Worries about the cost of the artificial intelligence build-out returned last week, and Thursday was the day they hit hardest. The Nasdaq fell about 2.6% that day, its worst session since June, as semiconductor stocks and the companies borrowing heavily to build AI data centers sold off. Chip-equipment maker Lam Research dropped about 8.5% in early trading after its outlook, and other AI-infrastructure names fell sharply. Quarterly results from Meta Platforms and Tesla did not calm nerves: Meta fell about 7% after its report, and Tesla slipped about 3%. The concern is less about whether AI demand exists and more about how much debt is being used to fund it when interest rates are this high. The market's biggest leaders remain its weak spot.
As stocks fell, investors bought U.S. Treasury bonds for safety, and long-term interest rates moved lower. The 10-year Treasury yield ended the week at 5.00%, down 0.09 percentage points, the 30-year finished at 5.33%, down 0.10, and the 2-year closed at 4.69%. Oil pulled in the opposite direction. Brent crude settled near $117 a barrel on Friday, its highest level since late April, after a series of attacks on Saudi energy and airport sites claimed by Houthi forces, and a New York Times report that the U.S. and Israel have drawn up plans for strikes on Iran after the November 3 midterm elections, though approval is uncertain. The S&P 500 energy sector rose 2.4% on Friday to a record high, helped by strong earnings from oilfield services company SLB. The economy itself still looks resilient: weekly jobless claims fell to 194,000 on Thursday, the lowest since July. Gold did not benefit from the tension, with gold-backed funds falling about 4% for the week, and silver and gold-mining shares fell further.
Beneath the headline indices, the week was again a rotation rather than a broad retreat. The S&P 500 slipped -0.46% and the Nasdaq fell -0.71%, while the Dow rose +0.63% and small-cap stocks led, with the Russell 2000 up +2.01%. The Dow gained 1.0% on Tuesday alone on solid earnings from industrial companies. The average stock did better than the largest ones: an equal-weighted version of the S&P 500 rose about 1% for the week while the standard, size-weighted index fell. Steadier, defensive areas of the market held up better than technology. In company news, SpaceX reported its first profitable quarter Tuesday evening, with revenue of $14.6 billion, up 161%, and its stock rose about 8% on Wednesday. On Friday, AT&T and T-Mobile each fell more than 6% after a report that SpaceX is seeking cell sites for a possible fourth wireless carrier. International stocks had a weaker week, with the MSCI ACWI Ex-USA index down -1.72%. Bonds again acted as a cushion, with the Bloomberg US Aggregate index up +0.54%, and the VIX ended the week at 19.45, little changed from 19.99.
This is one of the busiest weeks of the year, with a Federal Reserve decision, the first estimate of third-quarter growth and earnings from several of the largest technology companies. The Fed announces its decision Wednesday at 2 p.m. ET. A hold is widely expected after September's increase, according to CME FedWatch, so the focus will be on whether officials leave the door open to a December increase. Microsoft reports after the close Wednesday, with Alphabet expected the same day and Amazon on Thursday, and what they say about their spending on artificial intelligence, and how they plan to pay for it, will test the worries that drove last week's selloff. Thursday brings the first estimate of third-quarter GDP and September's personal consumption expenditures price index, the Fed's preferred inflation measure, which together will show whether growth is holding up as inflation stays elevated. Tuesday brings durable goods orders, a read on business investment, along with consumer confidence and new home sales. The Treasury sells 2-year, 5-year and 7-year notes on Monday, Tuesday and Thursday, and the week ends Friday with the Employment Cost Index, a key measure of wage growth, and earnings from Exxon Mobil and Chevron with oil prices near their highest levels since April. The midterm elections follow on November 3.
Last week brought a mix of signals that do not usually arrive together. Oil rose to its highest level since April, which normally pushes interest rates up, yet long-term rates fell as investors sought the safety of Treasury bonds. That tells us the market's main worry has shifted from inflation alone toward the debt-funded corners of the market, especially the companies borrowing to build out artificial intelligence. Some of that caution is healthy. Inflation is still running well above the Fed's goal, the job market remains firm and another Fed rate increase in December is still possible, so we do not read one week of lower yields as the start of a lasting decline.
What encouraged us was how the rest of the market responded. Even as the largest technology stocks fell, the average stock rose, small companies gained, and steadier, defensive areas held their ground. High-quality bonds cushioned the decline this week, though bond prices can fall when rates rise. That is the case for diversification: a portfolio does not have to rely on any single theme, though diversification does not ensure a profit or protect against loss. We continue to favor companies with strong cash flow and sound balance sheets over those that depend on borrowing to grow, and we keep interest-rate exposure measured while today's yields provide meaningful income.
We remain diversified across market capitalizations, sectors, and geographies, with an emphasis on higher-quality companies we believe are better positioned when borrowing costs and energy prices are elevated. This week's Fed decision, growth and inflation data and big-tech earnings will tell us a good deal about whether last week was a reset or the start of something broader. We believe a disciplined approach, rather than reacting to a single week's headlines, is a sound 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