Market Commentary: It’s All One Big AI Trade Now and More on Midterms

AI investment is tying together asset classes, sustaining inflation and concentrating equity-market gains, while historical midterm patterns still support a constructive view on stocks.

• The S&P 500 fell 1.9% last week as technology dropped 7.2%, although technology remained the second-best sector year to date after energy.
• Historical midterm data suggest the S&P 500 has risen in all 19 of the past 19 one-year periods after midterm elections, with an average gain of nearly 15%; the index is already up just over 18% from its late-March low after a 9.1% correction.
• AI optimism affected rates and credit: the 10-year Treasury yield fell from 5.33% to 5.08% in one day, while five-year CDS insurance rose to $1.1 million for an AI cloud provider, $282,000 for a large software and cloud company, and $215,000 for a private AI-related aerospace company.
• Inflation remains broad, with September CPI at an 8.1% annualized rate, three-month core CPI at 3.4% versus 2.1% in 2017–2019, and producer prices up 6.4% year over year; AI-linked inputs such as printed circuit assemblies rose 130% and computer storage devices 84%.
• Profit and market gains are highly concentrated: 42 AI stocks generated roughly 67% of S&P 500 price returns and 58% of earnings growth since January 2024, while Goldman Sachs’s broad AI basket returned 387% since the end of 2022 versus 112% for the S&P 500.

Takeaway: The author expects the current equity advance to continue and views a divided Congress as historically supportive, but warns that lower inflation and bond yields would not necessarily be bullish if they result from an AI-capex bust, rising unemployment or weaker nominal growth.