The U.S. equity markets took a beating last week, led by big losses in tech stocks. After months of AI optimism, the street finally got spooked about high tech valuations and used this as a justification for the sell-off.1 The limited economic data released last week raised some concerns about whether the labor market is beginning to crack further. The broader market fared somewhat better, but shaken investor sentiment clearly set the tone for the week.
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Market Moves
Weekly Market Snapshot:
- S&P 500: -1.6% – large-cap tech was finally a drag on the major averages even though defensive issues did relatively well.
- Nasdaq Composite: -3.1% – tech got hammered as concerns about overspending on AI development and rich valuations caused investors to think twice.
- Russell 2000: -1.9% – the rotation out of big tech benefited risk-off themes but not small-caps.
- VIX: 19.1 – volatility spiked to its highest level in three weeks as investors cope with economic and portfolio issues, but calmed into Friday’s close.
- Gold: +0.1% – precious metals remain a counterplay on monetary and geopolitical conditions, but not so much a safe haven consideration.
- 10-Year Treasury Yield: 4.09% – investors never really veered towards bonds in response to the tech sell-off.
Drivers:
Corporate earnings are a positive driver of stock performance, but consumer and investor sentiment is clearly taking a hit here. High tech valuations have been around for months, so it’s curious why they’re getting the blame here. A confluence of little things – questions around whether the Fed will cut again this year, how long the government shutdown will last and a surge in job cuts – seem to have finally broken the unending AI optimism.
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Economic Highlights
A couple of the notable themes that stood out this week:
- While the monthly non-farm payroll report was delayed again, the remaining labor market indicators were mixed. The ADP report showed the private sector adding 42,000 jobs in October, reversing a recent trend of negative growth.2 The Challenger job cuts number for October, however, soared to its highest level since just before Liberation Day in April and is well above its long-term trend. This could be partially due to the government shutdown, but the report highlighted AI adoption, slower corporate spending and rising costs as the primary reasons.3
- The Q3 earnings season is wrapping up.4 Year-over-year earnings growth for the S&P 500 is around 10%, the 4th consecutive quarter it’s been in the double-digits. That provides a solid backdrop for stocks to move higher, but forward guidance has been mixed indicating that companies see some potential challenges ahead.
- The government shutdown has become the longest ever and pressures continue to build. Airlines have begun cutting up to 10% of flights across 40 major airports starting Friday and that number could keep climbing if the shutdown drags on longer.5 SNAP food benefits are still in question and federal workers continue to go without paychecks.
- U.S. consumer sentiment dropped to its lowest level in more than three years.6 The biggest reason for the decline centered around current conditions, which is reflective of worries about the government shutdown, personal financial considerations and job security.
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The Week Ahead
A few themes to watch next week:
- We’re still in the midst of a government data blackout, so the markets will have to judge current conditions by guesses and what limited information is still available. As government benefits lapse, paychecks remain missing for federal employees, and airlines cancel thousands of flights, pressure on Washington to finally end the shutdown is mounting.
- The Q3 earnings season has been largely favorable, but a few late reporters, including Cisco and Disney, still plan to release their results.
- The biggest thing to watch might be how sentiment from last week carries forward into the coming one. Over the past year, the market has had a tendency to follow up a bad week with a good one and recover much of the previous losses. If the sell-off in U.S. equities continues, it could be a sign that investors are finally taking lingering risks more seriously.
In Summary
Last week marked a major break in the unwavering positivity provided by the AI boom. It’ll be important to watch how investors react next week after they have a couple of days to digest what happened.
Firm data and information to work with will be hard to come by for a while longer, so the markets could be more vulnerable to volatility. Investor confidence has been shaken, but this week should let us know if it’s just temporary or a real structural sentiment shift.
Stay tuned for next Sunday’s newsletter for our next update on market moves, economic shifts, and actionable insights.
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