Powell Pumps The Brakes Into Year-End, As Big Tech Floors The Gas

Stocks advanced last week amid a heavy dose of headlines, including five Magnificent Seven earnings reports and a key Fed decision on rate policy. The S&P 500 Index and Russell 2000 Index posted their sixth straight month of gains, while the NASDAQ Composite capped off its seventh consecutive month of positive performance.

This week, a government shutdown, continued earnings reports, and off-cycle elections on Tuesday will color headlines.

Last week in review:

• The S&P 500 Index and NASDAQ Composite gained +0.8% and +2.2%, respectively, on the week. For October, the S&P 500 finished up +2.3% and the NASDAQ ended higher by +4.7%.
• Stocks trended higher last month principally on continued AI growth momentum, driven by a host of chip-related deals and partnerships. Cooler-than-expected consumer inflation, solid Q3 earnings reports, and a de-escalation in U.S.-China trade tensions helped move stocks higher in October. And despite mixed performance across the Dow Jones Industrials Average and Russell 2000 Index last week, both benchmarks posted gains for the month.
• Treasury prices were mostly firmer throughout October. The U.S. Dollar Index rose +2.0% last month, and Gold ended higher for the fourth straight month. West Texas Intermediate (WTI) crude closed lower for the third consecutive month.
• On the not-so-positive developments in October, the U.S. government was shut down all month and is on pace for its longest shutdown in history. The lack of available government data on the economy, including insight into softening labor trends, could become problematic for investors in November. And although President Trump lowered tariffs on China by 10% last week and China agreed to ease restrictions on rare earth exports, cooperation between the two countries remains fragile.
• Notably, consumers overall are growing more cautious heading into the all-important holiday shopping season, stock valuations are stretched, and a Fed rate cut in December is far from certain. That said, major U.S. stock averages now enter one of their historically best stretches of the calendar. Over the last twenty years, the S&P 500 has averaged a +2.3% gain in November, its second-best month of the year, only surpassed by July's +2.5% average gain.

Powell pumps the brakes into year-end, as Big Tech floors the gas.

Last week's Federal Reserve meeting and the latest earnings reports from the world's largest technology companies delivered some mixed messages for investors. Yet, the overall tone from Fed Chair Powell and Big Tech suggests a largely favorable environment for U.S. stocks through year-end, aside from some potential bumps over the near term.

In our view, the market's next phase could be shaped, in part, by lingering uncertainty around the "pace" of monetary easing, given current labor and inflation dynamics and the absence of key government economic data currently. In addition, investors will need to consider the growing scale of investment in artificial intelligence and whether the eyewatering levels of capital expenditure being spent can continue to produce the outsized revenue growth that some of the largest Big Tech companies are currently enjoying. Thus, the key questions for investors after last week's updates will likely revolve around how stocks will react through year-end to the Fed possibly putting the brakes on rate cuts, while Tech is flooring the gas on AI capex spend.

On the Fed front, policymakers cut the fed funds rate by 25 basis points last week for the second time this year, bringing the target range to 3.75-4.00%. While the move was widely anticipated, Chair Powell's comments signaled a more cautious approach going forward. He emphasized that a December rate cut is far from guaranteed, citing a divided committee and the challenge of making decisions amid a government data blackout.

The Fed's decision to end quantitative tightening in December and reinvest maturing mortgage-backed security holdings into Treasury bills also marks a shift in balance sheet management, with Mr. Powell hinting at a possible modest expansion of its balance sheet in 2026. Notably, Powell highlighted that there was added debate within the committee regarding last week's rate decision, with two dissents, one member favoring a larger cut and the other preferring no change, underscoring the lack of consensus across the committee.

In our view, the Fed's focus is now squarely on the tension between a softening labor market and still-elevated inflation, with Powell acknowledging that the risks are "evenly balanced." Whether this suggests that the central bank believes its policy rate is getting closer to neutral after last week's cut is yet to be determined. However, given the current lack of available economic data and the absence of consensus among policymakers, we believe Chair Powell aptly described it best last week: "What do you do when driving in the fog? You slow down." In a nutshell, that appears to be a very effective way to think about how the Fed may evolve policy heading into next year.

On the Magnificent Seven front, the latest earnings reports from Meta Platforms, Alphabet, Microsoft, and Amazon highlight the scale and urgency of investment in AI infrastructure at present. All four companies posted stellar profit results for the prior quarter and plan to spend aggressively on AI-related infrastructure in the current quarter and into next year.

Meta posted record revenue growth in the previous quarter. Still, its stock reacted negatively after the report, as the company flagged a $15.9 billion one-time tax charge and signaled accelerating capital expenditures, particularly for AI and data centers. In a possible early indication of how investors are balancing capital expenditures against monetization efforts and profit margins, Meta is experiencing a slight shift in sentiment regarding its AI spending - a trend that investors should closely monitor from an industry perspective moving forward. However, CEO Mark Zuckerberg made it clear that aggressive investing in AI is necessary to position the company for a potential paradigm shift if superintelligence arrives sooner than expected.

In addition, Alphabet reported very strong results for the previous quarter, with cloud revenue up +35% year-over-year and capital expenditures set to rise to $91-93 billion this year. The company's Gemini AI app now boasts over 650 million monthly users, and Google Cloud's backlog has reached $155 billion, driven by enterprise demand for AI infrastructure. Similarly, Microsoft's Azure cloud business grew by +40% year-over-year, and the company is doubling its data center footprint over the next two years to keep pace with the demand for AI. The company's capital expenditure for the previous quarter reached $34.9 billion, and management expects the growth rate to accelerate further in 2026. Amazon's cloud unit accelerated by 20% year-over-year during the previous quarter, surpassing analyst estimates. According to CEO Andy Jassy, Amazon Web Services continues to experience strong demand in AI and core infrastructure, and the company plans to increase capital expenditures throughout the remainder of the year and into next year. Apple, for its part, surpassed profit estimates for the previous quarter and meaningfully increased guidance for the December quarter, expecting robust iPhone 17 demand.

Bottom line: Last week's Magnificent Seven earnings were very impressive across the board, and we believe their updates and outlooks reinforce our continued conviction in the durability of the secular drivers across Technology and AI. Outlooks from the major tech leaders appear strong, capital expenditure plans are accelerating, and the hyperscalers remain capacity-constrained due to very strong demand (a not-so-bad problem to have if it's rectified over time). Outside of near-term overbought conditions across Technology and the broader market, which could spark a temporary pullback at some point before year-end, fundamental conditions among the market's most owned stocks appear very strong and well-positioned heading into 2026.

The week ahead:

• The U.S. government shutdown enters its second month, with pressure beginning to build on Congress and President Trump to end the standoff amid furloughed workers, forming air traffic control issues, SNAP benefit delays, and rising Affordable Care Act costs for next year.
• Elections and proposals across New Jersey, Virginia, New York, and California on Tuesday should provide tons of headlines this week, but may provide less insight into the overall mood of voters across the country heading into next year's mid-term elections.
• Given last week's comments from key Mag Seven companies regarding AI capacity constraints, AMD's earnings report and outlook on Tuesday, as well as NVIDIA's report on Nov. 19, will be closely watched for signs that the companies that deliver the brains for AI are up to meeting the industry's needs for building the computing backbone of the 21^st century.
• October ISM manufacturing and services data, October ADP, and a preliminary look at November University of Michigan consumer sentiment this week will provide a welcome look at economic trends from private providers.

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