General Thoughts On Markets And Other Things
Equities staged a bit of a relief rally to close out the week, but don’t be deceived, as the major averages remain in a vulnerable position with the S&P 500, Nasdaq, Dow, and Russell 2000 ending the week below their respective 50-day moving averages. Anyone focusing solely on the S&P 500, which reached a 5% decline at last Thursday's low, is missing the pain that has taken hold beneath the surface. Even after Friday’s rally, nearly 70% of the stocks that make up the S&P 500 were trading 10% or more below their 52-week high, and almost 55% were trading below their 200-day simple moving average. This paints a more accurate picture of what the average stock is experiencing than what is being portrayed by the S&P 500 index, which is a modest 4% off its all-time high.
Let’s get into some specifics on what we learned last week.
1. What we learned from the earnings report of the largest company in the world?
Going into the earnings release, investor anxiety was elevated about the sustainability of the AI capex surge. Well, the results Nvidia put out did not disappoint as they beat revenues and earnings while raising forward guidance. CEO Jensen Huang gave the impression on the conference call that future demand was white hot and that revenue was expected to double over the two years to – ahem – over $500 billion. It’s hard to imagine them putting out a stronger report.
However, the price action in the stock following the results didn’t match the enthusiasm of the report. Initially, the stock popped 5%, but it ended the day down -3% as doubts on the sustainability of the AI capex spending spree outweighed rearview mirror results. At the center of this growing skepticism is OpenAI’s ability to fund their $1.4 trillion of infrastructure commitments over the next 8 years on a revenue run rate that will approach $20 billion/year by the end of 2025. Adding fuel to investor caution on the AI theme was Google releasing the latest update to its Gemini AI product which outperformed ChatGPT 5 on most benchmarks.
Then, over the weekend, an internal memo from OpenAI CEO Sam Altman was leaked, acknowledging Google's AI progress and noting it was likely to cause “temporary economic headwinds” for his company. At the same time this memo came out, Google’s head of Cloud Infrastructure said at a meeting that the company needed to double its AI capacity every six months to keep up with skyrocketing demand.
Why this is important is that Alphabet (Google) sources most of the technology/chips to run its AI internally, which means it doesn’t have much need for Nvidia GPUs. Moreover, Google has been providing their search engine for free since its inception. Suppose it does the same with its AI technology, which is as good, if not superior, to all other players. In that case, it rightfully flips the entire edifice of hyperscalers' future capex commitments ($400 billion/year) over the past several quarters.
We’ll see how it plays out going forward, as this has been the first (and it will not be the last) twist or turn in this ongoing arms race for AI domination. Nevertheless, it seems like we’ve moved into a new chapter in the sequence of the AI experiment, where the market is going to be more discerning on both returns and capex growth rates beyond 2026.
Does this mean an investor should bet against Nvidia or push back on the entire space? No, but it does provide context for why Nvidia traded down 6% last week and officially slipped into correction territory (-13% from its October peak). Beyond Nvidia, the Global X Artificial Intelligence & Technology ETF is down about -10% in November, while the Roundhill Magnificent Seven ETF (tracking Nvidia, Alphabet, Amazon, Apple, Meta, Microsoft, and Tesla) is off by nearly 7%. Of the companies in the MegaCap Tech sphere, Oracle has endured the biggest drawdown, with its stock price down 40% from its September highs. AMD has been slammed to the tune of -23% and even Microsoft, which likely has the strongest balance sheet of the bunch, is down -13% from its nearby peak. Meanwhile, Alphabet gained nearly 8% last week and is hitting new all-time highs.
2. What did we learn from the largest retailers on the planet?
Consumer spending has been another variable weighing on investors' minds and has rightfully heightened caution toward risk assets and economic growth, especially as it pertains to those at the lower end of the K-shaped economy. We had the Home Depot report last week, and this bellwether missed and cut guidance, pointing to “incremental consumer uncertainty” and the ongoing drag from housing. Its stock is down -6% since reporting, and didn’t allay concerns about the DIY consumer. However, its closest competitor, Lowe’s, reported better-than-feared results with the stock trading higher since. Last up to report was the king of retailing itself, Walmart, which projected a balanced view of the consumer: “…things remain remarkably steady here, which was the likely outcome, but a relief nonetheless; they said things are consistent and the Q4 guide implies an acceleration in top-line.”
What’s the takeaway? The consumer remains bifurcated, but on net skews marginally positive in the aggregate. Furthermore, some companies are navigating the challenging environment better than others.
3. Thoughts on the latest economic data.
The September jobs report, which admittedly is a stale data point, was a mixed bag. I don’t share the excitement espoused by the WSJ last week, describing it as “Strong,” although it will be the last clean read we have of the labor market for several months – the government shutdown started on October 1st and will have distortive effects for several months to come. On the surface, a +119k print on new job creation is solid, but looking at this number by itself lacks the necessary context. After all, that equates to a +0.1% month-over-month increase or barely more than a +0.9% annualized growth rate.
However, you need to recognize that two sectors (healthcare/social assistance and leisure/hospitality) accounted for 90% of the job gains. Moreover, we also saw a total of -33k in negative revisions to the prior two months, which means the US economy has experienced negative job prints in 2 out of the last 4 months (-13k in June and -4k in August). Over the past three months, the economy has cranked out an average of 62k jobs per month, which is decent, but we are seeing the unemployment rate creep higher (4.44%).
Bottom line, it's hard to have a lot of conviction on whether the labor market is stable/resilient or on the edge of becoming a real point of weakness. Compounding the confusion is AI entering the equation, which makes you wonder whether the labor market will become a structural concern as technology displaces labor in some areas. Keep in mind, this doesn’t necessarily mean it's bad for corporate bottom lines, and hence supportive of equities, but I must admit I’m not looking forward to walking the tightrope of analyzing markets clouded by the moral dilemma of technology-fueled profits at the expense of social stability.
As for economic growth, Q3 looks solid with the Atlanta Fed's GDPNow forecast at +4.2%. The fourth quarter is apt to be marred by the government shutdown and, therefore, likely to be given a pass by investors who are focused on a fiscally-enabled acceleration in the first half of 2026. However, what I think gets lost in the aggregate data when looking at the US economy through the lens of GDP is just how narrow the drivers of growth have been this year. Strip out all of the AI and related business spending so far this year, and the rest of the capex space has posted a -3% annualized volume decline. So, there is actually a capex recession in the other segments of the capital spending side of the economy.
Then we have what the “equity wealth effect” has done to the high end, where the top 10% owns around 90% of the stock market, because absent that, the consumer sector would be in recession as well, given that real disposable incomes since April have declined at a -1.2% annual rate. This is nothing new as the US economy has become hyper-financialized over the past 15 years to the point that it’s the stock market that drives the economy, not the other way around. This is great for those with exposure to asset prices and, therefore, can better keep pace with the increase in the cost of living, whereas those using every penny of their paycheck to stay afloat are not seeing the requisite rise in wages to keep up.
The financialization of the US economy is both one of its greatest strengths and greatest vulnerabilities.
4. As for the Fed…
It's perhaps the most divided group of voters (in terms of consensus) that markets have seen in four decades. At the low point last week, fed fund futures got as low as a 30% probability of a Fed cut in December, but those odds have moved up to about 70% as I type. This has undoubtedly helped stabilize risk assets – NY Fed Governor Williams' comments on Friday that he was leaning towards another 25bps cut were especially soothing to equity markets. Everyone talks about how the inflation rate is above target, but guess what? The unemployment rate is also above target.
Quite the conundrum, but as we know, there is very little chance of inflation being sustained without help from a vibrant labor market. Besides the fact that at the post-meeting press conference in late October, Jay Powell told us that after netting out the Trump tariffs, core inflation is now running at 2.3% – 2.4% and on track for 2.0% now that the dominant rental-OER trends are in deceleration mode. I’m of the view that the risks of not providing more accommodation at the December meeting outweigh the benefits of staying on hold into 2026. But I’m not a voter, so no one should care what I think other than what it means in relation to my thoughts on markets and how I’m positioning capital for various outcomes.
Alright, let's throw all this into a blender and make sense of what comes out. For starters, the market's character has undergone an understandable transition. Going back to the lows in April, which is where this latest bull run started from, the forward outlook is less clear than it was back then. Back then, once Trump backed off his version of Oprah’s ‘everyone gets a tariff’ it was clear to play the tailwinds of what was still an accelerating economy, a Fed that was clearly in accommodation mode, and a ramp higher in corporate earnings fueled by bigger than expected AI capex spend. Today, those tailwinds are much weaker – not dead, but definitely not as strong. The same goes for the labor market, which at the start of the year was at full employment and coming off a year where job growth was much more robust.
I could ramble on and on, but this is a holiday week, so I’ll just get to the point. I think the bull market in equities remains on track and think it will be supported by a global economy that still has a couple of quarters of broad-based growth in front of it. So, a portfolio holding a diverse mix of assets is a prudent way to be positioned at the moment. However, I advocate that investors lower their equity return expectations, as I don’t think the stock market will be able to deliver gains in 2026 that match +26% in 2023, +25% in 2024, and what looks like +15% in 2025. Nor do I think gold will match the returns it has put up over the past several years (+13% in 2023, +27% in 2024, and +55% so far in 2025), but I’d argue that all the drivers that caused gold to do what it has remain in place going forward. Lastly, most investors have lost interest in the bond market, but the investment-grade index is on track to generate a total return of +8-9% this year, with high yield in the low double digits. Bottom line, it's been a great year to own a diversified portfolio of assets.
Before, during, or after you fill your belly with a Thanksgiving feast, I strongly encourage you to read the latest piece published by Mike Green over the weekend:
This might be the most interesting and thought-provoking piece of research I’ve read this year. Not in its complexity, but instead in its simplicity and thoroughness in quantifying the affordability frustration we all know exists, but struggle to wrap our brains around fully.
Read it, and then read it again. I have and will be leaning heavily on AI to research it deeper over the holiday. I think this is behind a paywall, but it's well worth the modest annual fee Mike charges for his musings. If you don’t want to pay for it, send me or Mike an email, and one of us will be sure to get you access.
I’ll leave this week’s missive there, but before signing off, let us wish you and your families a Happy Thanksgiving. It’s a great time of year, and we hope you’re able to surround yourself with friends and family to share in the holiday cheer.
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