Last week, investors took a closer look at the AI spending boom and decided they needed better answers than “trust me, it’ll pay off.” Was it Jane Wickline’s wicked turn as Anthropic’s Dario Amodei on SNL Weekend Update? (“I urge you to urge me to stop.”) Who can say. What we do know is that investors spent the next week questioning the gap between AI’s long-term promise and its near-term price tag.
- The tech reversal wasn’t your standard “rough couple of days.” The S&P 500 fell 1.9%, while the Nasdaq dropped 4.5%, as tech momentum suffered its second-worst week in more than 20 years, aside from Covid. Semiconductor stocks are now down ~25% vs. the S&P 500 from their highs, while spreads on pure-play data center bonds widened sharply. Meanwhile U.S. bank shares recorded their worst weekly losing streak since the global financial crisis.
- Defensive sectors closed the gap with tech. Tighter financial conditions encouraged a shift from cyclical companies toward defensive ones, driving solid returns from consumer discretionary and health care, along with energy.
- Bonds became the market’s safe space. Money moved into U.S. Treasuries, pushing bond prices higher and yields lower. On Thursday alone, the 10-year yield fell 10 basis points to 5.09%, despite hotter-than-expected producer inflation. By Friday, the 10-year stood at 5.08%, though 30-year mortgage rates inched higher.
- Inflation hard to shake, and oil’s climb adds another problem. WTI crude finished the week just shy of $99 a barrel, while both consumer and producer prices (ex food and energy) came in higher than expected. If oil stays elevated, higher fuel, shipping, and production costs could make the Fed’s inflation fight even harder.
- Consumers kept spending, but they didn’t feel happy about it. September retail sales rose a seemingly healthy 0.8%, though a narrower measure that excludes several volatile categories increased just 0.15%, its weakest reading in months.
- U.S. factories picked up the pace in September, with more goods rolling off production lines and more machinery being put to work. Production rose 0.7%, above estimates of a 0.4% increase.
- Manufacturing was one of the week’s cleaner pieces of good news. September industrial production increased 0.7%, comfortably above the 0.4% consensus estimate and August’s upwardly revised 0.1% gain. Capacity utilization also rose to 76.9%, ahead of expectations.
- Despite the troublesome data, an October rate hike looks highly unlike. Market-implied odds dropped below 15% by the end of the week, as Fed officials signaled little urgency for another move.
- Bottom line: Investors aren’t giving up on AI. Demand signals for computing power remain strong. But stretched positioning, growing credit concerns, and questions about returns on AI infrastructure spending are triggering a sharp reset. The economy didn’t suddenly break, but even a good long-term story can have a very bad week.