Looking at the week overall, markets continued to march in place as midterms approach. However, that doesn't mean traders sat on their hands all week; far from it.

 

"Third-quarter earnings better be good," was the focus of one of my last columns. For Alphabet and some other AI tech stocks like Intel and Amazon, it was a disaster. Alphabet missed earnings. As a result, the stock dropped almost 13 percent on Thursday. That means it lost about $500 billion, the second-biggest one-day wipeout ever for a U.S.-listed stock.

 

And given that AI has become a global trade, Google's results drove down Asian equities as well — anxiety over the AI supply-chain trade spread across the region. As readers realize by now, the bloom is off the rose and has been for the entire AI equity universe recently.

 

As with most declines of this magnitude, I expected a dead cat bounce trade. We got one over the first three days of this week, in anticipation of home-run results from Microsoft and Google after Wednesday's close. The entire AI space rallied from an oversold position.

 

While Microsoft beat, it just wasn't enough to make up for Google's poor showing. The only index that wasn't down on Thursday was the small-cap Russell 2000. Friday, Amazon and Intel reported. They joined the rest of the AI gang in its downward spiral, dragging the indexes down.

 

 Over the past few weeks, I warned investors of the precarious nature of the AI trade. For those asking, I publish two columns each week — one on weekdays and another on weekends. If you have not read my last two weekday columns on AI, you should, because where AI stocks go, so does the market.

 

The FOMC meeting on Wednesday was almost an afterthought. As expected, the Fed held rates steady and offered few clues about what to expect at the December meeting. On Thursday, the government released two important data points. The Personal Consumption Expenditures Index (PCE) rose to 3.6 percent annual inflation, and GDP grew in the third quarter at an annualized rate of 3.4 percent. Credit the AI buildout for much of that growth.

 

As a government data cynic, I am not surprised that the GDP number was higher than expected less than a week before the elections. As for the PCE, the Fed's supposed primary inflation gauge, I was looking for a 3.8 percent increase, so I was a bit too high. However, readers may recall that the PCE tends to understate real inflation growth after recent changes were enacted last month.

 

Despite AI stocks imploding, the indexes remain somewhat stable, except for the Nasdaq. The reason for this is rotation. As technology stockholders sell, the money isn't going to cash. Instead, it's flowing into health care, utilities, financials, Treasury bonds and consumer staples.

 

This coming week will be eventful. Politics will be front and center for the first half of the week. We know that uncertainty is the bane of most markets. So far in October, markets have held in place, however, with many investors counting on the removal of this big question mark to spur the indexes higher.

 

I reserve judgment until I see how both parties respond to the election results and how investors react. If it is a close race, we may not know who won what for another month if individual races are disputed. If the Democrats manage a clean sweep of both houses, markets could sell off. If it is a mixed result, history says that could be somewhat positive since little would change. If the polls and betting markets have it wrong (remember that Trump always under polls) and the GOP prevails, well, prepare for even more changes ahead, good and bad.

 

In closing, I want to advise readers that this will be my last column until the third week in November. Yes, I am taking some time off, three weeks to be exact. It is my first real vacation since 2020. They say absence makes the heart grow fonder. It must be true because I already miss you.

 

The stock market is trading lower, but still close to its all-time highs. That's somewhat unexpected given that it is October in an election year.

 

Historically, October and November are great times to buy equities. Since 1950, October has generated an average gain of 3 percent, while November has averaged 2.7 percent. Not this year. So far this month, looking back 30 days, I see only the Dow performing well. That index is up a little over 1.6 percent while the Nasdaq is down more than 3.3 percent, the S&P 500 is off a little less than one percent, and the small cap Russel 2000 has suffered more than a 2.7 percent loss.

 

This is all the more surprising given that third-quarter earnings are expected to be up 30 percent. So far, 80 percent of companies reporting are beating earnings estimates. If it isn't earnings, then what could be keeping a lid on markets this late in October?

 

It could be the ongoing AI saga. Investors worry that all the spending by this group of companies may not return an investment for several years. There are now questions about whether there is even enough capital to finance all these ambitious AI spending plans.

 

Gone are the days when investors were willing to wait for the answers. The Warren Buffett approach is not in vogue. For an in-depth look at my take on AI, read my weekly columns "Corporate earnings better be good" and next week's, "AI and the financial markets." Warning: you won't get your typical kumbaya conclusions that you read from Wall Street and money managers all the time.

 

Climbing higher on this wall of worry, we find the possibility of a lower house sweep by Democrats and a close race in the Senate. I don't listen to pollsters given their track record and flaws in data gathering. However, I do follow the gambling sites like Kashi and Polymarket where people put real money on election results. Their results currently echo the polls.

 

The betting market is giving the Democratic Party a 67-68 percent chance of taking control of the Senate and a 91-94 percent chance of flipping the House. If so, it may heighten consternation among market participants. It would change the direction of government policy and would likely disrupt the economic landscape.

 

Historically, a party taking both the House and Senate was the worst-case scenario for markets. Many political experts with their ear to the ground in the capital dispute the betting market's odds on the U.S. Senate outcome. They think the Senate is still a toss-up.

 

The best outcome for the markets would be either a mixed result in Congress or a return of the ruling party to power. That outcome would increase the chance of continuing existing policies. There is a chance that whoever wins will contest the election, requiring recounts, court cases, etc. If so, that could extend election results into December. The markets are giving that a low probability, which could be a mistake.

 

Further up on the worry wall is the climbing energy prices and inflation levels, the prospect of a resumption of a shooting war with Iran after the elections, the guessing game of whether the Fed will raise rates next week at their FOMC meeting or wait until December, and finally Trump's apparent embrace of Russia and his seemingly abandonment of Ukraine.

 

That's a pretty steep wall to contend with, and yet, we remain within spitting distance of highs. It is uncanny how just before stocks roll over on a new negative data headline, something else hits the tape that pushes the averages back higher.

 

In any case, it appears astute players are making a concerted effort to keep markets aloft at least until the elections. And why not? The government has a long history of manipulating markets before elections by announcing or leaking better-than-expected economic data. In addition, there are carefully timed "breakthroughs" or "initiatives" that move markets in the direction most beneficial to the ruling party or president.

 

I think next week's earnings announcements by Alphabet, Amazon, and Microsoft, along with the outcome of the FOMC meeting, will give direction to the markets. After that, it will be all about the elections. Do nothing but strap in because there is turbulence ahead.

 

This week saw three major changes in the financial markets. Bond yields fell, AI stocks plummeted, and inflation reared its ugly head. Markets didn't take that well.

 

Let's start with inflation, since for some reason, the higher Consumer Price Index (CPI) and Producer Price Index (PPI) for September surprised the markets. Our readers were prepared for that, but I guess most of the public doesn't read my columns. In any case, yes, the data was much "hotter" than the market expected.

 

The PPI gained the most in four years. The last time it soared 1.3 percent from the previous month was back when Russia invaded Ukraine. The CPI was also higher, indicating that the annual inflation rate has now accelerated to 3.7 percent. As you may guess, both indexes rose on higher gas and diesel prices due to Trump's war on Iran.

 

Next in line was the rapid decline in the technology index, represented by the Nasdaq, which dragged the whole market down with it. The culprit, however, was not inflation, but rather worries over AI financing. Some of the second- and third-tier AI players in that space are highly leveraged. Several have spent or borrowed 3 or 4 times their annual cash flow.

 

Higher inflation, fears of rate hikes, and the spike in bond yields have led investors to worry that many AI companies may be over their heads in managing their debt load. As if this were something new, but suddenly it matters. The rout that has followed belies the almost 4 percent decline in the overall tech index. Many AI equities suffered double- and even triple-digit losses.

 

Given that the largest 10 companies in the S&P 500 are tech or AI centric and they represent almost 50 percent of the index, when technology falls, so does the S&P. However, the benchmark index finished the week down less than 1.5 percent thanks to some unforeseen support.

 

It should have been worse, but that's where the decline in bond yields came in. You might think that with such strong inflation numbers, bond yields would have soared, while prices declined. They didn't.

 

Yields dropped like a stone. I suspect the reason has something to do with a shift in who is buying and selling U.S. Treasury bonds. The historically staid crowd of insurance companies, pension fund managers, sovereign funds, and the like is still there, but now invest shoulder to shoulder with those masked villains: the bond vigilantes.

 

Who are behind those masks? Hedge fund managers. Hedge funds now represent at least 12 percent of the trading in the recently "hot" government debt market. Oh, and by the way, they also hold big positions in AI stocks.

 

By CPI Wednesday, bond yields were at the top of their risk range and technically overbought. Unlike traditional bond players, hedge funds pay attention to this, as does U.S. Treasury Secretary Scott Bessent. The CPI data was announced. Yields shot up and then bang! That was the signal traders needed to sell (cover) their profitable bond shorts and buy back bonds with both hands (possibly with a little help from ex-hedge fund manager Bessent and his Treasury).

 

In minutes, the narrative changed. Gone was the inflation risk; in its place was a dash to the safety of government bonds amid AI credit-risk worries. The subsequent sharp sell-off in AI equities, likely aided and abetted by these very same hedge funds, just added to the trade — traders seeking better credit investments piled into good old USA "Govies."

 

That move supported the S&P 500 and Dow indexes somewhat. As for the markets over the next two weeks, as I wrote yesterday, third-quarter earnings better be good. Despite everything the administration is doing to support the markets, I suspect less-than-stellar results from AI companies will lead to more downside for stocks.

 

With oil almost back to $100 a barrel, the downward pressure on equities is building. That is not what the administration wants with just three weeks to go before the midterms. Of course, if things get truly dicey, the president could always throw in the towel and make nice with the Iranians. It has worked before to bolster the markets; it might again.

 

Once again, markets managed to stay above the waterline thanks to a handful of tech names. With corporate earnings right around the corner, investors are betting on stronger results to keep the markets afloat. That could prove difficult.

 

Depending on who you talk to, third-quarter corporate earnings are expected to come in a range of up 25 percent-30 percent. That follows a second-quarter result of about the same magnitude. Investors are asking not only whether the AI crowd will deliver, but whether it beats expectations.

 

Given the record highs on the Nasdaq and the S&P 500 this week, most of the expected results have already been discounted. That means company managements (read AI) must beat expectations and by a sizable amount to justify the lofty heights of their company stock prices. They must also give future guidance that fulfills the loftiest expectations. That is a tall order. Failure would mean significant downside for their stocks and the market in general.

 

Given the president's belief that his fortunes are tied to the stock market's performance, not the polls — where AI goes, so does he. Both company management and the president have pulled out the stops. They all have a stake in keeping this circus going.

 

No matter how much of the earnings the AI crowd claims as real, it's simply an accounting ploy, according to recent analysis by several Wall Street firms like the Carlyle Group. The industry is about a trillion dollars over its head in spending, which is well known. The need to borrow more to compete is becoming a worry as well, since it is crowding out other borrowers in global bond markets.

 

And yet without them and their borrowing to fuel additional capital investment, the economy wouldn't really be growing as fast as the numbers indicate. That becomes a midterm election problem for Trump and the Republican-held Congress. Which is why the president, at every opportunity, has tried to assure Americans that not only should AI data centers be in practically everyone's back yard, but those who don't get aboard will miss out.

 

The handful of AI companies that attended the president's love fest last week at the White House were part of the administration's strategy to keep the effort going at warp speed. To justify the frantic race for first place in AI, both parties have trotted out the China card. "Whoever wins AI wins," said the Dear Leader, in explaining why it would be dangerous to fall behind in this race.

 

As for the fear that AI could run amok, well, a new federal task force, the "Super Intelligence Force," run by Trump's boy, Jay Clayton, the director of national intelligence, has been created with great fanfare.

 

The administration even established a solemn "accord" where Anthropic, Google, Meta, Nvidia, OpenAI, and SpaceX committed to internal risk reviews, third-party audits, and board oversight of frontier AI models. Of course, these will be considered voluntary industry guardrails, conducted by the same guys who just happened to have received the National Medal of Science (the CEOs of SpaceX, Nvidia, Google, and Advanced Micro Devices) and the National Medal of Technology and Innovation (Dell and Microsoft) on Thursday, Oct. 8, in Washington by the president.

 

I am sure the public will now rest easy, assured that whatever happens, the threat of Skynet will remain where it belongs — in "The Terminator" movies. It should allow us all to breathe a tremendous sigh of relief, shouldn't it, especially when we consider the source of this "morally binding agreement." After all, it was engineered behind the curtain by the same man who assured us that COVID-19 was just a simple flu that would pass quickly, and that an Iranian conflict victory would take just a few weeks at most.

 

The president also signed an executive order this week insisting all executive branch departments and agencies use the term "super intelligence" instead of artificial intelligence. Good luck with that. Rebranding is a difficult task at the best of times, as we know. Consider the president's lack of success at renaming the Gulf of Mexico or Lake Ontario.

 

Successful rebranding requires a clear strategic "why." "Trump Always Chickens Out" (TACO), for example, is a success and has become a satirical and meme-driven nickname for Donald Trump. It first gained traction online through the visual resemblance to Trump's signature hairstyle, which was likened to a folded soft-shell taco. The newly coined term TACO reflected his constant backpedaling on threats. It has signaled a shift in public perception, blending visual jokes, political irony, and market sentiment.

 

Marketwise, higher bond yields, a stronger dollar, climbing oil prices, and larger deficits and debt have created a barrier that has been difficult for both stocks and bonds to surmount. FYI: the U.S. budget deficit climbed to nearly $2 trillion in the fiscal year that ended September 30th. The U.S. spent $7.4 trillion last year (up 6 percent) while collecting $5.4 trillion in revenue.

 

This coming week we will see how badly higher oil and diesel prices have impacted the Consumer Price and Producer Price Indexes for September. Readers already know that I think the numbers will be on the "hot" side. Neither bonds or stocks will like that.

 

The administration is doing all it can to keep the markets up (or at least not down) over the next few weeks. I expect more machinations from the White House to prop up the markets, whether that means the data proves different from my expectations or, takes the form of more jawboning like Trump's promise not to act militarily against Iran before Nov. 3.

 

One look at the U.S. dollar's continued climb should tell you all you need to know about the war, inflation, bond prices, and the present gloomy sentiment of most Americans. What strikes me most is how little confidence any of us have in the U.S. economy. And yet, the S&P 500 Index hovers just below all-time highs while technology makes new highs.

 

As we enter the last quarter of 2026, a long calendar of market-moving events lies before us. Foremost on that pile is what, if anything, Iran will do to disrupt the midterm elections. They have already made substantial progress, if the polls are any guide. Despite the administration's best efforts, oil prices (think diesel and gasoline) remain at uncomfortable levels.

 

This is despite news reports that oil is now flowing at pre-war levels out of the Middle East. Between new routes, more tankers with Navy escorts passing through existing waterways, and fewer military incidents, oil flow is recovering. Why, you might ask, isn't that good news reflected in a deeper pullback in oil prices?

 

One reason is that it costs more to deliver energy to its destination. Longer waterways, ship-to-ship transfers, pipelines, and trucks rather than tankers add extra costs. Pre-war, those costs were around $4 a barrel. Today, the same quantity of oil costs more than $18 a barrel.

 

In addition, global traders are maintaining a hefty war premium on energy prices between now and after the elections. Even more so since a whole parcel of Marines and carriers are heading for the Gulf. Barring some real breakthrough between the parties (signed, sealed and delivered), we can expect higher prices at least until then.

 

There was some good news announced on Friday, thanks to the president's request that Europe and the G7 free up 120 million barrels of diesel fuel and oil. The G7 has agreed to release 100 million barrels of both from storage on Friday. That has sent diesel prices down, at least temporarily, and oil prices fell by 3.1 percent to below $90 a barrel on the news.

 

During the week, higher inflation expectations pushed bond yields higher. The government's 30-year bond was above 5.65 percent, and the 30-year mortgage rates are now over 7.28 percent. The benchmark U.S. Ten-year Treasury had surpassed 5.30 percent, a level where many traders expected a "top" in yields. They were right.

 

Trump's pre-election moves to lower fuel prices, combined with a weaker non-farm jobs report, created the perfect storm to force the bond vigilantes to cover their bond shorts. The last indication I saw for the yield on the 10-year Treasury was just below 5.25 percent. That is a big move in the bond world! You have to hand it to Trump, Bessent, and Warsh; they know how to engineer the results they want in the financial markets.

 

Kudos to Kevin Warsh for this week's Personal Consumption Expenditures (PCE) Index, the Fed's No. 1 inflation indicator. PCE inflation dropped to 3.4 percent, its lowest level in six months. Most of the good news came from a change in how the index is calculated. Prices for software, some accessories, and money management fees were pared back to give a more "accurate" reading.

 

Readers may recall I wrote about these expected changes, which were instituted by Stephen Miran, former chief of Trump's Council of Economic Advisers, who resigned to join the Fed as a Trump appointee. My prediction that his work would be released and provide a better read on inflation before the election proved accurate.

 

The non-farm payroll report for September released on Friday (leaked overnight) was weaker than expected. The economy added only 29,000 jobs (88,000 expected), and August's upside surprise of 162,000 was revised to 133,000 jobs. Weaker job numbers mean less chance the Fed hikes rates in October, which means higher stock markets.

 

However, I warned readers more than a month ago not to trust government-released statistical data. I expect more of the same as government data becomes more politicized. I wouldn't be surprised if the next CPI and PPI data for September, released in the middle of this month, show an improvement. If so, discount it entirely.

 

As for the markets, the Nasdaq is clearly supporting the markets. Outside of the AI trade, most stocks have been falling. Readers know I had been cautious from August into September. During that time, the equal-weight S&P 500 was down 6.6 percent, while the S&P was flat, the small-cap Russell 2000 lost 8.9 percent, the Dow fell 6.6 percent, and the Transports fell 15 percent. The Nasdaq, however, was up 2.5 percent. Friday's bounce saved the averages from going negative this week. However, Nasdaq gained almost 1 percent.

 

I expect that the administration will take out all the stops to keep markets supported between now and the midterms. See this week's maneuvers: hyping the president's "Super Intelligence" conference, easing diesel and oil prices, yields "topping," and economic data (PCE and jobs). Clearly, technology in general, and AI stocks in particular, will lead the charge from here.