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Oct 31, 2026QuickTakes

ECONOMIC WEEK AHEAD: November 2-6

The S&P 500 fell 0.6% last week, and the Nasdaq dropped 2.0%, both posting their third straight week of losses, as disappointing tech earnings revived concerns about AI-related spending. The FOMC held the federal funds rate (FFR) at 3.75%-4.00% on Wednesday in a 10-2 vote, with the dissenters favoring a 25bps hike. We believe the committee needs another 50bps of increases to get back to a neutral FFR that is neither accommodative nor restrictive. October’s employment report (Fri) caps a jam-packed week of labor market data, including JOLTS (Tue), ADP (Wed), and Challenger and jobless claims (Thu). ISM’s M-PMI (Mon) and NM-PMI (Wed) are also due. Six Fed officials are scheduled to speak. Tuesday’s midterm elections should be interesting. Rate decisions from the Reserve Bank of Australia and the Bank of England and earnings reports from Apple, Palantir, AMD, and Qualcomm round out the week's calendar. Here’s more: (1) Employment. October’s employment report is the economic headliner. Payrolls rose 29,000 in September, lowering the three-month average to 50,700 (chart). The unemployment rate rose to 4.2% from 4.1%, while average hourly earnings increased just 0.1% m/m. We expect a stronger payroll gain than the consensus, of approximately 55,000. Challenger’s October layoff announcements (Thu) follow September’s count of 43,300. Technology led September’s announced cuts, at 10,800. Initial unemployment claims (Thu) remain low, with a four-week average of 197,800 for the week ended October 24 (chart). We expect more of the same for both labor market indicators this week. The four-week moving average of ADP's employment measure peaked at 26,000 in late September before easing to 16,750 in early October (chart). September’s monthly ADP report showed a 90,000 gain in private payrolls, nearly double the Bureau of Labor Statistics’ 46,000. September’s JOLTS report (Tue) follows August’s 7.1 million job openings, down from 7.3 million in July. The share of consumers saying jobs are “plentiful” was 26.7% in October, little changed from 27.0% in August (chart). (2) PMIs. ISM’s M-PMI (Mon) follows September’s 54.5 reading, with the prices-paid index at 77.9. The NM-PMI (Wed) was 54.9 (chart). S&P Global’s flash M-PMI edged up to 56.0 in October from September’s 55.9, a 53-month high, while the flash NM-PMI eased to 57.9 from 58.8. Both still point to solid ISM readings. S&P 500 forward earnings rose 38.8% y/y as of October 26, up from 37.2% in September, suggesting more upside for the M-PMI (chart). (3) Earnings. The earnings reporting season continues this week, with 31% of the S&P 500 companies set to report. Apple, Palantir, AMD, Arista Networks, Qualcomm, and Arm headline the list. Analysts’ consensus estimates imply Q3-2026 operating EPS growth for S&P 500 companies of 23.8% y/y, down slightly from 24.1% last week, after Alphabet, Amazon, and Intel missed estimates (chart). Q4 growth estimates held at 30.2%. (4) Global. The Reserve Bank of Australia (Tue) is expected to hike its cash rate target by 25bps for a second straight meeting, to 4.85% from 4.60% (chart). The markets are pricing in 88% odds of that result, so it’s no sure thing. Last week, the Reserve Bank of New Zealand held its official cash rate at 2.75% despite 95% odds of a hike. Both central banks are often seen as bellwethers for the global rate cycle. The Bank of England (Thu) looks set to raise its rate by 25bps to 4.00%, with 98% odds priced into the markets. The markets see a 35% chance of another hike in December. The Eurozone’s flash CPI (Wed) is expected to rise in October from September’s 3.8% y/y, with the core rate holding at 2.5%. Among the major economies, Spain’s headline rate was the highest at 5.0% in September and Germany’s the lowest at 3.3% (chart).

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Oct 31, 2026QuickTakes

US MARKET CALL: AI Spooking Investors

I. Stock Market Performance Happy Halloween! Kids are enjoying the spooky cultural holiday today. The celebration evolved from ancient Celtic harvest festivals tied to All Hallows' Eve into the secular traditions of costumes, parties, and trick-or-treating that we know today. Investors have been spooked about the AI trade since the S&P 500 peaked at a record high of 7818.93 on October 6 (chart). The index is down 3.1% since then. We can blame the big-cap AI-related stocks for that decline because the equal-weight S&P 500—which doesn’t reflect those stocks’ performance more than any other’s—is up 4.9% since September 30. That's not very scary. Before that, the equal-weight index had fallen fell 6.5% from its record high on August 13 through September 30. The Nasdaq is down 7.8% since it peaked at a record high on October 6 (chart). That's not a very frightful decline for this relatively volatile index. Somewhat more frightening has been the sharp drop in the momentum trade relative to the S&P 500 since June 25 (chart). The former is a proxy for the AI trade. On a ytd basis, it has been mostly a walk past the graveyard for most stock investors. For many, it has been a walk in the park. The S&P 500 is up 10.7% since the end of 2025, with the XMAGS up 14.0%, while the MAGS has lagged with a 3.8% gain so far this year (chart). So, despite the frightening warnings about concentration of leadership, the S&P 500's rally has broadened beyond the Magnificent-7. Furthermore, the Russell 2000 has been on an uptrend since early 2025, rising to a record high on August 14 (chart). It dropped 3.2% since then through October 16, mostly on a scare from the bond market, which seems to be over. II. Stock Market Earnings Meanwhile, industry analysts' consensus earnings expectations for the S&P 500 show nothing to fear but fear itself. The real concern is that they are not only fearless but also too optimistic. They currently expect that EPS will increase 16.1% next year to $425 and 16.2% in 2028 to $494 (chart). Occasionally, reality bites, and last week's Q3 earnings misses by Alphabet and Intel modestly reduced the quarter's expected EPS growth rate to 23.8%, but Q4's estimate remained exceptionally strong at 30.2% (chart). Forward earnings for the S&P 500, S&P 400, and S&P 600 all rose to record highs again last week (chart). III. Valuation Investors do seem to be fretting that industry analysts’ earnings outlooks reflect irrational exuberance. As a result, the S&P 500 forward P/E is down to 18.2, its lowest reading since the April 2025 Liberation Day low (chart). Forward earnings is up 49.1% since then! (The stock market rally since then is all attributable to fabulous earnings momentum, or FEMO, because FOMO, or the fear of losing out that drives up the “P” of “P/E,” isn’t a factor.) We still counsel investors to proceed with caution in the coming days. Let's see how the midterm elections play out on November 3 and whether the war in the Middle East heats up again soon after. Now that the FOMC blackout period is over, Fed officials are likely to signal a bigger rate hike in December than expected, say 50bps rather than 25bps. AI jitters are likely to continue after Halloween. Nevertheless, we are sticking with our 7,900 year-end target for the S&P 500. Santa is coming. IV. Sentiment Odds are that Friday's drop in the S&P 500 weighed on the bull/bear ratios (BBR) we track (chart). We hope so. From a contrarian perspective, bearish BBR readings are bullish. V. Credit Alphabet and Intel stock prices dropped sharply after they reported weaker-than-expected earnings last week. As a result, investors pulled back from the AI trade on mounting fears that the AI infrastructure buildout is at risk of a significant slowdown. That notion spread to fixed-income securities. In recent weeks, the federal funds futures market's forecast of the number of Fed rate cuts over the next 12 months fell from three or more to two (chart). The 10-year Treasury bond yield dropped by more than 30bps this month, led by a similar drop in the comparable TIPS yield (chart). We think that the 10-year yield might remain around 5.00% through the end of this year and for most of next year. While credit-quality spreads have widened for AI-related bonds, the private credit market remains relatively calm (chart).

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Oct 29, 2026QuickTakes

US Economy Continues To Roar, While The Fed Waits For More

The FOMC voted 10-2 on Wednesday to hold the federal funds rate at 3.75%-4.00%, with the two dissenters favoring a 25bps hike. Yet Fed Chair Kevin Warsh's assessment of the US economy sounded decidedly hawkish. Economic growth is robust and broadening, the labor market is in good shape, inflation remains above the Fed's 2.0% y/y target, and financial conditions are hardly tight. So why did the Fed stand pat? Warsh argued that September's hike was already tightening financial conditions, inflation expectations remained anchored, and stronger productivity growth was allowing the economy to expand without overheating. With an "information-rich" period ahead, the Fed saw little reason to rush, he said. In our view, the decision was puzzling. It reminds us of someone standing in a room with a fire alarm blaring and smoke pouring under the door, yet insisting on more evidence before calling the fire department. Thursday's economic data only reinforced our conviction that the Fed should have raised rates by 25bps on Wednesday. Let's take a closer look. (1) GDP. The US economy expanded at a 3.4% annualized rate in Q3-2026, the largest gain in a year (chart). A closer look reveals remarkably strong underlying demand. Real final sales to private domestic purchasers, excluding volatile trade and inventory swings, surged 4.9% (saar), the best increase since Q2-2021 (chart)! Consumer spending advanced 3.8% for the second consecutive quarter, its fastest pace since Q4-2024. Nonresidential fixed investment soared 12.7%, a pace last exceeded outside the pandemic period in Q2-1978. The AI investment boom was a major driver, with investment in information-processing equipment surging 37.4% and software investment rising 9.6%. Yet headline GDP understated this strength because net exports subtracted 3.32 percentage points from growth. Imports surged 19.7%, led by AI-related durable goods. Exports fell 5.7%. Consumer spending and business investment are driving the US economic boom. Federal government spending is too, rising 15.8% last quarter. The Weekly Economic Index rose to 3.3% for the week ended October 16, signaling a solid start to Q4's real GDP growth (chart). (2) Inflation. In Q3's GDP report, core PCED inflation remained troublesome at 3.0% y/y, well above the Fed's 2.0% target (chart). On the brighter side, it rose at an annualized rate of 2.4% during the quarter. Headline PCED inflation rose 0.5% m/m in September, lifting its yearly rate to 3.6% (chart). Core PCED inflation, excluding food and energy, increased 0.3% m/m and 3.1% y/y. Both remain stubbornly above the Fed's inflation target. Furthermore, Warsh's inflation diffusion measure shows that nearly half of PCED components rose more than 3.0% y/y, compared with a pre-pandemic average of just 32%. Goods PCED inflation rose to 3.9% y/y in September from 3.6% in August, partly reflecting a 7.3% m/m increase in gasoline prices (chart). Tariff-related price pressures have yet to subside, while the AI investment boom is adding to inflation across the technology sector. Prices for computers and software are rising at record annual rates (chart). Together, these forces suggest goods inflation is unlikely to ease meaningfully soon. Services PCED inflation rose to 3.5% y/y in September (chart). Supercore services inflation, excluding housing and energy, edged up to 3.6% y/y (chart). It has been trending higher since late 2025, underscoring persistent underlying price pressures. Services inflation remains broad-based, with most major categories rising around 3.0% y/y or more. Transportation services inflation has been particularly troublesome as higher energy costs feed through to service prices (chart). (3) Consumer spending and income. Americans continue to shop. Real consumer spending remained at a record high in September, even as real disposable personal income (DPI) declined for the first time since April (chart). Real DPI has been essentially flat for over a year, a trend likely to persist as more Baby Boomers retire. September's saving rate declined to 3.8%, the lowest since 2022 (chart). We expect it to fall further as retiring Baby Boomers continue spending their sizeable net worth because they are no longer earning labor income. Real consumer spending was flat in September, as a 0.3% m/m decline in goods purchases offset a 0.2% increase in services spending. Spending on restaurants and hotels remained particularly robust, rising 0.5% following a 1.1% surge in August (chart). (4) Labor market. Initial unemployment claims fell to just 194,000 during the week of October 24, marking the tenth reading below 200,000 this year, the most in any year since 1969! The four-week moving average also fell to its lowest level since October 1969. Continuing claims also declined, approaching their lowest level since April 2023. These figures underscore the labor market's remarkable resilience (chart).

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