The Week Ahead
This is going to be potentially a very big week for the market.
I have been discussing the three catalysts that the market has been waiting for, and we are about to get answers on how they will play out:
Tech earnings: This week, major tech companies, like Alphabet (Google), Microsoft, Amazon, and Intel, report earnings. Investors are watching this space closely to see whether AI revenue growth continues at a rapid pace or whether issues in the economy are starting to have a negative impact.
Inflation: The Federal Open Market Committee (FOMC) meets October 27-28. US Treasury bond yields have been rising, in part due to inflation fears and worries that the Fed is making a policy mistake by not raising rates. The Fed is not expected to raise rates, but what it says (or doesn’t say) about inflation may move the markets.
The midterm elections: As I have discussed numerous times, the fourth quarter of a midterm year and the year that follows have historically been a very good time to own equities.
We start the week with the S&P 500 testing support in the lower zone of the sideways trading pattern that has been present since early August:
…and low-volatility and value areas of the market have shown higher positive momentum and relative strength vs. their high-beta and growth counterparts:
Market rotation has been favoring low-volatility and value over high-beta and growth.
The two big events this week that may change the current pattern deal with inflation and AI growth.
Inflation
First, the FOMC meets this week to decide whether to raise interest rates or not.
Currently, market participants expect the Fed to keep rates unchanged:
Futures markets are predicting a 90% chance the Fed does not change rates.
…however, the market will be closely listening to what the Fed says in its commentary on its economic outlook and future inflation policy.
Inflation continues to be a concern, and many, including myself, are worried that the Fed is mishandling the inflation risk. This worry is showing up in the bond market, as high-yield bond spreads continue to widen:
A high-yield bond spread is the difference in yields between high-yield bonds and higher-quality bonds, like US Treasuries.
A widening (rising) spread indicates higher perceived credit risk, usually associated with economic distress, while a tightening (declining) spread suggests increased investor appetite for risk and a better economic outlook.
I will be closely watching how the bond market reacts to what the Fed says about inflation. If bond investors feel that the Fed is starting to take steps to rein in inflation, high-yield spreads should drop, removing one of the fears that has been holding the market in its sideways/wait-and-see pattern.
AI Growth
On Wednesday, Google and Microsoft report earnings, followed the next day by Amazon and Intel.
The AI trade has stalled due to fears of revenue growth and the impact that higher rates will have on borrowing.
While I still believe we are in the very early stages of the AI cycle, akin to 1993 during the internet cycle:
For paid subscribers:
1993 vs Today
Macro events vs the AI cycle
Post-midterm election stock market performance since 1874
Today’s ARTAIS AI Theme screen results, updated every trading day