Weekly Investment Update (10/16/2026)

This week's market volatility suggested a shift in investor focus. AI-related stocks came under significant pressure amid renewed concerns about the sustainability of the infrastructure buildout, slowing revenue growth and increasingly aggressive financing commitments. But perhaps more revealing was the bond market's reaction. Despite hotter-than-expected consumer price index (CPI) and producer price index (PPI) reports, the 10-year Treasury yield fell sharply, declining roughly 15 basis points on Thursday alone. Investors appeared to be shifting their focus from inflation toward the potential implications for economic growth if AI investment slows.

We believe this is a natural part of the investment cycle surrounding a transformative technology. Markets inevitably overestimate opportunities at times and underestimate them at others, particularly when the scale of investment is unprecedented and the ultimate winners are still being determined. We continue to believe AI represents a powerful, long-term driver of productivity and economic growth, but that doesn't mean every investment will generate an attractive return or that the path forward will be smooth.

This week's developments reinforce the importance of building portfolios around genuine diversification. AI's influence now extends well beyond technology into industrials, energy, infrastructure, and even the broader economy, creating common sources of risk across investments that may appear diversified on the surface. In this environment, understanding what actually drives returns, and ensuring portfolios are not overly dependent on any single outcome, is becoming increasingly important.

Hot Inflation, Cool Response

What is happening: Inflation came in hotter than anticipated in September, with both the CPI and PPI exceeding market expectations. Headline consumer prices rose 0.6% month over month and 3.7% year over year, while core inflation, which excludes food and energy, increased 0.3% and 2.6% for the same periods. Perhaps more concerning than the headline figures was the broadening of inflationary pressures. Increases in shelter costs were accompanied by higher prices for lodging, airfare, vehicles, and recreational goods.

Producer prices told a similar story, with energy accounting for much of the increase but price pressures extending across a range of goods and services. The apparent spillover of higher energy costs into core inflation raises concerns about the persistence of price pressures and their potential impact on the Personal Consumption Expenditures (PCE) Price Index, the preferred inflation measure of the Federal Reserve (Fed).

The data initially pushed bond yields higher and increased the market’s expectation of an October Fed rate hike from 23% to 50%, but those market reactions quickly reversed, and both yields and odds of an October rate hike ended the week lower than where they started. Fed Chairman Kevin Warsh’s comments overnight largely reinforced those expectations, as did remarks from several other Fed speakers earlier this week. The expectations for eventual peak rates in late 2027 also remained largely unchanged. Equities were also volatile this week, but much of this can be attributed to AI-related concerns rather than inflation, and a rotation within equities played out.

Why it matters: Inflation remains one of the perceived risks to an otherwise favorable environment for portfolio returns. The latest readings reinforce expectations that the Fed will need to raise interest rates further, although they do little to change the market's expectation for three to four additional hikes by the end of 2027. The data may simply pull forward the timing of those increases, although despite the hotter prints this week, market expectations for an October rate hike are lower than where they started.

While equity markets have mostly adjusted to the prospect of higher interest rates, a more persistent and broad-based increase in prices could pose a greater challenge by weighing on consumer spending and, ultimately, economic growth. This is coming at a time when AI growth expectations are again being called into question.

Perhaps the most notable development this week was the relatively muted market response to the inflation data. Despite an initial increase in yields and rate hike expectations, bond markets quickly reversed course as renewed concerns about the AI trade weighed on equities and raised questions about the durability of future economic growth. The resulting decline in bond yields suggests that investors are increasingly balancing inflation risks against the potential for slower growth, and as the latter moves into focus, bonds may again be a good hedge to equity exposure.

Solid Third-Quarter Bank Earnings Highlight Consumer Resilience

What is happening: Third-quarter earnings season began this week with major U.S. banks reporting broadly higher profit and revenue growth year over year, though results were mixed relative to last quarter. The bulge bracket banks, including JPMorgan, Goldman Sachs, Citigroup, and Morgan Stanley, posted a combined profit of roughly $30 billion, up 15% year over year and combined revenue of $113 billion, up 11% from a year earlier. Equities trading was strong across the cohort, with revenues up an average of roughly 39%, though fixed income trading came in below expectations. Capital markets activity slowed from the second quarter with investment banking fees coming in lower as mergers and acquisitions deals and initial public offerings stalled, though management generally described this as delay rather than cancellation.

Credit metrics remained healthy despite higher yields and elevated energy prices, with credit card charge-off rates generally declining and nonperforming loans holding steady. That resilience starts with the consumer. As Citi CEO Jane Fraser noted, consumers continue to drive much of the economic growth trend despite the focus on AI. Card spending grew 10%-12% year over year at JPMorgan, Wells Fargo, and Citigroup, which executives attributed to the healthy labor market. This week’s economic data continued to underscore these dynamics, with September retail sales exceeding expectations, capping a strong quarter for consumer spending and leaving real GDP tracking estimates near 3%. That said, consumer spending is on track to slow somewhat in the fourth quarter as the effects of tax relief fade and the headwind from higher energy prices persists.

Why it matters: Earnings from the largest U.S. banks provide an inside look at underlying economic activity, particularly consumer health. Third-quarter earnings paint a picture consistent with the data: consumer spending is holding up despite various macroeconomic headwinds. The labor market underpins this spending strength, as unemployment held near 4.1%-4.2% throughout the third quarter and jobless claims stayed in the 198,000-297,000 range. Bank-level data reinforce this, with the continued rise in card spending year over year in Q3 and improved credit card delinquency rates year over year for consecutive quarters. Together, these trends show that consumer spending is anchored by income growth and a labor market that has shown signs of stabilization, a backdrop in which consumer credit tends to stay stable. 

The consumer continues to bolster the U.S. economy, and spending has held up even with higher yields and elevated energy prices, anchored by labor market trends. Since consumption is the largest component of GDP, that strength matters well beyond the banks. Ultimately, we believe resilient growth keeps credit and consumer balance sheets stable, and we do not expect an extended hiking cycle that would derail economic activity.