AI Trillion $ Spending Splits the Market: Winners and Losers
Stuart Katz
Executive Summary
Last week, stock and bond prices were up. The S&P 500 outperformed both the MSCI EAFE non-us developed and MSCI Emerging Markets Index. The best-performing sectors in the S&P 500 were technology, materials, and industrials. Across U.S. Russell style and market-cap indices, large-cap growth performed best, but the value factor led more broadly.
As for fixed income, the 10-year Treasury yield fell to 4.64% over the week, and the 2-year – 10-year Treasury yield spread steepened to +45 bps. Last week, municipal bonds posted positive returns, slightly outperforming taxable fixed income as rates were broadly mixed. Benchmark AAA municipal yields moved -1 to 2 bps, while Treasury yields fluctuated -7 to 11 bps. High-yield bond spreads were down to 264 bps and remain well below the 2025 high of 453 bps.
Key Takeaways
1. Federal Reserve Left Interest Rates Unchanged at Last Week’s Meeting
The Fed held its benchmark rate at 3.50% to 3.75% for a fifth consecutive meeting, the second under Chair Kevin Warsh. Three officials dissented in favor of a quarter-point increase, the most in that direction since 2016, and Warsh offered little guidance on the path ahead. Stocks declined and Treasury yields rose to multi-year highs after the decision, with the 30-year yield trading near a 19-year high, on concern the Fed was not moving fast enough on inflation and might have to raise rates more later. Markets place around a 60% probability on a hike at the September meeting. Why it matters: The Fed is providing less guidance about its intentions, which makes its policy path harder to forecast and, in turn, has made interest rates more volatile.
2. Oil Prices Remain Volatile as the Conflict in the Middle East Swings Between Escalation & De-Escalation
Oil spiked more than +30% in July as the U.S.-Iran conflict escalated again, with West Texas Intermediate crude above $90 a barrel. It has since reversed by nearly -20% as a planned U.S. strike was paused and talks turned to reopening the Strait of Hormuz, a critical route for global oil trade. Crude now trades near $75, roughly where it stood before the latest flare-up in early July. The headlines and move in oil prices are the latest in a pattern that has repeated multiple times this year, with each escalation followed by a round of de-escalation and one set of headlines countered by the next. Why it matters: The conflict and swings in oil prices have added to interest-rate volatility and uncertainty about Fed policy.
3. Investors React to Mixed Big Tech Quarterly Results
The difference came down to how much growth each could show in return for its AI spending. Microsoft rose +16% after its Azure cloud business grew +43%, the biggest one-day market-value gain for a stock on record, and Amazon gained +10% after its cloud division drove the first ever $200 billion quarter. In contrast, Meta declined as its heavy AI spending and a profit miss weighed on its ad business. The AI capital expenditure cycle remains is moving at a pace to surpass the telecom boom of the late 1990s and become the largest investment cycle since the railway buildout of the 19th century in inflation-adjusted terms. However, the ultimate scale of the buildout remains deeply uncertain. Bloomberg consensus forecasts imply that hyperscaler capital spending alone will surpass $1 trillion per year (~3% of US annual GDP) from 2027 onward. Why it matters: Investors are differentiating among the big tech companies, rewarding clear returns on AI spending and turning more cautious on the rest.
4. Headline Economic Growth Slowed in Q2, But Core Growth Remained Solid
The U.S. economy grew at a +1.5% annualized rate from April through June, down from +2.1% in Q1. The slowdown traced mainly to an increase in imports, which count against GDP, and a decline in government spending. A measure of private demand that combines consumer spending and business investment rose +3.9%, more than double the +1.7% pace of the first quarter, as consumers continued to spend. Why it matters: The economy’s core held up despite the slowdown, with consumer and business demand still growing even as the headline number cooled.
5. Manufacturing Survey Rose to a Four-Year High in July
A widely followed gauge of factory activity, the ISM’s manufacturing index, rose to 55.6 in July from 53.3 in June, its strongest reading since 2022. A level above 50 signals expansion. The improvement was broad: production led the gain, new orders held firm, factory hiring expanded for the first time in nearly three years, and cost pressures eased. Why it matters: Manufacturing continues to strengthen after several sluggish years, when elevated interest rates and reduced capital spending weighed on activity.
Weekly Commentary
AI Trillion $ Spending Splits the Market: Winners and Losers
Stuart Katz
Executive Summary
Last week, stock and bond prices were up. The S&P 500 outperformed both the MSCI EAFE non-us developed and MSCI Emerging Markets Index. The best-performing sectors in the S&P 500 were technology, materials, and industrials. Across U.S. Russell style and market-cap indices, large-cap growth performed best, but the value factor led more broadly.
As for fixed income, the 10-year Treasury yield fell to 4.64% over the week, and the 2-year – 10-year Treasury yield spread steepened to +45 bps. Last week, municipal bonds posted positive returns, slightly outperforming taxable fixed income as rates were broadly mixed. Benchmark AAA municipal yields moved -1 to 2 bps, while Treasury yields fluctuated -7 to 11 bps. High-yield bond spreads were down to 264 bps and remain well below the 2025 high of 453 bps.
Key Takeaways
1. Federal Reserve Left Interest Rates Unchanged at Last Week’s Meeting
The Fed held its benchmark rate at 3.50% to 3.75% for a fifth consecutive meeting, the second under Chair Kevin Warsh. Three officials dissented in favor of a quarter-point increase, the most in that direction since 2016, and Warsh offered little guidance on the path ahead. Stocks declined and Treasury yields rose to multi-year highs after the decision, with the 30-year yield trading near a 19-year high, on concern the Fed was not moving fast enough on inflation and might have to raise rates more later. Markets place around a 60% probability on a hike at the September meeting. Why it matters: The Fed is providing less guidance about its intentions, which makes its policy path harder to forecast and, in turn, has made interest rates more volatile.
2. Oil Prices Remain Volatile as the Conflict in the Middle East Swings Between Escalation & De-Escalation
Oil spiked more than +30% in July as the U.S.-Iran conflict escalated again, with West Texas Intermediate crude above $90 a barrel. It has since reversed by nearly -20% as a planned U.S. strike was paused and talks turned to reopening the Strait of Hormuz, a critical route for global oil trade. Crude now trades near $75, roughly where it stood before the latest flare-up in early July. The headlines and move in oil prices are the latest in a pattern that has repeated multiple times this year, with each escalation followed by a round of de-escalation and one set of headlines countered by the next. Why it matters: The conflict and swings in oil prices have added to interest-rate volatility and uncertainty about Fed policy.
3. Investors React to Mixed Big Tech Quarterly Results
The difference came down to how much growth each could show in return for its AI spending. Microsoft rose +16% after its Azure cloud business grew +43%, the biggest one-day market-value gain for a stock on record, and Amazon gained +10% after its cloud division drove the first ever $200 billion quarter. In contrast, Meta declined as its heavy AI spending and a profit miss weighed on its ad business. The AI capital expenditure cycle remains is moving at a pace to surpass the telecom boom of the late 1990s and become the largest investment cycle since the railway buildout of the 19th century in inflation-adjusted terms. However, the ultimate scale of the buildout remains deeply uncertain. Bloomberg consensus forecasts imply that hyperscaler capital spending alone will surpass $1 trillion per year (~3% of US annual GDP) from 2027 onward. Why it matters: Investors are differentiating among the big tech companies, rewarding clear returns on AI spending and turning more cautious on the rest.
4. Headline Economic Growth Slowed in Q2, But Core Growth Remained Solid
The U.S. economy grew at a +1.5% annualized rate from April through June, down from +2.1% in Q1. The slowdown traced mainly to an increase in imports, which count against GDP, and a decline in government spending. A measure of private demand that combines consumer spending and business investment rose +3.9%, more than double the +1.7% pace of the first quarter, as consumers continued to spend. Why it matters: The economy’s core held up despite the slowdown, with consumer and business demand still growing even as the headline number cooled.
5. Manufacturing Survey Rose to a Four-Year High in July
A widely followed gauge of factory activity, the ISM’s manufacturing index, rose to 55.6 in July from 53.3 in June, its strongest reading since 2022. A level above 50 signals expansion. The improvement was broad: production led the gain, new orders held firm, factory hiring expanded for the first time in nearly three years, and cost pressures eased. Why it matters: Manufacturing continues to strengthen after several sluggish years, when elevated interest rates and reduced capital spending weighed on activity.
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