Earnings from the largest technology companies split the market last week, and investors drew a clear line between artificial intelligence spending that is already producing revenue and spending that has yet to pay off. Alphabet fell 12.6% on Thursday, its worst day on record, after its capital spending, the money it puts into data centers and equipment, more than doubled from the same quarter a year earlier to about $51 billion and its free cash flow, the cash left after covering its costs and investments, remained negative. Microsoft held up better after its Azure cloud business grew 48% from a year earlier. On Friday the selling spread. Intel fell nearly 29% after a weak outlook for the fourth quarter, and Amazon fell 1.4% after reporting weaker profit than expected, leaving it down about 6% since Wednesday. The Nasdaq fell 2.9% on Friday, its worst day since June, and finished October down more than 5%, its worst month since March 2025.
The economic news pointed the other way. The Federal Reserve left interest rates unchanged on Wednesday at 3.75% to 4.00%, but two of the twelve voters wanted an increase, and the Fed's statement called growth strong. Thursday's data supported that view: the first estimate of third-quarter growth came in at a 3.4% annual rate, while September's personal consumption expenditures price index, the Fed's preferred inflation measure, ran 3.6% above a year earlier, with the core measure, which excludes food and energy, at 3.1%. Traders in interest-rate futures ended the week pricing roughly a 70% chance of a December rate increase, down from about 77% on Thursday. Even so, investors bought Treasury bonds as stocks fell, which helped pull yields, the interest rates the government pays on its debt, lower. The 2-year Treasury yield ended the week at 4.56%, down 0.13 percentage points, the 10-year at 4.94% and the 30-year at 5.31%. Oil kept climbing. Brent crude, the global oil benchmark, settled at $117.64 a barrel on Friday for the December contract that expired that day, its highest close since late April, while the more widely traded January contract settled near $113. Oil rose after Iran's Revolutionary Guard said a tanker hit a mine in the Strait of Hormuz, and after reports that the U.S. is preparing options for new strikes on Iran following the midterm elections. Brent finished October up about 13%. Abroad, Brazil's stock market fell nearly 14% on Monday, its worst day since March 2020, after Lula won Sunday's presidential runoff.
Under the surface, smaller companies again did better than the largest ones. For the week, the S&P 500 slipped -0.56% and the Nasdaq fell -1.99%, while the Dow was nearly flat at -0.08% and small-cap stocks gained, with the Russell 2000 up +1.30%. Healthcare and consumer staples, historically steadier parts of the market, held up well last week. Technology and communication services were the only two of the 11 market sectors to lose ground in October, based on sector fund returns. International stocks edged higher, with the MSCI ACWI Ex-USA index up +0.28%. The Bloomberg US Aggregate bond index rose +0.56% as stocks fell, and the VIX, a gauge of expected stock market swings, ended the week at 19.42, little changed from 19.45.
Jobs data and the midterm elections dominate the week. Monday's ISM manufacturing survey, a read on factory activity, starts the week, and Tuesday, November 3, brings the midterm elections along with the JOLTS report on job openings. Wednesday has the ADP private payrolls estimate, the ISM services survey and the Treasury's quarterly refunding announcement, which sets how much debt the government plans to sell in the months ahead and has moved long-term interest rates in the past. Weekly jobless claims and productivity data, a measure of output per hour worked, follow on Thursday. The week ends Friday with the October jobs report and unemployment rate, a key labor reading ahead of the Fed's December 9 decision. With growth strong and inflation high, a firm jobs number could keep a December rate increase in play, while a soft one could support the easing in long-term yields. The October consumer price index follows on November 10.
Last week showed investors becoming more selective about artificial intelligence. They are no longer rewarding every company tied to the theme. Instead, they are separating businesses whose spending is already producing revenue from those still asking shareholders to wait. We see that as a healthy shift. At the same time, the economy is still growing quickly and September inflation ran well above the Fed's goal, which keeps a December rate increase on the table even as long-term yields eased. Strong growth, high inflation and a stock market that is turning selective make the path less clear, and we think that calls for patience rather than bold bets in either direction.
The rest of the market held up better than the headlines suggest. Small companies gained, historically steadier areas such as healthcare and consumer staples held their ground, and high-quality bonds rose while stocks fell, though bond prices generally fall when interest rates rise. Spreading exposure means no single theme has to carry the portfolio, though diversification does not ensure a profit or protect against loss. We continue to favor companies with strong cash flow and sound balance sheets, a preference that applies across sectors rather than to any one company, and we keep interest-rate exposure measured while 2-year and longer Treasury yields above 4.5% 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 jobs report and the midterm elections, followed by the November 10 inflation report, will tell us a good deal about the path into year-end. We believe a disciplined approach, rather than reacting to a single week's headlines, is a sound way to approach 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