Weekly Investment Update (10/30/2026)

Volatility returned to AI-related stocks this week as a series of high-profile earnings reports renewed concerns about the sustainability of the enormous infrastructure buildout. Amazon provided a particularly interesting example: its cloud business grew an impressive 39%, yet shares came under pressure as investors focused on rising capital expenditures and negative free cash flow. Similar concerns surfaced across other major technology companies, highlighting an important shift in investor expectations. Strong AI demand is no longer enough on its own; investors increasingly want evidence that the economics justify the investment.

We view this as a natural, and arguably healthy, phase of a transformative technology cycle. The underlying demand signals are encouraging, but the market is beginning to distinguish more carefully between the beneficiaries of AI spending and those ultimately positioned to earn attractive returns on that investment. Importantly, the recent weakness has not been broad-based. While AI-linked stocks have struggled, the equal-weighted S&P 500 has meaningfully outperformed, suggesting a rotation in market leadership rather than a wholesale retreat from risk.

Our long-term conviction in AI's economic potential remains intact, but that does not mean the path will be linear or that every investment will succeed. If anything, the current environment reinforces why we favor quality businesses, disciplined valuations, and genuinely diversified portfolios. As the AI cycle evolves, the distinction between technological success and investment success will become increasingly important.

Gradual Hikes and Resilient Growth

What is happening: The Federal Reserve (Fed) left interest rates unchanged at the October FOMC meeting, holding the target range at 3.75%-4.00%. The decision was expected, though the meeting featured two dissents with Governor Lisa D. Cook and Cleveland Fed President Beth M. Hammack voting for a 25-basis-point hike. The policy statement upgraded economic growth from “solid” to “strong” and continued to acknowledge that inflation is still elevated. The decision to hold rates was framed as an opportunity to allow for “the accumulation of more information” before determining the next policy move. Fed Chairman Kevin Warsh reiterated these messages during the press conference, offering little guidance but noting that modestly tighter financial conditions since the last meeting allowed more time to assess incoming data. 

This week’s economic data also reinforced the Fed’s message. Third-quarter GDP came in above expectations at 3.4% annualized, and core PCE inflation was in line with expectations, though it was elevated at 0.3% month over month and 3.1% year-over-year. GDP data showed that strong consumer spending and nonresidential fixed investment (capex) continue to bolster growth. Real final sales to private domestic purchasers, a measure of underlying domestic demand, rose 4.9%. Similarly, within capex, equipment investment surged 20.9%, led by computers and industrial machinery, while structures investment accelerated to 5.4%, though sluggish housing activity persisted.

Why it matters: The FOMC meeting was generally in line with expectations, while the data suggest that the economic outlook, characterized by stronger growth and above-target inflation, is intact. This backdrop supports the likelihood of additional rate hikes, but we expect a gradual approach, rather than aggressive tightening. Market expectations for rate hikes were pared back from three additional hikes fully priced in through 2027, to now only two hikes fully priced in following the FOMC meeting. Going forward, inflation readings and domestic demand conditions, in addition to financial conditions, will be key to determining the Fed’s rate path, assuming the labor market stays relatively stable. Consensus fourth-quarter GDP growth is projected at 2.1%, a solid, yet more sustainable pace of expansion while our base case is that core inflation has peaked. 

Overall, the backdrop remains constructive. In our base case, a gradual approach to tightening is unlikely to jeopardize broader economic activity, although persistent inflation or more tightening than expected could weigh on growth and valuations. This backdrop supports our overweight to equities, even as interest rates remain higher.

AI Financing: $250+ Billion in Announced Deals Highlight Capital Needs

What is happening: Three large financings, worth over $250 billion, announced this week illustrate the scale and scope of capital being sought to fund the AI revolution. Anthropic publicly released its widely anticipated IPO prospectus, with the transaction expected as early as mid-November. Estimates peg the raise at $100 billion or more, valuing the company at $1.5-$2 trillion. Hours later, the company announced a $63 billion debt deal to lease specialized chips designed by Broadcom and Google, representing the largest AI infrastructure debt deal to date. Lenders include banks and private credit investors, with around a third of the total earmarked for syndication to the investment-grade bond market. Broadcom is providing a backstop to the lenders in case of default. Also this week, Meta announced plans to raise as much as $97.5 billion for continued AI buildout, consistingof $25 billion Class A (existing share class) stock, $12.5 billion in convertible preferred securities, and up to $60 billion in new, Class C non-voting common stock to be sold over time starting next year.

Why it matters: As companies increasingly tap capital markets to finance AI initiatives, attention turns to the question of a potential saturation point. Thus far, investor appetite has been robust: Meta’s Class A and preferred securities offerings were oversubscribed. Over time, however, portfolio-level concentration limits may act as a constraint on new issuance absorption. Analysts are estimating global AI-related capex spending to reach $4-5 trillion over the course of 2026-2030, to be financed with a mix of operating cash flows and new issuance. 

In corporate credit, the largest issuers make up around 2%-3% of the index; the largest investment-grade issuer has around $170 billion of debt in the index. Amazon, Meta, Alphabet, and Microsoft together would have a cushion of approximately $450 billion more issuance before they each approach that level. In equities, portfolio diversification limits can come from discretionary portfolio manager guidelines or regulatory constraints. The Investment Company Act of 1940 generally requires a registered management investment company classified as diversified to satisfy a 75%-of-total-assets test. Within that portion, securities of any single issuer generally may not exceed 5% of the fund’s total assets or 10% of the issuer’s outstanding voting securities, subject to exceptions for cash, U.S. government securities, and securities of other investment companies. Market appreciation alone does not necessarily cause a fund to lose its diversified status. Today, four issuers (Nvidia, Apple, Microsoft, and Alphabet) each account for over 5% of the S&P 500. 

Passive funds may operate under different diversification policies or rely on applicable SEC staff relief to continue tracking their indices, subject to required disclosures and other conditions Active managers can choose to underweight individual stocks relative to benchmarks to maintain their diversified status; however, in aggregate these limits may constrain new equity issuance. 

These considerations may be driving technology companies to utilize a wider variety of financing structures, including private credit, project finance, and off-balance sheet financings. Such structures provide investors with opportunities to gain AI exposure in a broader variety of strategies, but investors should evaluate aggregate exposure to common issuers, counterparties, and guarantors, as well as each structure’s leverage, liquidity, and repayment priority. Different financing structures do not necessarily diversify the underlying economic risks.