AI Concerns Weigh on Markets as Earnings Loom
Recap
Markets ended the week lower, led by weakness in technology and AI-related stocks. Concerns that higher interest rates could limit future access to capital, along with advances by Chinese chipmakers, weighed on the sector. However, strong chipmaker earnings and guidance showed that AI-related demand remains robust, with no signs of slowing. On the economic front, CPI (Consumer Price Index) and PPI (Producers Price Index) remained elevated, largely due to higher energy prices. Despite the hotter inflation data, investors moved into bonds, pushing the 10-year U.S. Treasury yield down from 5.24% to 5.10%. Houthi attacks on Saudi Arabia disrupted oil flows, pushing crude prices 8.4% higher.
In sector performance, Consumer Staples (+5.1%) and Energy (+5.0%) were the biggest gainers this week while Information Technology fell 6.4%.
Looking Ahead
With no major economic releases scheduled this week, attention will shift to earnings. Although only 9% of S&P 500 companies have reported, Q3 2026 blended earnings growth has eased to 29.0%, while Q4 2026 growth is projected at 28.6%, setting a high bar for results and guidance. Geopolitical developments in the Middle East will remain in focus, as the widening conflict continues to affect energy prices. With the midterm elections three weeks away, market volatility could increase. Treasury yields will also be closely watched, as continued bond buying could ease pressure on equities.
Market Watch
Source: Cetera Investment Management, FactSet. Total returns used, which includes dividends and interest.
Chart of the Week: Retail Sales Beat, but Core Spending Lags
U.S. retail sales rose 0.8% in September, beating expectations of 0.3%, led by a 6.4% jump in gas station sales. Control group sales, a key GDP input that excludes gas, autos, building materials, and food services, increased by just 0.1% vs. 0.3% expected.
Why are October rate-hike odds still only 16% despite hotter CPI and PPI?
Odds of an October rate hike have fallen from 55% to 16% over the past month. Headline inflation remained elevated in September, with CPI at 3.7% and PPI at 6.3% year over year. However, core CPI was more contained at 2.6%, suggesting that core PCE, the Fed’s preferred inflation gauge, may also remain relatively subdued. Although core inflation is still above the Fed’s comfort level, it is not yet alarming. September’s Fed minutes also signaled a preference for patience over aggressive tightening, while the labor market remains healthy without appearing overheated. With headline inflation driven largely by energy prices beyond the Fed’s control, further rate hikes may do little to ease price pressures while increasing risks to the broader economy.
Did You Know?
Black Monday, Oct 19, 1987: the Dow fell 22.6%, its worst day ever. The warning signs came first: a 4.6% drop the Friday before on triple witching, and a weekend threat from Treasury Secretary Baker to devalue the dollar.
Economic Calendar
Monday, October 19
NAHB Housing Market Index.
Tuesday, October 20
Housing Starts, Pending Home Sales.
Wednesday, October 21
Mortgage Applications.
Thursday, October 22
Jobless Claims.
Friday, October 23
S&P Manufacturing & Services PMI, Michigan Consumer Expectations.
This report is created by Cetera Investment Management LLC.
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