Weekly Market Wrap: October 24, 2026

Brought to you by your local Edward Jones financial advisors. AI, Oil and Interest Rates Test Market Confidence A sharp rotation in equity markets last week saw investors pull back from AI-related stocks, driving significant declines in semiconductor and tech-heavy indexes, while defensive sectors such as utilities, consumer staples and healthcare helped support broader market performance. Bond markets benefited from the shift in sentiment, with Treasury yields moving lower as investors sought safety and reassessed the strength of future economic growth amid concerns about the sustainability of the AI investment cycle. Markets are juggling three interrelated risks to the current bull market: sticky inflation and elevated energy prices, higher-for-longer interest rates, and growing questions around the pace and durability of AI-related investment. Despite these challenges, underlying economic and corporate fundamentals remain supportive, with U.S. growth expected to stay solid, business activity holding up well, and early earnings season results showing broad-based strength across sectors. While further market volatility is possible, we think investors should remain constructive on equities, but double down on diversification to avoid overconcentration in single stocks, sectors or investment styles like growth, and be sure to evaluate these opportunities in the context of their financial goals and risk tolerance. A sharp market rotation The sell-off in AI related stocks continued last week, with the Philadelphia Semiconductor Index down 4%, bringing its total decline over October so far to 15%. This rout weighed on the Nasdaq, which is down over 3% this month, and hit international equity markets with concentrations in tech hard, with the Chinese CSI 300 in bear-market territory, and the Korean Kospi now down 40% from June. However, distress among technology stocks did not spill over into a wider market sell-off, as a sharp rotation into more defensive sectors, like utilities, consumer staples and healthcare helped support broader market performance. The Dow Jones, which has a smaller exposure to technology stocks, finished 0.4% higher this week, while the equal weighted S&P 500 was up nearly 2%. This chart shows a market rotation away from the technology and communications services sectors towards more defensive parts of the market like healthcare, utilities and consumer staples, with the S&P 500 aggregate broadly stable. Past performance does not guarantee future results. An index is unmanaged, cannot be invested into directly and is not meant to depict an actual investment. (Source: Bloomberg) Otherwise, the big winner from the AI sell-off was the bond market. The benchmark 10-year Treasury rallied hard last week, driving the yield back below 5% from a recent high of 5.3%. In part this reflected a flight-to-safety move amid rising market volatility, but the rally could also indicate growing nervousness around the growth outlook amid a wobble in the AI sector. Markets grappling with three related risksStepping back: Equities have delivered strong returns this year, with many markets trading close to record highs. However, as we look ahead, there appear to be a number of risks building to a bull market that has recently turned four. These include High energy prices and sticky inflation Rising central bank interest rates and longer-term bond yields; and Fears over the sustainability of the AI Investment boom. Let's dig deeper into these concerns and explore the waymarks we will be tracking to understand how they are evolving. Stubborn price pressuresConflict in the Middle East continues to create uncertainty over the next leg for oil prices. Drone attacks last week on Saudi Arabia by the Iran-backed Houthi militia pushed Brent oil prices up almost 4% to around $115 a barrel, the highest seen since May, and reports suggest the U.S. could be planning renewed military action in the region after the midterms. This chart shows a renewed spike in global oil prices over recent weeks back towards 2026 highs. Past performance does not guarantee future results. (Source: Bloomberg) Rising oil prices have quickly filtered through to U.S. inflation, with the Fed's preferred measure, the personal consumption expenditures (PCE) deflator, expected to rise sharply when released on Friday. For now, consumers continue to show resilience in the face of this price squeeze, although there were signs of fatigue in the latest retail-sales figures.The good news, in our view, is that while geopolitical tensions continue to simmer, we have seen energy supply through the Strait of Hormuz rebound to prewar levels. If sustained, this could help cool inflation and help ease the pressure on households. However, we will need to watch carefully for signs of escalation that could drive a further spike in energy prices and test consumers' resilience. Elevated interest rates a headwindThe spike in global interest rates in recent weeks has ignited fears that tightening financial conditions could weigh on growth or spark financial distress among borrowers. While rates have come down from recent peaks, they remain elevated, with the 10-year U.S. Treasury trading at 5%. Against this backdrop this week's Fed meeting will be in focus. We expect the FOMC to hold the fed funds rate range steady after its hike in September, even if there are a couple of dissenters in favor of another increase. Chair Warsh is likely to reiterate his tough line on bringing inflation to target but could hint at a degree of patience around this process, consistent with the message from a range of Fed speakers in recent weeks. This chart shows that the market pricing for an interest rate hike at the Fed's October meeting has fallen from around a 70% chance in September to less than 10% now. (Source: Bloomberg) A more patient Fed could provide markets with reassurance that the central bank is carefully balancing the risk of raising rates enough to help bring inflation back toward target, but not too much to derail economic growth. We expect a rate hike in December and potentially one more move in 2027. However, that careful calculus might shift should oil prices spike, or other inflation pressures prove sticky over coming months, potentially driving a more disruptive policy adjustment. How sustainable is the AI boom?Rising rates have added to concerns over the sustainability of the AI investment and earnings cycle that has emerged in recent years. Capex spending among AI hyperscalers has surged, leading to a rise in leverage among these companies. Hyperscalers now account for around 10% of corporate investment-grade bond issuance this year, up from just 0.5% in 2024, and likely to rise further in 2027. Earnings reports in recent weeks have not dispelled some of the concerns around rising debt. Meta's results last week provided encouraging headlines around revenues, but plans to further accelerate AI investment were poorly received by the market, triggering a large sell-off and a spike in the cost of credit default swaps (CDS) for Meta's bonds – a financial instrument to insure against the risk of a default. CDS rates for other hyperscalers have increased markedly this year too. This chart shows that the price of credit default swaps - a financial instrument to protect against bond defaults - have spiked on the debt of U.S. hyperscalers this year. Past performance does not guarantee future results. (Source: Bloomberg) An unwind in the AI investment boom would have broad economic and market implications. The strong performance of these companies has driven high levels of market concentration across some major stock indexes, risking painful corrections. More broadly, AI investment has become an increasingly important leg of economic growth, and a reversal would hit capex spending, business sentiment, and potentially household spending. Despite the recent correction, we believe there are reasons to remain optimistic. Short-term earnings dynamics from AI companies remain strong, and investors will look forward to results from Alphabet, Amazon, Microsoft and Intel for updates on these fundamentals. Moreover, we have seen valuations re-rate notably lower this year, which should help ease bubble concerns. Longer-term, optimism remains around the progress being made in AI and around the potential for this to catalyze important productivity benefits across the economy, although of course the extent, timing and beneficiaries of this remain hard to predict. Fundamentals providing ballastWhile we think it is useful to understand the risks around the outlook, we should not lose sight of the fundamentals. First up, the economy looks to be in solid shape, with Friday's first estimate of third-quarter GDP expected to deliver an impressive 3.2% annualized gain, according to the Bloomberg consensus. This would point to robust growth momentum, and business sentiment surveys, like the Purchasing Managers Index, suggest that this continued into the fourth quarter. Meanwhile, corporate profitability remains robust. It is still early in the third-quarter earnings season, but of the 25% of S&P 500 companies which have reported, more than 80% have beaten consensus expectations. Markets expect average earnings growth to run at 30% this quarter, helped by strong gains in technology and energy names, but also widespread increases across almost all other sectors too. Companies continue to deliver strong earnings, which have supported equities this year. Bumps in the road?The market rotation seen in recent weeks reflects a recalibration of concerns around the sustainability of AI investment, particularly against the backdrop of high inflation and rising rates. It is possible we see further volatility in coming weeks as investors continue to recalibrate based on these risks. We remain constructive on the outlook for stocks but think that diversification remains critical in this environment. The International Monetary Fund's (IMF) latest financial stability report warned of rising concentration risks from technology stocks in major equity markets, and a growing trend for investors to use leverage to gain greater exposure to AI companies. Leveraged ETF assets have grown sharply, rising by around 56% since the end of 2025, with a rise in single stock leveraged ETFs behind some of this growth. This chart shows that the share of leveraged ETFs that contain a single stock has risen by 12 percentage points since 2024 to reach 28% in 2026. (Source: IMF)Therefore, we believe investors should think carefully around their equity portfolios to ensure they do not hold significant overconcentration in single names or in investment styles like growth, sectors or cap sizes. In our asset allocation we recommend holding mid-cap and large-cap stocks to help provide a broad exposure across sectors, cap sizes and investment themes at present. Your financial advisor can help ensure that your portfolio is sufficiently diversified to meet your long-term financial goals and risk tolerance, and help tackle any areas of overconcentration that could leave you vulnerable to large market swings. James McCannSenior Economist * Source for all data in commentary: Bloomberg and the IMF Important Information: The Weekly Market Update is published every Friday, after market close. This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice. Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal. Past performance does not guarantee future results. Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment. Diversification does not guarantee a profit or protect against loss in declining markets. Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining. Dividends may be increased, decreased or eliminated at any time without notice. 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