Oil, bonds and AI continue to dominate
Despite concerns about higher bond yields this year, stock markets have remained firmly on the rails. Contrary to the usual pattern where rising yields pressure stock markets, the S&P 500 has continued to climb and recently reached record highs, remaining close to those levels.
This apparent disconnect reflects the powerful influence of structural economic shifts, particularly the rapid adoption of AI. While much of the stock market is not at record highs and performance has been concentrated in a relatively small group of companies, strong earnings growth among AI companies has justified significant capital spending and outweighed concerns about rising yields. Investors are focusing less on traditional macroeconomic signals and more on long-term transformative trends, with confidence that continued investment in technology will generate attractive returns. So far, higher bond yields have not been enough to derail this growth narrative.
Oil prices push higher as energy and cost of living prices impact US midterms
Oil prices were volatile throughout the week as investors weighed developments in the Middle East and the outlook for energy supply. Crude prices cooled later in the week after President Trump said that the US would not attack Iran ahead of November’s US midterm elections though reports of additional attacks on Friday drove continued volatility. This coincided with Trump’s announcement of a deal with Russia to import Russian diesel into the US.
Meanwhile, congressional polling and prediction markets in the US suggest that Trump's approval rating has reportedly hit a record low of 32%, with cost of living and energy prices emerging as the dominant voter concerns ahead of the November midterms. Rising energy prices are squeezing voters and weighing on Republican turnout prospects.
Persistent inflation pressures remain a concern too for the central bank
Minutes from the US central bank, the Federal Reserve’s (Fed) September policy meeting, where officials unanimously voted to raise interest rates by 25 basis points (0.25 percentage points, showed that most policymakers anticipated another rate increase by year-end, although there was little clarity around the timing of the next increase. Fed Governor Waller said that he expects the Fed to continue raising interest rates to combat inflation but that “there is some flexibility about when those hikes will occur.”
Recently released economic data also pointed to ongoing inflationary pressures. While the US services sector continued to expand in September, the Institute for Supply Management reported that its services Purchasing Managers’ Index eased slightly to 54.9 from 55.4, but its prices index rose to 74.0, the highest level since July 2022. Meanwhile, the New York Fed's Survey of Consumer Expectations showed one-year inflation expectations increased to 3.9%, their highest level since May 2023, suggesting inflation concerns remain elevated.
