A sharp rotation in equity markets last week saw investors pull back from AI related stocks, driving significant declines in semiconductor and tech stocks, while defensive sectors such as utilities, consumer staples and healthcare helped support broader market performance. Bond markets benefited as yields moved lower as investors sought safety. Markets are grappling with three risks to the current bull market: sticky inflation, higher interest rates, and durability of AI related investments,
Despite these challenges, underlying economic and corporate fundamentals remain supportive, with U.S. growth expected to stay solid, business activity holding up well, and early earnings season results showing broad based strength across sectors.
But, the bad signs are piling up when it comes to where markets may be headed. Hedge funds are betting heavily against stocks this month, with bearish wagers nearing a five year high. Goldman Sachs said its clients have been selling stocks short at roughly five times the rate they’ve been buying them.
S&P 500 finished the week down about 0.47% at 7,623 and the Nasdaq fell 0.71% to 25,955, while the Dow Jones Industrial Average gained 0.41% to 52,215.
Future Wealth’s View
The spike in global interest rates in recent weeks has ignited fears that tightening financial conditions could weigh on growth. While rates have come down from recent peaks, they remain elevated, with the 10 year U.S. Treasury trading at 5%. With a hot inflation print of 3.7%, the upcoming Fed meeting this week will be interesting. While it is widely expected to hold the fed funds rate range steady after its hike in September, there will likely be at least a couple of dissenters in favor of another increase. Fed Chair Warsh is likely to reiterate his tough line on bringing inflation to target but will stay mum on further rate increases.
Wall Street will likely be more concerned about AI spending. An unwind in the AI investment spending would have broad economic and market implications. AI investment has become an increasingly important leg of economic growth, and a reversal would hit spending, business sentiment, and potentially household income. Investors will look to results from Alphabet, Amazon, Microsoft and Intel for direction this week.
The ride is about to get very bumpy.