Oil Rises on Geopolitical Risk, AI Continues to Face Scrutiny
Recap
In the absence of major economic news, earnings and geopolitical tensions continued to take center stage. Both Iran and the Houthis renewed attacks on oil infrastructure, sending crude oil (+4.3%) and the Energy sector (+1.6%) higher. Although only 9% of S&P 500 companies have reported, earnings growth is projected at 29.5% for Q3 2026 and 29.2% for Q4. However, concerns over returns on AI and data center spending fueled a risk-off trade, pushing the U.S. 10-year Treasury yield down from 5.10% to 4.99%. Unlike in previous quarters, higher capex is now facing greater scrutiny, with investors punishing undisciplined spending.
Looking Ahead
As oil continues to trade near its 52-week high, any military countermeasures by U.S. forces in the Middle East to ease shipping disruptions could push crude prices even higher in the short term. The FOMC policy decision is on Wednesday. No rate hike is expected, but markets will look to the Fed for guidance on the path ahead. Another earnings-heavy week lies ahead, with three Mag 7 names and several AI-related companies reporting. With the bar set high, beats may see a muted response, while any disappointment could be punished by investors.
Market Watch
Source: Cetera Investment Management, FactSet. Total returns used, which includes dividends and interest.
Chart of the Week: Higher Rates Weigh on Housing Demand
Housing construction slowed further in September, with housing starts falling 5.2% to an annualized rate of 1.22M, below expectations of 1.31M. Building permits, a leading indicator, also edged down 0.2% to 1.4M but exceeded estimates by 15k. Pending home sales also fell 7.3% in September from August and 11.3% year-over-year, with declines across all four regions. Higher mortgage rates continued to weigh heavily on affordability.
Is the AI Theme Over?
We don’t think the AI trade is over, but it is broadening. Our AI Investment Continuum follows three stages: Semiconductors, where spending begins with the chips that power AI; Infrastructure, where investment expands to data centers; and Implementation, where companies across sectors use AI to boost productivity and cut costs. We believe we are entering this third stage, shifting the focus from who builds AI to who can generate real returns from using it. As capital becomes more expensive, investors are likely to demand greater discipline and reward companies that can demonstrate tangible returns from AI adoption. The AI theme is not ending but merely spreading out.
Did You Know?
On October 27, 1997, circuit breakers built after the 1987 crash were used for the first time. A 7.2% drop in Dow Jones Industrial Index triggered two halts, and the second one closed the market at 3:30 p.m., the only early close in its history.
Economic Calendar
Monday, October 26
No Major Release.
Tuesday, October 27
Durable Goods, S&P Home Price Index, New Home Sales.
Wednesday, October 28
Mortgage Applications, Wholesale Inventories, FOMC Policy Decision.
Thursday, October 29
Jobless Claims. Q3 GDP, Personal Consumption Expenditure (PCE) Index
Friday, October 30
Employment Cost Index (Q3).
This report is created by Cetera Investment Management LLC.
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