Earnings, data centers, debt burdens, the housing market, the state of fixed income and year-end priorities in focus.
Earnings reports from the Magnificent Seven and other tech behemoths are underway and show that AI hyperscalers with very strong balance sheets remain the market’s darlings. The likes of Meta, Tesla, SpaceX, Lam Research and ASML delivered on the promise of AI-related earnings growth to justify their enormous AI spending cycle.
However, so-called neoclouds like CoreWeave, providers built primarily to rent AI computing power, have hit a speed bump as investors question whether the AI capacity business can be the moneymaker once hoped. CoreWeave and the other neoclouds took big hits as a result, while others like Firmus Grid and Nscale pulled planned IPOs, with the latter taking a hit following the news that Microsoft pulled out of a key UK data center lease. The reason? UK power grid officials stated electricity would not be available until 2030 or later because of bottlenecks and bureaucracy.
Anxiety surrounding this aspect of the AI build is growing in light of the upcoming midterm elections. If an anti-data center stance wins political contests, it could put data center regulation at the heart of the 2028 campaign. For now, opposition to data centers is centered more around quality-of-life concerns, such as environmental strains and home values, than by AI’s impact on jobs. But midterm results have a way of setting the narrative on key policy themes, like the Affordable Care Act in 2010.
Another policy issue captivating investors is fiscal instability. While many investors are recognizing the value opportunity offered by some of the highest bond yields that we have experienced in a decade, the lack of political will to address debt and deficit spending has advanced volatility and unrest, at least in France.
Indeed, civil unrest gained momentum overseas with riots and violent clashes spreading across multiple French cities. According to reports, more than 500 emergency personnel were injured, with nearly 2,400 event participants arrested. Initially, the protests were in response to deteriorating school conditions. They have since evolved into larger concerns of fiscal instability.
France, for example, now faces a massive debt of about 120% of GDP with fears of further deficit spending to accommodate outsized entitlements and pensions along with annual inflation in the region rising 3.4% in September. French yields have recently exploded with the 10-year OAT (Obligation Assimilable du Trésor) yield approaching 5%—the highest level in two decades.
While the U.S. economy is not yet in the same situation as that of our European counterparts, these kinds of reactions should be a warning about the risks of excessive borrowing and spending. Notably, the issue of the debt ceiling will be on the table again for the next U.S. Congress. The One Big Beautiful Bill Act increased the federal debt ceiling to $41.1 trillion. At our current pace, we will hit that ceiling in mid-2027 and need an increase by Congress or risk a default.
Economic data was thin this week and mostly housing related. It reflected a meaningful slowdown across the industry. The National Association of Home Builders (NAHB) Index declined to a reading of 29, marking a 14-year low. Home starts declined 5.2%, building permits and pending home sales plunged, and MBA mortgage applications fell off a cliff as the 30-year mortgage is trending at 7.41%.
Crude oil has remained at highs as Middle East supply risks continue, and inflation’s insidious impacts related to food prices are hurting those most in need. According to the World Bank, food prices in the quarter ending in September outpaced the headline inflation in 22% of 150 countries, up from 14% the previous quarter, and the FAO Food Price Index averaged 136 points in September, the highest reading since 2022.
So, while strong corporate earnings reports from the bellwethers are encouraging, how broadly that strength is shared and whether it will continue against a complicated economic backdrop remain the questions weighing on markets.
Investors are setting a higher bar now and want greater confidence in sustainable earnings momentum. At today’s valuations, alternative sources of return are in focus, with income generation back in style now that bond yields and, more recently, credit spreads have reached their highest levels in years. In equities, the rotation toward financials, energy, industrials, health care, income-oriented and quality value stocks, which started in April and continues to gain steam, may represent the early stages of a broader shift in market leadership. Sometimes a return in the hand is worth two in the bush.
Diversification remains the cornerstone of our investment strategy and will be central to our year-end planning discussions. We are seeking rebalancing and tax-loss harvesting opportunities, particularly in fixed-income holdings as changes in interest rates have repriced positions.
The investment landscape is becoming more complex as markets transition from AI excitement to AI economics against a backdrop of elevated inflation, moderate economic growth, demographic change and evolving productivity trends. Rather than attempting to predict every short-term twist and turn, our focus is on building resilient portfolios and letting your financial plan guide the allocation, which is the biggest determinant of your long-term success.
Written by a human.