Defensive equity sectors had another strong week in comparison to momentum sectors. Mag 7 names had another tough week, which could put more emphasis on corporate earnings for that basket of stocks. Last week Ken Griffin of Citadel indicated that "corporate America" is
looking at their AI bills and wondering what kind of productivity they are actually getting.1 As such, not only are hedge funds and institutional investors reducing equity, technology, as displayed in the graph, is being reduced at a 2-to-1 ratio compared to other equity sector reductions. Yet, according to Viraj Patel, global market strategist of Vanda Research, recently noted that while institutional buying of AI-related baskets of stocks has faded, retail buying of AI-related named continues.2 It is noteworthy that despite the warning, Griffin suggested the leaders in AI who have long-term staying power are “companies that are on the other side of that bubble are the market leaders for decades to come.”2
Last week we noted the higher than expected inflation numbers last week that one might have thought could influence a Fed rate hike.3 In addition, the Cleveland Federal Reserve is expecting the Consumer Price Index to rise again this month from 3.6% to 3.8%.4 And yet, futures
for next week's Fed meeting stands at a 90% probability of no rate hike. Earlier this month Fed Governor Waller stated, "The hikes do not need to come at consecutive meetings"5 and just last week Fed President Daly stated, "Why force urgency when you don't need to have urgency".6 For now it appears the Fed is in no hurry to hike at the end of this month. Perhaps the bond market is doing the Fed's work for them as interest rates have risen and lower quality credit is under some stress. In May as the CCC and lower quality end of the curve began to move higher and since the stress in AI debt began the spreads on CCC and lower bond has increased 27% (or, 281 basis points).7 Spreads in the high yield sector move higher as stress and risk in the market rises.
It's mid-term election time of the year and that typically means volatility in equities surrounding uncertainty in the political realm. The historical average for the VIX (volatility) Index is approximately 19.5.8 However, around mid-term election time it typically averages 21.2.9 According to
Lance Roberts of RIAAdvisors.com, since 1974 the S&P 500 Index has been higher in outcomes when there is a split Congress coming out of mid-terms and lower when Congress is controlled by one party.10 It is notable that since hitting a low of only 41% of S&P 500 stocks trading above their 200-day moving average at the end of September, that number has risen to at least 58% trading above the 200-day moving average.11 However, investors might want to consider adjusting portfolios to make sure risk is appropriate given long-term investing objectives.
- https://thehill.com/policy/technology/6161982-ken-griffin-ai-bubble-debt/
- https://www.businessinsider.com/retail-traders-ai-stocks-coreweave-bonds-crwv-citadel-securities-2026-10
- https://www.eudaimoniagroup.com/post/gravity-strikes-back
- Inflation Nowcasting
- https://www.federalreserve.gov/newsevents/speech/waller20261008a.htm
- https://finance.yahoo.com/economy/policy/articles/exclusive-feds-daly-says-rate-001531165.html
- $$CCCOAS | SharpCharts | StockCharts.com
- $VIX | SharpCharts | StockCharts.com
- https://x.com/pitbulltraders/status/2112534565709660528
- https://x.com/lanceroberts/status/2112499102894244049?s=12&t=rL12aWyiinzSgh3poyqO0w
- $SPXA200R | SharpCharts | StockCharts.com
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