I said regular posts would slow down during midterms, but this week was worth writing about. On the surface there is a lot of turmoil, but the correlations are clear and money is moving in an obvious direction. People are not confused about what is happening in markets. What they are worried about is the broader economy.
Weekly Recap
The week was a rotation, not a crash. SPY fell 0.4% to $759.97 and QQQ fell 0.8% to $704.40, but IWM rose 2.0% to $275.75. Big tech earnings set the tone. SpaceX (NASDAQ: SPCX) jumped after third-quarter revenue rose 161%, and Musk said Tesla (NASDAQ: TSLA) and SpaceX have each set up committees to study a merger. Meta (NASDAQ: META) beat after adjusting for its legal settlement, which was largely expected. The surprise was the cost. Meta raised the low end of its capex plan by $5B, reported its first negative free cash flow quarter, and a filing the next day showed its lease and contract commitments up $125B to $825B. The stock fell 9.4% on the week, and options were still pricing a large move into Monday. Thursday did the damage, with QQQ down 2.9%. Coming into Friday, semiconductors were down about 15% for October and testing their 200-day moving average for the first time in 16 months. The money did not leave the market. It moved into energy, which hit a record high on Friday, and into small caps.
Oil and rates moved in opposite directions, which is the clearest sign of what the market is worried about. Brent rose 6.2% to $116.72, its highest settlement since April 29 and its third straight weekly gain. WTI rose about 2% to $103.27. The drivers were Houthi strikes on Saudi Arabia and fears of renewed US strikes on Iran after the midterms. An oil spike would normally push yields up. Instead, the 10-year fell 11bps to 4.99%, its third straight weekly decline and down 29bps over that stretch. The 2-year fell about 5bps to 4.68%. That looks more like worry about growth than about inflation. Housing backed that up. September starts fell 5.2% and pending home sales dropped 7.3% to a record low. Gold fell about 4% to below $4,000 even as yields fell. The Fed picture also changed quickly after the last edition. September CPI ran hot, with headline at 3.7% and core up 0.3% against 0.2% expected, and October hike odds jumped to about 50%. Warsh then said he does not prejudge meetings, and odds for Wednesday are now about 9%. Taiwan Semiconductor (NYSE: TSM) beat with $4.60 in EPS and $46.72B in revenue. Gross margin of 66.4% landed inside the 65% to 67% guide, but the ADR still fell 1.8% on capex concerns.
What I'm Watching Next Week
The hike has been pushed back, not dropped. Futures put a 90.6% chance on a hold Wednesday, but about a 74% chance of a hike in December and roughly three hikes from here through the end of 2027. That makes Warsh's press conference more important than the decision. Any hint that he is lining up December would lift front-end yields. Thursday is the bigger data day. Q3 GDP is expected at 3.2% after 2.2%, and a strong print would push back on the growth worry. September core PCE is expected up 0.3% after 0.2%, and a hot reading would firm up December. Tuesday's Conference Board confidence is expected at 80.5 after 81.9, and another drop would add to the consumer worry. Abroad, the Bank of Canada is expected to hike 25bps to 2.50% on Wednesday. Australia's September CPI is expected at 4.2% after 4.0%, and a hot print would add to the global inflation theme. The ECB is expected to hold at 2.50% on Thursday, and a hawkish tone would firm up pricing for a December hike.
On earnings, the one I am most focused on is Microsoft (NASDAQ: MSFT), which reports Wednesday after the close with consensus near $4.71 in EPS and about $90.6B in revenue. After Meta's reaction, the focus is whether Azure meets its roughly 45% growth guide and whether capex still looks justified by revenue. Alphabet (NASDAQ: GOOGL) reports the same evening with consensus near $3.00 in EPS and $127.9B in revenue. Google Cloud grew 82% last quarter, so any slowdown there will matter more than the headline.
Research
Lately, markets have started to feel almost predictable. An event happens, oil goes up, and stocks go down. On Friday, Houthi strikes on Saudi Arabia pushed Brent up 3.1%. Energy stocks hit a record high and the broader market sold off. We have seen that chain play out enough times this year that the first reaction is close to expected. When the headline hits, most people already know which way oil will move and which stocks will follow.
As these events stack up, you can also track the bigger moves behind them. This month the direction has been clear. Money is moving out of AI and into things that benefit from the current environment. Semiconductors were down about 15% for October coming into Friday. Energy and consumer staples were each up double digits for the month. This week QQQ fell 0.8% while IWM rose 2.0%. None of that is random. The money is not leaving the market. It is moving away from expensive AI spending and toward energy, small caps and safety.
But even if we can see the moves and almost expect them, the economy does not know where it is going. Oil is above $116, which should mean more inflation and higher yields. Instead, the 10-year yield fell 11bps this week, and inflation expectations barely moved. Housing data was weak, yet GDP is expected to come in strong on Thursday. The Fed is expected to hold this week but still has roughly three hikes priced through 2027. The market can price each event as it happens. What it cannot price is where all of this ends up. That uncertainty is what keeps volatility high, and the VIX was on track this week to close above 20 for the first time since June.
Meta (NASDAQ: META) is a good example. Its earnings were strong. Revenue grew 26% to $64.6B and advertising revenue grew 28%, helped by AI improving how ads perform. The AI side of the business is clearly working. The stock still fell 7% on Thursday and 9.4% on the week, because the question is no longer whether AI works. It is how much it costs and whether the spending pays off. Meta reported its first negative free cash flow quarter on record and plans to issue nonvoting shares to help fund its buildout. When the outcome is that uncertain, the stock swings hard in both directions.
Those swings make options expensive. On Friday, the Meta $642.5 call expiring Monday was at the money with a delta of 0.50. It was marked at $6.83 with implied volatility of 50.4%. Dividing by the square root of 252 trading days turns that into a one-day move of about 3.2%, or about 2.5% on average, which is roughly what the at the money straddle prices. Meta's realized volatility over the last month was about 42%, and closer to 36% without Thursday's drop. Earnings are over, but the market is still paying for more. When people know how prices react to news but not where the economy is heading, that uncertainty shows up in option prices.
Personal
When I trade, I am constantly reminded that what works today may not work tomorrow. A setup can pay off for weeks and then stop for no obvious reason. That is why it is important to keep reading and understanding the market, even when things seem to be working. Just because A happens today and B happens tomorrow does not mean A will lead to B again.
This week was a good example. For most of this year, higher oil has meant higher yields. This week oil jumped and yields fell. Anyone who traded the old relationship without asking why it held would have been on the wrong side. The pattern was never a rule. It was a result of what the market was worried about at the time, and that changed. The work is in understanding why something happens, not just noticing that it did.
Disclaimer: Everything here reflects my own opinions and is shared for informational purposes only. It is not financial advice, and nothing in this report is a recommendation to buy or sell any security.