Good morning,
Last week was mixed and uneven, with the S&P 500 gaining 1.17%. On Tuesday, the index recorded its first all-time closing high since August, fueled by renewed optimism surrounding AI-related capital spending. The rally proved short-lived, however, as reports that OpenAI might miss its revenue targets weighed on technology shares. By Friday, all was well again—concerns about OpenAI had eased, the AI complex rallied, and much of the damage was reversed.
Elsewhere, the major indices turned in a decidedly mixed performance: Nasdaq +0.65%, Russell 2000 -0.90%, International Developed -0.53%, and Emerging Markets +0.04%. The pattern was familiar: indices with meaningful AI exposure generally held their own, while those without it struggled to find traction. All told, not a particularly exciting week.
That brings us to a potentially more consequential week for markets, with two important tests on the calendar.
Wednesday brings the Consumer Price Index (CPI), a critical inflation reading at a time when markets are increasingly betting that the Fed will hold rates steady at its meeting later this month. With bond yields already elevated, an upside surprise could quickly unsettle that expectation.
Perhaps more importantly, third-quarter earnings season begins tomorrow. Investors are eager to see whether another quarter of better-than-expected corporate earnings can justify equity valuations following their recent run-up, particularly against the headwind of rising interest rates.
The market setup for the week is straightforward. Equities enter the week near all-time highs, but the market feels increasingly fragile.
The bull case rests on earnings. Strong results, resilient margins, and constructive forward guidance could provide the fundamental support needed to sustain the rally, particularly if inflation continues to cooperate.
The bear case rests on inflation and interest rates. A hotter-than-expected CPI print could force markets to reassess the Fed’s policy path, driving bond yields higher and putting further pressure on equity valuation multiples—even if corporate earnings remain healthy.
In short, the bulls need earnings to deliver, while the bears need inflation to at least not surprise. With valuations elevated and leadership concentrated in the AI complex, there is little room for either side to stumble.
Be well,
Mike