By Ben Norris, CFA, Senior Vice President, Senior Investment Strategist
Stocks finished lower last week amid growing concern that the massive investment in artificial intelligence (AI) witnessed over the last year may not generate a positive return. The S&P 500 (S&P) fell 1.6% as large-cap growth stocks forged the path lower, ending a three-week win streak. The technology-heavy Nasdaq 100 fell nearly 3.0%. Investors shifted portfolios toward sectors that have been out of favor recently, bidding energy, health care and real estate stocks higher. As a result, value indices outperformed by a wide margin. The rotation last week felt less like a return to fundamental investing and more of a simple move away from stocks that had any exposure to AI.
A few developments sparked caution from investors. First, CEOs of two major banks flagged the possibility that stocks are overvalued in the short-term, particularly if signs emerge that investment in AI has gone too far, too fast. Stocks are up nearly 40% from lows reached following the Trump Administration’s “Liberation Day” in April, and 70% since ChatGPT was launched in the fourth quarter of 2022. Second, a few separate corporate earnings reports saw results that failed to live up to very high expectations relative to high stock prices. While investment in AI infrastructure continues to grow, any sign that investment is slowing, or that earnings growth could disappoint, could have a significant impact on market valuations.
Longer term, my concern is more tied to what will happen to the companies supplying AI technology when the current pace of investment slows as supply finally catches up with demand. Bulls argue that the lifecycle of an AI semiconductor is relatively short compared to other innovative technologies of the past—fiber optic cable has a lifespan of 20 to 30 years, for example, and we still use cable that was laid during the late 1990s’ technology bubble. Much of their case is built around the idea that current AI datacenters will need to be completely upgraded over the next five years, and that this cycle will continually repeat.
However, bulls run the risk that future AI workloads aren’t as demanding as anticipated, either because there isn’t an application to utilize built-out capacity, or because other technological advancements (such as software) make AI models more efficient. Historically, the semiconductor industry has been highly cyclical, with booms and busts occurring approximately every four years as excess capacity is digested. The issue is not the cyclicality of the industry—I am certain that semiconductor sales will continue to grow over time—but rather that the stocks are trading as though they are no longer cyclical. When the cycle does eventually wane, many of these stocks could see their valuations compress, and investors will want to be properly diversified in response.
AI wasn’t the only factor that had investors on edge last week. The government shutdown stretched on, making it the longest shutdown of all time, eclipsing the 35-day shutdown experienced during the first Trump term. As the shutdown persists, it becomes more likely that real economic headwinds will develop. Consumer sentiment fell to a three-year low to start November as SNAP (Supplemental Nutrition Assistance Program, previously known as “food stamps”) benefits and pay to federal workers halted. Consumer-facing companies have already warned that an absence of SNAP would negatively impact their results in the coming quarters. Similarly, the Federal Aviation Administration has had to limit the number of flights around the country as it deals with a shortage of air traffic controllers. These are two of the more apparent impacts of the government shutdown, but ripple effects will continue to show up even if the shutdown ends relatively soon.
two of the more apparent impacts of the government shutdown, but ripple effects will continue to show up even if the shutdown ends relatively soon.
One of those ripple effects is the lack of economic data being compiled while government economists and statisticians remain furloughed. Investors and private-sector economists have turned toward alternative data sources in recent weeks in hopes that they can piece together at least a blurry picture of the economy. After two consecutive months of negative job numbers, the ADP employment report (a nongovernment report) showed a modest increase in private payrolls in October. Elsewhere, the level of corporate layoffs tripled from a year ago, according to severance firm Challenger, Gray & Christmas. Cost cutting was the most common reason cited, while AI emerged as the second most common factor. Finally, the number of job postings on employment website Indeed.com fell to the lowest level since February 2021. We have seen particular interest in the labor market as the Federal Reserve (Fed) approaches its final policy meeting in December. After the Fed cut rates at its October meeting, Fed chairman Jerome Powell made it clear that another cut was not guaranteed, specifically because the lack of economic data had clouded the Fed’s view. Based on this patchwork of data, it appears that when government employment data finally resumes, the labor market will almost certainly be weaker than it was before the shutdown, and the Fed will have a case for another cut.
I should mention that late Sunday evening a deal emerged between Congressional Republicans and a handful of Democrats that could end the shutdown. Details are still being determined but it looks as though the government could reopen by the end of the week.
Looking forward to this week, what we will miss in the form of hard economic data we will make up for in corporate earnings reports and remarks from Fed members. The bond market will be closed on Tuesday for Veterans Day, but the stock market will be open as usual.
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, NOV. 10 | ||||
| None scheduled | ||||
| TUESDAY, NOV. 11 | ||||
| Veterans Day holiday, bond market closed | ||||
| 10:25 am | Fed governor Michael Barr speaks | |||
| 6:00 am | NFIB optimism index |
Oct. |
98.8 |
|
| WEDNESDAY, NOV. 12 | ||||
| 9:20 am | New York Fed President John Williams speaks | |||
| 10:00 am | Philadelphia Fed President Anna Paulson speaks | |||
| 10:20 am | Fed governor Chris Waller speaks | |||
| 12:15 pm | Atlanta Fed President Raphael Bostic speaks | |||
| 12:30 pm | Fed governor Stephen Miran speaks | |||
| 4:00 pm | Boston Fed President Susan Collins speaks | |||
| THURSDAY, NOV. 13 | ||||
| 8:30 am | *Initial jobless claims | Nov. 8 | NA | |
| 8:30 am | *Consumer price index | Oct. | 0.2% | NA |
| 8:30 am | *CPI year over year | Oct. | NA | |
| 8:30 am | *Core CPI | Oct. | NA | |
| 8:30 am | *Core CPI year over year | NA | ||
| 9:20 am | New York Fed President John Williams speaks | |||
| 12:15 pm | St. Louis Fed President Alberto Musalem speaks | |||
| 12:20 pm | Cleveland Fed President Beth Hammack speaks | |||
| 2:00 pm | Monthly U.S. federal budget |
$257.5B |
||
| 3:20 pm | Atlanta Fed President Raphael Bostic speaks | |||
| FRIDAY, NOV. 14 | ||||
| 8:30 am | *U.S. retail sales | NA | ||
| 8:30 am | *Retail sales minus autos | NA | ||
| 8:30 am | *Producer price index | NA | ||
| 8:30 am | *Core PPI | NA | ||
| 8:30 am | *PPI year over year | NA | ||
| 8:30 am | *Core PPI year over year | NA | ||
| 10:00 am | *Business inventories |
NA |
||
| 10:05 am | Kansas City Fed President Jeff Schmid speaks | |||
| 2:30 pm | Dallas Fed President Lorie Logan speaks |
*Subject to delay if U.S. government shutdown persists
NA – not available due to government shutdown
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market