Fuel Gauge

Stocks ended a choppy week higher, shrugging off a surge in Treasury yields and a steady stream of geopolitical headlines as third-quarter earnings season got underway. The S&P 500 rose 1.17%, the Dow Jones Industrial Average gained 0.96% on the strength of a Friday rebound, and the Nasdaq Composite added 0.65%. Nine of the S&P 500’s 11 sectors finished higher, led by energy, consumer staples and utilities.

The bond market was far less serene. The 10-year Treasury yield touched 5.36% on Wednesday, its highest level since April 2002, after minutes from the Federal Reserve’s (Fed’s) latest meeting showed most officials viewed another quarter-point rate increase by year-end as likely appropriate. With energy prices keeping inflation worries alive, yields eased to end the week slightly lower at 5.24%. The Fed’s September increase was its first since 2023, and investors are increasingly betting that rates will stay higher for longer. History offers no clear guide: equity returns after the start of a tightening cycle have been mixed, and elevated yields raise the bar for stock valuations, particularly for long-duration growth shares.

Oil prices softened after President Trump pledged not to attack Iran before the midterm elections. Investors appear to be hoping tensions will ease in the coming weeks, though a pause timed to the political calendar is hardly a resolution. Crude slipped further Friday afternoon after Trump said Russian President Vladimir Putin had agreed to supply diesel, a claim that drew scrutiny over the weekend.

The market’s resilience this year has been notable, led by technology and energy, which have returned 30.4% and 48.5%, respectively. But the headline gains flatter the typical stock. Only about a third of S&P 500 members trade above their 50-day moving average, a sign that a handful of names are carrying the rally. Narrow leadership is common during periods of technological change, and it has at times marked cyclical turning points.

Small caps illustrate the point. The Russell 2000 fell 0.9% this week and has shed almost 6% over the past five weeks, a sharp reversal from the first half of the year. Investors fear surging yields will squeeze smaller companies, which have less access to capital and are more exposed to higher borrowing and energy costs. The index is still up 14% this year, but more than half of its members sit at least 20% below their 52-week highs. A rotation back into small caps would likely result from attractive valuations, a peak in interest rates and some easing of geopolitical risk.

No discussion of markets is complete without artificial intelligence. Reports Thursday that OpenAI’s annualized revenue was roughly $20 billion below earlier estimates revived bubble worries, and semiconductor shares fell 3.4%. Sentiment rebounded Friday on reports that the company could reach an annualized run rate of $70 billion or more by year-end. Headlines like these will keep rattling investors, but evidence continues to build that businesses and consumers are using artificial intelligence (AI) and are willing to pay for it.

Earnings season opened Friday with Delta Air Lines, which narrowly missed third-quarter estimates, its first miss in two years. The bigger story was guidance as a significant rise in fuel prices added to uncertainty for future profits. Adjusted fuel expense jumped 62% in the quarter amid ongoing conflict in the middle east. Delta’s report sets the tone for what comes next: investors will be laser-focused on how companies absorb elevated energy costs and protect margins, alongside the ongoing questions of AI monetization and productivity gains.

The dollar posted its fourth straight weekly gain, its longest winning streak since May 2025, according to Dow Jones Market Data. Expectations of further rate increases tend to support the currency by widening rate differentials and making dollar-denominated assets more attractive. The move marks a turn from last year’s “debasement” narrative, when investors at home and abroad questioned the dollar’s long-term role as the world’s reserve currency.

Friday’s preliminary University of Michigan survey added to signs of economic softening. The consumer sentiment index fell to 46.3 in early October, its lowest level since May’s record low and well below expectations. The current conditions gauge dropped 6.2 points to 44.7, the weakest reading in the survey’s history, while the expectations index edged up 1.0 point to 47.3. “Frustration over cost-of-living continues to mount,” the university said, with consumers across the political spectrum believing the economy has weakened since the start of the year. Lower-income households, in particular, have little room to absorb further price increases. Yet the broader picture is less bleak. According to Bespoke Investment Group, home equity has reached its highest level since 1960 and real median income is at a record, suggesting that household balance sheets, in aggregate, have so far held up against higher prices.

With the midterm elections only weeks away, polls have shifted further toward Democrats, and prediction markets imply roughly a 65% chance they win the Senate and even higher odds they retake the House. Government spending and the nation’s fiscal outlook remain top issues for voters. Markets have historically favored gridlock in Washington, since divided government lowers the risk of major policy shifts.

Looking ahead, investors will look for signs of de-escalation in the Iran conflict, though tensions flared over the weekend after Iran-backed Houthi militants launched a fresh wave of attacks. Third-quarter results from the big banks, led by JPMorgan Chase, Bank of America and Citigroup, will show how businesses and consumers are coping with higher borrowing costs. So far, the climb in yields has been offset by upward revisions to forward earnings estimates, and continued earnings momentum will be key to sustaining the rally. On the economic calendar, consumer and producer price data will take center stage, along with retail sales, industrial production, and import and export prices. In the eurozone, investors will look to industrial production and trade figures.

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6010278 Exp. 10/31/2029