The midterm playbook still favors stocks over the next year, but the 200-day average at 7,325 decides whether that playbook starts now or after a deeper flush.

🏛️ Market Brief - The Post-Midterm Rally Lasted One Day

On Monday, we drew the line in the sand. As we wrote in Liquidity Weighed On Gold Trumping Real Yields, a close below 7,490 would make a test of the 200-day moving average more likely. By lunchtime Thursday, the market had blown right through that support level and tested that 200-day average. There is no way to sugarcoat Thursday's sell-off, with the S&P 500 falling 4.4% to 7,353.73, its worst day since the April 2025 tariff crash. The Nasdaq 100 lost 6.4%. For the week, the index fell 2.7% to 7,376.86. That leaves it 5.7% below the October 6 record and up 7.8% for the year.

What makes the week so jarring is the sequence. Wednesday delivered what Fortune called the best post-midterm election rally in 44 years, with the S&P 500 up 1.6% to 7,688.62. Twenty-four hours later, roughly $3 trillion in market value was gone. The semiconductor ETF (SMH) dropped about 11% on Thursday, Micron and AMD each lost roughly 17%, and Nvidia fell 9%.

The midterm election catalysts were stacked on top of each other.. Democratic wins in Texas, Georgia, Ohio, and Michigan put roughly 45% of planned data center capacity in states likely to tighten the rules, according to Goldman Sachs. Weak results from Qualcomm and Arm hit the chip complex. Asian markets sold off overnight, and the selling spread to the power names that feed the buildout. The politics lit the match, but leverage supplied the fuel. As we noted in Friday's commentary, Oracle Bought High, Sold Low, Goldman's prime book showed hedge fund gross leverage near 310%, close to a five-year high, after funds lost more than 3% in October.

Thankfully, Friday brought a partial reprieve, with the market holding key technical support but just barely as the October payrolls report surprised to the upside. Employment jumped by 165,000, exceeding expectations of 65,000, and the unemployment rate fell to 4.1%. Furthermore, revisions added another 84,000 jobs to August and September, and hourly earnings rose 0.4%.

While the outcome of the midterm elections gave the market something to worry about, unfortunately, Friday's strong labor report keeps a December rate hike in the conversation. That isn't what a market leaning on lower rates wanted to hear.

Nonetheless, chip stocks bounced on Friday, but the market, however, managed only a 0.3% gain and faded from 7,444 to close near the session low.

Beneath the brutal headlines, the actual selling was narrower than it felt. The equal-weight S&P 500 (RSP) beat the cap-weighted index by 1.7 percentage points. Five of eleven sectors finished higher, led by Communication Services at 4.9%. Energy was the worst performer, down 12%, as WTI crude fell 13% to $90.50 and Brent slid back below $100. Gold gained 4.5% to $4,076, and the 10-year Treasury yield eased to 4.86% from 4.93%. The VIX jumped from 19.4 to 28.2 on Thursday before settling at 25.6.

The thread to follow into next week is whether Thursday was a "liquidation event" or the start of a trend. Liquidations tend to exhaust themselves quickly, usually within a few sessions once the forced sellers are finished, the margin calls stop and the leverage that built up during the rally has been cleared out of the system. Trends don't. Tuesday's CPI report will tell us which way rates lean while the market sorts it out.

📈Technical Backdrop -  MACD Turns Up Just Below The Record

Thursday did real technical damage. The S&P 500 closed Friday at 7,376.86, below its 20-day (7,658), 50-day (7,679) and 100-day (7,619) moving averages. It's holding just 0.7% above the 200-day average at 7,325. The 14-day RSI sits at 35 after touching 33.5 on Thursday, and MACD has rolled into a sell signal at −61 points against a signal line of −27.

Here's where the "buy the dip" crowd has some hope. Following the post-midterm election rally, Thursday's close pushed the market 3.1 standard deviations below the 20-day average. That is an extreme that rarely lasts. In Friday's commentary, we found 27 prior cases since 1950 when the index stretched this far below its 20-day average while holding above its 200-day average. One month later, the market was higher 23 times, with a median gain of 2.4%.

In other words, oversold readings with an intact 200-day average have historically produced a bounce rather than a crash.

The problem is that our own rules have already spoken. On Monday, we said a close below 7,490 meant tightening stops and raising cash. On Wednesday, in Oracle Sells Cheap Stock As Its Debt Window Narrows, we said that a decisive close below $169 in the technology ETF (XLK) would have prompted us to step aside from new tech buying. XLK closed Friday at $164.74, 3.2% below its own 200-day average. While both triggers fired, that doesn't mean we are selling everything. It means the growth tranches we laid out last week are on hold until the trend repairs.

Sector breadth explains why the index held up as well as it did. Seven of eleven sectors are trading well above their 50-day averages relative to the S&P 500, led by Health Care (10.6 points), Staples (9.9), and Discretionary (7.7). Technology sits 8.6 points below with an RSI of 29, and semiconductors are 18% under their 50-day.

As we discussed Thursday in The Election Aftermath: Let The Market Finish Voting, Health Care is more than 15% above its 200-day average, a stretch seen only twice since 2005. The defensive trade is now as crowded as tech was in October. That cuts both ways. Oversold tech is where any rebound has to come from, while stretched defensives are where the next round of selling may start.

Pay close attention to Friday's market action, as it is likely more important than you think. The index opened near 7,378, rallied to 7,444, and gave it all back into the close. Sellers are still leaning on every bounce. Use any rally toward the 7,620 to 7,680 cluster, where the 100-, 20-, and 50-day averages converge, to trim laggards, rebalance the defensive winners that have run too far, and rebuild cash.

So what does that mean for next week? Start by holding core positions at target weights, but don’t aggressively add more exposure yet. If the 200-day average holds and semiconductors reverse, the advice to add exposure in small tranches resumes. However, a decisive close below 7,316, July's swing low, opens the door to 7,200. That violation would shift our process toward the 2018 playbook of raising cash and hedging portfolios more aggressively.

Support levels for the market matter most next week, and the 200-day average at 7,325 is crucial. If the market can hold that key support, then this past week looks like a violent correction inside a bull market. Lose it, and the conversation changes from "how high" to "how much cash."

🔑 Key Catalysts Next Week

Next week, inflation will move the market, and, unfortunately, the timing couldn't be any more awkward. On Tuesday, the markets will get the October CPI report, with the consensus calling for a 0.3% monthly gain. The good news is that it is half of September's 0.6% jump, with the core reading expected at 0.2%. Friday's PPI follows, with consensus at 0.4% after September's 1.3% surge. After a 165,000 payroll print, a hot reading on either would push December hike odds higher just as growth stocks can least afford it.

The bond market has a heavy week too. Treasury sells 3-, 10-, and 30-year debt on Monday, Tuesday, and Thursday. The bond market closes Wednesday for Veterans Day, while stocks stay open. Thursday afternoon's budget statement will show how October's deficit is tracking, with consensus near $298 billion.

Fed speakers are everywhere. Vice Chair for Supervision Bowman speaks Monday, Tuesday and Friday, Chicago's Goolsbee speaks Monday and Thursday, Governor Waller and Dallas's Logan speak Tuesday, and Thursday brings Cleveland's Hammack, Governor Barr, San Francisco's Daly and New York's Williams. Williams carries the most weight on policy. Listen for how each one weighs Friday's jobs report against Tuesday's CPI.

Notably, earnings season is slowing considerably, although there are still some important reports, like Nvidia, to come. However, the names reporting next week go straight to this week's selloff. Constellation Energy reports Monday before the open. Its read on data center power contracts will be the first corporate response to the midterm election results from Texas.

Then, after a brutal selloff this past week, CoreWeave reports Tuesday after the close, a direct test of how the debt-funded "neocloud" model holds up under pressure. Thursday after the close brings Applied Materials, the best read on chip equipment demand, and Cisco, a check on enterprise AI networking spend. Applied Materials matters twice over, since it reports into a semiconductor group that our commentary this week already placed in a bear market.

In other words, there is still significant risk to the technology sector next week.

For now, Washington will fade into the background, but it won't be quiet. The lame-duck Congress returns to a December 11 funding deadline, and headlines around the Sanders and Ocasio-Cortez data center moratorium bill will keep hitting AI stocks even though it has no path past a veto. Texas can't act until its Legislature convenes on January 12, so any clarity there is still weeks away.

From a market perspective, the single most market-moving event is Tuesday's CPI. A soft print gives the oversold bounce room to run toward the 50-day average. A hot one is the asymmetric risk, because layered on a strong jobs report and a fragile tech tape, it would challenge the 200-day average just as the market is testing it.

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💰 Midterm Election Goes Blue: What Happens With Markets Now?

On Tuesday night, the "blue wave" turned into something closer to a midterm election tsunami. Democrats took the House and flipped seven Senate seats, including Texas, for what Forbes tallied as a 54-seat majority. Futures dropped overnight. AI data center names took the worst of it, and then buyers showed up before the open. As we noted earlier this week in Liquidity Weighed On Gold Trumping Real Yields, the year after midterm elections has been positive for the stock market in all 19 cycles since 1950. The question is whether this result breaks that pattern. I don't think it does, but the reasons matter more than the base rate.

What A Democratic Congress Can Actually Do To The AI Trade

Okay, with that recap, let's start with the fear, because it's real. Democrats ran on electricity bills, and the data center was the villain. Bernie Sanders has called for a moratorium on new construction. Elizabeth Warren opened an investigation into hyperscaler power deals, and a voluntary ratepayer bill already cleared the House in September. Before the vote, Wells Fargo's Ohsung Kwon warned that a Democratic win in the Texas governor's race, the heart of the data center buildout, was the left-tail risk for the AI trade. Texas got that outcome.

The bigger threat sits outside Washington. Republicans lost the governor's mansions in Texas, Georgia, Ohio, Michigan, and Nevada. Goldman Sachs estimates that the states likely to tighten data center rules hold roughly 45% of planned U.S. capacity, with Texas alone accounting for about a quarter. Virginia, home of "Data Center Alley," already has moratorium bills moving ahead of its January 13 session. Permits, zoning, and utility rules are set at the state level.

This is where the risk to the capex story could actually slow. It's also why the selling hit the levered "neoclouds" while Alphabet, Apple, Microsoft and Amazon all traded higher during Wednesday's trading session.

However, Texas is also less of a shock than the headlines suggest. In August, Governor Abbott ordered an audit of every data center in the grid queue and, in September, halted the issuance of state environmental permits. What changed Tuesday is the exit door. Governor-elect Gina Hinojosa says the pause will remain in effect until the Legislature acts, and Democrat Vikki Goodwin's upset of Dan Patrick for lieutenant governor puts a pause supporter in charge of the Texas Senate's agenda.

In Texas, the legislative session runs from January 12 through May 31, 2027. Of course, with everyone now watching what happens in Texas next, the market will take its cues from its decisions. However, for investors, the most realistic risk is a delay in data center projects, not cancellations.

Most crucially, when looking at earnings for data center players, projects that already have power, permits, and steel keep building. However, it is the projects without them that are either delayed by a year or move to friendlier states like Louisiana. Jefferies summed it up as demand moving right, not away. To wit:

"The question will be how much does this alter fundamentals." Amit Daryanani, Evercore ISI

Gridlock Has A Better Record Than Either Party

During every election cycle, there is invariably some media outlet running a narrative that markets do better under one party than the other. The problem is that the data doesn't support it. I sorted the 19 midterm elections since 1950 by the government each one produced, from unified control to a split Congress, and then measured where the S&P 500 stood twelve months after the vote. The setup we now have, a Republican President facing a Democratic Congress, averaged 15.5% across seven cases. The full set of 19 averaged 15.1%. Every configuration was positive on average, and not one of the 19 cycles finished the following year lower.

Such is the real lesson. The midterm election cycle does the work, not the party that wins it. Throughout the history of all four-year presidential cycles, midterm election years tend to see the deepest drawdowns. Such is why, by Election Day, much of the "uncertainty" is already priced in. Once the votes are counted, that discount unwinds regardless of the map's color. Investors don't need a friendly Washington. They need a predictable one, and gridlock is about as predictable as Washington gets.

Seven Times Before, And The One That Stung

Here are the seven midterm elections that handed a Republican President a Democratic Congress, measured from the Election Day close. The averages look terrific, with the index up 10.7% after three months, 17.5% after six, 20.1% after nine, and 15.5% after a full year, which is better than the 19-cycle average at every horizon. All seven were higher at every checkpoint.

However, it is important to understand that “averages” hide the path, and the path is what investors actually live through. A good example occurred in 1986 when Democrats retook the Senate under Reagan. Over the next 9 months, the market gained 28.4%. Then October 1987 arrived, a 33% drawdown hit within the year, and the twelve-month gain shrank to 1.1%.

More recently, the closest analog to 2026 is 2006, when Democrats flipped both chambers under a second-term republican president, George Bush. Over the next 12 months, the market gained 6.7%, but the bull market peaked eleven months after the vote. Seven observations are a small sample, so treat this as a tilt in the odds rather than a promise.

Impeachment And Shutdowns Make Noise, Rarely Bear Markets

Unfortunately, the one thing that the markets will likely have to deal with is the resurgence of impeachment actions against the President. The incoming class includes a louder populist and, in a few cases, openly "socialist" wing; the relationship with the White House starts out hostile, and Hakeem Jeffries has said Democrats haven't ruled impeachment in or out. A House majority can impeach. Removal takes 67 Senate votes, and Democrats hold 54. So while an "impeachment" may cause short-term market turmoil, a full removal is highly unlikely.

However, how would the market likely respond to an attempt at impeachment? Less than you'd think. The Clinton impeachment coincided with a 28% rally, and stocks gained 12% from the opening of the first Trump inquiry to the acquittal.

The most likely risk of the post-midterm election configuration is a government shutdown. While government shutdowns are used for political positioning and media attention, they have very little impact on the market itself. The S&P 500 rose during every lapse since 1995 except a four-day gap this January. That includes the 35-day closure in 2018-19 and last year's 43-day shutdown.

The exception is Nixon. Stocks fell 26% from the opening of the House inquiry in October 1973 to his resignation the following August. That stretch also brought the Arab oil embargo, double-digit inflation, and a recession. Washington didn't cause that bear market. The economy did, and political chaos rode along.

The nearer test is December 11, when the stopgap funding bill expires, one day after ERCOT files its Texas data center audit. A defeated majority has to pass something in the lame duck, and a short lapse is plausible. Such is the nature of a Congress with nothing left to lose. I'd expect noise rather than anything that ends the bull market.

The Bond Market Is Betting On Slower Growth, Not Bigger Deficits

Someone will tell you that a Democratic Congress means a spending spree and a "bond vigilante" revolt. The bond market disagreed on Wednesday. By midday, the 10-year Treasury yield had slipped about five basis points to roughly 4.90%, and the 2-year and 30-year followed it lower. That isn't what a market bracing for a deficit blowout looks like.

Start with spending. Democrats would like to spend more, and Pimco's Libby Cantrill expects deficits to widen no matter who controls Congress. However, the same veto math that protects the data center buildout also blocks any large new spending program. The likely path is two years of stopgaps, standoffs and a debt ceiling fight that Reuters reports probably won't bite until late 2027. Gridlock won't shrink the deficit. It does keep it from accelerating.

For the market, growth matters more. Currently, ING estimates that AI-related investment accounts for roughly 33% of U.S. economic growth this year. Wells Fargo figures that for every 10% cut to Texas data center projects, it will trim total AI capex by about 1.6%. Therefore, if state permitting freezes, or federal scrutiny slows the data center buildout, the economy loses its biggest engine.

For the bond market, slower growth means lower yields. I've long argued that debt and deficits are ultimately disinflationary, because unproductive borrowing erodes growth over time. This sets up a trap that Democrats are potentially walking into. Since political parties can’t, and have no desire, to cut the deficit, any actions that slow the capex cycle will increase the economic drag that is already present. Such an outcome could be perilous heading into the 2028 Presidential election.

However, history agrees that midterm elections don't set interest rates. Over the last 16 midterm elections since FRED's daily 10-year data begins in 1962, the yield rose over the following year nine times and fell seven times, for an average change of just 4 basis points.

Most notably, given the current Congressional makeup, interest rates under a Republican President facing a Democratic Congress fell in three out of five cases. As we have repeatedly stated, it is economic growth, inflation, and the Fed that drive yields. Congress mostly supplies the noise.

There is one place that you should watch more closely, and that is the long end of the yield curve. The 30-year sits near 5.3%, and a shutdown standoff or debt ceiling brinkmanship can add term premium in a hurry, even when the growth outlook argues for lower rates. I would treat a fiscal-driven spike in long yields as an opportunity to add duration rather than a reason to run from bonds.

What Should Investors Do Now

The midterm playbook argues for staying invested through the November-to-April window. Since 1950, that six-month stretch has gained in all 19 midterm years, averaging 14.8% according to Carson Investment Research, and it has never once required a friendly Congress to get there. I reconstructed those figures from daily S&P 500 closing prices.

Every year ties out. History tilts the odds, but it does NOT manage your risk. As we discussed in Oracle Sells Cheap Stock As Its Debt Window Narrows, the weakest links in the AI chain are the companies funding the buildout with borrowed money. A state permitting freeze hits them first, and a hearing room doesn't help. Even the workaround is stuck, since the Texas permit halt also reaches the on-site power plants developers were using to skip the grid queue.

That brings us back to last week's newsletter. On October 5, we tilted the equity model toward value, trimming Apple, Nvidia, AMD, and Palantir, and adding Walmart, Costco, JPMorgan, Goldman Sachs, Kinder Morgan, and RTX. By last Friday, growth had lost 11.9% against value since October 7. Three of the five conditions on our turn checklist were met.

The plan was a first tranche back into growth on weakness, a second only after the S&P 500 reclaims its 50-day average near 7,697, and a stop on every new position. This week, the Factor Rotation model used overbought readings in value to rebalance toward oversold growth. We added to Amazon, Alphabet, Microsoft, Nvidia, and the rest of our growth positions, and took profits in those previous value-oriented trades.

The election-night selling in tech is exactly the weakness that first tranche was built to buy. Our October exits from Applied Digital and Vertiv kept us away from the builders most exposed to a state permitting freeze, and our exits from KMI and Williams protected us from the drop in oil. Such is why we prepared the rotation before the vote rather than reacting to it.

The calendar is on the bulls' side, and gridlock has historically been good company for stocks. Politics will make the headlines. Leverage will make the losses.

🖊️ From Lance’s Desk

This week's #MacroView blog explores the PPI vs. CPI gap, the widest since 2022, and history suggests record profit margins are in the crosshairs.

Also Posted This Week:

• Credit Spreads: Calm On The Surface, Concern At The Bottom- by Michael Lebowitz
• Above-Average Returns: Why The Next Decade Differs- by Lance Roberts

📹 Watch & Listen

Stocks surged following the midterm elections, but can the post-election rally finally break the market out of its prolonged trading range?

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📊 The Weekly Market Dashboard

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

Last week I stated: "With Energy and Healthcare are the most overbought along with Real Estate, Utilities, and Materials. Take profits and look for a potential reversal in Technology and Communications." While Technology did not reverse, and has become even more deeply oversold, Energy reversed even more. Bonds performed well and are the most overbought, which increase the risk of a reversal in the more growth focused sectors.

📐 Technical Composite: 30.67 - Sell-Off Reduces Overbought Conditions

The technical condition plunged last week dropping from 53.53 to 30.67 as the technology sector unwind intensified. Notably, However, the reduction reversed the previous overbought condition back to more extremely oversold. Rallies from these levels, are not uncommon, but there is risk of further contraction. Rebalance risk and remain tactically cautious until conditions improve.

🤑 Fear/Greed Index: 54.89 – Holding At Neutral

Even though the market sold off sharply on Thursday, the underlying market allocation and sentiment remain more neutral. There was an increase in the Commitment of Traders equity allocations; however, investor sentiment turned more bearish last week. With the market getting decently oversold short-term, a reflexive bounce is possible.

🔁 Relative Sector Performance

Five weeks ago we warned that the more extreme divergence growth from value in the market was due for an eventual rotation. That rotation came swiftly those value oriented sectors are more overbought and growth is very oversold. As shown below, the Healthcare, Staples, Financial and Real Esate have become more overbought, while the Technology is the most oversold. Historically, these more extreme deviations, as noted last week, have been a precursor to a rotation, while that didn't happen this past week, doesn't mean it won't.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of November 6, 2026, with the S&P 500 at 7,376.86, the Money Flow Breadth Ratio (MFBR) stands at 45%, down from a peak of 80% set 12 weeks ago and falling versus 50% the prior week. The trailing four-week change is -15 percentage points, and the near-term trend has rolled over. This places the indicator in neutral territory (40-50%). The raw zone signal reads NEUTRAL, but the model still flags a TOP REVERSAL, with 35 points now off the 80% peak. This is the lower half of the neutral band, and the path matters: the gauge is still sliding out of overbought, not bouncing off a low, and the 40% sell line is now just 5 points away.

Bottom line: hold target weights for now, but treat it as a weight already on the books, not a fresh buy. The roll-over off the 80% peak has now taken the gauge 35 points lower, into the lower half of the neutral band, where falling readings have averaged just +1.3% over 26 weeks. The 8-week hold keeps the target locked for 5 more weeks; unconstrained, the grid already reads 58%. A break below 40% would move the grid into the sell zone (25% if still falling); a turn back up would lift the grid to 75%, though the backtest flags rising readings in this band as a trap."

📊 Sector Model & Risk Ranges

We noted three weeks ago that "Energy and Technology are now extremely deviated above their long-term weekly means. Historically, such deviations lead to corrections or consolidations, so profit-taking and rebalancing are recommended." While the rotation to Technology hasn't materialized yet, the advice to take profits in Energy helped shield the market from this past week's decline. Bonds also rallied as the rotation to safety accelerated. Energy remains extremely elevated above long-term means, and Healthcare has now joined that club. Continue to rebalance risk, as we still expect the rotation to Technology, in particular, to occur.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Midterm Election Goes Blue: What Happens With Markets Now? appeared first on RIA.

The PPI vs CPI gap is the widest since 2022, and history says record profit margins are in the crosshairs.

The most important number in October's inflation reports wasn't the one that made the headlines. Everyone watched the Consumer Price Index print 3.7%. Far fewer noticed the Producer Price Index for final demand. It jumped 1.3% in a single month, the largest gain since March 2022, and the annual rate hit 6.3%.¹ When you put PPI vs CPI side by side, the gap tells you who is paying for inflation. Right now, that's corporate America, and it's paying from the highest profit margins ever recorded.

PPI vs CPI: What The Gap Actually Measures

Most investors treat the two reports as interchangeable "inflation" readings. They aren't. The CPI measures what households pay at the register. The PPI measures what businesses receive for their output, and its intermediate stages measure what they pay for inputs. In other words, the PPI is the cost side of the income statement. For any company selling to consumers, the CPI is the revenue side.

That distinction matters because margins live in the space between them. When producer prices rise faster than consumer prices, someone in the chain is absorbing the difference. Sometimes it's a wholesaler. Often it's the company at the end of the line, the one selling to a household that just watched its gasoline bill jump and its real paycheck shrink, that can't push the higher price through without losing the sale. A widening PPI vs CPI gap is a margin signal first and an inflation signal second.

Notice in the chart above that the two lines tracked each other closely for most of the last decade. The exceptions are the episodes worth studying. In 2015 and 2016, producer prices fell faster than consumer prices as oil collapsed, which handed companies a margin tailwind. The 2021 and 2022 surge did the opposite. Today's gap is smaller than 2022's. But it's opening from a far higher starting point for profitability, and that changes the math.

The Price Pipeline Is Loaded

The final demand number understates the problem. The PPI is built in stages, and the earlier stages show what is still working its way toward finished goods. To wit:

"In September, prices for processed goods for intermediate demand rose 14.1 percent... the index for unprocessed goods for intermediate demand rose 21.5 percent."- U.S. Bureau of Labor Statistics, Producer Price Index release, October 15, 2026

Read that chart from top to bottom and the story writes itself. Raw inputs are up more than 20%. By the time those costs travel through refiners, manufacturers, freight carriers and retailers and finally reach the checkout counter, consumer prices are up less than 4%, which means a great deal of cost is being swallowed somewhere between the top bar and the bottom bars. Energy did most of the damage in September. Final demand energy prices jumped 10.8% in one month, and gasoline station sales rose 6.4%.^1,3

Such is the nature of an energy shock, and why calling it "transitory" misses the point. It hits every producer at once, through fuel, freight, chemicals and packaging, long before it shows up on a store shelf. I've written about this dynamic before in our analysis of why the May inflation headline was an oil story. The difference now is that costs are moving down the pipeline faster than consumer demand can absorb them.

Why Wall Street Isn't Worried About Profit Margins

Here's where it gets interesting. Despite cost pressures, analysts are about as optimistic about earnings as they've ever been. With 60% of S&P 500 companies reporting, FactSet shows blended third-quarter earnings growth of 30.2%. Analysts expect 28.4% for the fourth quarter and 32.9% for calendar 2026. Watch this, though: the aggregate earnings surprise is just 1.9%, the smallest since late 2022.⁵ 

FactSet now puts the second-quarter net profit margin at a record 17.0%, and the blended third-quarter margin at 14.9%, the second-highest since it began tracking in 2009. Analysts expect margins to climb back to 15.2% in the fourth quarter and higher still into 2027.⁶

The macro data confirms just how stretched profitability already is. After-tax corporate profits reached 13.1% of GDP in the second quarter. That's a record going back to 1947, and well above the 7.4% long-run average.⁴

From a contrarian view, Wall Street is wildly optimistic about the future. Historically, when the consensus is for pricing margins to hold at record levels while input costs run at double-digit rates, something tends to happen. While it's not impossible that the optimism is correct, it just requires companies to pass those costs on to consumers whose paychecks are shrinking in real terms, and that is a much bigger assumption than the "30% earnings growth" headline implies.

What Does The PPI vs CPI Gap Tell Us About Profit Margins?

The September gap isn't a one-off, so I went back to the long-run data. The PPI for all commodities runs back to 1947. Using it, I measured how far producer inflation outran consumer inflation each quarter. Then I tracked what happened to the corporate profit share of GDP.^7,9

The results aren't a perfect signal, and I don't want to oversell them. The correlation between the gap and the next year's change in profit share is negative but modest. However, the large episodes tell a clearer story, shown in the table below.

Four of the six prior episodes saw the profit share fall by a point or more within two years. The two that escaped, 2004 to 2006 and 2010 to 2011, share a common thread. Consumers had money to spend. In the mid-2000s, it came from mortgage equity withdrawal, and after 2009 it came from recovering employment and the Fed's balance sheet. Both times, companies could pass costs through because demand was funded, whether by a home equity ATM or by a central bank buying bonds, and customers kept paying the higher prices without much complaint. The PPI vs CPI gap doesn't kill margins on its own. It kills margins when the consumer can't pay the higher price.

Where The Bulls Are Right

The other side of this debate has real merit, and I'll lay it out plainly. Retail sales rose 0.8% in September and are up 6.3% from a year ago.³ Companies are beating earnings estimates at an 82% clip.⁵ And the AI capex boom is generating real demand for chips, power and construction. That supports pricing power in exactly the sectors driving index earnings.

"But Lance, companies passed costs through just fine in 2021. Why would this time be different?"

Because the consumer of 2021 was sitting on stimulus checks, enhanced unemployment benefits and a pile of excess savings built up during lockdowns, while the consumer of 2026 has none of that cushion to draw on. Real average hourly earnings fell 0.7% over the past year.² I covered what that means for consumer-facing companies in Real Wages 2026: Why Consumer Stocks Feel It First.

Strip gasoline out of September's retail sales and spending rose just 0.2%. Higher fuel prices did most of the lifting.³ Such is the difference between "good" and "bad" inflation, which I laid out in detail in Bad Inflation Cures Itself. Good Inflation Doesn't. Good inflation comes with rising incomes that fund higher prices. Bad inflation arrives via a supply shock with no paycheck to back it, so it eventually destroys the demand it depends on. That's the setup the pipeline chart describes. It's why I'm reasonably confident the margin consensus is too high for 2027, even if the next quarter or two looks fine.

"Costs are running at double-digit rates up the pipeline and consumer paychecks are shrinking in real terms. Someone has to eat the difference, and the earnings estimates assume it won't be shareholders."

A question that keeps landing in my inbox puts the bull case another way: if margins are at a record, doesn't that prove companies have "pricing power"? It proves they HAD it. Margins are a lagging measure.FactSet's S&P 500 margin has already slipped from a record 17.0% in the second quarter to 14.9% in the third, although one-time valuation gains at Alphabet and Amazon inflated that Q2 record. Second-quarter profits were booked before September's 10.8% jump in energy producer prices. Third-quarter profit data won't arrive for weeks.

What PPI vs CPI Means For Your Portfolio

None of this argues for a dramatic move. It argues for paying attention to the part of the earnings story the market is taking for granted. With the 10-year Treasury yield near 4.9%, investors also have a real alternative to paying full price for peak margins. I made that case recently in Bonds At 5%: Is The 10-Year Treasury Finally A Buy? ⁸

Here's what I'd be watching through the rest of earnings season and into the Fed's December 9th meeting. The Fed held rates steady on October 28, but two officials, Lisa Cook and Beth Hammack, dissented in favor of a hike. Margin guidance matters more than earnings beats. A "beat" against lowered estimates is easy. Instead, listen for companies citing input costs, freight, and energy when they guide the fourth quarter.

Estimate revisions come next. If that 28.4% fourth-quarter growth estimate keeps slipping (it was 28.6% two weeks ago) in the weeks after companies report, the market is beginning to price the squeeze, and that tends to happen well before the profit data itself confirms anything.

Then look at where your own holdings sit in the pipeline. Businesses that buy commodities and sell to stretched consumers are on the wrong side of this gap. Those with contractual pricing or inelastic demand sit on the better side. Finally, consider what you're paying. At 19x forward earnings, the market is valuing record margins as if they were permanent.⁵

As we noted in Corporate Profits: A Reading Without Rose-Tinted Glasses, profits have a long history of reverting toward the economy's ability to fund them. The trade-off is that leaning defensive too early has a cost if margins hold for another year. However, rebalancing to your target allocation after a strong run is a simple form of risk management. It costs very little if I'm wrong.

Costs can climb for a long time before margins crack. The crack comes when the customer stops paying, and the paycheck data says that customer is already tapped out.

The post PPI vs CPI: Are Record Profit Margins About To Get Squeezed appeared first on RIA.

Oracle has repurchased roughly $96 billion of stock since 2019. That tide is turning. As we wrote in Oracle Sells Cheap Stock, they are now sellers, issuing $10 billion in equity, on top of $19.9 billion already issued between February and August. The recent switch from buyer to seller lets us once again highlight the problem with the decade-long spate of record share buybacks. The right way to judge whether a company is efficiently buying back shares and/or issuing them is not by price, but by the valuation at which they occurred. To wit, in 2011 Warren Buffett said:

Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.

Let's dig into Oracle's recent history of share repurchases and issuances. Per the chart below, Oracle bought about $92 billion in stock between 2019 and 2022. Weighted by dollars, Oracle retired those shares at roughly 21 times trailing earnings. Buybacks collapsed from 2023 through 2025 because of its $28 billion purchase of Cerner and the associated debt issuance.

Today, Oracle trades at 18.7 times trailing earnings, a one-year low, and roughly 15 times forward earnings compared to a five-year average near 21. Simply put, the shares are relatively cheap, so one would think it's a good time to resume buybacks. Instead, the company is issuing equity at about 13% below the multiple at which it bought it, and nearly 30% below its own recent norm on forward earnings.

Oracle bought high-quality earnings at 21 times and is selling the same earnings stream back at 15 to 19 times. If it had saved the money for future investment instead of buying back shares, its credit rating would not be on the verge of a downgrade to junk, and it would not rely so heavily on dilutive equity issuance to fund its AI-related investments.  Poor judgment designed to bolster the stock price a few years ago leaves the company in a precarious position today.

Market Trading Update: Special Update

Yesterday, we laid out the year-end tailwinds and drew a line in the sand. A close below the Nov 2 low near 7,530 meant the tailwinds had stalled and we would temporarily stop adding exposure. Thursday, the market crossed that line before lunch and never looked back. The S&P 500 fell 4.4% to close at 7,354, the low of the day. The Nasdaq 100 dropped 6.5%, and the semiconductor ETF (SMH) lost 11%. Memory names took the worst of it, with Micron and AMD each down roughly 17%. Nvidia lost 9%. By the close, there was no place to hide, as even Staples and Utilities finished red. Since 1950, the S&P 500 has posted a daily loss that large only 44 times.

So what happened? The trigger was political. Reuters attributed the selling to the Democrats’ sweeping midterm win, which fueled fears of tougher congressional scrutiny of the data-center buildout. That fear has a paper trail. The Sanders/Ocasio-Cortez AI Data Center Moratorium Act would pause construction of new data centers until Congress passes AI regulation. Weak results from Qualcomm and Arm added fuel, and the selling spread to GE Vernova and Constellation Energy.

However, a moratorium bill and a moratorium law are two very different things. Even a Democratic Congress needs a presidential signature, and plenty of Democrats oppose a halt to competition with China. The likely outcome is hearings and headlines, NOT a halt in hyperscaler spending. Earnings for 2027 did not change on Thursday. The multiple investors were willing to pay for them did.

Is a hedge fund blowing up? While there is no evidence of a single fund failure, we often don’t know these things until a few days after the fact. A good example was Leopold Aschenbrenner’s Situational Awareness, the AI-focused hedge fund run by the former OpenAI researcher. At its peak, the fund was about $45 billion. In late July, it was forced to unwind all its publicly held stock positions after steep losses, and the Wall Street Journal reported that Citadel had bought the portfolio. However, we didn’t know that for about two days after the fund collapsed by 67%.

What we can see today are the mechanics of a forced unwind. Goldman’s prime book showed both fundamental and systematic funds lost over 3% in October, a first since 2016. Funds sold existing longs four times faster than they added shorts, which is “de-risking,” not bearish conviction. The problem is that gross leverage remains near 310%, close to a five-year high. When crowded, leveraged positions fall together, risk managers force more selling regardless of fundamentals. Such is the nature of a crowded trade.

Has This Happened After A Midterm Before?

The short answer is no. We went back through every midterm election since 1950. The S&P 500 rallied 1.6% on Wednesday, then fell 4.4% on Thursday. That sequence has never occurred in the two days following a midterm. The worst second-day decline in the prior 19 midterms was a 2.3% drop in 2002. In most years, the two days after a midterm were simply quiet. The only election that comes close is 2008, when the S&P 500 rallied 4.1% on Election Day and then fell about 5% on each of the next two days. That was the middle of a financial crisis, so it is hardly a useful template.

History does offer one caution. The post-election rally after the 2018 midterms failed within days, and the S&P 500 fell 16% into Christmas. Across the prior 19 midterms, the market finished the year higher from the second day after the election only 11 times. Seasonality is a tailwind, not a guarantee.

Deeply Oversold Changes The Math

Notice where the market sits in the chart below. The S&P 500 closed more than 3 standard deviations below its 20-day average, with RSI at 34. It is down roughly 6% from its October peak and sits just above its 200-day average near 7,320. The Nasdaq 100 is now down about 15% from its October peak, a correction by definition. Semiconductors are down 33% from their June high, which is a bear market.

That kind of stretch rarely lasts. Since 1950, the S&P 500 has closed 3 standard deviations below its 20-day average while still above its 200-day average 27 times. One month later, the index was higher in 23 of those cases, with a median gain of 2.4%. Three months later, it was 22 times higher, with a median gain of 6.2%. When the long-term trend holds, extreme oversold readings have historically been buying opportunities rather than the start of something worse. One of the exceptions was October 2018, and the difference came down to whether the 200-day average held.

So, is this a buying opportunity? A skeptic would argue we just told you not to fight the tailwinds. Fair enough. We said the trend was supportive until 7,530 broke, and it broke. Our rules said to stop adding exposure, and we are following them. That does not mean we sell everything, but it also doesn’t mean that opportunities to buy strong companies at a discount aren’t becoming available.

Bob Farrell’s Rule #9 reminds us that when everyone agrees, something else tends to happen. Two weeks ago, everyone agreed AI was the trade. Today, everyone agrees it’s broken. Neither extreme tends to be right.

Our plan is simple. The test of the 200-day average is here, and now it has to hold. A reflexive bounce toward the 20-day average near 7,680 is likely in the days ahead, and we will use that rally to rebalance risk rather than chase it. If the market then retests and holds the 200-day average, with semiconductors reversing, we will start adding to our growth exposure in measured tranches. A sustained break below 7,320 shifts the playbook toward something closer to 2018. Until then, patience is a position.

“Corrections always look like opportunities in hindsight. In real time, they just look like losses.”

Hiking Into Disinflation

Last week, in our article Warsh Is Promising Something The Fed Can’t Control, we made a simple point:

The Fed controls the overnight interest rate. It does not control the Strait of Hormuz,” and “it does not decide whether a handful of companies spend $600 billion next year or $400 billion.

We wanted to show how the Fed risks a policy error by hiking rates to dampen the recent spurt in inflation. Importantly, we noted that inflation drivers- oil and AI capex-related inflation- are largely beyond the Fed's control. The inflation outlook just changed, and it's not because of the Fed's hawkish policy, raising the question of whether a December rate hike is appropriate.

On October 30th, crude oil peaked at $104. Today it sits below $90, its lowest level since August 31. This sharp decline stemmed from rumors of a pending agreement, President Trump pulling back from promises to attack Iran, and investors betting the Democrat-led Congress pushes toward ending the Iran war.

The second inflationary force that gets less attention is the AI buildout. J.P. Morgan estimates DRAM prices will rise more than 400% between early 2024 and the end of this year. The CPI for software and accessories is up 23% since the end of 2024, and import prices for computers and parts are up 37%. Their economists put the lift to core inflation at 0.2 to 0.4 percentage points.

With the potential for peace in the Middle East and political pressure to slow down capex spending, the December Fed math improved. However, the graphic below, courtesy of the CME, shows that despite the election and lower oil prices, the market remains steadfast that the Fed will hike rates.

The question worth considering, as we have opined plenty on, is whether the Fed is making a mistake by raising rates to combat inflation it can't control.

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Markets traded roughly 2% lower late Tuesday night, led lower by the Nasdaq, as results pointed to the Democrats taking Congress. The next morning, markets reversed course, with the S&P 500 opening about 1% higher. That is a three-point round trip in twelve hours, on identical information.

This short missive focuses on patience, but first let's see the markets' initial gut reaction to the results. As we share below, the value rotation reasserted itself, with banks, healthcare, and staples leading the way. The Magnificent 7 stocks were higher, except for Nvidia and Tesla. The losses were concentrated and specific. The data center power complex took the biggest hit, with Vertiv down 6.8%, GE Vernova down 6.3%, Quanta down 5.5%, and Eaton down 4.7%. Oracle fell 4.3% and Palantir 4.0%. Defense stocks also declined, with Lockheed off 4.1% and RTX off 3.2%. Semiconductors were weaker, with Nvidia, Broadcom, Intel, and Micron trading lower.

Those initial moves are guesses about which policies will emerge from the new Congress and, equally important, how Trump will work with the Democrats. Investors must have patience because market guesses often prove wrong. Remember when S&P 500 futures fell over 5% on the night Trump won his first term only to finish the following day green? Initial reaction trades are much more about positioning, forced covering, and reflex than political analysis. Nobody is pricing in a utility’s regulatory outlook or change in healthcare at two in the morning. The quote below from Trump's 2016 victory sums up why patience matters.

Now, looking at it just a few hours later, that was all wrong — 100 percent wrong. - Nick Colas

The market votes slowly. It needs committee assignments, a legislative calendar, and the time between what gets proposed and what gets passed. That takes weeks and months. The useful question is not what moved last night or in the coming days but which of those moves is still there in a month.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, in Oracle Sells Cheap Stock As Its Debt Window Narrows, we asked whether the midterm technology sell-off was a warning or a setup. We also said we'd add technology in tranches. Today, the follow-up question is where that money comes from. The answer may be the defensive sector rotation that has quietly become one of the most crowded trades in the market.

Notice what has happened in the chart below since the Nasdaq 100 peaked on October 6. Semiconductors fell 18%, and technology dropped 12.6%. Meanwhile, health care (XLV) gained 10.1%, and consumer staples (XLP) rose 8.7%. The S&P 500 slipped just 3.2%. That's NOT a market in a panic. It's investors rearranging the furniture.

Here's where it gets interesting. "Safety" stopped being cheap. XLV closed Tuesday at $184.02, which is 15.8% above its 200-day moving average near $158.95. It also sits 6.6% above its 50-day average near $172.60. The 14-day RSI is at 69 after pushing above 70 last week. Since 2005, XLV has closed 15% or more above its 200-day average in only two other stretches, late 2009 into early 2010 and the spring of 2013.

However, while history is a guide, it doesn't hand us a clean answer. Six months after the 2010 readings, XLV was 6% to 9% lower. After 2013, it was 5% to 12% higher. Stretched is not broken. However, a 10% gain in four weeks for a sector that usually moves at a crawl suggests positioning drove the buying more than earnings did. Bob Farrell's Rule #2 warns that an excess in one direction leads to an opposite excess in the other. The tech unwind was one excess. The rush into defensives looks like the other.

A skeptic might ask, "Isn't health care exactly where you want to be if the economy rolls over?" The answer is yes, and that's why we aren't selling it outright. But defensive doesn't mean riskless. Thursday morning brings Cigna, Cardinal Health, Becton Dickinson, and Zoetis before the open. A sector priced for safety tends to get punished hard for any disappointment.

Such is the problem with crowded trades. They feel safest right before the exit narrows.

JOLTS Report Signals Hope For The Labor Market

Tuesday’s JOLTS report was strong, with September job openings rising to 7.52 million versus expectations of 7.10 million. Quits climbed to 3.37 million, lifting the quits rate to 2.1% and above 2% for the first time since June 2025. The quits rates tend to rise when workers believe another job is available.

The increase in openings is a first step toward improving labor market health, but actual hires show intent. Hiring ran at a 3.4% rate in September, the slowest pace since 2013, and total separations have barely moved in two and a half years. Simply, employers are advertising more jobs without filling more of them. Roughly 104,000 of the openings came from state and local government outside education, which is not cyclical private demand.

So what does JOLTS portend for Friday's BLS employment report? We'll likely see another modest payroll number rather than a breakout. The JOLTS report was for September, and we know the BLS September report added just 29,000 jobs, and the three-month average is near 51,000.

It's worth adding that the JOLTS layoff rate has held steady at 1.0% within its range since mid-2024. The frozen labor market has produced small positive payroll prints so far, not negative ones.

Expect low hiring and low firing again on Friday, but the strong job openings may portend a better market in the months ahead.

Credit Spreads: Calm On The Surface, Concern At The Bottom

Taken together, the credit market is sending a nuanced message. On the surface, spreads are historically tight. Investment-grade companies are borrowing at spreads that are near the bottom of their 20-year ranges, and the high-yield index is near the middle of its long-term range. That suggests little fear of a broad-based recession or a meaningful tightening of financial conditions.

Beneath the surface, CCC spreads are flashing a warning. Their sharp widening tells us investors are making a sharp distinction between companies that can handle rising yields and those that cannot. The weakest borrowers tend to feel higher rates first because they rely most on refinancing. Encouragingly, the stress has not migrated to BB- and B-rated bonds. If CCC stress begins to move up the ratings ladder into B, BB, and eventually investment-grade BBB credits, it would be a far more meaningful signal for the economy and the stock market.

Learn about corporate credit spreads, why they are a great liquidity and economic gauge for stocks, and how to use our new SimpleVisor tool pack to stay on top of them.

READ MORE...

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Stock investors spend countless hours sifting through fundamental data, listening to earnings calls, charting prices, and tracking the economy, among other things. Yet one of the most revealing gauges of financial conditions and liquidity that underpins the stock market sits in a market most equity investors don’t follow. Even if you don't own a bond, corporate credit spreads deserve a spot on your equity dashboard.

Think of credit spreads as a real-time vote by some of the world's most sophisticated investors on the health of corporate America, the economy, and financial market liquidity.

In this article, we explain what credit spreads are and why they matter to stock investors. We also show what they are signaling today through a walk-through of SimpleVisor's new and improved Credit Spreads Analysis page. This tool puts the entire corporate credit spread curve, its history, and its relative value on one easy-to-use screen. 

What Is A Credit Spread?

A credit spread is the difference between the yield on a corporate bond or index of corporate bonds and the yield on a Treasury of similar maturity. Because Treasuries are considered free of default risk, the spread represents the compensation investors are paid for the risk that the company does not pay them back, along with liquidity and other risks.

The most widely followed market spread data comes from ICE BofA indices. These are option-adjusted spreads (OAS), which strip out the value of embedded options on callable bonds so that bonds with different structures can be compared fairly. Spreads are quoted in basis points (bps), where 100 bps equals one percentage point.

To track the broader markets, investors generally differentiate bonds by credit rating and often distinguish between investment grade and high yield, or junk. Investment grade bonds run from AAA down to BBB-. Anything rated BB+ or lower is high yield, or junk. As we move down the ratings ladder, default risk rises, and spreads widen.

Stock vs. Bond Analysis

Unlike stock investors, a bondholder's best-case scenario, assuming they plan on holding the bond to maturity, is a series of coupon payments and the return of principal. Thus, unlike a stockholder who focuses on potential upside and downside, most bond analysis focuses on downside risk. Accordingly, they ask whether a company can make good on coupons and ultimately return the principal. Equity investors, by contrast, often focus on growth, multiples, and how well a management team can execute the plan. That difference in mindset, with bond investors much more heavily focused on downside risks, makes credit spreads a valuable cross-check on the stock market and individual stocks.

What Spreads Can Tell Us

• Credit spreads have proven to be a great barometer of financial conditions and broad market liquidity.
• A corporate bond yield, made up of the spread over Treasury yields, represents companies' cost of borrowing. Wider spreads are therefore financially restrictive.  They raise the cost of capital, weighing on hiring, investment, buybacks, and debt refinancing.  Accordingly, spreads tend to widen ahead of and during recessions as investors anticipate rising defaults. They tend to tighten when the economic outlook is improving.

Spreads also reflect financial market liquidity. Corporate bonds trade far less often than stocks or Treasuries, and dealers have limited balance sheet capacity to absorb selling. Accordingly, when broad financial market liquidity dries up, spreads can widen rapidly even on high-quality bonds as forced sellers meet few buyers. Widening driven by liquidity rather than fundamentals often signals broader funding stress in the financial system, the kind that tends to draw a Fed response.

• Often, spreads move inversely with stock prices. When stocks rally, the economic outlook and earnings forecasts tend to be bullish, leaving corporate bond investors with less reason for concern. However, when spreads widen during what appears to be a period of good economic growth and rising prices, the divergence deserves attention.
• Junk bond spreads can be a good harbinger of broader market, financial, and economic risk. In 2007, bonds sent a warning four months before the stock market peaked. As shown below, credit spreads were tightening as stocks rose from 2005 to mid-2007. But starting in July of 2007, credit spreads on junk-rated B debt started rising. The stock market didn’t peak until October, when B-rated spreads were already at 2-year highs.

Is CCC The Canary In The Credit Mine?

As of October 28, 2026, the ICE BofA BBB-rated investment-grade OAS was 107 bps, and the BB-rated high-yield OAS was 184 bps. Both spreads had widened over the previous few months. However, while some fear-mongering has surfaced on social media, both BBB and BB spreads remain tight by historical standards, sitting in the 8th and 9th percentiles of their 20-year ranges, respectively.

BB and B junk-rated spread indexes don’t tell the whole story about high-yield debt. CCC-rated bonds, the riskiest tier of the market, have a spread of 1,307 bps. That is in the 99.5th percentile over the last five years, and the 88th percentile over 20 years. CCC spreads have risen by more than 500 bps since the start of September and touched 1,356 bps on October 23, their highest level in three years. In other words, the lowest-quality borrowers face mounting financing stress while conditions for the rest of the corporate bond market remain relatively easy.

To analyze spreads further, we walk through a few screenshots from our latest version of SimpleVisor.

Using SimpleVisor's Credit Spreads Page

SimpleVisor's Credit Spreads page pulls ICE BofA data from the Fed’s FRED data portal to help answer three questions: How wide are spreads? How do they compare to history? Where is the stress concentrated?

Step 1: Current Spreads & Historical Context

The first table lists the current spread for each rating tier along with its historical percentile over 3-month, 1-year, 5-year, and 20-year windows. A low percentile means spreads are tight and investors are earning little extra yield for taking credit risk. A high percentile means spreads are wide and the market is demanding more compensation. Red coloring indicates spreads are wide relative to history, and green signals that spreads are tight. Today, every tier from AAA through B sits between the 8th and 24th percentiles of its 20-year range. CCC, at the 88th percentile, is the clear outlier.

However, while spreads are tight historically, note the contrast between the orange and yellow windows. All rating tiers are above the 75th percentile over the last year. The takeaway: spreads have widened recently, but from very low levels.

Step 2: Graphing Spreads

Each row of the main table has a View button that loads the historical spread analysis for that rating directly below the table. Given its outsized move, we show CCC spreads. The short-term view shows a steep climb since the summer, well above the 3-year average of 900 bps. While that graph raises concerns, the long-term view shows today's level is above the 20-year average of 1,036 bps, but still far below 2008 crisis levels and moderately below the 2016 and 2020 peaks.

Step 3: Intra-credit Spreads

The two tables below the chart show the spread differences between each possible pair of ratings and how those changed over the past four weeks. This shows whether investors are differentiating between strong and weak borrowers.

For example, over the last four weeks, the gap between CCC and every other tier widened by 124 to 138 bps. Meanwhile, the gap between BB and investment grade tiers narrowed by 10 to 14 bps, and gaps within investment grade (AAA-BBB) barely moved. The stress seen in CCC-rated debt is not spreading up the ratings ladder.

Step 4: Comparing ETF Implied Credit Spreads

This section provides similar analysis but using implied investment grade and high yield spreads as derived from the two most popular corporate bond ETFs, LQD (investment grade) and HYG (high yield). Each spread is the ETF's effective yield less the 10-year Treasury yield. The investment-grade index yields 83 bps over the 10-year Treasury, and the high-yield index yields 297 bps over. Both are rated FAIR, meaning between the 20th and 80th percentiles of their 20-year history, but both are near the top of their 3-month and 1-year ranges.

Below are the current ETF implied spread and graphs plotting their spreads over the last three years. The April 2025 tariff shock stands out. The current increases are noticeable, but, like the charts on the AAA through BB indexes, they are not alarming.

Finally, the Quality Premium panel measures the difference between high-yield and investment-grade spreads. At 228 bps, it is close to its 225 bps historical average and in the 64th percentile of its 20-year history. A rising premium signals investors are becoming more selective, and credit conditions may be deteriorating.

What Is The Message?

Taken together, the credit market is sending a nuanced message. On the surface, spreads are historically tight. Investment-grade companies are borrowing at spreads that are near the bottom of their 20-year ranges, and the high-yield index is near the middle of its long-term range. That suggests little fear of a broad-based recession or a meaningful tightening of financial conditions.

Beneath the surface, CCC spreads are flashing a warning. Their sharp widening tells us investors are making a sharp distinction between companies that can handle rising yields and those that cannot. The weakest borrowers tend to feel higher rates first because they rely most on refinancing. Encouragingly, the stress has not migrated to BB- and B-rated bonds. If CCC stress begins to move up the ratings ladder into B, BB, and eventually investment-grade BBB credits, it would be a far more meaningful signal for the economy and the stock market.

We also caution that tight spreads cut both ways. They may reflect confidence, but they can also mean investors are complacent and willing to be paid relatively little to bear credit risk. As we have written before about valuations in other asset classes, low compensation for risk does not cause a sell-off, but it does leave little cushion if the outlook changes.

Summary

Credit spreads deserve a place on every investor's dashboard, whether or not you own corporate bonds. Today, they signal calm and bullish financial conditions, but with growing stress among the lowest-rated borrowers. If the widening we see in CCC bonds starts to show up in B, BB, and BBB spreads, it may be time to consider hedging or reducing your equity exposure.

The post Credit Spreads: Calm On The Surface, Concern At The Bottom appeared first on RIA.

On Monday, Oracle filed to sell $10 billion of common stock and $10 billion of debt. The stock fell roughly 8% after disclosing it would offer the new shares at an 11% discount to the current price.

Oracle’s free cash flow was negative $23.7 billion in fiscal 2026, so it must fund AI data center construction from outside the company. Its choice to fill the cash gap with debt and equity suggests its debt options are limited. Oracle's total debt, including leases, reached $169.1 billion in August, up from $84.5 billion in August 2021. S&P cut Oracle to BBB- in July, one notch above junk, and its debt, as shown below, trades at junk-bond levels. Borrowing the full $20 billion would have possibly resulted in a downgrade to junk status and higher yields.

Because of the rating implications and lofty yields, Oracle must issue shares. The equity issuance comes at roughly 15 times forward earnings versus a five-year average near 21, meaning it is selling stock while it is cheap. That is when companies should buy back shares, not issue them.

We wrote last month in Meta Splits: The Buyback Machine Shifts To Reverse that for a growing list of hyperscalers, existing revenues can no longer fully fund the AI buildout. We also noted in The Market’s Biggest Buyer Is Stepping Back that S&P 500 companies “have been the marginal buyer of US stocks for a decade,” contributing roughly 1.8% a year to S&P 500 returns due to shrinking share counts.

Key takeaway: negative free cash flow forces a company into the capital markets. High rates and a stretched balance sheet push it toward equity over debt. Together, those two conditions halt buybacks, turning some of the last decade's biggest buyers into sellers.

Please see the Tweet of the Day below for breaking news on how rising debt levels affect Meta's capital structure.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we looked at the market’s track record after midterm elections in Liquidity Weighed On Gold Trumping Real Yields. Today, the question is narrower. Is the midterm technology sell-off a warning, or a setup?

Let’s start with the damage. The Nasdaq Composite closed Monday at 25,164, down 8.8% from its October 6 record of 27,600. The Technology Select Sector SPDR (XLK) fared worse, falling 13.8% from $202.00 to $174.22. The worry is “regulation.” If control of Congress shifts, investors fear new rules on AI, antitrust, and chip exports. That fear may prove right. History suggests it rarely stays the market’s problem for long.

Notice in the chart below what happens around midterms. Since 1950, the S&P 500 has been higher six and twelve months after all 19 midterm elections. The Nasdaq, with data back to 1974, was higher six months later in all 13 cycles and twelve months later in 12 of 13.

Here’s the part that matters for technology. In seven of those 13 cycles, the Nasdaq fell during the three months before the vote, including drops of 14.8% in 1990 and 16.5% in 2022.

However, after those seven pre-election declines, the Nasdaq averaged a 23.8% gain over the next six months and 27.6% over the next year. That beat the cycles that came into Election Day strong. Such is the nature of an uncertainty discount. Investors price it in before the vote and unwind it after.

So, is this selloff unprecedented? It’s NOT even close. So far, it’s milder than 1990 or 2022.

Here is the current fear. “The AI trade is crowded, and the rules could change.” That is true, but it is not a certainty, and as Bob Farrell’s Rule #9 reminds us, "when everyone agrees, something else tends to happen."

Four weeks ago, XLK’s 14-day RSI was above 70. On Monday, it closed at 32, with the price below its lower 2-standard-deviation Bollinger Band. The fund sits 8% below its 50-day moving average near $189.50, yet still 2.7% above its rising 200-day average near $169.70.

As long as the 200-day holds, this is a correction inside an uptrend. A break below it, however, does change the math, and is critical to pay attention to.

So, what are we doing? In the Factor Rotation model, we used overbought conditions in value to rebalance toward oversold conditions in growth. We are also planning to add technology exposure in tranches on weakness rather than all at once. Position sizes stay at target weights. If XLK closes decisively below roughly $169, we step aside and wait for the trend to repair. If it holds, history says patience gets paid.

Seasonality and history tilt the odds. They don’t remove the risk. Buy the dip with a plan, or the dip will happily buy you.

Is The Tech Sell-off Worse Than The Dotcom Bust?

As we share below, Andreas Steno Larsen flagged a startling chart this week. It shows that Morgan Stanley’s US TMT momentum factor sits about 62% below its 12-month high, a deeper drawdown than the dot-com bust. He said this is happening “while the underlying earnings keep accelerating.”

A momentum factor is not an index of technology share prices. It is a long/short model that buys recent winners and sells recent losers. It profits when winners keep trending higher. So the 62% decline doesn't mean tech and other recent market-leading stocks fell 62%. It means the strategy of owning what had already worked and selling laggards stopped working.

That understanding helps explain the paradox in his comment about the momentum factor failing amid rising earnings. Roughly 80% of companies have beaten earnings expectations this quarter, with S&P 500 earnings growth tracking near 27%.

Morgan Stanley’s Nick Savone says the selling “stems more from the concentrated unwinding of crowded positions than from a turn in fundamentals.” Goldman has called it structural rather than fundamental. Goldman's distinction matters when comparing recent activity to the dotcom bust.

In 2000, the momentum longs were companies without earnings. The factor collapsed because the fundamentals underneath it failed. To wit, the promised revenue never arrived, and many of the stocks leading the momentum charge became worthless. Today, the momentum longs are among the most profitable companies. The momentum factor fell while fundamentals improved, the opposite configuration.

The factor fell 40% from its peak in 17 trading days, against a historical median pullback of 22% over 33 days. That timeframe suggests significant leverage and crowding unwinding is at fault, not a business model failing.

Note: Morgan Stanley does not publish the exact definition of this particular factor, so we described the general model rather than their specific rebalance rules, lookback window, or screening techniques.

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A reader asked: "You have said many times that gold has a strong negative correlation with real yields. If that is true, why did precious metals get hammered (last Friday) when yields were lower on the day?"

Our model shows that gold tends to trend opposite to real yields (the yield on TIPS) over long periods. One explanation is that gold pays no interest or dividend, so the real yield is the opportunity cost of owning it. When real yields rise, gold often struggles. When they fall, gold tends to do well. From 2003 through 2021, the correlation between the two was negative 0.84. Second, real yields indicate Fed policy. When they are high, as they are today, it signals that the Fed is running a restrictive policy to combat inflation. Conversely, when low or even negative, real yields signal policy that is too easy and inflationary. Many people buy gold to hedge against inflation; thus, Fed policy is crucial to that decision.

Gold rallied despite high real yields in 2024 and 2025 as central bank buying and geopolitics overwhelmed the traditional correlation. But as real rates kept climbing, the negative correlation reasserted itself.

All that said, Friday was an important lesson for gold investors. Friday was a liquidity story.

On Friday, the Nasdaq fell 2.86% on doubts about AI spending. Leveraged investors facing margin calls do not always sell what they want to sell. They sell what is most liquid. Gold is among the most liquid assets in the world and among the best collateral, so it often gets sold first. Bear in mind, last Friday was month-end, when liquidity is often compromised to some degree.

The takeaway: real yields explain Fed policy and thus heavily impact gold trends over years. Liquidity explains divergences from the trend. An asset you may consider insurance may also be somebody else's margin call.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we walked through the technical damage after the S&P 500 closed Friday at 7,580, its first close below the 100-day moving average since April. Today, with voters heading to the polls, let's look at what happens after midterm elections, starting with the calendar.

November has been the best month of the year, on average, since 1950. Notice in the chart below that the average gain runs close to 2% since 1950, just over 2% for the past 20 years, and above 4% over the past decade. In midterm years, November has averaged near 2.7%.

The reason isn't magic. Midterm years are historically the weakest of the four-year presidential cycle, with an average peak-to-trough drawdown of roughly 18%. Once the vote clears, that uncertainty discount tends to unwind. To wit: since 1874, the S&P 500 has averaged a 6% gain in the three months after a midterm and 14% over the following year. It was higher 84% of the time. Since 1950, the year after a midterm election has been positive in all 19 cycles.

Which party wins matters less than whether anyone wins outright. BofA's data, dating back to 1936, show the best average annual returns occurred under divided government. The current setup, a Republican president with a Republican Congress, has averaged 12%. A Republican president facing a split Congress averaged 15%. Markets like "gridlock" because it limits policy surprises.

This year's midterm drawdown was only about 9% into the March 30 low, half the historical norm, and the index sits just 3% below the October 6 record of 7,819. There's simply less pessimism to unwind this time.

So, what are we doing? Nothing dramatic. Seasonality is a tailwind, NOT a strategy. As we discussed in this past weekend's newsletter, we are rotating from value back to growth but keeping core equity at target weights in the Equity Growth and Factor Rotation models, and yesterday's levels still govern. A close back above the 100-day, near 7,615, lets us add growth exposure during the strongest stretch of the calendar. A close below 7,490 still means tightening stops and raising cash, regardless of what the history books say.

Such is the nature of base rates. They give you the odds, not the outcome. The calendar has never once paid for a stop that wasn't honored.

Now...go vote.

Have Value Run Its Course?

On September 22, our Factor Rotation model signaled that large-cap growth stocks were extremely overbought compared to large-cap value stocks. Accordingly, we adjusted our models to add weight in large-cap value stocks and reduce our exposure to large-cap growth. The model's signal was prescient. As we share in the first graphic from the newly released version of SimpleVisor, over the last 20 trading days, the large-cap growth ETF (IVW) is down over 6%, while VTV, the large-cap value ETF, is up nearly 5%. Below it, sectors show an even more dramatic performance gap: technology is down about 10%, while many value sectors are up around 10%.

The key question is whether the Value-over-Growth rotation has run its course. To assess this, we can look at the sectors' absolute and relative scores, as shown in the second graphic. Clearly, value is now overbought, Communications is grossly oversold, and technology is oversold but not far from fair value. If we click on the communications sector in the table, we see a breakdown of its top ten holdings. Google (GOOG & GOOGL), which accounts for nearly 25% of the index, fell over 10% last week on earnings and is now grossly oversold. So how might we use this information to manage our portfolios?

The last graphic is a custom-made two-stock rotation comparing LLY and GOOG. LLY is the most overbought stock in the healthcare ETF (XLV). It shows that since 10/2, LLY and GOOG have moved in opposite directions- LLY seeing its absolute and relative scores increase to very overbought levels and GOOG moving in the opposite direction. In our new version of SimpleVisor, we can animate the changes over the last few weeks and see how it played out. We can also save this custom view.

To answer our lead question, "Has Value Run Its Course," it's hard to answer. However, the rotation toward value appears much closer to the end than the beginning. Election results and employment data may drive the market and the rotations over the next few days, but our models suggest investors could start favoring larger-cap growth stocks again.

Above-Average Returns: Why The Next Decade Differs

In 2016, McKinsey warned that the “golden era” for investors had ended. Falling rates, fatter margins, and a rising multiple had done their work in creating above-average returns. Younger savers, the report said, would have to work seven more years or save nearly twice as much. Ben Carlson went back and graded that call this month. Since that spring, U.S. stocks have returned roughly 15% a year and more than tripled, European shares compounded near 10%, and a saver who took the advice and doubled their contributions now has a very comfortable problem. The call was wrong. Carlson’s verdict is blunt and correct. Sometimes the three most useful words in this business are “I don’t know.”

“Strip the multiple out and the last sixteen years were ordinary. Every point of excess came from investors agreeing to pay more for the same dollar of profit.”

I also have to take that same hit, as I have previously published my own versions of that caution, and the market ran anyway. Anybody claiming they called the last sixteen years of above-average returns is selling something.

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Sixteen years of above-average returns came mostly from rising valuations, and that is the one source that cannot be repeated from here.

In 2016, McKinsey warned that the "golden era" for investors had ended. Falling rates, fatter margins, and a rising multiple had done their work in creating above-average returns. Younger savers, the report said, would have to work seven more years or save nearly twice as much. Ben Carlson went back and graded that call this month. Since that spring, U.S. stocks have returned roughly 15% a year and more than tripled, European shares compounded near 10%, and a saver who took the advice and doubled their contributions now has a very comfortable problem. The call was wrong. Carlson's verdict is blunt and correct. Sometimes the three most useful words in this business are "I don't know."

"Strip the multiple out and the last sixteen years were ordinary. Every point of excess came from investors agreeing to pay more for the same dollar of profit."

I also have to take that same hit, as I have previously published my own versions of that caution, and the market ran anyway. Anybody claiming they called the last sixteen years of above-average returns is selling something.

Where The Above-Average Returns Actually Came From

While the bulls certainly have control of the narrative, there is a problem with treating that scoreboard as the end of the argument. The bears weren't wrong about the inputs. They were wrong about ONE variable. Which one matters is important because it will decide whether the case still stands today.

Let’s start with the data. I pulled Robert Shiller's monthly series back to 1871 and broke real returns down into their specific components. Real total return splits into three pieces. What earnings were, what dividends were paid out, and what investors decided those earnings were worth.

Real earnings grew 4.91% a year. That's close to three times the 1.91% long-run rate. Dividends chipped in 1.96 points against a past norm of 4.25, because yields today are far thinner. Then there's the third bar. The CAPE ratio climbed from 20.32 at the end of 2009 to 41.04 in October, and that single "re-rating" of the same earnings stream, with no help at all from profits or payouts, added 4.33 points a year to what investors took home. Look at how much of the left bar it is.

Strip the multiple out and the last sixteen years delivered roughly 7% real, which is almost exactly the long-run average. Every point of excess came from investors agreeing to pay more per dollar of smoothed profit. Such is the anatomy of a "golden era."

That's the piece McKinsey missed. They had the right list of tailwinds, but they just assumed the "re-rating" had finished. But it hadn't, and it ran for another decade, producing the above-average returns that made the forecast look foolish.

Why Above Average Returns Can't Repeat From Here

Now run the same math forward. The multiple would have to add another 4.33 points a year for sixteen years. That takes a CAPE north of 83. Not 41. Eighty-three. No market on record has held half that.

Which raises the question that the decomposition doesn't answer. What drove the first doubling?

The discount rate did most of the work. Roughly half those sixteen years were spent with the funds rate pinned at zero, from January 2010 through December 2015 and again from March 2020 into 2022. The 10-year average yield was 2.20% from 2010 to 2021, compared with 4.71% for the entire Shiller record since 1871.

The Fed's balance sheet went from under a trillion dollars to a peak near $9 trillion. Argue all you like about whether the Fed led that or followed it. Either way, money was cheaper for longer than at any point on record, and cheap money lifts what buyers will pay per dollar of earnings while quietly flattering earnings themselves.

Here's the trap in that. The only thing that brings ZIRP and QE back is the crisis that justifies them. Either rates hold near 5%, and the multiple gets no help, or something breaks badly enough to put the Fed back at zero, which means the damage already happened. Baa corporates yield 6.47% today, and the maturity wall refinances at the new number, not the old one.

Going back to the Shiller data set, I tested every month from 1881 onward. For each one, I logged the CAPE, then the real total return over the next ten years.  That gives 1,628 overlapping readings. They stop in August 2016, because any month after that doesn't have ten years behind it yet.

The pattern isn't subtle. Of the 164 starting months with a CAPE at or above 25, some 140 of them, roughly 85%, gave back a decade below the 6.72% long-run average. Go higher, and it gets worse. The 57 months above a CAPE of 30 averaged a loss of 1.02% per year, and the best of them posted a gain of 4.49%.

Before we proceed, we must discuss the caveat, because somebody will raise it, and they're right to. Two dozen of those expensive months beat the average. They ran from June 2014 through August 2016, starting CAPEs between 25.16 and 27.00, and delivered real returns of 8.86% to 12.02% over the decade that followed. So an expensive market has paid off. Exactly once.

Look at what that particular decade contained. It caught the back half of ZIRP, the 2020 emergency response, and the AI earnings expansion, and it finished with the CAPE at 41 instead of 26. The one time in 146 years that a high starting valuation was paid, it paid because the multiple expanded again from an already expensive base. That is the engine described above, and it's the engine that is most likely not returning anytime soon.

The overlap caveat matters a lot. When looking at those 1,628 readings, they were not 1,628 independent events. This is because the ten-year windows overlap, and the months within one episode repeat the same story. For example, the “expensive” months cluster into four episodes: 1901, 1928 through 1930, the long stretch from 1995 to 2007, and 2014 to 2016. Three ended badly. One didn't.

So call it three out of four, not 140 out of 164, and the honest reading is that expensive markets usually disappoint and occasionally don't.

Even the exception started from a valuation of 27, and it needed the multiple to run to 41 to get there. We're now being asked to believe the market can do it again from 41. Such is the "this time is different" bet, whether or not anyone phrases it that way.

"The bears had the right list of tailwinds. They simply assumed the re-rating had finished. It hadn't."

The Bullish Case Against The Next Secular Bear

While the data is clear, the bulls do have a serious answer to all of this.

The bullish argument is that above-average returns may remain for three primary reasons:

• The current CAPE ratio of 41 is a broken yardstick, because the measure still drags the 2020 earnings collapse into its ten-year average.
• It ignores the shift from capital-heavy industry to software margins, and accounting rules expense the very intangible spending that builds those fat margins.
• Corporate buybacks also changed the cash math. A 2% "yield" in 2026 isn't the same as a 2% yield in 1962.

Every one of those points is fair. It's why real earnings grew at triple the old rate instead of reverting. I can't argue the AI capital cycle is a fiction either. The spending is REAL, and the profits so far are real.

Then there's the bull's best evidence, which happens to be mine too. The Fed raised the Fed funds rate from zero to more than 5% starting in 2022, and the CAPE promptly fell from 38.30 to 27.08, exactly as the discount-rate story would predict. Since then, that valuation multiple has climbed to 40.94 anyway, with the 10-year at 5.01%. The multiple rose into the most aggressive tightening in forty years.

The obvious answer is uncomfortable for both bulls and bears. A multiple that expands while the discount rate rises isn't resting on rates at all. It's resting entirely on what investors believe earnings will do, and today those estimates are very exuberant, as we noted recently.

“Corporate earnings just broke above a trend that had contained them for more than 90 years.”

With expectations as high as they are currently, that foundation is much more fragile than a rate-supported multiple. If the earnings story disappoints, there is nothing sitting below the market to support it.

Here is where it gets interesting. Grant the whole case. Say margins hold higher and earnings keep growing near 5% real. You still don't get back to 11%, because the other two engines now run in reverse.

Stocks now yield 2.44% on smoothed earnings, and a 10-year Treasury pays 5.0%. That gap is the widest since 1999. For most of the previous market history, the discount rate was a tailwind, falling year after year and lifting what buyers would pay. It isn't doing that now. And the dividend engine can't climb back to 4.3% unless prices fall a long way first, which rather defeats the purpose.

However, there is a second channel that gets much less attention than valuations. Critically, it works through flows rather than math. From 2010 through 2020, the 3-month Treasury bill averaged 0.56%. It sat below a quarter point on 63% of all trading days. Cash paid you nothing to wait. For most of the previous decade, the entire market trade was built on the "TINA" trade. The idea that “There Is No Alternative” to risk assets was never really a thesis. It was a hostage situation. Money got pushed out of safe assets and into risk because safety had been priced at zero.

That entire scenario has now flipped with a 3-month Treasury bill paying roughly 4% today, while the S&P yields 1.06% in dividends, the lowest reading in the entire Shiller record. Cash pays roughly four times what stocks pay, with none of the drawdown risk. The same policy that once shoved money into equities can now pull it back out. That doesn't take a forecast to matter. It just takes a retiree doing arithmetic.

I will get this comment almost as soon as this article is posted:

"You're just repeating the mean-reversion call that's been wrong for a decade."

Fair enough. But I'm not making a timing call. A CAPE of 41 tells you almost nothing about next year. However, it tells you a great deal about the next ten.

What A Reasonable Investor Does With This

Start with the understanding that none of this discussion is a “forecast.” Valuations are, and always have been, a horrible timing tool. Instead, let’s examine the data in a grid. Start at a CAPE of 40.94. Add the dividend yield of 1.06%. Then vary the two things nobody can know. Where the multiple goes, and how fast real earnings grow.

Those are yearly real total returns. One cell beats the last sixteen years. It also needs the most expensive market on record to stay exactly that expensive for ten more years, while earnings grow at triple their old pace. Such is the wager now priced in.

None of this argues for selling everything and waiting in cash. As I've written before, full market cycles have two halves, and sitting out the first half can cost you more than the second half takes. However, the grid suggests that we should calibrate our expectations. For example, if your current plan assumes a 10% nominal return because that's the number in the brochure, you may be disappointed when your portfolio returns something nearer 3%. That gap doesn't show up as a bad quarter. It shows up as a retirement date that moves much further out into the future.

Secondly, the hard work is both practical and dull, and you will be fighting your emotions the entire way.

• Save more than the plan requires.
• Trim winners back to target weights instead of letting them grow into concentration.
• Own duration while it pays 5%, since the rate hurting stock valuations is the same one paying you in the bond sleeve.
• And decide now what you'll do at a 20% drawdown, because bear markets do useful work for anyone holding cash and a plan when one shows up.

Carlson is correct in his view that nobody knows what will happen next year, or the year after that. He is also right in that humility beats false precision. However, a forecast and a constraint are very different animals, and historically above-average returns from here run into the second kind. In other words, the math simply doesn't care whether anyone believes it.

The post Above-Average Returns: Why The Next Decade Differs appeared first on RIA.

ZeroHedge carried a line this week from Goldman Sachs’ Delta One desk worth consideration:

The point at which hyperscalers shift from needing more capacity at almost any cost to optimizing returns on what they’ve already built is the one I’d really worry about.

What happens when hyperscalers' spending on data centers slows? To help you see how that hyperscaler evolution will affect spending, we share an analogy with a new airline.

In the beginning, the focus is buying planes. The capex is enormous, with nearly all spending flowing to a narrow set of suppliers, such as airframe and engine producers and the financiers behind them. Every quarter the fleet gets bigger, and every quarter those suppliers book substantial revenue. That is the phase the hyperscalers are in now. The planes are data centers. The suppliers are chips, memory, foundry capacity, transformers, and power.

At some point the fleet is the right size, and purchase growth slows. Attention shifts from purchasing planes to running the airline more efficiently: filling seats, yield management, fuel burn, turn times, baggage fees, and maintenance intervals. The planemaker's revenue declines in phase two while vendors that help with revenue management systems, fuel hedging, and loyalty programs start receiving revenue. The airline compounds earnings, but its original suppliers see less of it.

Today, vendors selling data center buildout goods and services have robust pricing power. But at some point, the hyperscalers will have enough data centers, and optimization will become their main goal. At that time, the spending will shift heavily toward inference efficiency, scheduling software, cooling, long-dated power contracts, and custom silicon, some of which the hyperscalers design themselves. Spending may not change materially, but the beneficiary of the spending might.

What To Watch Today

Earnings

Economy

Market Trading Update

Friday's decline did real technical damage. The S&P 500 closed at 7,580.07, its first close below the 100-day moving average since early April. It now sits 0.5% below that average at 7,615 and 1.5% below the 50-day at 7,697. From the October 6 record close of 7,819, it's down 3.1%. Is the bull trend over? No. The index remains 3.7% above a rising 200-day average at 7,310, the line that defines the bigger trend, and while it slipped below that line for about three weeks in late March and early April, it has held above it ever since. The short-term trend is another matter.

Momentum confirms the break. RSI fell from 50.8 to 40.1 in a single session. MACD had been closing in on a bullish crossover, then turned back down below zero, and its histogram widened from −3.7 to −11.5 index points. Friday's close also landed below the lower Bollinger Band at 7,600, a move 2.3 standard deviations below the 20-day mean. Notice in the chart below that closes under that band marked short-term lows on September 16 and July 29. That isn't a guarantee. In March, the index closed below the band six times over three and a half weeks before it finally bottomed.

Sector breadth explains why the index fell while most stocks rose. Measured against the S&P 500, eight of 11 sectors trade more than 2.5% above their 50-day relative average. Energy leads at 9.5%, with health care at 9.0% and staples at 7.3%. Only technology at −3.9% and communication services at −8.4% sit meaningfully below. The "safe" trade has become the crowded trade. In other words, the oversold groups are exactly where a rebound would have to start.

That cuts both ways, though. Technology and communication services carry the heaviest weights in the index, and oversold can always get more oversold. A market trading below its 50-day and 100-day averages tends to sell rallies until it reclaims them. Such is the nature of a broken short-term trend. I wouldn't treat Friday's selloff as an automatic buying opportunity.

We positioned for this earlier in the month. On October 5, we trimmed Apple, Nvidia, AMD, and Palantir in our equity model. The proceeds went into names like Walmart, Costco, JPMorgan, and RTX. Last Friday, we took profits in Kinder Morgan and Williams as energy got stretched. That leaves us balanced going into a volatile week rather than chasing either side.

For the week ahead, hold core equity exposure at target weights and don't chase a bounce. The 100-day at 7,615 and the 50-day at 7,697 are now resistance. Rallies into those levels are places to rebalance, not add. First support is the September 16 close at 7,552, followed by the July 31 close near 7,490. A close below 7,490 would open the door to the 200-day near 7,310, and that's where I'd tighten stops and raise some cash. A close back above 7,615 would do the opposite. It would turn Friday into a one-day shakeout and favor adding growth exposure.

The single most important level this week is 7,615. Reclaim it, and the four-week run in value starts to look exhausted. The growth vs value trade has reached an extreme, and we may be close to a point where growth begins to find buyers.

The Week Ahead

The election results could have a sizeable impact on the markets on Wednesday. Of importance, will they be as widely expected, with the Democrats taking the House and a slim margin of victory for the Republicans or Democrats in the Senate? If so, the market reaction may be somewhat tame. Something other than the expected may drive upward or downward volatility. The graphic below shows that Kalshi odds favor Democrats taking control of the Senate.

With the FOMC meeting in the rearview mirror, investors will watch economic data closely as it shapes the Fed's rate decision at its December meeting. This week's employment data will be key to that assessment. JOLTS on Tuesday, ADP on Wednesday, and the BLS labor report on Friday will carry significant weight. Wall Street expects BLS job growth of 40k, which would continue to confirm the labor market is stagnant- little hiring and little firing.

Earnings continue this week, with Apple and Palantir reporting this afternoon. Also of note this week will be AMD on Tuesday. The market will be on the lookout for any clues toward future AI-related capex spending.

Real Wages 2026: Why Consumer Stocks Feel It First

The September jobs report grabbed the headlines. Payrolls rose just 29,000, and July was revised to an outright loss.⁶ However, the number I’d circle came out twelve days later, buried in the Bureau of Labor Statistics’ real earnings release. Real wages in 2026 are sliding further into negative territory. Average hourly earnings, adjusted for inflation, fell 0.7% over the twelve months through September, more than double August’s decline.¹ That’s the first negative stretch since the spring of 2023, and it changes the math for every company selling something a household can put off buying.

Workers did get raises, and the “strong labor market” crowd will rightly point that out. Average hourly earnings rose roughly 3.0% over the past year, a respectable figure by most measures. The problem is what happened at the pump. Gasoline prices are up 34.2% from a year ago, and the broader energy index is up 20.4%.² Food is up 2.5%. Core CPI, which strips out food and energy, is running at just 2.6%.

In other words, the paycheck is beating everything EXCEPT energy.

This is why the two versions of real pay tell such different stories. Deflate wages by core CPI and real pay is still growing, though only about 0.4% a year now. Deflate them by headline CPI, the prices people actually pay at the register and the pump, and real pay has been negative every month since April.

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Value has crushed growth for four weeks, and the AI bill just came due. The risk now is assuming the defensive trade still has room to run.

🏛️ Market Brief - The AI Bill Comes Due

In last week's Bull Bear Report, I warned that a "Meta-style reaction" to this week's mega-cap earnings could push the S&P 500 below its 100-day average and back toward the September lows. Alphabet delivered that reaction on Thursday. Intel finished the job on Friday. The S&P 500 fell 1.8% on Friday to close at 7,580, its lowest close since September 16, and ended the week down 0.6%. On Friday alone, the Nasdaq Composite dropped 2.9%, and the Dow lost 1.1%.

The change in tone came from cash flow, not demand. Google Cloud revenue more than doubled, yet Alphabet reported negative free cash flow of $9.1 billion, with quarterly capital spending at $51.4 billion. The stock fell 12.6% on Thursday. Amazon's AWS grew 39%, but earnings missed, and capital spending ran near $77 billion for the quarter. Intel collapsed 28.6% on Friday after a weak fourth-quarter outlook, and Caterpillar dropped 9.3% on Thursday. Microsoft was the exception. Azure grew 48%, and the stock gave up less than 2% over two days.

Investors aren't questioning whether AI works. They're questioning who pays for it, and with Treasury yields near 5%, that question has a price.

Macro didn't help. The Fed held rates at 3.75% to 4.00% on Wednesday in a 10-2 vote, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting and favoring a hike. Thursday brought September PCE inflation of 3.6%, with core at 3.1%, and third-quarter GDP growth of 3.4%. Futures now price in roughly an 85% chance of a December hike. The one bright spot was wages. The employment cost index showed wage growth slowing to 3.1%, a sign that energy-driven inflation isn't feeding into paychecks. Meanwhile, the 10-year yield slipped to 4.93% from 5.00% a week ago, while Brent crude held near $118.

Here's the part the headlines missed. Nine of 11 sectors rose this week. The equal-weight S&P 500 gained 0.8%, outrunning the cap-weighted index by 1.4 points, and 500 of 849 actively traded stocks finished higher. Nearly all the damage was in technology and communication services, the two sectors that carry the AI capex trade.

The mainstream narrative is that the “broadening” in the market is a healthy sign. Maybe that is the case. However, Howard Marks has long argued that the riskiest thing in the world is the belief that there's no risk, and right now that belief lives in the defensive sectors everyone ran to. Watch whether the bid under the equal-weight index survives Apple's results and next week's October jobs report. If it does, Friday was a rotation. If it doesn't, it was the start of something larger.

📈Technical Backdrop -  MACD Turns Up Just Below The Record

Friday's decline did real technical damage. The S&P 500 closed at 7,580.07, its first close below the 100-day moving average since early April. It now sits 0.5% below that average at 7,615 and 1.5% below the 50-day at 7,697. From the October 6 record close of 7,819, it's down 3.1%. Is the bull trend over? No. The index remains 3.7% above a rising 200-day average at 7,310, the line that defines the bigger trend, and while it slipped below that line for about three weeks in late March and early April, it has held above it ever since. The short-term trend is another matter.

Pay attention to momentum as it confirms the break. RSI fell from 50.8 to 40.1 in a single session. MACD had been closing in on a bullish crossover, then turned back down below zero, and its histogram widened from −3.7 to −11.5 index points. Friday's close also landed below the lower Bollinger Band at 7,600, a move 2.3 standard deviations below the 20-day mean. Notice in the chart below that closes under that band marked short-term lows on September 16 and July 29. That isn't a guarantee. In March, the index closed below the band six times over three and a half weeks before it finally bottomed.

As noted above, sector breadth explains why the index fell while most stocks rose. Measured against the S&P 500, eight of 11 sectors trade more than 2.5% above their 50-day relative average. Energy leads at 9.5%, with health care at 9.0% and staples at 7.3%. Only technology at −3.9% and communication services at −8.4% sit meaningfully below. The "safe" trade has become the crowded trade. In other words, the oversold groups are exactly where a rebound would have to start.

That setup also cuts both ways. Technology and communication services carry the heaviest weights in the index, and oversold can always get more oversold. With the market trading below its 50- and 100-day averages, investors tend to sell rallies until the market reclaims those levels as support. Such is the nature of a broken short-term trend. I wouldn't treat Friday's selloff as an automatic buying opportunity.

However, this is why we positioned for this situation earlier in the month. On October 5, we trimmed Apple, Nvidia, AMD, and Palantir in our equity model. The proceeds went into names like Walmart, Costco, JPMorgan, and RTX. Last Friday, we took profits in Kinder Morgan and Williams as energy got stretched. That leaves us balanced going into another potentially volatile week rather than chasing either side.

Next week, we suggest that investors continue to hold core equity exposure at target weights and, importantly, avoid chasing a market bounce. With the 100-day at 7,615 and the 50-day at 7,697, those levels are now resistance to rallies, rather than the support they were previously.

For now, any rally to those levels is where investors should rebalance exposures, not add. The first notable support level is the September 16th close at 7,552, followed by the July 31st close near 7,490. Any close below 7,490 would certainly open the door to the 200-day near 7,310, and that's where I'd tighten stops and raise some cash. A close back above 7,615 would do the opposite. It would turn Friday into a one-day shakeout and favor adding growth exposure..

For investors, the single most important level next week is 7,615. If the market can reclaim it, the four-week run in value starts to look exhausted. That's the setup I walk through in today's main body. Below, I lay out why the growth vs value trade has reached an extreme, and what has to happen before growth leads again.

🔑 Key Catalysts Next Week

If you thought last week was busy, you get no reprieve next week either. On Monday, we will get Apple's earnings results. The midterm elections follow on Tuesday, and the October jobs report drops on Friday. Each one lands on a market that just lost its footing.

The midterms are largely priced in. Democrats are favored to win the House at roughly 94% odds and the Senate near 69%, according to Polymarket data cited by Newsquawk. A surprise in a close Senate race is the bigger risk. So is a count that drags on for days.

Furthermore, the economic data calendar is also heavy. On Monday, the ISM manufacturing report is expected to print at 54.7, with its price index running near 78. If that is the case, it is a reminder that the energy shock behind this year's inflation is still working its way through supply chains and into companies' prices.

ISM services follows on Wednesday. So does the Treasury's quarterly refunding announcement, which matters more than usual with the 10-year near 5%. Friday's payroll report is the main event. Consensus calls for just 55,000 to 65,000 new jobs, with unemployment holding at 4.2% and hourly earnings up 0.3%. A soft jobs number alongside 3.6% inflation would put the Fed's December hike in genuine doubt.

Fedspeak will be loud. Chicago Fed President Austan Goolsbee speaks Monday. On Thursday, Cleveland's Beth Hammack speaks fresh off her dissent for a hike. Richmond's Tom Barkin and Dallas's Lorie Logan follow. Friday features New York Fed President John Williams, St. Louis's Alberto Musalem and Governor Michelle Bowman.

While last week was a heavy earnings week, this week remains heavy also. As noted, Apple reports on Monday, along with Palantir, which will give another look at the AI case. Then on Tuesday, AMD, Amgen, and Arista Networks report, followed by Qualcomm, Arm, and AppLovin on Wednesday.

AMD and Palantir will likely matter the most as they sit at the center of the spending debate that punished Google and Amazon last week. If either one shows that AI demand is still turning into cash rather than just more spending, the oversold chip and software names could bounce hard.

Friday's jobs report is the single most market-moving event. The outcome to fear is a weak headline number with hot wage growth. That mix would revive the December-hike case just as the AI trade loses its bid.

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💰 Growth vs Value: Value Had Its Run. The Turn Is Setting Up.

Four weeks ago, we told you that "a market rotation from growth to value is becoming more likely heading into year-end." We acted on it two days later. On October 5, we trimmed Apple, Nvidia, AMD, and Palantir in our equity model and added Walmart, Costco, JPMorgan, Goldman Sachs, Kinder Morgan, and RTX. We then followed on October 8 by exiting Applied Digital and Vertiv and adding Berkshire Hathaway. We made a matching shift toward value in our ETF model as well. Since that close, the growth vs value spread has moved in our favor. The Vanguard Value ETF (VTV) has gained 4.6% while the Vanguard Growth ETF (VUG) has lost 7.6%, and technology has dropped 10.7%.

That trade did its job; however, it may be close to time to shift in the other direction. In last week's report, I suggested that we were "potentially set up for a rotation in the other direction, buy growth and reduce value, heading into year-end." For the year, VTV is up 19.4%, VUG is up just 4.6%, and energy is up 56.6%. When one side wins that decisively, the useful question is how much good news is already in the price.

Value Won 2026 Because Oil And Yields Wrote The Rules

The lead of value over growth has a rather simple explanation. Last week, Brent crude traded near $118 with the 10-year Treasury sitting just under 5% heading into the Fed meeting with odds of a December rate hike still elevated. That's a hostile backdrop for growth stocks, whose valuations lean on cash flows years down the road. It's a friendly one for energy producers, banks, and the "defensive" sectors that have soaked up the flows

The chart below measures the growth-versus-value ratio directly. Between October 7 and Friday's close, growth lost 11.9% against value in 17 sessions, pushing the ratio below both its 50-day and 200-day averages. That's a REAL trend change. Still, look at where it is now. The ratio sits just above its March low of 85.2. On Friday, its 14-day RSI fell to 28.6, below the 30 level that usually marks a washed-out reading.

Trends like this rarely reverse cleanly. They reverse when selling gets lopsided enough that the last few sellers are acting out of fear of missing the "safe" trade rather than on fundamentals, and the ratio is getting close to that level now.

Energy Is Stretched. Staples Are Just Bouncing.

The "rotation" headlines lump energy and staples together into a single trade. In the data, they look very different. The Energy Select Sector SPDR (XLE) gained 10.8% over the past month. Measured against the S&P 500, which is the fairer test for a sector that has spent the year riding an oil shock, it now trades 14.9% above its own 200-day average, the widest gap of any group in the chart below. Such is what an excess looks like.

Bob Farrell's Rule #2 says that excesses in one direction lead to an opposite excess in the other direction. The energy sector hit a record high on Friday, and that's where the excess lives right now. Energy has outrun the S&P 500 by nearly 40 points this year.

Staples started from a very different place, but they're catching up fast. XLP rallied 11.3% in a month as money hid in "safe" names. Relative to the S&P 500, it climbed from 2.6% below its 200-day trend a week ago to 1.8% above it. That's a sharp bounce off a deeply oversold base, and it's starting to look crowded.

Then there's the technology sector, which was beaten up hard last week. Since October 6th, XLK has fallen 11.1%, including 4.9% on Friday alone. On October 16, its RSI hit 33.3, the lowest reading since the March 30 bottom. Even so, it still sits 2.5% above its relative 200-day average. The "rotation" bruised tech's short-term trend without breaking its long-term leadership.

When everyone hides in the same "safe" sectors, the hiding place becomes the risk.

What Has To Happen Before Growth vs Value Flips

A reader emailed this week with a fair question. Isn't buying tech here just catching a falling knife? It can be. That's why the entry should rest on conditions rather than conviction: a sector that has dropped 11% in four weeks can easily drop another 6% when the macro pressure that pushed it there hasn't gone away. Here's the checklist I'm watching, with readings as of Friday's close.

Three conditions are met, and one is close, so this is a setup to prepare for rather than a signal to chase. The first three items tell you the selling is stretched. The last two tell you it's over. Momentum readings can stay washed out for weeks if the macro pressure doesn't let up. A close below the lower band is a symptom of panic, and panic can deepen before it clears.

Make no mistake, the earnings reports matter here too. Hyperscaler capital spending is running near $800 billion this year, and investors balked at the bill this week. Alphabet fell 12.6% on Thursday after reporting negative free cash flow. Amazon slid 4.3% ahead of its report and another 1.4% after it. Microsoft, with Azure growing 48%, gave up less than 2% over the same two days. The market isn't rejecting AI. It's rejecting AI that can't pay for itself.

Where The Value Crowd Has A Point

Being that I am in the value camp, the best argument is that nothing driving the trade has changed. September CPI ran at 3.7%, and energy is still the engine of that inflation. A Fed that hikes into an oil shock keeps pressure on long-duration assets. If Brent pushes higher and the 10-year breaks decisively above 5%, the growth vs value ratio could revisit its March low of 85.2.

This is why the plan laid out below is staged. Furthermore, there is a stop under every new growth position, rather than a single bet that the oil shock is already behind us and the Fed is finished. Where caution is required is in the assumption that oil only goes one direction. As we discussed two weeks ago, "bad inflation" tends to cap yields rather than send them higher. Supply-driven price spikes drain the household income needed to sustain them. The diagram lays out both paths.

Notice the asymmetry. The value case needs oil and yields to keep rising from already punishing levels, while the growth case only needs them to stop. That's a lower bar.

What Should Investors Do Now

Nobody has to call the bottom in tech to act on this. The better approach is to trim where the excess is largest. We started last Friday, taking profits in Kinder Morgan and Williams in our equity model as energy pushed into overbought territory. The staples we added on October 5 are where we'd look next. Then rebuild growth exposure in stages and let the market confirm the turn. We continue to recommend the following.

Let me reiterate my point above. The staging matters more than the names themselves. We will use a first tranche on weakness to start gaining exposure at lower levels if the turn is real. At the same time, we will wait until the 50-day mark before adding the second tranche to avoid doubling down on a trade the market hasn't yet confirmed. Lastly, if the stops trigger, the market has told you the value case won another round, and that's fine. You'll have trimmed energy near a record high on the way.

Crowded trades don't end when the story changes. They end when the last buyer finally shows up.

🖊️ From Lance’s Desk

This week's #MacroView blog explores how real wages in 2026 have slipped below zero for the first time in three years, and the squeeze is showing up in consumer stocks before it shows up in GDP.

Also Posted This Week:

• The Fed Risks Policy Error Fighting Oil Prices- by Michael Lebowitz
• Griffin May Be Right About AI. The Timing Could Be Very Wrong- by Lance Roberts

📹 Watch & Listen

Google (Alphabet) shares are plunging nearly 10% following its latest earnings report, while Microsoft is moving higher. But does Google's sharp selloff present a buying opportunity, or could the stock fall even further?

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📊 The Weekly Market Dashboard

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

Last week I stated: "This next week, 44% of the S&P 500 will report Q3 earnings. So far, reports have been good, but the market response has been weak. I suspect we could see some more of that action next week, as the technology sector remains under some pressure." That certainly was the case, but now, on a short-term basis, technology is very oversold, while Energy and Healthcare are the most overbought along with Real Estate, Utilities, and Materials. Take profits and look for a potential reversal in Technology and Communications.

📐 Technical Composite: 53.53 - Sell-Off Reduces Overbought Conditions

The technical condition eased sharply last week dropping from 58.32 to 53.53 as the technology sector came under selling pressure. However, the reduction only brings the overbought condition back to neutral. While rallies can occur from these levels, if this is the beginning of a more severe correction, then markets have more work to do to the downside. Rebalance risk and remain tactically cautious until conditions improve.

🤑 Fear/Greed Index: 56.95 – Holding At Neutral

Even though the market sold off last week, the underlying market allocation and sentiment remain more neutral. There was a continued weakness in the Commitment of Traders equity allocations; however, investor sentiment turned slightly more bullish last week. With the market getting decently oversold short-term, a reflexive bounce higher following the election on Tuesday may be possible.

🔁 Relative Factor Performance

Four weeks ago we warned that the more extreme divergence growth from value in the market was due for an eventual rotation. That rotation came rather swiftly over the past three weeks and now those value oriented factors are more overbought and growth is oversold. As shown below, the Quality, Equal Weight, and Value factors have become more overbought, while the High Beta, Megacap, and Speculative Factors are more oversold. As we noted last week "While there may be a bit more work next week, we are getting potentially set up for a rotation in the other direction, growth vs value, heading into year end." That remains the case this week.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of October 30, 2026, with the S&P 500 at 7,580.07, the Money Flow Breadth Ratio (MFBR) stands at 50%, down from a peak of 70% set 7 weeks ago and falling versus 55% the prior week. The trailing four-week change is still -10 percentage points, but the near-term trend has rolled over. This places the indicator in the 50-60% range. The raw zone signal reads NEUTRAL, but the model still flags a TOP REVERSAL, with 20 points now off the peak. Read that NEUTRAL as a zone label, not as fresh confirmation - the model reached this band by falling out of overbought, not by building up from below.

Bottom line: hold the target weight. The roll-over off the 70% peak is real and worth watching, but it has carried the gauge into the band that has historically been the best place to own equities. This is neither a chase nor a de-risk. A sustained break below 60% would move the grid to an underweight; a move back above 70% would re-engage the contrarian trim."

📊 Sector Model & Risk Ranges

We noted two weeks ago that "Energy and Technology are now extremely deviated above their long-term weekly means. Historically, such deviations lead to corrections or consolidations, so profit-taking and rebalancing are recommended." That advice worked well this past week as the rotation from Technology to Value continued. Bonds also rallied sharply as the rotation to safety accelerated. Energy remains extremely elevated above long-term means, and Healthcare has now joined that club. Profit-taking ahead of an eventual reversion, which could be very swift.

Have a great week.

Lance Roberts, CIO, RIA Advisors

Lance Roberts is Chief Investment Strategist at RIA Advisors in Houston, Texas, and publishes his market research and the weekly Bull Bear Report at RealInvestmentAdvice.com and lanceroberts.substack.com.

The post Growth vs Value Hit An Extreme As AI Spending Broke Big Tech appeared first on RIA.

“The Committee will deliver price stability.”

That promise has appeared in the FOMC statement in each of Warsh's first three FOMC meetings. It deserves scrutiny because the Fed doesn't usually make promises. Typically, the Fed Chair and FOMC describe economic and financial conditions and then state intentions. They tend to be shy about making promises because the Fed's ability to impact prices and economic activity is limited. To wit, two of today's biggest drivers of prices and economic growth are oil and AI-related capex spending.

Crude oil is over $100, up roughly 70% over the past year and 14% this month alone, due entirely to the war with Iran. The Fed can't manage the war or reduce oil-related inflation. It said as much in July, when the FOMC statement attributed elevated inflation “in part” to “supply shocks that have driven price increases in certain sectors, including energy.” That sentence came out of the September FOMC statement.

Then there is the capital spending boom. Across Alphabet, Microsoft, and Amazon, calendar 2026 spending guidance approaches $600 billion, with Alphabet already signaling a significant increase in 2027. This is not only keeping GDP elevated but putting upward pressure on inflation.

The Fed controls the overnight interest rate. It does not control the Strait of Hormuz, and it does not decide whether a handful of companies spend $600 billion next year or $400 billion. The Fed may face breaking a promise, which does not bode well for the higher level of Fed credibility Warsh is trying to restore.

The statement instead should read "The Committee aims to deliver price stability."

What To Watch Today

Market Trading Update

Yesterday, we argued for trimming value and adding to beaten-down tech in thirds, with cash-rich platforms like Alphabet at the front of the line. The Alphabet earnings selloff on Thursday tests that view. Shares opened at $286.88, down nearly 12% and on pace for the worst day since March 2020.

Start with what went right. Google Cloud revenue doubled to $30.7 billion, and its operating margin jumped to 36% from 24% a year ago. The cloud backlog grew to $561 billion. The GAAP earnings miss, $2.12 versus $3.01 expected, was driven largely by an $8.7 billion paper loss on equity holdings. That’s an accounting mark, not a broken business.

The tape agrees the selling is extreme. Notice in the chart below that the stock sits 3 standard deviations below its 20-day mean with RSI at 23. The only other reading under 25 in the past two years came at the March 30 closing low of $273.50. From there, the stock rallied 47% into May.

The opening hour shows where buyers and sellers are meeting. Sellers pushed the stock to $280.36 in the first ten minutes. Buyers absorbed it there, and by 10:40 a.m. ET shares were back near $286, above the session’s volume-weighted average price of about $284. Roughly 40 million shares traded in the first 70 minutes, already more than a typical full day. That’s capitulation volume, and so far the dip is being bought.

So what spooked the market? Cash. Capex hit $51.4 billion in the quarter, and management expects spending to rise “significantly” in 2027. Free cash flow turned negative, at $9.1 billion. Buybacks went to zero, while Alphabet raised $29 billion of debt and issued $12.4 billion of new stock.

That’s an investment phase, not an operating problem. As we wrote in AI Capex Depreciation Risk Is The Catch To Record Earnings, negative free cash flow is the temporary cost of building future capacity. Alphabet’s $42.3 billion of operating cash flow still covered 82% of the quarter’s capex. It holds $265 billion in cash and securities. That’s a world apart from the neoclouds borrowing just to stay in the race. The real catch comes later, when depreciation on all that equipment starts flowing through reported earnings.

Bob Farrell’s Rule #8 reminds us that sharp declines usually bring a reflexive rebound first, and a 3-sigma flush is where those rebounds start. The risk is a retest of the lows before the “buildout” story wins back the benefit of the doubt. With the 50-day average now rolling under the 200-day, the trend argues for patience.

If you put the first third to work this week, hold it. Do NOT add the second third yet. Today’s $280 low is the first line buyers must defend. We want a close back above $317, the October 26 low that held before earnings, before committing more. A close below $273.50 ends the trade.

Such is the nature of an investment phase. The business can be fine for months before the stock agrees.

Alphabet Ad Revenue In Question

For two years, one of the biggest bear cases on Alphabet has been that chat assistants, like its Gemini, would pull users away from its traditional Google search engine, possibly reducing advertising revenue. Wednesday’s earnings give that thesis nothing to work with.

Google Search and other revenue rose 12% to $63.35 billion. YouTube ads grew 9% to $11.21 billion. Google Network, its third-party publisher business, grew 1% to $7.46 billion. Total advertising came to $82.0 billion, up 10.5% from a year ago.

In total, Alphabet grew 25% in the quarter. Advertising accounted for 10.5% of that. Of the $25.3 billion of additional revenue the company produced versus last year, advertising contributed nearly a third. The rest came from Cloud services.

Alphabet is no longer primarily an advertising company and has diversified its revenue significantly. Diversification is good. Going forward, the question for bulls and bears is not how the revenue will be split between advertising and other services, but what the total bottom line will look like in a few years, when AI is much more developed.

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Real wages in 2026 have slipped below zero for the first time in three years, and the squeeze is showing up in consumer stocks before it shows up in GDP.

The September jobs report grabbed the headlines. Payrolls rose just 29,000, and July was revised to an outright loss.⁶ However, the number I'd circle came out twelve days later, buried in the Bureau of Labor Statistics' real earnings release. Real wages in 2026 are sliding further into negative territory. Average hourly earnings, adjusted for inflation, fell 0.7% over the twelve months through September, more than double August's decline.¹ That's the first negative stretch since the spring of 2023, and it changes the math for every company selling something a household can put off buying.

Where Did The Raise Go?

Workers did get raises, and the "strong labor market" crowd will rightly point that out. Average hourly earnings rose roughly 3.0% over the past year, a respectable figure by most measures. The problem is what happened at the pump. Gasoline prices are up 34.2% from a year ago, and the broader energy index is up 20.4%.² Food is up 2.5%. Core CPI, which strips out food and energy, is running at just 2.6%.

In other words, the paycheck is beating everything EXCEPT energy.

This is why the two versions of real pay tell such different stories. Deflate wages by core CPI and real pay is still growing, though only about 0.4% a year now. Deflate them by headline CPI, the prices people actually pay at the register and the pump, and real pay has been negative every month since April.

As I wrote in June, the May inflation print was an oil story. The latest paycheck data now shows who is actually paying for it. In 2026, the squeeze on households is an energy tax, and it hits families with the least room in their budgets the hardest. That matters much more than you think. A household that commutes 30 miles to and from work every day, or heats an older, less energy-efficient home, spends a far larger share of every dollar on energy than a household earning five times as much. That means the "average" real wage figure most likely understates the impact on the bottom half of the income distribution.

How Households Are Covering The Gap

Consumers rarely cut spending the moment real income turns negative. They find a "workaround" first, and right now there are three.

First, they’re working longer. The average workweek is 0.6% longer than a year ago, yet real weekly earnings still slipped 0.1%.¹ In August, those extra hours kept weekly pay ahead of inflation. In September, they didn’t. 

Second, they're spending past their income. In August, real consumer spending rose 0.6% while real disposable income was flat, and the saving rate sat at 4.1%.³ 

Third, they're borrowing. Credit card balances climbed to $1.26 trillion in the second quarter, with the share of card balances rolling into serious delinquency running near 7% annualized.⁴

It is the last point that worries me most. Credit Card debt at today's interest rates turns a temporary energy shock into a lasting drag on the household budget because interest keeps compounding long after gasoline prices come back down, and the family that borrowed to fill the tank is still paying for it next year.

"New delinquencies for auto loans and credit cards remain at elevated levels." - Federal Reserve Bank of New York, Household Debt and Credit Report, Q2 2026

This, of course, leads us to the most common question asked: "If consumers are this squeezed, why is spending still growing?" It’s a good question, and one where the media tends to spin a story around Wall Street's favorite word, "resilient."

The problem is that every one of those workarounds to “keep spending” has a limit. I discussed much of this when we walked through the same pattern last winter in The Consumption Conundrum. At that time, sentiment was sitting at decade lows, but spending refused to roll over. Not much has changed since. Nonetheless, longer hours, thinner savings, and more credit can bridge a gap for a few quarters. None of them can bridge it forever.

Why Real Wages In 2026 Hurt More Than In 2022

Let’s take a look at a recent example, and a fair objection goes something like this: “real wages fell far harder in 2022, down more than 3% at worst, and consumers kept right on spending.” That's true. It also misses what carried households through 2022. Job openings topped 11 million, so switching jobs was the fastest way to increase available wages, and families were still sitting on pandemic-era savings.

Today, openings are near 7.1 million, unemployment is 4.2%, and the economy added just 29,000 jobs in September. The 2026 consumer faces a smaller shock with far fewer shock absorbers. The 2022 consumer could quit and find a better-paying job by Friday. The 2026 consumer, stuck in what economists now call a "low hire, low fire" labor market, mostly can't, and that's why a modest drop in real wages this year could do more damage than a big one did four years ago.

Consumer Stocks Are Already Voting

The stock market doesn't wait for GDP. The ratio of consumer discretionary stocks to consumer staples has fallen about 19% from its late-2025 peak, suggesting the so-called "smart money" has been quietly moving out of what people want and into what people need for most of this year.⁵ 

Notice in the chart above that the ratio broke down in February, a month before gasoline's run fully showed up in the CPI.

"The paycheck is the last line of defense for the consumer. When it starts losing to the gas pump, the market sells the mall first."

Third-quarter earnings season is now underway, and the early reads fit the rotation. Domino’s reported U.S. same-store sales up just 0.3%, with customers ordering fewer items per order.⁷ September retail sales looked solid on the surface, up 0.8%, but excluding gasoline, they rose only 0.2%.⁸

Over the next few weeks, we will hear from the major retailers. During those earnings calls, I’ll be listening for the same language on retail, restaurant, and travel calls: “trading down,” “choiceful consumer,” and “smaller basket sizes.” That language usually surfaces on earnings calls a quarter or two before it appears on the revenue line.

"Consumers remain under pressure, but they continue to choose Domino's."- Joe Jordan, CEO, Domino's Pizza, Q3 2026 results, via Nation's Restaurant News

Where The Bulls Are Right

The bulls have a real point. Energy shocks reverse, and when they do, the math reverses with them. Gasoline is a small slice of the CPI basket, but the CPI math works both ways, and a sharp drop in crude would flip real wages in 2026 back to positive within a few months. Gulf oil flows have recovered toward prewar levels, and the national average for gasoline eased to about $4.36 a gallon in early October before crude spiked again.⁹ Core real pay is still growing, and unemployment remains low by historical standards. If oil breaks, discretionary stocks could snap back hard.

Will that happen? Maybe. However, I wouldn't build a portfolio around an oil forecast when tankers are still being hit in the Strait of Hormuz, and Brent just pushed back above $115 a barrel.⁹ Howard Marks titled one of his best memos "You Can't Predict. You Can Prepare." That's the right frame here. Such is the nature of "bad" inflation, which I covered in Bad Inflation Cures Itself. Good Inflation Doesn't. It does cure itself, but the cure is demand destruction, and demand destruction shows up first in the earnings of companies selling things people can live without.

What Real Wages In 2026 Mean For Your Portfolio

When it comes to managing an investment portfolio, here's how we are thinking about it. First, we need to ask how much of our overall equity exposure depends on healthy lower- and middle-income consumers. This is because that's a wider net than the discretionary sector alone. Secondly, we need to treat "buy the dip" rallies in consumer names ahead of earnings with suspicion until guidance confirms them. When the consumer is stretched, pricing power and clean balance sheets matter MORE than growth stories. Lastly, we need to watch the monthly real earnings print for signs of weakness.

Remember that patience is a position. We will watch real wages closely each month, and the moment the BLS shows paychecks beginning to outpace headline inflation again, that will be the signal to lean back into consumer names. That one signal is stronger than any analyst's price target you will read.

Bottom line: Real wages in 2026 are negative because of energy, households are bridging the gap with hours and credit, and consumer stocks are already pricing the day that bridge runs out.

The consumer always spends right up until the day it can't.

Questions This Article Answers

Are real wages falling in 2026?

Yes, on a headline basis. The BLS reports real average hourly earnings fell 0.7% over the year to September 2026, and real hourly pay has been negative every month since April. Adjusted for core inflation instead, real pay is still up about 0.4%.

Why are real wages negative if paychecks are rising 3%?

Because energy prices are rising much faster. Gasoline was up 34.2% and energy 20.4% over the year to September, pushing headline CPI to 3.7%, above wage growth of about 3.0%. Core inflation, at 2.6%, is still below wage growth.

How do falling real wages affect consumer stocks?

Falling real income squeezes spending on things households can postpone, which hits discretionary companies first. Consumer discretionary stocks have already fallen about 19% relative to consumer staples since their late-2025 peak, and third-quarter earnings guidance will show whether that rotation was justified.

Sources & Notes:

1. U.S. Bureau of Labor Statistics, Real Earnings, August 2026.
2. U.S. Bureau of Labor Statistics, Consumer Price Index, August 2026.
3. U.S. Bureau of Economic Analysis, Personal Income and Outlays, August 2026.
4. Federal Reserve Bank of New York, Household Debt and Credit Report, Q2 2026, August 11, 2026. The delinquency figure is the annualized flow of credit card balances into 90+ days delinquent.
5. Massive Market Data, weekly closes for XLY and XLP, January 2025 through October 2, 2026. Calculations by RIA Advisors.
6. U.S. Bureau of Labor Statistics, The Employment Situation, September 2026, released October 2, 2026.
7. Replication note. The real hourly earnings series in the chart was rebuilt from BLS average hourly earnings for all private employees and CPI-U and core CPI index levels, pulled via Massive Market Data. Our computed August 2026 reading is −0.2% versus the BLS-published −0.3%, a gap we attribute to rounding and index-level differences. October 2025 CPI was never published, so that month is omitted. Job openings are from the BLS JOLTS survey via the same feed.

The post Real Wages 2026: Why Consumer Stocks Feel It First appeared first on RIA.

The S&P 500 has gone nowhere since June 1, but beneath the surface, a stealth bear market, driven by a series of significant value vs. growth rotations, has significantly impacted many S&P 500 members. Over the last five months, the S&P 500 is up about 1%, yet at some point during the period, 182 S&P 500 stocks, or 36% of the index, fell 20% or more from their 2026 highs. Furthermore, 108 stocks were already down 20% from their respective 2026 peaks before June. All in all, nearly 58% of the index has fallen at least 20% from peak to trough this year, which many consider bear-market territory. Market breadth like that usually signifies a declining market, not a flat one.

The relatively flat index reflects massive rotations, not a calm environment. The S&P 500 Growth ETF (IVW) is down 2.6% since June 1, while the Value ETF (IVE) is up 5.4%. That doesn't nearly tell the whole story. Consider that the ratio of growth-to-value (IVW:IVE) fell 11% into late July, rallied 14% into early October, and has since given back 9%. Each swing of that ratio pushed one group of stocks lower while the other rose and compensated, keeping the S&P 500 relatively flat.  

This churning could have a constructive outcome. A series of rolling corrections, as we have had, unwinds excesses stock by stock, leaving the S&P 500 with less need to correct. However, none of this heavy rotational activity means the S&P 500 is immune from a correction. But doing so would likely require both growth and value to decline at the same time.

What To Watch Today

Market Trading Update

Yesterday, we discussed how AI concentration now sets the margin of error for the entire portfolio. Today, let's take on the question filling our inbox. Is it time to trim value and buy beaten-down tech stocks?

Start with the scoreboard. As of Tuesday's close, the S&P 500 Value ETF (IVE) sat within 0.1% of its 52-week high. The iShares Semiconductor ETF (SOXX), meanwhile, closed at $511.06, 22% below its June 22 peak. Notice in the chart below that the ratio of semis to value remains 26 percentage points below its peak. On October 22, it closed under its lower 2-standard-deviation band as its RSI fell to 28.7. That was the first oversold reading since the April 2025 tariff panic, and the ratio has since climbed back above its 200-day average.

So my answer is yes, but as a rebalance and NOT a wholesale rotation. Bob Farrell's Rule #1 says markets return to the mean over time. Value has run to the top of its range while semis sit near the bottom of theirs. Value isn't broken. It's simply where the gains are parked.

The cynic in the room will call this buying "cheap" for the sake of cheap. Fair enough, which is why beaten-down tech is not one trade. As the next chart shows, software (IGV) and cybersecurity (CIBR) trade near their highs. That's where money hid while hedge funds dumped tech at the fastest pace since 2016. The real damage sits in chip equipment, custom silicon, and the platforms. Applied Materials is 45% below its high, and Broadcom is down 29%. Alphabet and Meta are each about 20% off their highs and below their 200-day averages.

Here's where I would focus:

• The cash-rich platforms come first. Alphabet and Meta have enough non-AI revenue to sustain their spending despite slower payoff.
• Quality semis with pricing power come next. Nvidia and Broadcom remain the toll collectors of the buildout.
• Equipment gets the smallest dose. Applied Materials offers the most upside and the most risk until order books stabilize.

Avoid anything funding the buildout with borrowed money, from Oracle to the neoclouds.

Execution matters more than the call. Trim value holdings back to target weight, not below it, then add to tech in thirds. Microsoft and Alphabet reported last night, and Amazon reports tonight. Put the first third to work now. Add the second if the ratio holds its 200-day average near 2.09 through earnings, and the third on a reclaim of its 50-day near 2.26. A close below the October 22 low near 1.99 ends the trade. 

Such is the nature of rebalancing. It always feels early, and it usually is. The bargain bin is full of stocks that looked cheap all the way down.

Reader Question: 20 Year Treasury Bonds

A reader sent us the following question:

I am contemplating buying a longer Treasury Bond. I see that the 20-year has a higher yield than the 10- and 30-year. Why wouldn't I buy the 20-year?

As we wrote our response, the 20-year Treasury yield was 5.343%, versus 5.280% on the 30-year and 4.995% on the 10-year. The curve humps in the middle of the long end, which, as our reader alludes to, is extra yield.

The reason for the premium yield has nothing to do with credit risk, since all 3 options are obligations of the US Treasury. It is a function of demand. Pension funds and insurance companies tend to buy 30-year bonds to match their long 30+ year liabilities. Second, the 30-year is one of the most actively traded across the curve; thus, liquidity is robust. Unlike the 30-year or 10-year, the 20-year doesn't have an active natural buyer base. To wit, the Treasury stopped issuing it in 1986, brought it back in May 2020, and auction sizes are much smaller than 10- and 30-year auctions. The bottom line: the extra yield compensates the buyer for owning something slightly less liquid, not something riskier.

Three considerations for our reader:

• As we show below, the 20-year bond yields about 21 bps more than it should on interpolated levels, but only 6bps more than the 30-year.
• Given our reader is likely buying small amounts compared to institutions, the liquidity differences between 10-, 20-, and 30-year bonds for a retail investor should be minimal.
• Duration matters. At 12.2 years of modified duration, a 47-basis-point rise in yields erases a full year of coupon. Alternatively, a five-year Treasury note yielding 5% can rise over 1% before it offsets the coupon payment.

The Fed Risks Policy Error Fighting Oil Prices

We got rebuked by some and applauded by others for asking, Are Bonds Pricing In A Fed Policy Mistake?  Given the strong feelings for the topic, we think it is worth digging into our question a little deeper. To help us, United Airlines’ recent earnings report offers a timely illustration of inflation mechanics and one that supports our growing concern that the Fed, by raising rates, risks making a policy error.

United reported that its fuel expenses jumped 62% from a year ago as the average price it paid for jet fuel rose to $3.90 a gallon. Importantly, United’s CEO Scott Kirby said the company “will not recapture 100% of fuel costs in Q4.” Not “recapturing 100% of fuel costs” means United raised fares to offset jet fuel costs. Whether they raised fares enough to cover higher energy costs is irrelevant to this article. What matters is that higher energy costs are being passed through to consumers via airline fare inflation.

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On Monday morning, Anthropic filed an SEC S1 form to begin the listing process on the Nasdaq under the symbol ANT. Three topics within the filing caught our attention.

Let's start with the financials, which are better than the headlines. Revenue for the first half of 2026 reached $16.3 billion, up sharply from $1.2 billion a year earlier. The headlines report an $80.7 billion net loss, which sounds horrendous, but, as we show below, $72.4 billion of it is a non-cash charge for revaluing convertible notes and similar instruments. That primarily reflects the company’s valuation rising. The company actually had an operating profit of $974 million. Cash and short-term investments stood at $131.7 billion at June 30.

The future funding needs are timely, given Meta’s stock split, which essentially opens up an equity funding line.  Anthropic spent $8.9 billion on compute and infrastructure in the first half alone, exceeding the $7.3 billion spent in all of 2025. The filing discloses purchase commitments and leases running through 2045, with a portion due before 2030 and the remainder between 2031 and 2045. We have seen credible estimates putting that number above $500 billion. Anthropic states it intends to secure further compute beyond those commitments and build its own data centers. To wit, a company sitting on $131.7 billion is telling investors it will need significant financing going forward.

Finally, the voting structure. The seven co-founders will hold a single share of Class F common stock entitling them to 50.1% of total voting power, with no economic rights. A separate trust elects a majority of the board through another nonvoting class. The filing warns the structure “may effectively eliminate the ability of holders of our Class A common stock to influence important decisions, including a change in control.” This structure takes a page from the Meta playbook, separating control of the company via voting rights from capital financing.

There is actually a fourth topic that we share in the Tweet of the Day below.

What To Watch Today

Market Trading Update

Yesterday, we discussed how hedge funds sold technology at the fastest pace since 2016 while retail investors stepped in to buy semiconductors. Today, let's look at what that tug-of-war means for the index, because AI concentration risk now sets the margin of error for the entire portfolio.

Nohshad Shah at Citadel Securities made the point well in a note on Friday. With so much of the market levered to the AI trade, he wrote, there is "precious little margin for error." The weights back him up. As of Monday's close, 18 AI buildout names, from Nvidia and the hyperscalers to the chip equipment and power suppliers, make up 33.6% of the S&P 500. Nvidia, Microsoft, Amazon, Alphabet, Broadcom and Meta alone account for 27.1%.

That math cuts both ways. If the AI complex drops 20% and nothing else moves, the S&P 500 loses 6.7%. To hold the index flat, the other 485 stocks would need to rally 10.1%. Notice in the chart below how quickly the required "support" from the rest of the market escalates.

Here's where it gets interesting. The rest of the market has been doing the lifting this month. Through Monday, the equal-weight S&P 500 (RSP) is up 4.5% in October, while the cap-weighted SPY is up just 0.4%. The RSP/SPY ratio bounced from 27.10 on October 7th, its lowest reading in 15 months, to 28.39. It's back above its 50-day average and pressing against its 200-day at 28.54.

The optimist calls that healthy rotation, and that may indeed be the case. However, it has only been a few weeks since a broadening market and a market losing its leaders look exactly alike. That doesn't necessarily equate to a massive change in leadership. The difference shows up in the index level. The S&P 500 closed Monday at 7,676.77, still just under its 50-day average near 7,700, even with the average stock rallying. That's what one-third concentration does. The other two-thirds can run hard and still only tread water.

Today is the test. The Fed announces at 2:00 p.m. ET, and Microsoft and Alphabet, together accounting for roughly 11% of the index, report after the close. Shah's capex warning is the lens to use. Meta spent $34.9 billion in the third quarter against $32.8 billion of operating cash flow. If two more hyperscalers show the same squeeze, the "sell the capex" trade gets another leg.

Such is the problem with a market built on one narrative. It doesn't need to be wrong to hurt you. It only needs to be less certain.

In our Equity Growth model, AI exposure stays at target weight, NOT above it, heading into Wednesday. If you're overweight the AI complex, trim back to target now while the equal-weight rally provides the liquidity. Put the proceeds to work in the sectors doing the lifting, and keep stops below the 200-day average near 7,295.

A thin margin for error is not the place to add leverage.

Who Will Survive The "AI Bubble"

There's a lot of talk about AI being a bubble. To be clear, AI is not a bubble; the technology is real and will most likely fundamentally change how we do business and, to some degree, how we live our lives. However, some stocks will likely go bust in the process. That is a hard fact of every major US innovation, from the railroad companies in the 1800s to today. To help appreciate the problem facing companies and how to better position yourself and try to avoid those companies that do not make it, we share the Morgan Stanley graph below.

The graph aggregates total spend and revenue by hyperscalers and neoclouds. For purposes of this discussion, let's ignore the numbers in the graph and focus on the framework. In 2026, it shows that the money these companies spend to build out AI computing dwarfs the revenue they generate. For 2027 and 2028, it shows estimates of capex spending alongside the annual recurring revenue (ARR) that would justify such spending.

Again, ignore the numbers. The graphic really shows that AI companies face a timing issue. Can revenue grow soon enough to justify and, importantly, finance the spend? The neoclouds, like CoreWeave, now facing 15% borrowing rates, better hope revenue picks up quickly. For big hyperscalers like Amazon, Meta, and Google, they have significant revenue from other sources and the ability to keep funding, reducing reliance on revenue timing. Taking it a step further, a neocloud default could create an opportunity for a hyperscaler or other company to buy data centers and/or GPU chips for fractions of a dollar.

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We got rebuked by some and applauded by others for asking, Are Bonds Pricing In A Fed Policy Mistake?  Given the strong feelings for the topic, we think it is worth digging into our question a little deeper. To help us, United Airlines' recent earnings report offers a timely illustration of inflation mechanics and one that supports our growing concern that the Fed, by raising rates, risks making a policy error.

United reported that its fuel expenses jumped 62% from a year ago as the average price it paid for jet fuel rose to $3.90 a gallon. Importantly, United’s CEO Scott Kirby said the company "will not recapture 100% of fuel costs in Q4."

Not “recapturing 100% of fuel costs” means United raised fares to offset jet fuel costs. Whether they raised fares enough to cover higher energy costs is irrelevant to this article. What matters is that higher energy costs are being passed through to consumers via airline fare inflation.

Jet Fuel Is Fueling Inflation

The CPI data confirms that higher fuel costs are fueling airfare prices. To wit, airline fares rose 22.4% over the last year. While airline fares rose mainly because of higher energy costs, those increases still factor into core CPI, even though core CPI excludes energy prices. The BLS classifies airfares as a transportation service, not energy.

With a weight of roughly 1.1% of the BLS core CPI figure, airfares alone added about a quarter point to the 2.56% core CPI annual reading for September. In other words, the Iran-driven oil shock and recent events in the Ukraine-Russia war are leaking into the inflation measure the Fed believes excludes energy prices.

From an investment perspective, this wonky CPI discussion could matter for financial markets if the takeaway is that the Fed is misgauging core inflation. A false reading of oil's impact on CPI, given its transitory nature, makes the Fed more prone to policy error with negative implications for the economy and ultimately the stock market.

Oil Exposure In The CPI Figure

Airfares are not the only CPI items sensitive to oil prices and contributing to core CPI.  Accordingly, we looked for other CPI items whose prices strongly correlate with oil. We weren’t just looking for a strong correlation; we also considered the time lag between energy price changes and when those changes affected selected goods. With this logic, we built our own version of core CPI that strips out energy and energy-related items with high correlations and short lag times.

The model tests the correlation of CPI components against WTI crude prices since 2008. The table below shows the results. We grouped candidates for exclusion into 3 tiers:

• Tier 1, direct petroleum fuels: gasoline, diesel, and other motor fuels, fuel oil, propane, and kerosene. These products have the tightest link to crude oil, and the BLS excludes them from the core CPI, as do we.
• Tier 2, fuel-intensive transportation: airline fares, other intercity transportation (bus, rail, and ship fares), and delivery services. Jet fuel is a large share of airline operating costs, and parcel carriers add fuel surcharges. Delivery services are the closest the CPI comes to measuring trucking costs affected by diesel prices. We exclude these from our core CPI while the BLS includes them.
• Tier 3, weak or lagged: car rental, moving and freight, local transit, tires, and vehicle accessories. These prices are linked to oil, but the data show a delayed relationship. We keep them in our core CPI measure.

Interestingly, moving, storage, and freight- the item that sounds most like trucking- have a correlation of only 0.14. Pricing for those services is much more dominated by labor costs.

We placed electricity and natural gas in Tier 1 as the BLS already removes both from core CPI. Combined, Tiers 1 and 2 account for 7.51% of the CPI.

Tier 3 is interesting. It includes tires and vehicle accessories, including motor oil, which show little relationship with oil prices in the same month, with correlations of 0.27 and 0.15. However, their correlations jump to 0.59 and 0.66 when compared to oil prices nine months earlier. Synthetic rubber, carbon black, and lubricants are petroleum-based, but manufacturers and retailers pass those costs through slowly. Car rental has a modest 0.52 correlation, but renters buy their own fuel.

Tier 3 prices are affected by oil, but with a long enough lag that we thought it best to exclude them to give us a more current assessment of inflation. However, because oil prices started rising in March, the impact on Tier 3 prices is starting to reach core CPI. Thus, our core CPI is slightly higher than reality.

Oil Explains The Inflation Rebound

The first graph shows that our Tier 1 and 2 basket tracks crude closely, with a 0.83 correlation over the last 25 years.

As shown below, oil and energy-related items added 1.49 percentage points to headline CPI. That is large but not unprecedented. They added 3.23 points in June 2022 and subtracted 3.51 points in July 2009.

The next graph shows how high oil prices impact the BLS headline CPI and its core CPI, as well as our core CPI model. In January, BLS core CPI and our core ex-Oil were nearly identical at about 2.5%. As oil rose, the BLS core climbed to 2.85% in May, while our measure peaked at 2.59%. Most recently, the BLS core was 2.56%, versus 2.35% for our Core. The gold shading represents the impact of fuel-sensitive services inside core CPI.

Over the longer term, our core reading and the BLS core CPI are very similar. That makes sense, as Tier 2 is a small share of core prices. The two diverge only during oil shocks, like today.

While the 20-30 bps differential between our model and the BLS gauge is relatively small, we think our model overestimates core inflation and the differential is likely larger. As we discussed, we didn’t exclude some of the tier 3 items whose prices are rising with oil prices. We also didn't exclude other items whose prices are partially affected by higher oil prices. All in all, a more exhaustive analysis using our model would likely render a core CPI reading much closer to the Fed's 2% inflation target.

Policy Is Already Restrictive

The Fed raised rates by 25 basis points in September to a range of 3.75% to 4.00%. According to the minutes:

 Most judged that another rate increase would likely be appropriate by year-end.

The median Fed projection now puts the Fed Funds rate at 4.1% at year-end. As we wrote recently, Dallas Fed President Lorie Logan thinks another 50 basis points may be needed, and other members have echoed her sentiment.

The Fed gauges how restrictive policy is by comparing Fed Funds to inflation. Using BLS headline CPI, the real Fed Funds rate is roughly zero, which supports the hawks' argument that policy is not restrictive. Using our Core CPI, the real rate is 1.40%.

The Fed's quarterly economic projections (SEP) provide some context for gauging whether policy is restrictive or easy. Its longer-run Fed Funds estimate is 3.2%, alongside a 2% inflation target. That implies the Fed views a real rate of about 1.2% as neutral. Using our core figure, Fed policy is already .20% above the Fed's neutral rate. If the Fed hikes in October or December, that number will rise.

Long-Term Rates Make Policy Tighter

Consumers and businesses do not borrow at the Fed Funds rate. Mortgages, corporate bonds, and many bank loans are priced off longer-term Treasury yields. The 10-year Treasury sits around 5%. Subtracting our core CPI, the real 10-year yield is 2.64%, the highest since 2010. The average since 2008 is just 0.26%, as we share below.

Borrowing costs this far above inflation weigh on housing, capital spending, and credit-sensitive sectors. In other words, the bond market is doing much of the Fed's tightening for it.

Is The Fed Overreacting To Oil?

Oil prices did not rise because the economy overheated. WTI averaged $58 in December 2025 and has oscillated between $80 and $105 as the conflict with Iran and the threat to shipping through the Strait of Hormuz disrupted supply.

Higher interest rates will not reopen shipping lanes or pump a barrel of oil. Rate hikes work by slowing demand, and their full effects can take a year or more to show up. If the Fed tightens further in response to oil-driven inflation, it risks slowing the economy. The prolonged impact of raising the Fed Funds rate, coupled with the recent surge in long-term bond yields, is exactly the kind of over-restrictive policy mistake the bond market may be worried about, helping explain the recent decline in long-term yields.

Summary

Our core CPI is about 20 to 30 bps below the BLS version, with both trending flat to lower. As we showed, unlike the headline CPI number, they are not overly concerning, though they are above the Fed’s 2% target.

This suggests the Fed may be fighting higher oil prices with a policy designed to slow economic growth and tighten financial conditions.  If the BLS core CPI and our core CPI continue to drift toward 2% or fall below it, the risk of policy increases with each Fed Funds hike and each tick higher in longer-term yields. 

The post The Fed Risks Policy Error Fighting Oil Prices appeared first on RIA.

According to Goldman Sachs prime brokerage division, hedge funds cut technology positions in mid-October at the fastest rate since 2016. The selling helps explain recent weakness in the Nasdaq 100, which recently had its worst week since April 2025. Goldman’s data also shows that global AI stocks gave back every dollar of net buying hedge funds had accumulated since early 2025. The data, which some may read as suggesting hedge funds are bracing for a decline, is a little misleading.

Technology shares still represent 23.5% of Goldman’s global prime book, putting it in the upper 90th percentile over the past five years. While total technology holdings matter, what's more telling is the speed of the reductions. To that end, hedge fund net leverage fell to a one-year low of 48.6%, suggesting they reduced leverage in a more defensive posture but kept their exposure to technology stocks.

That distinction is important. Selling at a record pace from a 90th-percentile allocation is not capitulation. It is a crowded trade getting marginally less crowded. There remains considerable room to deleverage and sell if the AI financing story deteriorates further. However, now there is room for hedge funds to lever back up into the technology sector.

Retail investors, known by institutional investors as the “dumb money,” bought $2.6 billion of semiconductors the same week hedge funds sold aggressively. $2.6 billion is a 96th-percentile reading. When professionals sell a crowded position and retail steps in to absorb it, the market has historically viewed that as a bearish signal. Recently, however, the "dumb money" has been on the right side of the trade more often than not.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed how the market's biggest buyer is stepping back, with the S&P 500 resting on its 100-day moving average at 7,605. Today, let's look at the calendar, because year-end seasonality is about to turn in the bulls' favor.

As shown below, October 21st through the 27th has been the weakest stretch of the month since 1950. On average, the S&P 500 surrenders about 70% of its October gain in that window, bottoming on the 27th. The final four sessions then recover all of it and a little more. This year followed the script almost to the day. The index slipped 1.7% from the October 21st close of 7,757 to Friday's 7,623.68.

The fundamentals support the seasonal turn. According to FactSet, 24% of S&P 500 companies have reported, and 83% beat estimates, above the 5-year average of 78%. Blended Q3 earnings growth sits at 29.5%. More telling, a record 72 companies issued positive EPS guidance for the quarter, against a 10-year average of 40. Only 44 guided lower, well below the norm of 57. The catch is the size of the beats. The aggregate surprise is just 2.1% versus a 5-year average of 7.5%, which suggests analysts have finally caught up with reality.

So what happens next? From the October 26th close through December 31st, the S&P 500 has averaged a 3.94% gain since 1950 and finished higher 82% of the time. This year stacks the deck further. 2026 is a midterm year, the index is up 11.4% year-to-date, and October is slightly negative month-to-date. Each of those regimes lifts the average return to between 4.5% and 5.6%. In the nine midterm years with a positive year-to-date gain, the market finished higher every single time.

Applied to Friday's close, the long-run average implies roughly 7,925, above the October 6th record. However, averages are NOT forecasts. The worst outcome came in 1973, a 12.4% decline. The closest analog may be 2018, also a midterm year, when a Fed hiking into rising yields produced a 5.7% loss over the same window. With the FOMC meeting on Wednesday and the 10-year near 5.0%, the risk of over-tightening deserves respect.

Our playbook hasn't changed. The 100-day average at 7,605 is the line. If it holds through Wednesday's Fed decision and the Microsoft and Alphabet reports, we'll use the seasonal tailwind to rebalance back toward growth. If it breaks, we wait for the September 16th low at 7,564 or the 200-day at 7,293 before adding risk. Keep stops below the 200-day either way.

The calendar won't save a portfolio that ignores the tape.

Healthcare Is Red Hot: Time For a Change?

The "out-of-technology" rotation is playing out in an interesting way. About a month ago, the technology sector was in the upper-right corner of the graph, with absolute and relative scores in the 80s and low 90s at times. Except for energy, almost every other sector was oversold, with many deeply oversold. In less than four weeks, healthcare is now very overbought, alongside energy, which lingers in overbought territory due to the Iran war. Many interest-rate-sensitive stocks are clustered at fair value. Sitting slightly in oversold territory are technology alongside the more energy-sensitive transportation and industrial stocks.

Healthcare stocks are unique in that they are not overly sensitive to interest rates or economic activity. Thus, with the sell-off in technology, it seems to be the sector investors are most comfortable with. Interest rate-sensitive stocks like utilities, staples, and real estate have improved but seem hesitant to lead the market as rates remain very high and it's still unclear whether this bond rally has further to go. Similarly, with higher rates and the Fed likely raising rates again Wednesday or in December, investors aren't gung-ho about economically sensitive stocks. For now, healthcare seems like the safe sector. However, healthcare is very overbought and seemingly ripe for a rotation in the coming weeks.

Will the technology financing concerns continue, pushing the sector into more oversold territory? Might rates keep falling and, in the process, boosting interest rate-sensitive stocks? Lastly, energy is and has been very overbought. It might continue that way until the Iran crisis simmers down. But beware: a durable peace agreement with Iran could likely set energy stocks to underperform and push the sector to the bottom-left corner of the scatter plot.

Griffin May Be Right About AI: The Timing Could Be Very Wrong

Ken Griffin told a room full of investors recently that we are “almost certainly” in an AI bubble. He may well be correct in that assessment, and there are plenty of media narratives that support that view. However, as always, the problem is that “right” isn’t a trade. Timing the AI bubble is where the money is made or lost, and history is littered with smart people who called a bubble correctly and still cost their clients a fortune by acting on it too soon.

“Being right, and being early, is the same thing as being wrong.” – Howard Marks

Again, I don’t disagree with Griffin’s thinking, and I want to stay entirely neutral in this analysis. Here are the two arguments as they stand currently, and both are likely correct.

• The bullish argument is that AI technology is transformational.
• The bears argue that the prices being paid for it look stretched.

The question that we want to answer, and the only one that actually matters for your portfolio, is what to do while both are true, possibly for years.

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To paraphrase Peter Lynch, timing the AI bubble is the hard part, and history says going to cash early can cost more than the crash itself.

Ken Griffin told a room full of investors recently that we are "almost certainly" in an AI bubble. He may well be correct in that assessment, and there are plenty of media narratives that support that view. However, as always, the problem is that "right" isn't a trade. Timing the AI bubble is where the money is made or lost, and history is littered with smart people who called a bubble correctly and still cost their clients a fortune by acting on it too soon.

"Being right, and being early, is the same thing as being wrong." - Howard Marks

Again, I don't disagree with Griffin's thinking, and I want to stay entirely neutral in this analysis. Here are the two arguments as they stand currently, and both are likely correct.

• The bullish argument is that AI technology is transformational.
• The bears argue that the prices being paid for it look stretched.

The question that we want to answer, and the only one that actually matters for your portfolio, is what to do while both are true, possibly for years.

Griffin And Fink Are Both Right

Griffin's comments at Citadel's Future of Global Markets conference weren't a dismissal of AI. They were a description of how every great technology gets financed.

"Any radical transformation of our economy is generally intertwined with a bubble. Corporate America has been very uneven in its ability to extract value from its AI models."- Ken Griffin, Citadel, October 20, 2026

That seems correct. However, a day later, BlackRock's Larry Fink argued the opposite risk on Bloomberg Television. Compute is scarce and expensive, he said, and "the faster we can build out more data centers, the more compute we have, the faster we can bring down the cost." In other words, the real risk is slowing the buildout, which, in his view, "jeopardizes the economy."

Here is the critical takeaway to incorporate in your thought process. Giffin and Fink don't have opposing views. Griffin is talking about the price investors pay. Fink is talking about whether the infrastructure needs to exist. Railroads, electrification, and fiber optics all changed the economy, and all three also destroyed a lot of the capital that built them. Both arguments can exist simultaneously. Notably, and this is the uncomfortable part, it means the bubble and the progress can run together for a long time.

However, let's analyze Griffin's argument more closely.

The Case That Griffin Is Right

Let's start with the mainstream narrative popular among permabears: "AI is a bubble because there's no revenue."

That isn't accurate. Anthropic booked $16.3 billion of revenue in the first half of 2026, up from $1.1 billion a year earlier, according to the Wall Street Journal's review of its draft S-1.¹ The issue is the size of the bill relative to that money. The same filing shows roughly $450 billion in compute commitments over the next decade, much of it payable whether the capacity is used or not, and up to $750 billion, including deals still in negotiation.¹

Before you point fingers and say "See, Anthropic is going to fail," you need to put that $16 billion in revenue into perspective.

Anthropic didn’t sell its first product until 2023. Coca-Cola has been selling soda since 1886. Yet in the September quarter, Anthropic booked $16.8 billion of revenue, more than Coca-Cola, Netflix, Uber, or Intel, and more than triple the $4.7 billion it reported just two quarters earlier.

If we annualize that quarter, the revenue “run rate” lands near $67 billion. That’s already above the roughly $45 billion a year its signed commitments average over the next decade. That shrinks the 28x gap to something much closer to 7x.

Furthermore, the financing of the AI buildout is also changing. In the early stages, the hyperscalers funded the early buildout from free cash flow. Fast forward, and Goldman Sachs' credit team now expects project finance plus direct hyperscaler issuance to hit roughly $720 billion in 2027, up from about $37 billion of project finance in 2025.³ And as I noted earlier this week in AI Capex And Earnings: What Happens When Growth Slows, AI spending now drives about half of S&P 500 earnings growth. The risk is not that spending declines and hurts earnings; it just has to stop accelerating.

That said, a decline in free cash flow isn't automatically a warning sign. What matters is the "why free cash flow is falling." A company burning cash because customers are leaving or margins are collapsing has an operating problem. A highly profitable company choosing to pour its cash into new capacity has made an investment decision.

As I showed in AI Capex Depreciation Risk Is The Catch To Record Earnings, consensus estimates have the five hyperscalers' combined free cash flow dropping roughly 91% this year to about $16 billion. Those estimates then have it recovering to about $185 billion in 2028 and roughly $387 billion by 2029 once the heaviest building is done.⁴ Yes, the decline in free cash flow is real, but what matters is whether the returns on that spending show up before the debt comes due. Such is the difference between Microsoft funding data centers from its operations and a neocloud borrowing against its GPUs.

Lastly, there is also the market's breadth issue. When the average stock keeps pace with the giants, a market is healthy. Since January 2018, the equal-weight S&P 500 has lost about 26% relative to the cap-weighted index, with most of that damage coming after the AI trade took hold in 2023.

The Case That This Isn't 2000

As I stated at the outset, the goal is to analyze the current environment for the real versus perceived risks. In Spotting Market Bubbles: Why History Says It's Nearly Impossible, I compared 13 indicators against 1999. Four looked similar or worse. Six looked better, and three remain worth watching. But there is a critical distinction: the leaders of this cycle aren't Pets.com, which went public with nine months of cash. Microsoft, Alphabet, Amazon, and Meta generate enormous profits and fund most of their spending from operations.

The productivity argument also deserves significant consideration. In the early 1980s, computers appeared everywhere but didn't significantly affect productivity statistics until the mid-1990s. Flat productivity growth today may simply mean AI is early, not that it's a failure, which is the immediate go-to argument for the bears.

When you put both cases side-by-side, the real answer to the question of "is it a bubble?" is "maybe." That's not a dodge. It's what the evidence actually says.

Is AI A Bubble? Right Is Not The Same As On Time

Let's suppose that Griffin is completely correct in his assessment. Should you sell all your investments today? History says no, or at least NOT yet. As I wrote in Market Bubbles: A Rational Guide To An Irrational Market, recognizing a bubble is one skill, but the "timing" of when you take action is something else entirely. This AI cycle, whether it is a bubble or not, will be no different.

Here is a good example of prediction and timing. Alan Greenspan warned of "irrational exuberance" on December 5, 1996, with the Nasdaq near 1,300. Greenspan was 100% correct in his assessment. The problem, if you heeded his warning and sold your investment, is that the Nasdaq went on to nearly quadruple, closing at 5,048.62 on March 10, 2000. Of course, after that massive run, the "irrational exuberance" finally popped and the Nasdaq declined by roughly 78% by October 2002.⁵ 

The point is that while the "warning" did eventually come to fruition, and Greenspan was validated for his call, it took more than three years of watching everyone else get rich. Most people don't have the stomach for that, so they buy back in near the top and get the worst of both outcomes.

However, here is an even more recent example that most have forgotten about entirely.

What Happened To The Bubble Callers Of 2019

Here's where this gets personal. Seven years ago, plenty of serious people said the market was in a bubble, and the data backed them up. In January 2020, I wrote in Market Bubbles: It's Not The Price, It's The Mentality that the S&P 500 was trading nearly 90% above its long-term median valuation. I also wrote that the only missing ingredient for a correction was a catalyst to bring "fear" into a complacent market. A year later, Jeremy Grantham called the market a "fully fledged epic bubble."⁶

The valuation data was accurate, and the catalyst even showed up a few weeks later, in the form of COVID leading to a swift 35% decline. But if you had sold the market in January 2020 due to the media's calls for a bubble and failed to get back in after the pandemic crash, here is what that mistake would have cost you.

But read the following chart very carefully.

An investor who went to cash in October 2019 would need a decline worse than in 2008 just to break even with the investor who stayed. Even the investor who sold on Grantham's January 2021 warning, and then watched his call partly vindicated by the 2022 bear market, would need stocks to drop roughly 44% today to catch up. Being early on a bubble call isn't a small mistake. It compounds every year the bubble keeps inflating. That's the real cost of timing the AI bubble, or any bubble, too early.

Peter Lynch put it better than anyone. To wit:

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."- Peter Lynch, former manager of Fidelity Magellan

None of that means that valuations don't matter; they do, and they matter a lot. I argued that case in Asset Bubbles And Forward Returns; however, as I stated in that article:

"Valuations are a terrible timing indicator, but over the long term they tell you a lot about expected returns."

Both statements are true at once. Such is precisely why the decision shouldn't be framed as in or out.

The Strongest Case Against Staying Invested

The bearish case is real, and I am not dismissing it. What I am suggesting is that you balance the bearish view against how markets have historically performed. However, there is a real caveat worth discussing, because Lynch's line doesn't apply equally to everyone. When bubbles do break, and they always do, the damage is severe. The largest equity bubble drawdowns in history ran from 57% to 99%. The Nasdaq needed 15 years to regain its 2000 high. Japan's Nikkei took about 34 years.

So, this is the point that each person must evaluate for themselves, and it all comes down to time.

"The math of staying invested works if you have 20 years, but I retire in three." 

Time is the most valuable commodity we have because it is the one thing we can not get more of. A 50% decline is survivable at 40. However, at 65, when one is drawing income from their portfolio, it can permanently change the retirement plan. This is the precise problem we discussed at length in Sequence Of Return Risk: The Math That Breaks Retirements. Your timeline, not Griffin's forecast, should set how much bubble risk you carry. For a retiree, timing the AI bubble matters far less than surviving it.

How To Participate With The Bubble: Rules To Follow

Are we in a "bubble?" Maybe, but we won't know for sure until it finally pops. Therefore, going to cash on a bubble call has a cost that history keeps measuring. However, riding the trade with no plan has a cost that history also measures, usually all at once.

The middle path is participation with rules, and the rules have to be set now, while you're calm, because nobody writes good rules during a 20% drawdown. Trying to time the AI bubble is essentially equivalent to a coin flip, but managing your risk and exposure to the "bubble" isn't.

Skip the light switch. As I wrote in the bubble-spotting piece, stocks aren't a light switch. The choice is rarely fully invested or fully in cash. You can adjust exposure in steps as conditions change, so you never have to be exactly right about timing.

Size it, then rebalance it. Before you invest your first dollar into anything, decide, in writing, how much of your portfolio you're willing to have tied to any trade, let alone AI. Remember that a plain S&P 500 index fund already carries a large share of the AI trade. Take programmatic steps to manage risk, such as rebalancing to target weights on a set calendar. Rebalancing is profit-taking you don't have to agonize over, and in a bubble it's the only kind most people actually do.

Own cash flow, and skip the leverage. Focus on, and favor, companies that fund their AI spending with free cash flow over those that fund it with debt and "take-or-pay" contracts. Notably, don't add margin or leveraged ETFs of your own on top of a buildout that is increasingly debt-financed. Leverage is the fuel that turns a simple market correction into a financial catastrophe.

Set the exit, and watch what ends bubbles. Always define in advance, and always in writing, what will cause you to reduce portfolio risk. One simple tool is a break of the 40-week moving average. Also, pay close attention to liquidity and credit spreads. This is because bubbles usually end with a tightening of monetary policy or a credit-related event, not because of a change in the narrative. When AI-related spreads widen while stocks hold near their highs, the bond market is telling you something important.

Match the risk to your timeline. Most importantly, the closer you are to needing your investment dollars, the less risk belongs in the portfolio, particularly if you are concerned that Griffin is correct. That’s the one rule that keeps a market accident from becoming a retirement accident.

"Being right about the bubble won't protect your portfolio. Having rules before it pops will."

The bubble will end. It always does. The only question is whether you're still around, with your capital intact, when it finally matters.

The post Griffin May Be Right About AI. The Timing Could Be Very Wrong. appeared first on RIA.

S&P 500 companies have been the marginal buyer of US stocks for a decade. Stock buybacks reached a record $1.020 trillion in the twelve months through September 2025, accounting for roughly 60% of all cash returned to shareholders. That tailwind has had a big impact on returns. If we decompose the S&P 500 return from June 2021 to June 2026, we find earnings per share grew 13.2% annually while the price-to-earnings multiple contracted 1.1%. In other words, the entire advance came from earnings growth. Within that earnings growth, roughly 1.8% a year came from share count reduction rather than profit. That equates to about 14% of the total return, and 1,240 index points since 2016.

The tailwind may be fading as buybacks slow and new large IPO shares come to market. Alphabet and Meta both paused repurchases in the first half of 2026 to fund AI investment. As we discussed in Commentary last week, Meta went a step further, creating a new class of nonvoting stock that is essentially a funding mechanism, issuing shares, not retiring them. At the same time, new supply is coming from IPOs. SpaceX raised roughly $85.7 billion in its June offering and will further add to supply as lockouts occur. Additionally, Anthropic is expected to come public in November with nearly a $1 trillion offering. OpenAI will likely come over the next two quarters with a similarly sized offering.

The market is being asked to absorb new equity just as some of the largest buyers of existing equity are pulling back and, in some cases, like Meta, becoming net issuers. None of this says the market must fall, but it does warn that one of the market's biggest buyers could be much less influential.

What To Watch Today

Earnings

Economy

Market Trading Update

The S&P 500 closed Friday at 7,623.68, down 0.4% for the week. That leaves it 2.4% below its October 6 record close near 7,815. The index sits 1.0% below its 50-day moving average of 7,702 and is resting right on its 100-day average of 7,605. It remains 4.5% above the 200-day average at 7,293, so the longer-term uptrend is intact. Friday’s close also landed just above the lower 2-standard-deviation Bollinger Band at 7,604. Closes below that band are marked by short-term lows in March, June, late July, and mid-September this year. In the October 19 Before the Bell, we flagged a short-term momentum sell signal and a test of the 100-day. That test is here.

Momentum confirms the pressure. The 14-day RSI sits at 42, neutral but falling. MACD also crossed below its signal line, a sell signal that tends to cap near-term rallies. Neither reading is oversold, which means the index hasn’t finished correcting the way tech has. The divergence is the story. Equal weight rose 1.1% this week, and the Dow gained 1.4%. The average stock is holding up while the mega-caps drag the cap-weighted index lower.

Sector breadth tells the same tale from a different angle. Eight of 11 sectors are ahead of the index, measured by distance from their 50-day averages. Only technology, industrials, and communications are lagging. Energy is the most stretched, followed by health care and staples. The leaders have become the crowded trade, and the laggards are where a bounce would come from. That runs counter to the defensive posture that worked over the last three weeks, and it’s why we’re watching for a chance to rebalance back toward growth rather than adding to the winners.

This week is the test. Roughly 44% of the S&P 500 reports earnings, including Microsoft and Alphabet on Wednesday and Amazon on Thursday, on top of a Fed decision and the September PCE report. That’s a lot of information hitting a market that’s sitting on support. If the 100-day holds and the mega-caps show that AI spending is producing a return, oversold tech has room to rally. The first stop is the 50-day near 7,700, with the October 21 close at 7,757 just above it. If the 100-day breaks, the September 16 low at 7,564 is next, followed by the July 31 low near 7,494. The 200-day at 7,293 is where the bull trend gets questioned in earnest.

For traders, the playbook is simple. Don’t chase the defensive sectors at these levels. Look at taking some profits in stretched energy and staples positions. Then let tech reach a real oversold extreme before rebalancing toward growth. That means an RSI near 30 and closes below the lower band. Keep stops below the 200-day average. A rally into the 50-day is likely to see selling, so use strength to rebalance rather than to add risk. The most important level next week is the 100-day average at 7,605. Where the market closes relative to it after Microsoft and Alphabet report will set the tone into November.

The Week Ahead

Next week concentrates the quarter’s two biggest questions into forty-eight hours:

• Will the Fed buck market expectations and hike rates?
• Do capex plans from other large companies require equity issuance and a halt or reduction in buybacks?

The FOMC meets to make its policy decision at 2:00 PM ET on October 28. Fed Funds futures put the odds of a hike at roughly 10%, down from 28% a week earlier. December remains in play, with the odds of a hike at 85%. The statement language and the press conference will help investors better gauge the Fed's policy stance.

On Thursday, we will get GDP and September PCE. PCE prices will help guide the Fed on whether it's appropriate to hike at this week's meeting or if it's comfortable waiting until December.

StockTitan counts 542 companies worth $2 billion or more reporting this week, with many on Wednesday and Thursday. Microsoft and Alphabet report Wednesday after the close, Amazon Thursday. Apple comes the following week on November 2.

Fed Over-Tightening: How Much Runway Is Left Before It Bites?

The Fed raised rates in September, and the 10-year Treasury yield has since topped 5.3%, the highest since 2007.  That combination raises a question the market isn’t asking loudly enough. If long-term rates are already doing the tightening, does every additional hike from here raise the risk of Fed over-tightening? I think the answer is yes. What’s more, the data suggest the “runway” before the damage shows up is shorter than most assume.

On September 16, the FOMC voted 12-0 to raise the target range to 3.75%-4.00%, its first hike since 2023.¹ The new dot plot puts the year-end rate between 4.1% and 4.4%. Markets now expect a hold at the October 28 meeting but still price roughly three-in-four odds of another hike by December.² As I argued in why the Fed rate hike won’t fix the inflation it targets, the Fed’s tool works on demand and only demand. So the real question is where that demand is most exposed. Let’s take it in four steps.

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The stock-bond correlation broke twice in four years for the same reason, and both times the cause was inflation from the supply side. When that kind of inflation fades, the hedge comes back, and last week was the first look at it.

1. The tech rout just needed a reason. On October 2, the technology ETF sat 7.3% above its 50-day average, and we had already rotated toward value. Meta supplied the trigger, and semiconductor stocks have now fallen 16.4% over three weeks.
2. Bonds have failed as a hedge for most of 2026, and oil is why. Since March, SPY and long Treasuries have mostly fallen together, as headline CPI has climbed from 2.4% to 3.7% while core CPI has barely moved.
3. The short-term hedge just flipped back. The 20-day correlation between SPY and TLT ended the week at −0.24 after touching −0.30 on Thursday, its lowest reading since early March.

🏛️ Market Brief - Earnings Season Opens On A Raised Bar

The headline reason for this week’s tech rout was Meta. The company beat earnings estimates, then reported its first cash outflow in more than a decade as AI spending outpaced cash inflows. It also announced a two-for-one split and will issue non-voting shares to help fund the buildout. The stock fell 7% on Thursday, and the Philadelphia semiconductor index dropped 6.7%. The Nasdaq Composite had its worst day since early June. Friday added oil to the pile, with Brent settling at $116.72, a six-month high. The S&P 500 finished the week at 7,623.68, down 0.4% and its second straight weekly loss. The Dow, oddly enough, gained about 1.4%.

If you only paid attention to the headlines, you’d think Meta’s cash flow statement broke the “AI story” overnight. It didn’t. This is always the problem with “media headlines.” The media quickly suggested that Meta was the explanation for the selloff after the fact. It is the kind of headline that gets attached to a move once the move has already happened and everyone needs a story to explain it. However, in reality, the selloff didn’t need Meta. It just needed a reason, and Meta happened to supply one.

I say this because the setup was already in place three weeks ago. In the October 6 Daily Market Commentary, we wrote that “technology is very overbought” and that tech allocations sat in the 96th percentile of the past five years. That’s why we rebalanced the ETF Sector Rotation Model toward value and took profits in the growth factors. The numbers backed it up. On October 2, the technology ETF (XLK) sat 7.3% above its 50-day moving average with an RSI near 69. The semiconductor ETF (SMH) was 10.7% above its 50-day. As Bob Farrell’s Rule #1 reminds us, markets tend to return to the mean over time. They usually do it faster than anyone expects.

Since that rotation, SMH has fallen 16.4%, XLK has fallen 8.3%, and the Nasdaq-100 ETF has lost 6.0%. On the other side, the equal-weight S&P 500 and large-cap value both gained 3.2%, and energy rose 10.4%. That’s rotation, not a broad liquidation.

Here’s the part that matters for what comes next. Tech is starting to get decently oversold. XLK’s RSI has dropped to 38, and the ETF sits 3.4% below its 50-day average. SMH and communications (XLC), home to Meta and Alphabet, both have RSIs of 33. Those aren’t washout readings yet, but they’re close. Meanwhile, the defensive trade that worked so well is getting crowded, with energy’s RSI at 69 and the ETF 7.8% above its 50-day. Cross-asset, the 10-year Treasury yield ended near 4.99% after Thursday’s bond rally, the VIX closed at 19.70, and bets on an October rate hike faded.

Such is the nature of rotations. They feel like a crisis in the sector being sold and a sure thing in the sector being bought, right up until the positioning flips. Next week, the Fed and the biggest names in tech will decide whether this oversold bounce has a reason of its own.

📈Technical Backdrop -  MACD Turns Up Just Below The Record

The S&P 500 closed Friday at 7,623.68, down 0.4% for the week. That leaves it 2.4% below its October 6 record close near 7,815. The index sits 1.0% below its 50-day moving average of 7,702 and is resting right on its 100-day average of 7,605. It remains 4.5% above the 200-day average at 7,293, so the longer-term uptrend is intact. Friday’s close also landed just above the lower 2-standard-deviation Bollinger Band at 7,604. Closes below that band marked short-term lows in March, June, late July and mid-September this year. In the October 19 Before the Bell, we flagged a short-term momentum sell signal and a test of the 100-day. That test is here.

Investors should pay close attention to market momentum, which currently confirms the selling pressure. The 14-day RSI sits at 42, neutral and still falling. The MACD has also crossed below its signal line, a “sell signal” that tends to cap near-term rallies until it reverses.

More importantly, neither reading is at more extreme oversold levels, which means the broad index hasn’t finished correcting the way tech has. That divergence is the story investors should pay the most attention to. Equal weight rose 1.1% this week, and the Dow gained 1.4%. The average stock is holding up while the mega-caps drag the cap-weighted index lower.

Furthermore, sector breadth tells the same story from a different angle. Three weeks ago, only three sectors were ahead of the index. As of Friday, 8 of 11 sectors are ahead of the index, measured by distance from their 50-day averages. Only technology, industrials, and communications are lagging. Energy is the most stretched, followed by health care and staples. The leaders have become the crowded trade, and the laggards are where a bounce would come from. That runs counter to the defensive posture that worked over the last three weeks, and it’s why we’re watching for a chance to rebalance back toward growth rather than adding to the winners.

However, next week will be the test for the market. Roughly 44% of the S&P 500 reports earnings, including Microsoft and Alphabet on Wednesday and Amazon on Thursday, on top of a Fed decision and the September PCE report. That’s a lot of information hitting a market that’s sitting on support. If the 100-day holds and the mega-caps show that AI spending is producing a return, oversold tech has room to rally. The first stop is the 50-day near 7,700, with the October 21 close at 7,757 just above it. If the 100-day breaks, the September 16 low at 7,564 is next, followed by the July 31 low near 7,494. The 200-day at 7,293 is where the bull trend gets questioned in earnest.

So, what should you be preparing for ahead of next week? Well, the playbook is actually quite simple. Don’t chase the defensive sectors at these levels. Look at taking some profits in stretched energy and staples positions. Then let tech reach a real oversold extreme before rebalancing toward growth. That means an RSI near 30 and closes below the lower band. Keep stops below the 200-day average. A rally into the 50-day is likely to see selling, so use strength to rebalance rather than to add risk. The most important level next week is the 100-day average at 7,605. Where the market closes relative to it after Microsoft and Alphabet report will set the tone into November.

🔑 Key Catalysts Next Week

This is the busiest week of the earnings season, and it collides with the Fed. Roughly 44% of S&P 500 companies report, and the three that matter most for the tech trade come in a 24-hour window. Microsoft and Alphabet report after Wednesday’s close, and Amazon follows Thursday evening. After Meta, the question is no longer whether these companies are spending on AI. The question is whether the spending is starting to show up as cash, and the market just told us it won’t give anyone the benefit of the doubt. Visa and Mastercard provide a read on consumers, and Exxon and Chevron report Friday, with Brent above $116. Apple doesn’t report until November 2.

The Fed announces its decision Wednesday at 2:00 p.m. ET, with Chair Kevin Warsh’s press conference at 2:30. Markets widely expect a hold at 3.75% to 4.00% after September’s hike. Bets on a move faded after Thursday’s bond rally. The risk is in the tone. A hawkish Warsh with Brent at a six-month high could push the 10-year back above 5%, which is exactly what oversold tech doesn’t need. The blackout period means no Fed speakers until St. Louis Fed President Alberto Musalem on Friday at 12:30 p.m. ET.

Thursday is the heaviest data day. Third-quarter GDP is expected to be near 3%, and the September PCE report is expected to show headline inflation rising to 3.6% from 3.4%, with core inflation at 3.1%. Friday’s employment cost index is the cleanest read on whether this inflation is moving into wages. If it isn’t, the “bad inflation” argument holds, and the case for the Fed staying on hold gets stronger. Tuesday’s consumer confidence report, last at 81.9, will show how much $116 oil is weighing on households. Thursday’s 7-year auction also matters with yields near 5%.

The most market-moving event is the Microsoft-Alphabet pair on Wednesday night, landing a few hours after the Fed. The asymmetry favors the bulls more than it did a month ago. With tech already down sharply and getting oversold, the bar is lower, so a credible answer on AI returns could spark a sharp short-covering rally, while another Meta-style reaction would push the S&P through its 100-day average and into the September lows.

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💰 Stock-Bond Correlation: Oil Broke The Hedge. Oil Will Fix It.

On Thursday, the S&P 500 ETF fell 1.2% and long Treasuries rose 1.9%. A week earlier, in the five sessions ended October 16, the S&P 500 lost 2%, the Nasdaq 100 ETF lost 5.5%, and the semiconductor ETF fell 10.5%, while TLT gained 2.7%. That’s the stock-bond correlation behaving the way every 60/40 portfolio assumes it will. The problem is that this year it’s been the exception. Over the past year, SPY gained 15.2% while TLT lost 12.8%. In August, I argued that ditching bonds is the wrong move because “what bonds protect you against is a growth shock.” The last two weeks were a growth scare. Most of 2026 was something else.

The Hedge Everyone Counted On Quit In 2022

For two decades, investors took the hedge for granted. A Federal Reserve paper published on October 16 puts numbers on it. Fed economists Canlin Li and Emre Yoldas measured the correlation between U.S. stock returns and changes in the 10-year yield. It ran +0.40 from 2000 to 2021 and −0.09 since. Yields move opposite to bond prices, so in plain terms, bonds reliably rose when stocks fell for twenty years, and then they stopped. The paper also found that 10-year yields now react about three times as much to inflation surprises as they did from 2000 to 2019.

In the chart below, I rebuilt the stock-bond correlation with weekly returns for SPY and TLT, so the charts below read the same way as our Daily Market Commentary. Below zero, bonds hedge. Above zero, they fall with stocks. From 2017 through 2020, the correlation ran −0.23. Then it flipped to +0.13 in 2022, +0.36 in 2023, and +0.24 in 2024. A hedge that only works when inflation is quiet isn’t one you can set and forget. In 2022, the S&P 500 fell roughly 25% on a weekly closing basis while TLT fell 31%. Both halves of the “balanced” portfolio lost at the same time.

However, this is the part the “bonds are dead” crowd skips: when inflation cools, the hedge from bonds returns. From April 2025 through February 2026, the correlation ran −0.24. Then the spike in oil over this summer broke it again. As shown, from March through mid-October it ran +0.18, and the 10-year yield climbed from 4.18% at the start of the year to 5.31% on October 5th.

The chart below shows inflation over the same period. In February, headline CPI rose from 2.4% to 3.7% in September. Simultaneously, Core CPI went from 2.5% to 2.6%. That is clear evidence of a supply shock: prices rise because something got scarcer, not because the economy is running hot. The Fed paper lands in the same place. Bonds’ value as a hedge depends on the inflation environment and the type of shock, not on anything fixed about bonds.

The Short-Term Signal Just Flipped

The annual numbers move slowly. The daily ones don’t. We dug into this in Friday’s Market Trading Update, and the turn is showing up faster than the 52-week data can capture. The 60-day correlation between SPY and TLT climbed from near zero in February to +0.56 in early June, which is about as bad as a hedge gets. The 20-day correlation slipped below zero on Wednesday for the first time since July. After Thursday’s session, it sits at −0.30.

“A hedge that only works some of the time isn’t a hedge. It’s just another position.” - Meta Splits: The Buyback Machine Shifts To Reverse.

(Note: Read the full Market Trading Update for the TLT chart and the two signals we need to see before adding duration.)

The two signals that we discussed are 1) TLT closing above its 50-day moving average, and 2) the 20-day correlation staying negative. If both signals are triggered, it suggests investors can extend duration back toward the target weight in our allocation models. On Thursday, TLT closed at $81.74, above its 50-day average of $80.58, with the 20-day correlation at −0.30. Both boxes are checked for now. One close isn’t a trend, though, and the 200-day average still sits near $84.81, roughly 4% higher.

Drawdowns Are The Only Test That Matters

Correlations are averages, and nobody owns bonds for an average week. You own them for the weeks when stocks get hit. So I went back through every meaningful S&P 500 drawdown since 2018 and checked what long Treasuries did during each one.

That is the pattern, and it’s hard to miss. When the market began to fear slower growth, yields fell, and bonds paid. When inflation was the prevailing fear, yields rose, and bonds fell right along with stocks. Pay attention to the last two rows. Those outcomes are specifically due to growth scares, not inflation scares, and that matters because a hedge that shows up when earnings and spending are the worry is still alive even after a year of losing money.

Why Bad Inflation Hands The Hedge Back

This brings us to our analysis from last week on “Good vs Bad Inflation” and the underlying framework. This is where my bad inflation framework comes in. Inflation from a supply shock tends to burn itself out because there is no rising income to pay for it. Higher gasoline prices don’t come with a raise attached. Consumers cut back elsewhere, demand cools, and the price spike chokes off the growth that would have sustained it. Lacy Hunt at Hoisington has made a version of this argument for decades. Heavily indebted economies slow down under pressure. They don’t overheat.

Bonds do NOT hedge inflation. They hedge the slowdown that bad inflation eventually causes.

“Inflation is back at 3.7%. Why would anyone own bonds?” That one shows up in my inbox every time CPI runs hot. The answer is that bonds were never an inflation hedge. They’re a hedge against the growth damage a supply shock eventually causes, which is exactly what the last two weeks started to price.

The "bond bears" still have a point, and it deserves a direct answer. If the oil shock persists and the Fed hikes into it at the October 27 to 28 meeting, yields can rise further while stocks fall, which is the 2022 playbook. A 10-year yield above 5% also means long-duration bonds carry real price risk if inflation surprises again, and as I noted in Druckenmiller Warning: The Bond Market Already Priced It, Treasury buybacks are too small to set long-end yields. I’m reasonably confident the hedge strengthens over the next six to twelve months as the energy shock fades. In the next few weeks, I’m much less sure, because the Fed meeting is hard to call and oil hasn’t rolled over yet.

What Should Investors Do Now

Don’t abandon the bond sleeve because 2026 has been hard on it. Size it for the job it does well, and don’t ask it to fight inflation shocks. Here’s how we continue to suggest thinking about it:

The stock-bond correlation isn’t broken in any permanent sense. It’s following the cause of the inflation, the same way it did in 2022 and again in 2025. The bond market will tell you the oil shock is over before the CPI report does.

🖊️ From Lance’s Desk

This week's #MacroView blog explores why the economy is running bad inflation, and the bad kind is the temporary kind, which is precisely why the bond market refuses to panic.

Also Posted This Week:

• Are Bonds Pricing In A Fed Policy Mistake? - RIA- by Michael Lebowitz
• AI Capex And Earnings: What Happens When Growth Slows- by Lance Roberts

📹 Watch & Listen

Stocks are under pressure despite strong earnings from major technology companies. With S&P 500 futures falling and the Nasdaq facing renewed selling, are investors preparing for a market correction, or is a breakout approaching?

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📊 The Weekly Market Dashboard

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

This next week, 44% of the S&P 500 will report Q3 earnings. So far, reports have been good, but the market response has been weak. I suspect we could see some more of that action next week, as the technology sector remains under some pressure. However, on a short-term basis, technology is very oversold, while Energy and Real Estate are the most overbought. As noted previously, the neep oversold condition in bonds warned of a reversal which happened this past week.

📐 Technical Composite: 58.32 - Sell-Off Reduces Overbought Conditions

The technical condition eased sharply last week dropping from 70.49 to 58.32 as the technology sector came under selling pressure. However, the reduction only brings the overbought condition back to neutral. While rallies can occur from these levels, if this is the beginning of a more severe correction, then markets have more work to do to the downside. Rebalance risk and remain tactically cautious until conditions improve.

🤑 Fear/Greed Index: 54.87 – Holding At Neutral

Even though the market sold off last week, the underlying market allocation and sentiment remain more neutral. There was a continued drop in the Commitment of Traders equity allocations; however, investor sentiment turned slightly more bearish last week. If the market can continue to hold up into earnings season, it could present a good buying opportunity over the next month or so.

🔁 Relative Factor Performance

Three weeks ago we warned that the more extreme divergence growth from value in the market was due for an eventual rotation. That rotation came rather swiftly over the past two weeks and now those value oriented factors are more overbought and growth is oversold. While there may be a bit more work next week, we are getting potentially set up for a rotation in the other direction, buy growth and reduce value, heading into year end.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of October 23, 2026, with the S&P 500 at 7,623.68, the Money Flow Breadth Ratio (MFBR) stands at 55%, down from a peak of 75% set 7 weeks ago and flat versus 55% the prior week. The trailing four-week change is still -10 percentage points, but the near-term trend has rolled over. This places the indicator in the 50-60% range. The raw zone signal reads NEUTRAL, but the model still flags a TOP REVERSAL, with 20 points now off the peak. Read that NEUTRAL as a zone label, not as fresh confirmation - the model reached this band by falling out of overbought, not by building up from below.

Bottom line: hold the target weight. The roll-over off the 75% peak is real and worth watching, but it has carried the gauge into the band that has historically been the best place to own equities. This is neither a chase nor a de-risk. A sustained break below 60% would move the grid to an underweight; a move back above 70% would re-engage the contrarian trim."

📊 Sector Model & Risk Ranges

We noted the week before last that "Energy and Technology are now extremely deviated above their long-term weekly means. Historically, such deviations lead to corrections or consolidations, so profit-taking and rebalancing are recommended." That advice worked well this past week as the rotation from Technology to Value picked up steam. Bonds also rallied sharply as the rotation to safety accelerated. Energy remains extremely elevated above long-term means and warrants profit-taking ahead of an eventual reversion, which could be very swift.

Have a great week.

Lance Roberts, CIO, RIA Advisors

Lance Roberts is Chief Investment Strategist at RIA Advisors in Houston, Texas, and publishes his market research and the weekly Bull Bear Report at RealInvestmentAdvice.com and lanceroberts.substack.com.

The post Stock-Bond Correlation: Oil Broke The Hedge. Oil Will Fix It. appeared first on RIA.

Meta reported record third-quarter revenue of $64.60 billion, up 26% and decently above the $63 billion consensus. Diluted EPS of $3.83 was nearly quadruple the $1.05 they earned a year ago. Bear in mind, EPS was distorted by the $18 billion teen mental health settlement. Without that charge, EPS would have been $7.40. While the revenue and earnings growth were outstanding, the more interesting number is cash-related. Capital expenditures, largely for AI development, reached $34.91 billion in the quarter, exceeding cash earned from operations. As a result, free cash flow turned negative (-$2.12 billion). Additionally, it significantly raised full-year capex guidance to $135-$145 billion from $85.8 billion. Simply put, their old advertising-related business model can no longer fully fund the AI buildout.

To bridge this cash gap, Meta is splitting its stock. A stock split doesn't raise money for the company, but in this case it creates the ability to raise funds later. Meta is creating a new class of nonvoting Class C stock, distributed as a dividend of one share for each share held. Essentially, the split will double the share count, halve the stock price, and produce the economic effect of a two-for-one split. Trading in Class C shares is slated to begin in late January 2027.

CEO Mark Zuckerberg stated the purpose directly:

Creating a publicly traded nonvoting stock “usable for, you know, capital raising employee compensation acquisitions, other general corporate purposes while preserving the voting power of existing class A and B shareholders.”

Meta just guided to an additional $60 billion in capital spending, despite negative cash flow. At the same time, the split and new Class C shares created a funding mechanism for acquisitions and capital raises without surrendering any voting control for Mark Zuckerberg. Below is a section describing how the clever issuance of the new Class C shares keeps Mark Zuckerberg's voting power intact.

For much broader consideration: Might Meta be signaling that the large megacap companies that for years were buying back shares due to a lack of investment ideas are now doing the opposite, issuing shares to fund AI development? We will have more on this in Monday's Commentary.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed why small caps have recently traded like a bond proxy. Today, I want to widen that lens to the stock-bond correlation itself, because it decides whether a "balanced" portfolio actually balances.

For most of 2026, it hasn't. The 60-day correlation between daily returns of the S&P 500 (SPY) and long Treasuries (TLT) climbed from near zero in February to +0.56 in June. It still sat at +0.38 at Wednesday's close. A positive reading means bonds fall WITH stocks, which is the opposite of what you own them for. Over the past year, SPY gained 15.2% in price while TLT lost 12.8%. The "hedge" became a second source of losses.

Notice the dashed 20-day line in the chart above. It dropped to -0.03 on Wednesday, its first sub-zero reading since July. Since the S&P 500 set its October 6 record near 7,808, the index has slipped about 0.8% to roughly 7,748. Meanwhile, TLT rallied 4.1% off its October 5 low of $77.11 as the 10-year yield eased from 5.31% to 5.12%. For the first time in months, bonds are doing their job on a soft tape.

The obvious pushback is fair. "It's two weeks of data, Lance." Correct, and the TLT chart below shows why I'm not celebrating yet. TLT closed at $80.24, pressing right into its 50-day moving average at $80.59 and its upper 2 SD Bollinger Band at $80.61. The 200-day sits well above at $84.84. RSI went from a deeply oversold 22 on October 5 to 57 now. Such is the nature of counter-trend rallies inside a downtrend. They look like trend changes right up until they fail at resistance.

Bob Farrell's Rule #1 says markets return to the mean over time. With TLT still roughly 5% below its 200-day, there's room for that reversion if yields keep easing. But price has to confirm it. Hope doesn't count.

Here's how we're managing it. If TLT closes above its 50-day and the 20-day correlation remains negative, we'll extend the duration back toward the target weight in our allocation models. A failure at that line keeps us shorter in duration, with cash rather than long Treasuries as the shock absorber. On the equity side, nothing changes. Technology stays at target weight, gains in the megacap leaders get rebalanced toward areas that have already corrected, and a close below 7,567 on the S&P 500 still means raising cash and adding hedges.

A hedge that only works some of the time isn't a hedge. It's just another position.

Meta's Class C Shares Preserve Zuckerberg's Vote

Most media coverage frames the split as a way to reduce the high share price ($680), making the stock more accessible to retail investors. As we quoted in the opening, Zuckerberg described it differently on the call, saying the purpose was creating a publicly traded nonvoting stock “usable" to fund the company's burgeoning capital needs. Simply, Class C shares will be a funding mechanism for Meta

The "split" with the distribution of new shares changes nothing. Every shareholder receives shares pro rata, and their relative ownership of the company doesn't change. What changes is that, after the split, Meta will issue new Class C shares to fund their capital demands.

To appreciate why they introduced a new class of shares, let's describe the current Class A and B shares. Meta’s current dual-class structure gives Class A shareholders one vote and Class B holders ten. Mark Zuckerberg’s control of Meta currently rests on his Class B holdings, of which he holds 99.8% of B shares, as shown below. Therefore, while he owns only 13% of Meta shares, he controls about 61% of the vote. Under the old arrangement, issuing voting Class A shares to meet its capital needs would dilute his voting percentage. With Class C available, Meta can issue nonvoting equity and his voting share majority does not change.

It's worth noting that Google did something similar in 2014 for the same stated reasons, and as a result, Google settled a shareholder suit for roughly $522 million.

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The post Meta Splits: The Buyback Machine Shifts To Reverse appeared first on RIA.