Stock Market Update

[BRIEFING.COM] The stock market is trading lower at midday, although the losses in the major averages mask a notably stronger showing across much of the broader market. The S&P 500 (-0.4%) and DJIA (-0.4%) are holding relatively modest losses, while the Nasdaq Composite (-1.4%) is under considerably more pressure as investors react to a busy slate of earnings reports and renewed concerns about the substantial costs of AI infrastructure investment.

Alphabet (GOOG 282.89, -39.00, -12.12%) is at the center of the selling following its disappointing Q3 earnings report. Despite exceptional growth in its cloud business, the company's substantial capital expenditures, negative quarterly free cash flow, and expectations for another significant increase in AI spending next year have raised concerns about the eventual returns on those investments. The sharp decline in Alphabet has weighed heavily on the communication services sector (-6.0%).

The information technology sector (-1.1%) is also struggling, with Microsoft (MSFT 524.75, -6.26, -1.18%) retreating despite better-than-expected earnings and encouraging Azure growth as investors scrutinize its rising capital expenditure commitments. Software stocks are facing particularly pronounced selling pressure following disappointing reactions to earnings from ServiceNow (NOW 111.76, -38.38, -25.56%) and Fortinet (FTNT 135.12, -38.96, -22.38%), leaving the iShares Expanded Tech-Software Sector ETF (IGV) down 4.1%.

The PHLX Semiconductor Index (-1.4%) is also lower amid renewed scrutiny of the substantial costs and uncertain returns associated with AI infrastructure investment. Marvell (MRVL 221.62, -30.02, -11.93%) is a notable laggard following a Bloomberg report that the company is in discussions to acquire Lumentum (LITE 934.28, +20.32, +2.22%).

Weakness also extends to the consumer discretionary sector (-0.4%), where Amazon (AMZN 246.56, -8.04, -3.16%) is trading lower ahead of its earnings report after the close. However, strong post-earnings gains in Carvana (CVNA 68.69, +9.64, +16.33%), Norwegian Cruise Line (NCLH 18.16, +2.10, +13.04%), Chipotle Mexican Grill (CMG 31.04, +2.32, +8.06%), and DoorDash (DASH 177.42, +7.93, +4.68%) are helping offset some of that pressure.

Despite the weakness in mega-cap stocks, participation across the broader market is decidedly positive. Seven S&P 500 sectors trade higher, and the S&P 500 Equal Weighted Index (+1.0%) is outperforming its market-cap-weighted counterpart by nearly 140 basis points, while the Vanguard Mega Cap Growth ETF (-1.3%) underscores the concentrated nature of today's selling. Advancers outpace decliners by roughly 2-to-1 at the NYSE and 3-to-2 at the Nasdaq, while the Russell 2000 (+1.1%) and S&P Mid Cap 400 (+1.1%) are also posting solid gains.

Earnings strength is helping fuel the rotation, with Eli Lilly (LLY 1368.18, +79.88, +6.20%), Merck (MRK 148.30, +7.37, +5.23%), and Mastercard (MA 636.29, +25.98, +4.26%) contributing to gains in the health care (+2.2%) and financials (+1.5%) sectors. The real estate (+2.1%), utilities (+1.7%), industrials (+1.1%), and consumer staples (+1.0%) sectors are also outperforming, highlighting the breadth of the advance outside mega-cap technology.

Caterpillar (CAT 656.94, -56.44, -7.91%), however, is a notable laggard in the industrials sector despite strong quarterly results and a record backlog, as expectations for moderating sales growth and continued tariff-related costs weigh on its shares.

The broader rotation is also receiving support from declining crude oil prices and Treasury yields following a Wall Street Journal report that Vice President JD Vance reached out to Iranian security chief Mohsen Rezaei in an effort to restart peace talks. Crude oil is down $1.83 (-1.8%) to $100.95 per barrel, while the 10-year note yield is down five basis points to 4.99%. The retreat in yields is particularly supportive of interest-rate-sensitive areas such as the real estate and utilities sectors, while lower oil prices benefit a host of consumer facing stocks.

Overall, today's action reflects a sharp divergence between mega-cap technology stocks and the broader market. While concerns about AI investment returns are weighing heavily on the capitalization-weighted major averages, positive market breadth, encouraging earnings reactions outside technology, and easing pressure from oil prices and Treasury yields are helping sustain gains across much of the market.

Reviewing today's data:

• Q3 GDP-Adv. 3.4% (Briefing.com consensus 3.0%; Prior 2.2%)
• Q3 Chain Deflator-Adv. 2.2% (Briefing.com consensus 3.5%; Prior 6.1%)
• Personal income increased 0.2% month-over-month (Briefing.com consensus: 0.3%) in September following an upwardly revised 0.3% increase (from 0.2%) in August. Personal spending rose 0.5% month-over-month (Briefing.com consensus: 0.3%) following a 0.9% increase in August. The PCE price Index was up 0.5% month-over-month (Briefing.com consensus: 0.5%), which left it up 3.6% year-over-year versus 3.4% in August. The core PCE price Index jumped 0.3% month-over-month (Briefing.com consensus: 0.3%), leaving it up 3.1% year-over-year versus 3.0% in August.
• Sep PCE Prices 0.5% (Briefing.com consensus 0.5%; Prior 0.3%)
• Sep PCE Prices - Core 0.3% (Briefing.com consensus 0.3%; Prior 0.3% revised from 0.2%)
• Initial jobless claims for the week ending October 24 decreased by 1,000 to 194,000 (Briefing.com consensus: 196,000). Continuing jobless claims for the week ending October 17 decreased by 21,000 to 1.701 million.
  • The key takeaway from the report is that the historically low level of initial jobless claims points to a labor market that remains relatively full on account of a solid demand outlook for goods and services.