AI Questions Begin To Effect Equities
Defensive equity sectors hold up as momentum sectors give up returns last week. Tech stocks suffer the worst weekly losses since March of 2025. We are seeing some
downward pressure on AI as some of the data center deals and AI profitability are coming under some scrutiny. Over the weekend, it was reported that Microsoft was pulling out of a data center deal with U.K. company Nscale.1 Last month, Oracle faced delays with its data center in New Mexico forcing the company into a "force majeure" situation.2 A recent report by Jefferies, as noted in The Economic Times, stated, "The reason credit risk has become more of an issue is that it can no longer be assumed... that large language models will ever be profitable given the related ongoing collapse in token pricing."3 The value of bonds involved in US data centers has declined under pressure from profitability due to the large scale of capital devoted to the AI buildout.
Meanwhile, concentration in equities continues to rear its head. The top 5 holdings in the S&P 500 Index are all AI-related. Their market cap, as indicated in the graph, is
approximately $21.6 trillion. It requires adding the market caps of 434 other stocks in the S&P 500 to equal the market cap of just the top 5. As the line graph indicates, this has not happened before going back to at least 1991. While AI, and the concentrated S&P 500 Index with it, look invincible, a pullback in any of the top 5 names could weigh more heavily on the index than in less concentrated periods. Last week, Mag 7 names, which includes the top 5 in the S&P 500 Index, were down more than 3% for the largest weekly loss since mid-to-late July.4 J.P. Morgan issued a report that investors should embrace the bond market as portfolios could be "over-allocated to stocks."5 As they note, "a typical 60/40 stock-bond portfolio from 2019, without rebalancing, would now be a 74/26 portfolio - meaning that investors are now unintentionally exposed to a greater amount of risk."5
The question of what will the Fed do next will be fascinating to watch over the next couple of weeks. Last week, the September report on the Consumer Price Index
showed an expected increase month-over-month of +0.6%.6 That raised the year-over-year number from 3.4% to 3.6%.7 The Producer Price Index increased more than expected in September (+1.3% vs +0.6%).8 The year-over-year reading for PPI rose from 5.6% last month to 6.3%.9 One would think the troublesome inflation reports would signal a rate hike by the Fed in two weeks. However, that does not appear to be the case as there is now an 83% probability that the Fed will hold rates steady at the end of this month.10 If that proves to be true, according to the Dot-plot supplied by the Fed at their last meeting which indicated at least one more rate hike in 2026, that means a hike would have to come at the final meeting in December.11
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The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
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