First light: A brighter market setup comes into view

Equity leadership should broaden as an overstretched rates selloff, idiosyncratic inflation pressures and moderating AI investment create a brighter but still only moderate market setup.

• S&P 500 breadth has narrowed sharply, but aggregated technology, communication services and healthcare breadth remains healthy, with equal-weighted technology and healthcare near all-time highs; a washout in defensives and cyclicals could support a catch-up rally.
• The 21-day correlation between the Magnificent 7 and the Philadelphia Semiconductor Index fell into negative territory at a record low in early September before the two groups resynchronized, suggesting the extreme either-or AI trading dynamic is easing.
• Core PCE has run nearly 1 percentage point above core CPI, although revisions reduced the gap to 56 basis points; information-processing equipment contributes 30 basis points to the core PCE overshoot, while healthcare and airfares contribute 21 and 16 basis points respectively.
• Nominal growth accelerated from 4.8% to 6.3% over the past year, while real growth cooled from 2.4% to 2.2%; AI infrastructure contributed nearly 90 basis points to real growth over the past six quarters.
• Hyperscaler capex estimates for 2027 have risen above $1 trillion from about $800 billion in 2026, but capex growth is expected to slow from nearly 90% in 2026 to about 37%, reducing its contribution to real GDP growth to roughly 40 basis points.
• The 10-year Treasury yield rose 54 basis points in September and exceeded the authors' fair-value estimate near 4.90% by roughly 30–40 basis points, while a strong October auction and higher rate volatility suggested that a washout may be approaching.

Takeaway: The authors expect technology to retain leadership but see increasing potential for a broader equity catch-up trade and eventual relief in long yields; investors should temper that opportunity with the prospect of ho-hum growth through 2027 and the risk that energy, tariffs or AI-related prices delay disinflation.