Market Commentary | October 2026

Market Commentary – October 2026

I am writing this October letter on the day after the midterm elections, so I will quickly touch on that first. Voters clearly revolted against the pain of inflation, felt by both businesses and consumers, but I will leave politics to others. As investors and market participants, we must be dispassionate and apolitical and focus on the actual economic and market impacts of future policy. From the standpoint of Washington, a split federal government will lead to little change in legislation at the federal level over the next two years. That said, just as oil analysts count barrels, the results of the governors' races will have us counting data centers, and we must assume fewer will now be built, as was threatened on the campaign trail. The question from here is whether the data center industry pivots to the states that want them. The Federal Reserve needs to start counting too, as this construction feeds directly into the pace of growth, inflation and the condition of the stock market.

AI and the state of data center construction were a major focus for investors in October for several important reasons. During the month, we saw canceled IPOs from overseas neo-cloud data center operators such as Firmus, AirTrunk, NEXTDC and Nscale, mostly due to investor pushback on valuations. CoreWeave, a US-based neo-cloud data center operator, saw its equity value and bond prices fall during the month to the point where its unsecured debt now yields about 15%¹ and its credit default swaps imply a roughly 50% probability of default over the next five years.² If fewer data centers get built due to a higher cost of capital and/or permitting challenges, then less equipment needs to be ordered to fill these facilities.

The other concern came on the heels of the major hyperscaler earnings reports from Alphabet, Amazon, Meta and Microsoft, where deteriorating free cash flow and ever-growing levels of CapEx spending are a key investor focus. With about half the market cap of the S&P 500 made up of companies selling into the AI data center ecosystem,³ and about half of the contribution to GDP growth coming from the construction of data centers,⁴ so much depends on this spending continuing at a healthy clip. With regard to S&P 500 earnings, about one third of the roughly 30% expected Q3 growth comes from just two companies, Nvidia and Micron.⁵ Add in other technology companies and that share rises to about two-thirds. Then bring in the non-tech companies benefiting from the data center build, such as steel, aluminum, machinery, HVAC and other equipment, and about 75% to 80% of earnings per share growth is helped by the AI build.

From here, we await the highly anticipated IPO from Anthropic, and the questions are twofold. First, at what valuation will investors agree to finance it, and second, what will the ultimate profitability be of this still fast-growing business? The same can be said for OpenAI, which will try to go public in early 2027, in a world that is seeing more price competition from open-source and open-weight AI models, particularly from China.

After reaching a high of about 5.30% in the early part of October, the US 10 yr Treasury yield fell for the rest of the month and stands at 4.93% as of this writing.⁶ The peak seemingly coincided with peak concerns about the financial condition of France, whose 10 yr yield rose above 5% during the month as riots and protests filled its streets.⁷ Also of note, the Federal Reserve held the fed funds rate unchanged, which was expected. The question from here is whether it hikes rates again in December, and the market is currently pricing in about an 84% chance of that occurring.⁸ I believe the state of the AI trade will be a determining factor when the Fed gathers next month, not just the inflation and labor statistics. The European Central Bank and the Bank of Japan also left their benchmark rates unchanged, while the Bank of Canada and the Reserve Bank of Australia each hiked rates by 25 basis points, as expected. Overall, I think we are in a cycle of rate tweaking around the edges rather than anything more.

With respect to inflation, it remains elevated at both the consumer and the producer level. In fact, producer prices (PPI) are now running 260 basis points above consumer prices (CPI), pointing to the potential for a margin squeeze if higher costs cannot be passed on. September CPI was up 3.7% y/o/y and PPI was up 6.3% y/o/y.⁹ On the other side of the Fed's mandate, the labor market remains on firm ground with an unemployment rate of 4.2%.¹⁰ While job growth has slowed, it is in line with the more subdued increase in labor force participation.

Conclusion

October was full of market-moving events that seemingly had it all, and it was quickly followed by the midterm elections. While there is so much to juggle, we remain very balanced in our investing approach. We acknowledge the important and large contribution from the AI data center buildout, but we also understand the importance of owning other things unrelated to it. As it has been an 'either/or' market, in the sense that either tech rallies and other areas sell off or vice versa, it is good to be very diversified. 'Diversification' is certainly one of the most overused clichés in wealth management, but we think it is a crucial attribute for a portfolio to have right now.

Regardless of how all the above plays out, it remains essential that investors maintain adequate short-term liquidity to cover two to three years of spending needs. Knowing that this near-term period is secured allows the rest of a portfolio to be viewed with a longer perspective, and a long-term time horizon is always an investor's best friend.