Over the past few weeks, interpreting the market has been harder than usual. From a macro perspective, the picture has gotten bleaker, with higher interest rates and soaring energy prices. Meanwhile, a flurry of new innovations and AI spending has buoyed the market overall.
With just 2½ months left in the year, the S&P is up 11.9% YTD, the Nasdaq is up 12.5%, and 3Q earnings season is just underway.
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Factors Driving Recent Volatility and Price Action
The Fed: After the Fed’s quarter-point rate hike last month (the first in 3 years), stocks rallied on the news. Both the S&P and Nasdaq hit new all-time highs shortly thereafter, despite the recent pullback. While the Fed penciled in one more rate hike by year’s end, it’s unlikely to happen at its next meeting later this month (10/28).
Inflation: The latest CPI and PPI reports showed headline and core rates ticking back up. That contrasts with the latest Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, which showed easing inflation. Much of the increase is due to higher oil prices. Either way, we’ll get four more inflation reports, and two more employment reports before the December Fed meeting.
Crude Oil: Tensions in the Middle East continue. But Middle East crude exports have risen to 16.3M barrels per day, which is the highest since the war began. That’s approximately 80% of pre-war levels. Additionally, the G7 announced it would release up to 100 million barrels of diesel fuel and crude oil over four months.
Treasury Yields: There’s been much concern about rising Treasury yields. With the Fed Funds Rate (FFR) at 3.88% midpoint, and the 10-yr yield at 5.10%, the spread is 122 basis points. Historically, over the past 40 years (1985-2025), the spread between the FFR and the 10-yr has been 100 to 150 bps, with the median at 120. So, the recent rise in yields isn’t ominous. It’s right in line with the historical norm, and appears to be a simple reversion to the long-run median spread of 120 bps.
AI Buildout Concerns: Besides opposition to data centers, Neocloud stock took a major hit after technology research outfit Gartner predicted that 80% of companies in the space would cease to exist by 2030. Neocloud operators are next-generation cloud computing companies whose infrastructure is designed specifically to run artificial intelligence (AI) workloads, like large language model (LLM) training and inference.
Reasons to be Optimistic
Improving Market Breadth: Investors aren’t bailing on the stock market, despite an ugly selloff in technology names this week that helped to saddle the S&P 500 with its worst weekly showing in months. The S&P 500 lost almost 2% even as most of the index’s stocks advanced during the week. Seventy percent of stocks in the index posted weekly gains while 30% fell, according to Dow Jones Market Data. That helped the equal-weighted version of the index
Dot-Com Comparisons: Last year, the S&P 500 gained 16.4%. That was on top of 2024’s 23.3%, and 2023’s 24.2%. The historic AI tech boom has been leading the way. It’s reminiscent of the dot-com boom of 1995-1999, when the market surged double digits each year for 5 years in a row, resulting in a 220% increase in the S&P.
Plus, the AI boom is even bigger than the dot-com boom, driven by real earnings and real growth. The AI capex boom has often drawn comparisons to the fiber-optic build-out and subsequent collapse of the early 2000s, when companies laid massive amounts of cable expecting demand would follow supply. When demand took longer than expected to materialize, several companies went bankrupt.
What’s different with AI is utilization rates. Unlike the early days of fiber, deployed AI infrastructure runs near 100% utilization rate, while GPU rental rates have risen 12% to 37% year to date, a sign of scarcity, not glut. Rising rates, geopolitics, data center backlash, and stress at some sub-IG neoclouds have revived dot-com comparisons, and the SOX has already endured multiple 20%+ bear markets this year.
Fourth Quarter Historical Perspectives: The fourth quarter has just begun. Historically, the 4Q is the best quarter of the year. Since 1950, the S&P has gone up 79% of the time, with an average gain of 4.1%. October is typically the best month for stocks in midterm years, which we are in. The gain averages 3.0%. And November is close behind with 2.7%. Both have win ratios above 70%, with October up 73.7% of the time and November up 78.9% of the time.
Mark Notes
With growing concern about the AI trade and volatility in these companies’ spending, investors have broadened their view and looked for other opportunities. Now money is rotating out of tech into areas that had been really depressed.
Tech had been the stock market’s “safety trade,” rising when Treasury yields spiked in September, as investors appeared confident the AI trade would keep powering higher despite higher rates. Instead of a broad-based selloff, you’re just seeing a rotation from tech to everything else. A rotational market is better than when money is broadly leaving the market.
This article is for general informational and educational purposes only. It is not intended as financial advice, investment guidance, or a recommendation to buy or sell any security. The content reflects publicly available information and broad market commentary. Readers should conduct their own research and consult a licensed financial professional before making investment decisions.
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