Market Commentary & Blogs

Is this the pause that refreshes? Markets took investors on a wild ride last week following the midterm elections. Stocks initially rallied as the election results reduced some political uncertainty, but that optimism quickly faded as investors turned their attention back to the biggest question facing markets: How much longer can the AI investment cycle continue at its current pace? The result was a sharp selloff in tech and AI-related stocks, with the Nasdaq entering correction territory and volatility jumping significantly. But this looks more as a reset than a retreat. The AI story is undergoing a shift. For the past several years, investors rewarded companies that supplied the “picks and shovels” of the AI buildout—semiconductors, data centers, cooling systems, power infrastructure and electrical equipment. Now, the focus is increasingly moving from AI investment to AI economics: How much will companies spend, how quickly will those investments generate returns, and which businesses will ultimately capture the productivity gains? That shift could create a different group of winners. Companies with strong balance sheets, healthy cash flow, and the ability to fund massive investments internally may have an advantage. The mega-cap technology companies are particularly well positioned because they can continue investing through a period when smaller or more highly leveraged companies may struggle with higher financing costs. At the same time, the next wave of AI beneficiaries may come from outside technology. Healthcare, financials, industrials and other businesses that successfully use AI to lower costs and improve productivity could become increasingly important to market leadership. The encouraging part is that the underlying economy remains relatively healthy. Consumers are holding up, retail activity remains solid and fundamental earnings growth has not disappeared. Meanwhile, valuations have come down meaningfully, making some high-quality companies more attractive than they were several months ago. That doesn’t mean investors should rush to buy everything that has fallen. Selectivity matters. But after several months of valuation compression, price action is beginning to entice investors back into areas of the market that were previously priced for perfection. The bottom line: This looks more like a pause that refreshes than the end of the AI bull market. The next phase may simply be more selective, with balance sheets, cash flow, valuation and actual productivity gains driving returns rather than simply exposure to the AI theme. For long-term investors, volatility can be uncomfortable—but history has repeatedly shown that some of the best opportunities emerge when sentiment changes faster than the underlying fundamentals.

The market continued to rotate away from mega-cap tech stocks last week as investors question if/when massive AI investments will pay off. Demand for AI remains strong but the bar for companies to justify their spending is getting higher. Economy Remains Resilient Q3 GDP grew by 3.4% annualized. Core PCE increased into the 3.1%, remaining above the Fed’s 2% target, but 3.1% isn’t extremely high. The Fed held interest rates.

Oil prices hit 6-month highs. Credit spreads are near one-year highs. A.I. stocks moved lower. Yet, the S&P 500 hovers a few percentage points below all-time highs. Diversification reigns supreme for most long-term investors.

Last week, Tech stocks declined over concerns of the AI buildout. Adding to the pressure… Hotter than expected inflation data means interest rates could be higher for longer. Higher bond yields are creating new investment opportunities. As yields rise, they start to compete with stocks. The fundamental backdrop and mega trends in the market remain intact. Corporate earnings are outpacing stock prices. Economic growth continues to expand. Consumers continue to spend. Interest rates are rising, but a recession does not look likely in the near term. The equity market continues to expand. Corporate earnings will take the spotlight this week.

Global bonds had another volatile week before settling down fairly flat/slightly lower. Oil prices remain volatile. Big bank earnings and inflation data will be in focus this week. Inflation data may shift Fed expectations (either direction – we don’t know) as well as Treasury yields. Higher yields impact capital markets. As the risk-free rate rises, bonds compete with stocks. We’ve seen some of this response through lower stock valuations, but earnings have been supporting higher stock prices.

Last week, Inflation came in hot, but weaker than expected. Oil prices fell. The jobs report was soft. - The previous 2 months were revised lower, and the jobless rate increased. Yet, 10-year bond yields continued higher.