Capital Market Outlook

Summary

• Escalating conflicts in the Middle East & Russia have turned an initial crude-oil shock into a persistent crisis, causing oil & refined fuel prices to worsen since mid-summer.
• The U.S. average diesel price reached new highs nearly double year-ago levels, with fuel surcharges propagating inflationary impulses throughout the supply chain.
• Inflation has remained sticky above target, contributing to a spike in interest rates, growth data disappointments, & a loss of equity-market momentum in recent months.
• Oil prices have peaked from highs, the dollar has softened, downside pressure on non-technology equities has eased, & the market advance/decline ratio has improved.
• The S&P 500 Index has returned approximately 131% in total returns since the bull market commenced in October 2022.
• Corporate earnings have generally exceeded expectations, Artificial Intelligence has ignited a historic investment boom, & technology giants have powered the market to new heights.
• The report projects the bull market will continue into 2027.
• Investors are advised to assess portfolio concentration, diversification, tax efficiency, profit-taking timing, positioning for a new interest rate regime, & shock-proofing.
• Information technology accounts for roughly 40% of the S&P 500 market cap, while the top 10 companies represent 38.4% of the index.
• More than two-thirds of companies in the Russell 1000 index are linked to AI, either directly, indirectly, or through embedded business models.
• Big Technology hyperscalers & AI spending beneficiaries make up about 16% of the U.S. high-grade bond market.
• The spot Brent price surged from $92/barrel in mid-August to a $115 to $135/barrel range before cooling to $115/barrel between October 2 & October 20.
• The AAA average U.S. retail diesel price was 74% higher year-over-year as of October 20, while the New York Harbor wholesale diesel price was 130% higher from a year ago.
• Distillate inventory decreased from 37 days of demand coverage in January to 26 days by early October, bringing the supply buffer to the bottom of its historical range.
• East Coast distillate inventories are the lowest since 1990 & are expected to remain below their 5-year average into late 2027.
• Oil market balances are forecast to remain in deficit through the end of the year, with constrained middle distillate supplies likely to persist well into 2027.
• A 22% rise in airfares over the past year contributed approximately 0.2 percentage points to the 2.6% 12-month increase in the core consumer price index for September.
• The Iran-war oil crisis is estimated to have contributed about 0.50 percentage points to the roughly 2.40 percentage point increase in the real U.S. long-term Treasury rate from 2020 to early October.
• Small-caps lost relatively more momentum than Large-caps due to higher sensitivity to energy price & interest rate shocks.
• Roughly 40% of constituent stocks in the S&P 500 were in bear market territory (down 20% or more) as oil & interest rate headwinds widened stock-level return dispersion.
• The market-capitalization weighted S&P 500 Index has mainly consolidated just below its peak, while the equal-weighted S&P 500 Index was about 3% off its peak as of October 20.
• The Federal Reserve's Beige Book described economic activity as losing some momentum since mid-July to late-August, with growth described as slight to moderate.
• Five of twelve Federal Reserve Districts noted reports of businesses cutting staff through attrition, delaying hiring, or anticipating less job creation due to AI-driven productivity gains.
• Real consumer spending is unlikely to accelerate much absent stronger labor demand & real wage growth given rising electricity prices, wage growth lagging inflation, & higher gasoline prices.
• Rising French bond yields with a sharp rise in spreads above German bunds & mixed AI buildout concerns are creating nervousness across capital markets.
• Rising credit spreads in lower quality corners of the market are viewed as a natural signal that investors are moving up the quality stack during the AI buildout lifecycle.
• The report emphasizes higher quality balance sheets in corporate & sovereign credit as well as higher quality leaders in the AI buildout overall.
• Investors are expected to transition from exposure to the AI "buildout" to exposure to "AI adopters" as 2027 approaches.
• The DJIA closed at 52,215.16 with a 10.0% year-to-date return, while the NASDAQ closed at 25,955.34 with a 12.2% year-to-date return.
• The S&P 500 closed at 7,623.68 with a 12.4% year-to-date return, & the Russell 2000 closed at 2,775.90 with a 12.9% year-to-date return.
• WTI Crude closed at $103.27/barrel with a 79.9% year-to-date return, while Gold Spot closed at $3,996.1/ounce with a -7.5% year-to-date return.
• Economic forecasts project Real U.S. GDP growth of 2.4% for 2026 & 2.3% for 2027, with CPI inflation at 3.5% for 2026 & 2.8% for 2027.
• The Fed funds rate is forecast to end 2026 at 4.38% & remain at 4.38% for 2027.
• The Chief Investment Office remains overweight Equities, favors U.S. stocks, sees potential opportunities in broader market participation & select cyclical sectors.
• Higher bond yields are viewed as attractive to add income & extend duration within Fixed Income portfolios.