The S&P 500 and Nasdaq Composite finished the week higher on a rebound in AI stocks and solid economic data. Despite coming under pressure earlier in the week on surging bond yields and higher prices that could dampen demand for non-AI goods and services, the Dow Jones Industrial Average also managed to finish higher helped by a 478+ point rally on Friday on optimism for re-opening of the Strait of Hormuz. Strong AI growth has continued to carry the U.S. economy. Persistent inflationary pressures, high interest rates, and a hawkish Fed however will test the economy’s resilience, however.
Key Highlights:
- U.S. business continues to boom! S&P Global Services jumped to 58.7 in September, its highest level in nearly five years, from 56.5 in August. Meanwhile, the manufacturing gauge raced to 56.7, a level not seen in more than four years, from 53.9 the prior month. Strong demand, however, is a double-edged sword as pricing pressures intensified across both goods and services.
- Durable Goods Orders were unchanged in August as orders in the volatile transportation sector slipped -0.60%. However, the more important signal came from business investment. Nondefense capital goods orders ex-aircraft accelerated from 0.60% to 1.60%. Orders for machinery, electrical equipment and components, and computers were all solid, pointing to continued strength in equipment demand despite the flat headline.
AI-Led Rally Outruns Rising Rate and Inflation Risks
Wall Street was quick to toss aside concerns over AI destroying humanity, helping push the S&P 500 and Nasdaq Composite to a weekly gain. The tech heavy Nasdaq even managed to score an all-time high on renewed enthusiasm for AI stocks. Meanwhile, the Dow struggled early in the week, pressured by rising Treasury yields, higher prices, and hawkish remarks from Fed officials that threatened to cool economic momentum. Despite those headwinds, the index finished the week higher. On the tech front, chipmaker AMD shattered the $1 trillion market value level for the first time ever on Tuesday on news it would hike prices by 10% given the robust demand for its chips. MAG-7 member Meta also joined in the market moving action, nearing the $2 trillion market cap level this week due to the positive buzz over its new personal AI agent, Muse. The AI trade got another shoutout in this week’s economic reports as business was booming for all things AI. The AI pick and shovel companies saw robust demand for their machinery, equipment, and computers which are all essential in the tech buildout. As the Street cheered the AI economy, the non-AI economy remained bogged down by high prices, seen in this week’s S&P Global PMI report, and rising Treasury yields. Investors, however, were a bit more optimistic on Friday that a Middle East deal could soon emerge to tame inflationary pressures. The latest reports indicate U.S. and Iranian negotiators are considering a deal that would bring a phased end to the war with Iran, reopening the Strait of Hormuz and the U.S. lifting its economic blockade on Tehran. An end to the war would also help alleviate some of the pressure on the bond market, which has seen bond yields surge on the prospect for higher interest rates. The 10-Year Treasury rate rose to 5.23%, the highest level since 2007, while the 30-Year Treasury rate climbed to 5.52%, its strongest reading since 2004.
The primary factors for markets are all intertwined presently: Iran, oil, inflation and rates. Solving Iran helps all the rest but in the meantime, we believe investors should view rising rates as an opportunity. Markets are currently pricing in a 64% chance of an October rate hike and a 50-50 split on a December hike. While Fed hikes should only directly impact the short end of the yield curve, virtually all of last week’s hike was reflected in the 10-year as well – which is odd. Should we get the forecasted hikes, and should the market continue to price those into the intermediate part of the curve, a 5.5-5.75% yield would start to look awfully enticing. Despite the recent volatility in the bond market, stocks continue to take the war, high prices, and now an even more hawkish Fed in stride, having recovered from the recent downdraft. That speaks to the present strength in the AI powered economy. The question remains whether it can continue to carry the load for the non-AI portions if inflationary pressures remain persistent and interest rates remain elevated for an extended period of time.
The Week Ahead
Key reports include nonfarm payrolls, ISM manufacturing, and personal income and spending.
Probity’s Fall Celebration Reminder: An Evening at The Meadows Museum
We look forward to welcoming friends, colleagues, and clients on October 7th for an evening of art, conversation, and connection at the Meadows Museum in Dallas which is celebrating its 25th year in its current location on the campus of Southern Methodist University (SMU).
The Meadows Museum opened in 1965 and houses one of the largest collections of Spanish art outside of Spain. After outgrowing its original location in the Owen Art Center at SMU, it moved to a newly constructed home in 2001—a freestanding, stately red-brick building that provided 14,000 square feet of gallery space for its permanent collection, major loan exhibitions, and for innovative educational programming. Around the world, the museum is known as the “Prado on the Prairie” after the Prado Museum in Madrid, so our event is aptly named a Celebración de Otoño which translates to Fall or Autumn Celebration.
Upon arrival, guests will be greeted by Wave, a monumental 80-foot long kinetic sculpture made up of 129 motorized bronze-coated steel beams aligned horizontally over a reflecting pool, designed by Spanish architect Santiago Calatrava. The undulating work rises and falls in a wave-like motion, welcoming visitors as they arrive on Bishop Boulevard. Just up the steps is another major work by Spanish artist Jaume Plensa: a 13-foot-tall steel mesh sculpture at the museum entrance.
During our Celebración de Otoño, the galleries will be open for private viewing, providing an opportunity to experience works dating from the 10th to the 21st centuries with pieces by renowned artists including El Greco, Velázquez, Murillo, Goya, Dalí, Miró, and Picasso, among many others. Also on view is a new exhibition of sixty-three paintings from the Spanish Americas on loan from the Thoma Foundation. Many of these works are recent acquisitions that are being exhibited for the first time. You can read more about this collection here.
The Meadows Museum is truly a Texas treasure, and we look forward to welcoming everyone on Wednesday, October 7th, for an evening surrounded by remarkable art and even better company.