This week’s key theme was the market repricing returns on AI capex. Health Care has become a “de-AI” safe haven, with the S&P 500 Health Care Index up about 23% since late April.
U.S. 3Q GDP grew at an annualized 3.4% QoQ, beating expectations and accelerating sharply from 2.2% in 2Q. Growth was driven mainly by strong business investment and resilient household spending. The October Consumer Confidence Index jumped 7.5 points to 91.7. That was its first increase in four months and its highest reading since June, above every economist’s forecast.
The FOMC voted 10-2 to keep the federal funds target range unchanged at 3.75%-4.00%. Warsh gave no clear guidance for December and stressed that decisions will depend on the data. With two dissents this month and most officials expecting another hike this year, markets now put the odds of a December hike at about 80%. The pause gives the Fed time to judge whether more tightening is needed.
Major tech companies reported mixed results this week, but the AI infrastructure arms race shows no sign of slowing. Hyperscalers’ capex now accounts for as much as 45%-50% of revenue, consuming most of their operating cash flow, and they have already raised funds through equity and debt markets.
The Fed is tightening policy, and the market is heavily concentrated in AI infrastructure and monetization themes. Large funding needs and rising bond yields are adding to future financing costs, while market concentration keeps increasing. Equities are still trending higher, but several risks are building at once, so volatility may rise. We think diversifying and reducing AI exposure is an important strategy.
