While the blue-chip index and the S&P 500 reached new highs, the Nasdaq Composite remained nearly flat, reflecting ongoing market skepticism regarding the profitability of massive artificial intelligence investments.
A Broad Market Rotation
The rally was defined by a shift toward sectors less sensitive to economic volatility. Healthcare led the S&P 500’s 11 major sector indexes, hitting a record high, with Eli Lilly serving as the largest index point contributor. According to Reuters, other blue-chip stalwarts including UnitedHealth, Merck, Johnson & Johnson, and Amgen also provided significant support to the Dow’s advance.
Small-cap stocks experienced a notable resurgence, with the Russell 2000 index climbing 1.7%. This represented the index’s best daily performance since early August. Market breadth improved significantly, with nine of the 11 S&P 500 sectors closing in positive territory, compared to only four on Monday. Financial services, real estate, and utilities all recorded gains exceeding 1%.
The rotation away from growth-oriented technology stocks was evident in the performance of the S&P 500 value index, which rose 0.9%, while its growth counterpart dropped 0.2%. Technology shares eased 0.3%, and the communication services sector fell 0.9%. Notable declines included a 1.7% drop for Netflix, a 1.6% slide for Meta, and a 1% loss for Alphabet.
AI Financing and Market Anxiety
The muted performance of the Nasdaq follows a 4.5% decline the previous week, driven by investor concerns over the high cost of financing artificial intelligence infrastructure. According to J.P. Morgan Asset Management, the market is grappling with uncertainty regarding whether income from AI can cover the massive capital expenditures required for data centers.
Evidence of this tension appeared in the credit markets. The yield on CoreWeave’s 2031 corporate bonds recently rose to 15.78%, while the company’s 5-year credit default swap exceeded 1000 basis points. Roger Lee, an analyst at Cavendish, noted that investors are seeking reassurance that current capital expenditures are generating a return, a metric that remains difficult to verify.
Despite these immediate concerns, J.P. Morgan Asset Management has raised its long-term expected annual return for large-cap US stocks to 7.5% over the next 10 to 15 years, up from its previous forecast of 6.7%. This outlook contrasts with more cautious projections issued by other firms in recent years.
Macroeconomic Crosscurrents
Macroeconomic data provided a mixed signal for traders. September housing starts fell more than every Bloomberg estimate, with single-family starts reaching their lowest level in a year. Meanwhile, Treasury yields saw a slight shift, with the 10-year yield slipping 2 basis points to 5.12% and the 2-year yield rising 3 basis points to 4.79%.
Energy markets remained volatile as oil prices fluctuated. Traders tracked reports of potential diplomatic developments involving Iran and Pakistan, alongside ongoing concerns regarding Houthi attacks on infrastructure.
Corporate earnings continued to influence individual stock movements. 3M shares rose nearly 6% after the company raised its full-year guidance and announced a deal with Amazon. In late trading, SpaceX shares gained 4% after the company reported third-quarter profits that exceeded expectations. Conversely, Netflix shares fell 6% after the bell following a weaker-than-expected forecast for the fourth quarter. Investors will now turn their attention to upcoming reports from Meta, Tesla, IBM, and Texas Instruments.
Sources
- Dow outperforms as Wall Street rises, healthcare stocks lead gains
- Even with AI Anxiety, US Stocks at 7.5% Annually: Why JP Morgan Raised Its Long-Term Outlook｜宮野宏樹
- Small Caps Lead a Broad Rally as Tech Bounce Stalls
Photo: Jeffrey Zeldman from Manhattan, USA (CC BY 2.0)
