THIS WEEK IN REVIEW:
Oct. 25-31, 2026 The AI trade keeps tripping up markets

Read Article

Fed stays put on interest rates as GDP roars back to life

The Federal Reserve’s meeting last week concluded with rates left unchanged. The move (or lack thereof) was widely expected given the proximity to midterm elections. Expectations are still strong for an additional rate hike of one-quarter percent (0.25%) at the Fed’s final meeting on Dec. 8-9.

Despite the generally dour mood, there was some encouraging news last week. Consumer confidence rose significantly from 84.25 (revised up from 81.9) in September to 91.7 in October, beating the consensus estimate of 80.4 by a wide margin. That’s great news as we head into the holiday season. It was a shot in the arm after personal consumption expenditures (PCE), the Fed’s preferred measure of inflation, rose modestly. PCE rose from 3.4% to 3.6% year over year, while Core PCE rose from 3.0% to 3.1%.

Despite this, it doesn’t seem like we’re currently on the verge of anything bad. Gross domestic product (GDP) kicked into high gear in the third quarter, Update to: ramping up to a 3.4% annualized growth rate in the third quarter. Personal spending was the key driver for economic growth in the third quarter, growing at a 3.8% rate. The bottom line, though, is that income isn’t keeping up with inflation while spending continues to increase. That’s not a great recipe for long-term success, and as the money dwindles the debts will pile up.

The AI and data center build-out also remains a very important factor, and it’s having some far-reaching impact which we’ll get into in the next section. Finally, oil is flowing through the Strait of Hormuz at higher levels than before the Iran conflict began, yet energy prices aren’t coming down. That’s due to a few factors:

  • President Donald Trump said he was going to “end things” with Iran after the midterms.
  • Companies are still hesitant to ship through the Strait due to renewed attacks on shipping.
  • The attacks keep insurance and shipping costs higher.
  • There are additional limitations in the region from drone and missile strikes.
  • Worldwide inventories are reduced with China stepping up to buy after laying low the past months.

All in all, things could be worse, but they could certainly be better. Last week had a little something for everyone, from the optimists to the pessimists. As always, this is a very mixed picture. We’re nowhere near a recession but we’re far from smooth sailing.

AI trade keeps stumbling

Earnings have been strong, but at times they’ve been overwhelmed by concerns about Big Tech’s spending on the AI build-out. The basic concern is when we’ll see a payoff from all that spending. When the market gets nervous about it, tech stocks go into a tailspin — and as they go, so goes the market.

Last week’s angst was instigated by disappointing news from Google parent Alphabet, whose quarterly update last Wednesday sent shares down 13%. Revenue from its core search unit fell short, due partly to the popularity of less profitable “AI mode” searches. The company also burned cash at a faster rate than expected.

Alphabet’s market value declined by just under half a trillion dollars last week and helped drag the Nasdaq down 1.4% on the day. The selling accelerated as we ended the week and the entire sector caught Google’s bug.

We hear the term “AI spend” a lot. Just what is it, and why is it important? The “spend” is basically money being used or borrowed to buy or build hardware and infrastructure (microchips, data centers and power for them, and cloud computing), the software and platforms, people, vendors, regulations and compliance. In essence, these companies have a lot of money but still need to borrow to build all this, and the markets aren’t sure if the companies are overborrowing, overspending or both. Then when these eye-popping spending numbers are reported, the market gets nervous because we have yet to see a payoff.

In addition, more pressure is placed on the capital markets that lend money to Big Tech, making interest rates go even higher. So we go through these ebbs and flows, where the market gets excited about AI and the future then gets nervous when it sees how much companies are spending and the lack of revenue from those expenditures. All this causes a lot of volatility, which will continue until we start seeing results in the form of greater profitability.