Last week's inflation report came in hot, but the bigger story for markets was a sharp pullback in the stocks tied to artificial intelligence. The September Consumer Price Index, released Wednesday, showed prices up 0.6% for the month and 3.7% from a year ago, up from 3.4% in August and above the 3.6% economists expected. Gasoline accounted for more than half of the monthly increase, while core inflation, which excludes food and energy, rose a steadier 0.3% for the month and 2.6% from a year ago. The S&P 500 fell 1.1% that day, its worst session since July, as investors briefly raised the odds of another Fed rate increase at the October 28 meeting. Thursday's producer price index added to the picture, rising 1.3% in September, the largest monthly jump in about four and a half years.
The hot inflation data landed on a market already worried about the companies building out artificial intelligence. Many of the firms constructing AI data centers have borrowed heavily to do it, and higher interest rates make that debt more expensive to carry. CoreWeave, one of the largest of these borrowers, fell about 25% for the week, the yield on its bonds rose to roughly 16%, and the cost of insuring its debt against default reached a record. Semiconductor stocks fell for eight straight sessions. Investors moved money out of these crowded positions and into U.S. Treasury bonds, so long-term interest rates fell even as the inflation numbers ran hot. The 10-year Treasury yield ended the week at 5.09%, down 0.15 percentage points, the 30-year finished at 5.43%, and the 2-year closed at 4.74%. On Friday, Fed Chair Kevin Warsh gave no signal about an October move, and futures markets shifted to price a pause later this month as most likely, while still expecting an increase in December. The economy itself showed little sign of slowing: the New York Fed's manufacturing survey jumped to its highest reading since December 2021, industrial production rose 0.7%, and weekly jobless claims stayed near historic lows at 199,000. Oil kept the inflation concern alive, with Brent crude settling at $109.86 a barrel on Friday, its highest since May, after attacks on shipping near the Strait of Hormuz and a drone strike on a Russian refinery.
Under the surface, the week was a rotation rather than a broad retreat. The S&P 500 fell -1.94% and the technology-heavy Nasdaq dropped -4.48%, while the Dow rose +0.79% as healthcare, consumer staples and other steadier sectors held up. Healthcare led Thursday's rebound, continuing a strength we have highlighted for months. Small-cap stocks had a harder week, with the Russell 2000 down -3.04%. Big-bank earnings were mixed: Goldman Sachs posted a very strong quarter on trading revenue, while JPMorgan Chase missed estimates for the first time in almost three years, and bank shares generally slipped on their report days. International stocks held up better than U.S. stocks, with the MSCI ACWI Ex-USA index down -0.68% as the dollar had its first weekly decline in five weeks. Bonds did their job as a cushion, with the Bloomberg US Aggregate index gaining +0.88%. Market volatility rose, with the VIX closing the week at 19.99, up from 14.84.
This week shifts the focus to corporate earnings, especially from the largest technology companies. The Federal Reserve enters its quiet period ahead of the October 27-28 meeting, so there will be no comments from Fed officials to steer expectations. Monday brings the homebuilders' sentiment index and Tuesday September housing starts, both useful reads on how housing is coping with mortgage rates tied to a 10-year yield near 5%. Tuesday also brings earnings from Netflix, General Motors, GE, RTX and Capital One. Wednesday is the week's biggest day, with Meta Platforms, Tesla, IBM and Texas Instruments reporting after the close. After last week's pullback, investors will be listening closely to what these companies say about their spending on artificial intelligence and whether that spending is paying off. The Treasury also sells 20-year bonds Wednesday, another test of demand for long-term government debt. Thursday brings weekly jobless claims and a sale of inflation-protected Treasury securities, and the week closes Friday with early October readings on business activity and the University of Michigan's final October consumer sentiment survey, including households' inflation expectations.
Last week showed why we pay as much attention to how a market moves as to which direction it moves. A hot inflation report would normally push interest rates higher, but this time investors were more worried about the debt behind the artificial intelligence build-out, and they bought Treasury bonds for safety. That is an important distinction. The economy is still growing, inflation is still running above the Fed's goal, and oil prices remain high, so we do not see last week's drop in rates as the start of a lasting decline. What changed is that investors are starting to question the most crowded and most borrowed-against parts of the market.
That is exactly the environment diversification is built for. While the Nasdaq fell more than 4%, the Dow rose, healthcare and consumer staples held up, international stocks fell far less than U.S. stocks, and high-quality bonds gained. We have avoided leaning too heavily on any single theme, and we have favored companies with strong cash flow and sound balance sheets over those that depend on borrowing to grow. We continue to keep interest-rate exposure measured, and we see today's higher yields as a meaningful source of income. This week's technology earnings and the Fed's decision on October 28 will tell us more about whether last week was a healthy reset or the start of something broader.
We remain diversified across market capitalizations, sectors, and geographies, with an emphasis on higher-quality companies that can hold up when borrowing costs are elevated. As always, we believe a disciplined, long-term approach, rather than reacting to a single week's headlines, is the best way to navigate a period like this one.
If you have any questions about the above, please reach out to us to set up a one-to-one meeting so we can review your situation.
Sincerely,
President
SBC Investment Management
P: (602) 641-5996 · M: (319) 520-2033 · E: bandrus@sbcinvestmentmanagement.com
Investment Analyst, Junior Portfolio Manager
SBC Investment Management
P: (435) 775-2950 · M: (435) 590-8317 · E: jrehkop@sbcinvestmentmanagement.com