Earnings from AI-related companies will remain in focus.
U.S. stocks fell early this week before recovering, with gains from artificial intelligence upstart Anthropic's initial public offering announcement and the Federal Reserve's decision to hold rates steady being erased by concerns over the financing and financial returns needed to sustain the core AI investment theme underpinning the U.S. bull market.
In the coming week, market attention will continue to center on earnings from numerous AI-related companies, while midterm election results could shape the outlook for AI regulation, injecting greater uncertainty into the market.
Rate hike expectations edge lower
Economic data released last week showed that despite tightening monetary policy, the economy remains strong, with demand and overall inflation heating up in tandem.
U.S. third-quarter gross domestic product grew faster than expected, with an annualized rate of 3.4%, driven by a robust 3.8% increase in consumer spending and a 20.9% rise in business equipment investment.
Price pressures remain elevated. The September personal consumption expenditures (PCE) price index rose 0.5% month-over-month, 0.2 percentage points faster than August, while the year-over-year rate climbed from 3.4% to 3.6%.
Excluding volatile food and energy prices, the core PCE inflation rate that the Fed watches more closely came in at 0.3% month-over-month and 3.1% over the past 12 months, still well above the 2% policy target.
Bob Schwartz, a senior economist at Oxford Economics, told Yicai Global in an interview that the strong GDP growth reflects the ongoing AI boom, while other parts of the economy are also strengthening. "We expect economic growth to continue outpacing market consensus next year, but it will increasingly depend on a capital expenditure boom driven by AI, defense, and a favorable inventory cycle. There is currently little to change the Fed's judgment, as they believe the economy and labor market remain resilient, meaning the near-term focus will stay on inflation, and the September inflation rebound supports the possibility of the Fed raising rates further at its upcoming meeting," he said.
The Fed held rates steady this week and said it needs more information before considering policy adjustments. Fed Chair Warsh said he is reluctant to describe the economy as "overheating," partly because it is difficult to estimate the economy's non-inflationary growth rate, especially with productivity gains. However, new data may challenge Warsh's view, as key price pressure indicators surged, with strong consumer spending and business investment driving growth well above what most central bank officials consider sustainable.
Capital market volatility has cooled Fed policy expectations, with federal funds rate futures pricing showing the probability of a December rate hike falling from 91% to 78%, and 71 basis points of tightening expected by next September (down 5.2 basis points from Thursday).
Deutsche Bank believes Warsh returned to the theme of strong growth multiple times during the press conference, and although he continued to avoid forward guidance, his remarks reinforced the signal from the September SEP, when the vast majority of FOMC members expected another rate hike before year-end. The bank continues to expect the Fed to raise rates by 25 basis points in December and March.
Schwartz told Yicai Global that September inflation deviated from the Fed's 2% target. The spillover effects of rising energy costs into core prices, combined with strong AI investment demand, will keep the Fed vigilant and could lead to two more rate hikes. However, eventually falling energy prices and a non-inflationary labor market will ultimately curb price pressures by the end of next year, creating conditions for a policy shift thereafter.
Market alarm not yet cleared
With a late-session selloff, both the Nasdaq and the S&P 500 recorded a third consecutive weekly decline, with the Nasdaq down 7.8% since hitting a record closing high on October 6.
Dow Jones market statistics show that the two declining sectors in the S&P 500 this week were communication services and information technology, falling 8.5% and 1.8% respectively, with communication services posting its largest monthly decline since April 2022.
Capital rotated into defensive sectors, with healthcare leading gains at 3.1%, followed by materials and utilities, each up about 2%.
The sharp drop in tech stocks stemmed from disappointing quarterly results from Intel and Amazon released Thursday evening, with Intel plunging 28.6% on Friday and shedding more than $140 billion in market value.
Data provided by LSEG to Yicai Global shows that U.S. equity funds saw net outflows of $6.65 billion last week. Institutional investors exhibited extreme risk-aversion behavior, with single-stock net outflows reaching a record $14.8 billion, and institutional net selling for the week marking the 10th largest peak since 2008.
Bank of America said the communication services sector recorded its largest single-week fund outflow since records began in 2018, while the tech sector saw $1.9 billion in net outflows for the week, the largest since June 2026.
Looking ahead to the coming week, Wall Street expects the market to show a pattern of short-term high volatility and intense bullish-bearish tug-of-war, with investors facing key tests from earnings and midterm elections, and structural opportunities still remaining in year-end markets after short-term turbulence.
Deutsche Bank believes U.S. stocks are at the low point of the year's final decline, and based on historical seasonal patterns since 1928, midterm election years typically bottom in late October, with the following three months likely to see gains.
Goldman Sachs is relatively cautious, believing the Fed will likely resume a 25 basis point rate hike in December, with upside inflation risks not yet fully resolved, and a high-rate environment continuing to pressure tech sector valuations.
Morgan Stanley believes three major hurdles must be cleared before the next U.S. stock rally, with the S&P 500 potentially falling to the 7,100-7,200 range before a sustained uptrend begins, maintaining its year-end target of 8,000.
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