The AI sell-off stole the spotlight from big banks, which opened the Q3 earnings season on a mixed note. Growing valuation concerns over AI capital spending, debt, and Chinese competition spurred investors to take gains in tech stocks and rotate into value stocks and Treasury bonds. The move out of tech comes on the heels of another hot batch of economic data which could keep the Fed in rate hiking mode in order to tame inflation. That could complicate the borrowing picture for the market’s highly levered AI names. Excluding the AI trade, it was a good week for investors with the Dow Jones Industrial Average posting a winning week.
Key Highlights:
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Not surprisingly, the cost of living is up. The CPI Index rose 0.60% in September, bringing the 12-month rate to 3.70%. Core CPI, which excludes volatile food and energy prices, rose 0.30% for the month for a 2.60% YOY gain. Energy drove much of the increase, up 5.20% on the month. Producer prices also came in hot in September, up 1.30%. YOY, producer prices surged 6.30% for their biggest jump since December 2022. Core PPI meanwhile rose 0.70% month-to-month, pushing the YOY rate to 5.00%. Unfortunately, little relief appears to be in sight for inflation weary consumers and businesses. Escalating tensions in the Middle East have pushed WTI to $101+ a barrel.
- In the face of higher prices, consumers responded by continuing to spend in September as they try to live amid persistent inflation. Retail sales rose 0.80%, lifted by a 6.40% increase in gasoline prices. Consumers also dug deep into their wallets to spend on discretionary items including restaurants and bars, department stores, and electronics and appliance stores.
Dow Takes the Lead as Tech Tumbles
A sharp tech sell-off overshadowed the official start of the third-quarter earnings season this week, as escalating skepticism around the artificial intelligence trade collided with a mixed batch of big bank earnings reports. Technology stocks bore the brunt of the sell-off as investors revisited concerns regarding stretched valuations, soaring capital expenditures, and rising debt loads tied to the AI buildout. Semiconductor stocks led the retreat, tumbling nearly 11% this week and wiping out $1 trillion+ in market capitalization. The rout was driven by reports that China’s CXMT plans to introduce a more powerful chip by year-end, stoking competitive worries. Meanwhile, AI cloud provider CoreWeave added to market jitters that its cash flows will fail to materialize quickly enough to justify its enormous capital spending. That sparked broader concerns that it will become more difficult for highly leveraged companies to tap the bond market if the Fed continues to hike rates. Big banks earnings did little to ease investor skittishness around the AI trade despite reiterating they remain confident in the AI buildout, noting continued strong demand in the tech sector. On the whole, big banks reported mixed results as investment banking softened while consumer spending and loan growth remained strong. That is welcome news for the economy as consumers continue to spend despite persistent inflation.
Excluding the tech sector, market action painted a noticeably more constructive picture. The Dow Jones Industrial Average managed to overcome tech-driven headwinds and inflation to finish the week higher, bolstered by gains in value-oriented sectors. Although the S&P 500 finished the week down, that was mainly due to its 40% weighting in tech stocks. The equally weighted S&P 500 Index posted a 0.50% gain, showing broadening interest by investors across multiple sectors. It was also a good week for fixed income, which saw a solid rebound in U.S. Treasuries as they attracted significant safe-haven inflows despite ongoing uncertainty over the Federal Reserve’s interest rate path and fiscal debt concerns. Overall, the week demonstrated early signs of market breadth expanding beyond the AI trade. If consumer spending holds firm and non-tech earnings continue to deliver positive surprises, that may be enough to maintain market momentum as investors reassess the AI trade, navigate stubborn inflation and potentially higher interest rates.
The Week Ahead
The Q3 earnings season continues with notable reports from big tech names Meta and Texas Instruments. On the economic front, it’s a light week with Flash PMI and housing starts on deck.
Automatic Enrollment and Stock Donations: What’s New with Trump Accounts
The U.S. Department of Treasury and President Trump announced last week that nearly 70 million Trump Accounts have been created, including more than 60 million through automatic enrollment, giving every child under the age of 18 with a Social Security number an account in their name. Also known as 530A accounts, Trump Accounts are individual accounts for children created under President Trump’s One Big Beautiful Bill Act in 2025 to encourage long-term savings and help build wealth for the next generation. President Trump announced last week that every eligible child has now been enrolled and that more than $4.5 billion has been deposited into Trump accounts. The automatic enrollment does not mean that a child automatically receives the $1,000 seed contribution from the federal government. A parent or guardian must claim the account in order to manage it, allow others to contribute to it, and for eligible children to receive the one-time federal deposit.
The Treasury Department also added a feature to Trump Accounts: donations of stocks of U.S. companies. Under the new rules that took effect last week, donors, with Treasury Department approval, can put individual stocks into the accounts of thousands or millions of children. Stock donations generally can’t be sold for five years under the rules. Gwynne Shotwell, president of SpaceX, pledged more than two million shares of SpaceX to children between ages 11 and 17 who live in lower income areas.
Below is a brief Q&A on how Trump Accounts work and some of the advantages and benefits.
What are the eligibility rules?
Trump Accounts are open to children under 18 years of age who are U.S citizens and have a valid Social Security number. The federal government will make a one-time $1,000 contribution for each eligible child’s account. To qualify for the one-time federal pilot contribution, the child must be born between January 1, 2025 and December 31, 2028 (during Trump’s second term).
How do Trump Accounts work?
These new accounts operate in a custodial-style structure where the assets are owned by the child, while an adult — typically a parent or guardian — is authorized to act on the child’s behalf until the beneficiary (the child) reaches age 18. The U.S. Department of Treasury will set up and administer the accounts, and the money will initially be managed by Bank of New York Mellon and Robinhood. All accounts must be opened through the federal framework, and the IRS is expected to issue more guidance for families to be able to roll over the accounts to their preferred brokerage firm.
How are the funds invested?
Contributions to Trump Accounts are invested in a low-cost exchange-traded fund that tracks the performance of the S&P 500 index.
How are Trump Accounts opened?
Families can claim their child’s Trump Account through the IRS by filing Form 4547 or using the online tool at trumpaccounts.gov.
Who can contribute to a Trump Account?
Trump Accounts may be funded by contributions from family members, businesses, governments, and charitable organizations. Authorized contributions from individuals and employers are allowed up to $5,000 per year. Employers can donate and let workers fund accounts with payroll deductions. The annual contribution limits are indexed to inflation and will adjust starting after 2027. A $6.25 billion gift from the Michael & Susan Dell Foundation will fund $250 charitable deposits for qualifying children in certain zip codes. More than 100 companies, foundations, and other entities have announced plans to make contributions to Trump Accounts.
How are the funds withdrawn or used?
The funds are generally inaccessible before age 18. At age 18, the account converts into a traditional IRA with similar tax rules. From that point forward, the account holder can make penalty-free withdrawals for certain life expenses, such as college tuition, first-time home purchases, or medical costs. However, because it functions as a traditional IRA, ordinary income taxes still apply to all withdrawn funds. Early withdrawals for nonqualifying expenses before age 59½ may incur a 10% penalty. Additionally, Required Minimum Distributions (RMDs) rules apply once the account holder reaches the applicable age. Trump Accounts may be converted from a traditional IRA to a Roth IRA after age 18. The converted amount is added to taxable income for that year, but if the account holder has low income (such as a student with minimal earnings), the conversion may incur little or no federal income tax. Once in a Roth IRA, future growth and qualified withdrawals are tax-free, providing a long-term tax advantage.
One nuance worth understanding: contributions made by parents, grandparents, and other family members create basis in the account since they’re after-tax dollars, and that basis comes back out tax-free at distribution — similar to a nondeductible IRA. However, there are other factors for families to consider when weighing making additional contributions. First, 530A accounts follow pro-rata distribution rules, so a withdrawal can’t isolate basis and pull it out first — every distribution is a blended mix of basis and taxable growth. Second, that basis has to be tracked on IRS Form 8606, filed annually with the child’s tax return, and unlike a 529 plan, the custodian isn’t required to track it for you. Over an 18-plus-year holding period — often spanning multiple preparers, custodians, or a family member who simply forgets to file the form — that basis history can get lost, and an untracked contribution effectively becomes fully taxable on distribution. By contrast, the $1,000 federal pilot contribution and any employer contributions carry no basis at all; that money, and its growth, are fully taxable as ordinary income regardless. Families should weigh the recordkeeping burden when comparing a 530A account to a UTMA or to a Roth IRA for a child with earned income (generally age 14 and up).
Given some of the disadvantages of Trump Accounts, including not only those addressed above but also the limited investment choices, restrictions on withdrawals, and the cap on annual contributions, parents and guardians should discuss their family’s priorities with a financial advisor when making decisions about investing and saving for their children and grandchildren to make the best choice.