Author: Davis Finke, CFA
This week’s economic headlines were dominated by the release of the September consumer price index (CPI), one of the primary measures used to gauge inflation. Headline CPI rose 0.6% for the month and 3.7% year-over-year, with the monthly increase in line with expectations and the annual figure coming in slightly above forecasts. Consistent with previous readings, much of the increase was driven by higher energy prices, with a 9.1% jump in gasoline prices accounting for more than half of the monthly rise. However, inflationary pressures also extended beyond energy. Core CPI, which excludes the volatile food and energy categories, rose 0.3% for the month, while the annual rate increased to 2.6% from 2.4% in August. Both readings exceeded expectations, providing further evidence that underlying inflationary pressures remain persistent. With inflation already a primary focus for the Federal Reserve following its September interest rate increase, this week’s report reinforced expectations that additional tightening may be necessary. The futures market is now pricing in a roughly 90% chance of at least one additional 25-basis-point rate hike by December. Major stock indexes declined on Wednesday as investors weighed the possibility that higher borrowing costs could slow economic growth and put additional pressure on corporate investment.
Market performance for the week was mixed, with the tech-heavy Nasdaq posting one of its worst weekly declines in months, falling 5.52%. The S&P 500 also finished lower, declining 1.98%, while the Dow Jones was the only major equity index to finish the week higher, gaining 0.64%. Much of the weakness was concentrated in the technology sector, which was the worst-performing sector for the week, falling 7.70%. Selling pressure intensified as bonds issued by cloud-computing company CoreWeave fell into distressed territory, while its share price declined more than 25% over the week. These developments fueled broader concerns about the growing reliance on debt to finance the buildout of AI infrastructure, particularly as borrowing costs remain elevated. Further weighing on sentiment were reports of slowing quarterly revenue growth at AI company Anthropic, raising additional questions about the pace of growth across the industry. Despite the weakness in technology stocks, performance across the broader market was more resilient, with seven of the 11 S&P 500 sectors finishing the week higher. Leading the gains were consumer staples (+5.06%), energy (+4.88%), and health care (+3.44%). Support for the broader market came in part from the first week of third-quarter earnings season, as several major U.S. banks reported encouraging results. Although earnings performance relative to expectations was mixed, the reports highlighted continued strength in credit card spending, healthy loan demand, and generally stable credit quality, pointing to resilient consumer spending and corporate activity despite higher interest rates.
With the prospect of additional Federal Reserve tightening on the horizon, third-quarter earnings results will be an important influence on market performance through year-end. The S&P 500 is currently on track to deliver year-over-year earnings growth of 29% for the third quarter, based on a combination of reported results and estimates for companies yet to announce earnings. If realized, this would mark the third consecutive quarter of earnings growth above 25%. At the sector level, 10 of the 11 sectors are expected to report year-over-year growth, with five projected to deliver double-digit increases. Next week’s earnings calendar includes another group of financial institutions, along with two members of the Magnificent Seven, Meta and Tesla. Given their significant weighting in major stock indexes, results from these companies have the potential to meaningfully influence overall market performance. Their earnings and forward guidance will also provide investors with further insight into corporate growth prospects as markets assess the effects of higher borrowing costs and the sustainability of AI-related investment.
