Traders Maintain Expectations That the Fed Will Hold Rates Steady in October; U.S. Stocks Diverge; Nasdaq 100 Expected to Fall More Than 3.5% This Week

U.S. stocks diverged in early trading on Friday. Fed Chairman Warsh's latest remarks reinforced market expectations that the Fed will keep rates unchanged in October, providing some support for U.S. equities. However, lingering concerns over the sustainability of the artificial intelligence (AI) investment boom continued to weigh on tech stocks, with the Nasdaq 100 on track for a weekly decline of more than 3.5%, ending a four-week winning streak. As of press time, the S&P 500 was up 0.03%, while the Nasdaq 100 was down 0.52%. Earlier, Warsh spoke during the International Monetary Fund (IMF) annual meetings, and traders maintained expectations that the Fed will hold rates steady at the end of this month. As a result, the market quickly scaled back bets on a Fed rate hike in October. Data showed that before Warsh's remarks, traders saw about a 27% probability that the Fed would raise rates at its October 27-28 monetary policy meeting, and after the remarks that probability fell below 15%. Andrew Tyler, head of global market intelligence at JPMorgan, said Warsh's remarks further reinforced market expectations that the Fed will stay on hold in October. The bank is still focusing on selective buy-the-dip opportunities. Despite easing rate expectations, U.S. stocks still posted a weak overall performance this week. As of early Friday trading, the S&P 500 was down about 0.8% for the week, after rising in two of the previous three weeks. The Nasdaq 100 was down more than 3.5% for the week, on track to end a four-week winning streak. Still, the S&P 500 is only about 1% below its record closing high set on October 6, indicating that despite the recent pickup in volatility, U.S. stocks remain at relatively elevated levels overall. One of the main reasons tech stocks have come under pressure recently is that investors have begun reassessing the sustainability of the AI infrastructure investment boom. AI cloud computing provider CoreWeave (CRWV.US) has recently suffered a selloff in both its shares and bonds, triggering market concerns about the financing capacity, debt burden and long-term profit model of emerging AI cloud computing companies. In early trading on Friday, CoreWeave shares fell more than 6.5% again, and were expected to post a weekly decline of more than 20%. Dell Technologies, Inc. Class C (DELL.US) also extended its weakness, falling more than 1% in early trading on Friday. In the previous two trading sessions, the stock plunged 17% cumulatively and became one of the worst performers in the S&P 500 on Thursday. The chip sector was broadly weak. The iShares Semiconductor ETF (SOXX.US), which tracks semiconductor companies, fell more than 1% in early trading on Friday and was on track for a ninth straight daily decline. Storage-related companies were hit even harder. Seagate Technology Holdings PLC (STX.US) fell more than 4%, while Western Digital Corporation (WDC.US) dropped more than 3%. The market is worried that as AI data center construction continues to consume huge amounts of capital, whether related companies can maintain their previously rapid pace of capital expenditure growth in the future, and whether these investments can generate sufficient commercial returns. Meanwhile, global bond yields are still hovering near roughly 20-year highs, further increasing the financing cost of AI infrastructure construction. For tech companies that rely on long-term growth expectations to support their valuations, persistently high rates also mean the discounted value of future earnings could come under greater pressure. Despite the selloff in AI-related stocks, other large tech companies were relatively steady in early trading on Friday. Tesla, Inc. (TSLA.US) rose 0.5%, Apple Inc. (AAPL.US) gained 0.77%, and Microsoft Corporation (MSFT.US) also edged higher. This divergence reflects that investors have not fully retreated from the tech sector, but are paying closer attention to individual companies' profitability, capital expenditure pressure and valuation levels. With Fed officials about to enter their customary quiet period this weekend ahead of the monetary policy meeting, the market will lack new official policy guidance. Before the Fed announces its rate decision on October 28, investors will continue to assess the impact of inflation pressures, changes in bond yields and AI investment risks on the stock market. At present, an important question facing the market is what factors can still drive U.S. stocks further higher after the S&P 500 set a record high on October 6. Although inflation and rate risks continue to trouble Wall Street, U.S. corporate earnings remain an important factor supporting the stock market. As the third-quarter earnings season officially entered its busiest disclosure period this week, results from a number of companies showed that overall U.S. corporate profitability remains resilient. Among them, Alcoa Corporation (AA.US) rose more than 7% in early trading on Friday. The company's third-quarter adjusted earnings beat market expectations, mainly benefiting from higher aluminum output and rising product prices. Strong corporate earnings have to some extent offset the pressure from high inflation, rising financing costs and AI investment concerns, helping major U.S. stock indexes remain relatively stable amid recent market volatility. However, as AI-related company share prices continue to adjust, investors are raising their demands for future growth prospects. The market's focus is no longer just on whether AI capital expenditure can continue to expand, but on whether the related investments can truly sustainable revenue and profits.