Weekly Market Update: Investors Rotate Away From Tech as Inflation Heats Up
Markets were mixed this week as technology and growth stocks declined while value and defensive sectors traded higher. The S&P 500 fell -0.3%, the Nasdaq declined -2.6%, and the Russell 2000 small-cap index slipped -1.0%.
However, the Equal-Weight S&P 500 gained 1.3%, and Value 1.6% outperformed Growth -2.3%, signaling broader participation and a rotation beneath the major indexes. Health Care 5.6% and Consumer Staples 3.9% led, with nine of the eleven S&P 500 sectors finishing higher. Technology -4.4% significantly underperformed.
Bonds rallied as Treasury yields declined, with longer-maturity Treasuries gaining 2.7%. Investment-grade corporate bonds gained 1.0% and outperformed high-yield bonds, which were flat as credit spreads widened. Oil rose 6.8%, while the U.S. dollar and Bitcoin were little changed.
Key Takeaways
Energy Pushes Inflation Higher
The Consumer Price Index (CPI) rose 0.6% in September, lifting year-over-year inflation from 3.4% in August to 3.7%. Gasoline prices jumped 9.1% month-over-month, accounting for more than half the monthly increase. Underlying inflation also firmed.
Core CPI, which excludes food and energy, rose 0.3%, slightly above expectations. Producer prices climbed 1.3% for the month, their largest gain since March 2022, reflecting both rising energy costs and broader price pressures.
Why it matters: The combination of persistent inflation and slower hiring complicates the Federal Reserve’s efforts to balance price stability with economic growth.
Spending Beats Expectations, Helped by Gas Prices
Retail sales rose 0.8% month-over-month in September, beating expectations for a 0.3% gain, and August’s increase was revised higher to 1.3%. Part of that strength reflected gasoline prices. Retail sales aren’t adjusted for inflation, so higher fuel prices can lift reported spending, and sales at gas stations rose 6.4% in September.
Excluding gas stations, retail sales increased 0.2%. Spending at restaurants and other retailers stayed positive, suggesting consumers kept buying despite higher costs.
Why it matters: The report points to continued consumer spending, although growth outside gas stations wasn’t as strong as the headline suggested.
AI Borrowing Comes Under Scrutiny
AI-related stocks declined sharply this week as investors grew more concerned about the heavy borrowing behind AI infrastructure. CoreWeave, a major provider of AI computing capacity, fell roughly -15% on Wednesday. Yields on some of its bonds approached 15%. That’s a sign investors are demanding much higher compensation to lend to the company.
Building AI infrastructure takes enormous upfront spending on data centers, specialized chips, and electricity, and some companies are borrowing heavily to fund it. The sell-off came even though semiconductor manufacturers reported strong earnings.
Why it matters: Demand for AI computing and infrastructure remains strong, but higher borrowing costs have increased scrutiny of how companies are paying for that buildout.
Bank Earnings Point to a Resilient Economy
Third-quarter bank results showed continued growth in credit and debit card spending, adding to evidence that consumers remained active. Credit quality was also solid. Borrowers generally kept up with their payments, and loan losses stayed contained despite rising interest rates.
Bank leaders said consumers and businesses were holding up well, though they acknowledged challenges from inflation and higher borrowing costs.
Why it matters: Taken together, the results suggest consumers and businesses remain relatively resilient despite higher interest rates, elevated oil prices, and persistent inflation.
