abrupt change from FOMO to FOGO (fear of getting obliterated).” 

Futures traded modestly higher overnight as tech tried to get off the mat despite some mixed tech news. Newly elected Texas Governor Hinojosa made comments suggesting that she is not completely anti-data centers but does want protections. Neocloud Iren (+15%) had earnings that beat estimates, announced some new contracts and tried to talk about the strength of the relationship with Microsoft. It also cut its Capex guidance to $20B from $25B - $30B due to the state of capital markets. Lam Research announced a new $25B buyback authorization (~11% of mkt cap). From a broader market perspective keep in mind companies coming out of the buyback blackout window inflected higher this week (see Citadel chart below). 

On the flipside, overnight there was a WSJ article raising questions about the timing and valuation of the Anthropic IPO, though ARR reportedly exceeded $80B in October. Over the last two days there were also reports that Microsoft was looking to scale back its neocloud partnerships. This afternoon Bloomberg reported that the company was winding down its agreement to rent compute from Oracle, which used older Nvidia chips as it no longer met the company’s specifications. This headline took some of the wind out of the sails of this morning’s rally.

It is going to take some time to see what the true reality of the situation is but the buildout is not just going to stop on a dime. A Meta executive highlighted at a tech conference yesterday, that a newly elected governor said, “as we get past inauguration let’s meet because we don’t want to lose the investment in our town or want the jobs to go elsewhere.” In the meantime, while we figure it out it looks like we’re in for some volatility.

This morning’s jobs data (details below) came in much better than expected, which caused Treasuries to give back some of yesterday’s gains. Equities moved modestly higher after the open but did fade in the back half of the day. It was an inside day after yesterday’s wide range bar with the intraday range ~1%. For the week major US indices ended lower across the board. 

The sector level returns were more split this week with 5 of 11 sectors trading higher. Energy led to the downside falling >10% along with the commodity. Info tech wasn’t far behind with industrials weighed down by the defense and AI exposed stocks also fell ~3%.  

On the upside consumer discretionary led to the upside with travel and housing related stocks some of the best performing. Communication services were up >2% with strength in media and wireless companies. Financials ended up 1% with strength in financial services, insurance, exchanges and data analytics companies while banks, consumer finance and crypto related companies underperformed.  Defensive/yield-oriented sectors staples and REITs ended with modest gains. Utilities were mixed with IPPs and flipped data center states under pressure. 

We got a lot of labor market data this week, and it continues to offer the Fed no reason to worry. The headliner BLS Employment Report came in well ahead of estimates with 165k (vs. 65k) jobs added and positive revisions of 84k to the previous two months. Private sector hiring accounted for 159k of the 165k adds. The household survey was also very strong with 463k jobs added. The unemployment rate ticked back down to 4.1% while the labor participation rate ticked up to 61.9%. Wages increased +0.4% from +0.3% last month.

JOLTS jumped to 7.52ml from an upwardly revised 7.19ml. Layoffs and Discharges as a percentage of total nonfarm employees remained very low hovering just over 1%. The ADP Employment data came in ahead of expectations with 86k added split between small, medium and large companies. Pay metrics held steady from last month up 3% for job stayers and 4.8% for job changers. Weekly claims fell below 190K. Challenger job cuts fell slightly in October from September and were the eighth month this year that cuts were below the same month last year. 

Productivity was better than expected and improved from last quarter, as unit labor costs fell 0.7%, below the +0.6% expectation and versus almost +2% last quarter. Hourly compensation rose 2.9%, but productivity rose 3.6%.

ISM Manufacturing rose from last month and beat estimates. New Order growth was relatively unchanged while Production and Inventories accelerated. Prices remained very elevated but moderated from last month. Final US S&P Manufacturing PMI for October was 54.9, lower than the flash reading of 56.0 though still firmly expansionary and continuing its upward trend. ISM Services was slightly below expectations and last month though still expanding. New Order growth slowed as did Prices, though they remain highly elevated. 

September construction spending fell 1.9% from last month. Residential fell 5.5%, and 8.9% from one year ago. That was due to a 5.5% decline in Home Improvements, while new single-family and multifamily construction was flat. Data Center construction rose 8.6% from last month and 90% from last September. That’s the spending that has come under scrutiny after this week’s elections. Power construction rose 1.2% / 12.1%.

US treasury yields fell 7-9bp out to the 10y while the 30y was flat, with most of the decline coming on Wednesday and Thursday as the equity sell-off drove a safe haven bid. Friday’s strong jobs report had yields moving to their highs before pulling back. Market expectations for a Fed hike in December stand at 77%, versus 70% a week ago. Global yields fell as well. France in particular saw yields pull back 15-20bp as the spread between OATs and Bunds continued to narrow after blowing out on French political and social upheaval. 

The Treasury released its near-term borrowing plans, expecting to borrow $618B in Q4, $10B lower than the August estimate despite the starting balance being $34B higher. 1Q27 borrowing is expected to be $800B, up 38% year-over-year.  $150B of that is to build Treasury’s cash balance to $1T. Excluding that extra $150B, borrowing would still be up 12% year-over-year.  The Treasury left auction sizes and mix unchanged. However it dropped the “at least” language from “Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters.”  That signals that it’s beginning to contemplate an increase in coupon issuance, putting some upward pressure on the long-end.

The US Dollar Index rose ~0.5% and hit a fresh closing high this year. A sharp rally on Friday erased weakness that began right before Halloween. The Swiss franc strengthened against the greenback on a safe haven bid.

It shouldn’t be surprising to see large losses in Asian markets with the latest Tech Wreck. Investors had to wait until Friday to catch their beating that US stocks took on Thursday, and couldn’t benefit from the US bounce.  Japan, South Korea and Taiwan indices all fell ~10%. Advantest and Softbank (-20%), Kioxia (-30%) saw major selloffs. Japanese carmakers were solidly higher though. The Nikkei crashed through its 200d ma but managed to end Friday off the lows. 

In South Korea Samsung and SK Hynix fell 15-20%. Hyundai Heavy Industries and LG Electronics fell ~5%. The Kospi YTD gains have fallen below 20%, after being up as much as 120% earlier this year.    

In China, Shanghai and Hong Kong indexes bucked the global selloff with the help of liquidity efforts and National Team activating like Voltron. The Hang Seng Tech Index bounced off 2-year lows, gaining 10% as the big consumer tech stocks saw solid gains- Tencent, Alibaba, Xiaomi up 10%-plus. Australia squeezed out a weekly gain as well as its central bank hiked rates as expected, and India continued its rebound as the Sensex was up for the 7th straight day.  Emerging Markets held up well, missing out on the Tech carnage. One exception was Paraguay, which saw Ueno Bank, a major digital lender that counted 60% of the country’s adults as customers, collapse. That led to President Santiago Pena to resign.  

Europe’s STOXX 600 finished the week slightly higher, with the region's lower exposure to tech helping. The sharp drop in European gas and regional yields helped equities overall. France was an outperformer with its major banks and luxury/consumer stocks up ~5%. The CAC continued to bounce from recent lows though it failed to hold the 200d ma. The BOE and Riksbank raised policy rates by 25bp while Norges held, as expected. The US elections placed more focus on trade, Ukraine and NATO relationships. German defense leader Rheinmetall fell over 20% after cutting guidance while shipping major Maersk fell over 10%. US-Ukraine-Russian talks will take place November 10-11 in Abu Dhabi. 

Next week the focus shifts to inflation with CPI released on Tuesday. The pace of earnings starts to slow dramatically but there are a couple of high profile late cycle tech earnings. It will be interesting to hear from some of the neoclouds and IPPs to shed some light on how they are thinking about the changing environment. On Tuesday the trilateral US-Ukraine-Russia negotiations begin. Wednesday is Veteran's Day. Have a great weekend!

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