Iran-backed Houthi rebels in Yemen kept up their attacks on Saudi Arabia and on ships in the Strait of Hormuz. With the U.S. midterm elections approaching, geopolitical risks stayed high and added to selling pressure on stocks. China’s CXMT reported progress in developing a new chip, which hit semiconductor stocks. Investors sold off memory makers Micron, Samsung and SK Hynix even though memory demand still exceeds supply, and South Korea’s stock index fell more than 18% for the week. Broadcom’s CEO said that funding is the biggest bottleneck to expanding AI infrastructure. Optical communications stocks led the decline, and tech and semiconductor stocks fell sharply.
U.S. September CPI and PPI both rose more than expected. PPI climbed 1.3% month-over-month, well above the 0.5% forecast and the biggest monthly increase since 2022. Year-over-year, PPI rose 6.3%, the largest gain since December 2022. This shows that inflation pressure is spreading from energy to other sectors. Because inflation is proving sticky, markets now expect high rates to last longer. U.S. Treasury yields briefly climbed, but Treasuries recovered after stocks fell sharply and investors moved into safe havens. Weaker corporate issuers are showing warning signs. CoreWeave’s bond yields jumped, and the yield on its 2032 notes briefly reached 15%. The company has borrowed heavily to build data centers, and markets are worried about its debt load, interest costs and ability to refinance. Default risk is rising, and high borrowing costs are cutting into corporate profits. Both CoreWeave’s stock and its bonds fell, which shows that even AI and tech credit bonds are starting to diverge.
U.S. annual CPI inflation rose to 3.7% in September. Core CPI rose from 2.4% to 2.6% year over year, and its 0.3% monthly gain was above the 0.2% forecast. Energy drove the rebound and made up more than half of the monthly rise in headline CPI. Energy was the main shock, but consumer spending held up, so companies could still pass higher costs on to customers. Housing and some service prices stayed sticky, and demand-driven inflation edged higher. Stronger corporate capital spending is also supporting the economy and corporate profits, so overall demand is unlikely to cool quickly.
U.S. third-quarter earnings season is underway, and markets will watch how companies perform in a high-rate environment. According to FactSet, S&P 500 earnings are expected to grow 29.5% in the third quarter, which shows that corporate fundamentals remain supportive. Tech earnings are expected to grow 65% on strong AI demand, so the sector remains a key driver of overall profit growth.
U.S. healthcare spending is heavily shaped by regulation. Deductibles under employer-sponsored insurance (ESI) and Affordable Care Act (ACA) plans have risen, and out-of-pocket maximums are higher than a year ago. Because of these changes, U.S. hospital admissions, surgical volumes and hospital visits all improved in the third quarter. Goldman Sachs estimates that 3Q hospital visits will rise 4% year over year. Seasonal factors should also lift healthcare utilization in the second half above the first half. Fourth-quarter earnings are expected to be solid, and this strength could carry into next year. This outlook is reflected in the recent record high of the XLV ETF.
Healthcare, healthcare services and biotechnology are traditional defensive sectors because demand for healthcare usually holds up even when the economy weakens. Interest rates remain high, and control of Congress could shift after the U.S. midterm elections in November, so the risk of stock market volatility is rising. In the past, when the VIX rose, healthcare held up better than tech stocks and proved more resilient to market swings.
