Markets Pullback as Volatility Hits Tech

Good Morning Investors,

Markets ended their impressive seven-day winning streak Tuesday with the S&P 500 ($SPY ( ▲ 1.92% )) declining 0.4%, Dow ($DIA ( ▲ 2.48% )) falling 0.2%, and Nasdaq ($QQQ ( ▲ 2.11% )) retreating 0.7% as Oracle's cloud margin concerns triggered AI sustainability questions. Gold's historic breach of $4,000 per ounce reflects investor unease despite equity market records, while Tesla's stripped-down Model Y disappointed expectations for a truly affordable EV, creating the type of consolidation I've anticipated during October.

Futures advance modestly Wednesday with Dow futures up 0.2% and S&P/Nasdaq futures gaining 0.1% as markets digest Tuesday's pullback and await this afternoon's critical FOMC meeting minutes. The seven-day winning streak conclusion represents healthy profit-taking rather than fundamental deterioration, though Oracle's margin pressure report and consumer sentiment weakness add complexity to the near-term outlook.

Today's FOMC minutes from September's initial rate cut become the focal point for policy direction insights, particularly regarding new Fed Governor Stephen Miran's dovish positioning and committee debate around neutral rate estimates. The government shutdown entering its seventh day continues limiting economic data, though the New York Fed's September consumer survey provided troubling signals about wage expectations and job market confidence.

Tuesday's decline following the S&P 500's seven consecutive record closes represents exactly the type of tactical consolidation I've anticipated during October. This rally has substantial power behind it and could theoretically run without pullback, but I expect a slight period of uncertainty before major buyers step in to push us toward my 6,800 year-end target.

The Oracle catalyst triggering Tuesday's weakness, a report showing cloud business margins weaker than analyst forecasts with the company losing money on some Nvidia chip rental deals, raises legitimate questions about AI infrastructure profitability. However, this represents margin pressure on specific business models rather than demand deterioration, a critical distinction for assessing sustainability.

SoFi's Liz Thomas captured current market psychology perfectly: "We had a long rally. Everything feels extended. It feels exciting. It feels euphoric. In reality, I still think that the euphoria can get even more euphoric before something has to actually turn." This acknowledgment of stretched conditions coexisting with further upside potential reflects the complex positioning environment.

I maintain conviction we reach 6,800 by year-end, but expect the path includes October volatility creating strategic entry points for patient capital.

Gold's ($GLD ( ▲ 3.07% )) historic breach of $4,000 per ounce for the first time represents the precious metal's 53% surge this year, driven by geopolitical anxieties, economic uncertainty, and dollar weakness. Remarkably, this safe-haven rally occurs simultaneously with equity markets establishing consecutive records, an unusual combination suggesting investors hedging portfolio risk rather than fleeing equities entirely.

The gold surge reflects a zero-sum dynamic with the dollar, as currency weakness makes precious metals more attractive to international buyers. Record ETF inflows demonstrate investors seeking gold exposure without physical storage requirements, validating the secular strength thesis I've emphasized.

This continues gold's seven consecutive weekly gains discussed Friday, with silver and platinum similarly outperforming. The combination of Fed rate cuts, geopolitical tensions, and central bank diversification away from dollar reserves supports continued strength despite elevated levels.

Tesla's ($TSLA ( ▲ 3.5% )) Tuesday unveiling of $39,990 Model Y Standard and $36,990 Model 3 disappointed investors expecting a paradigm-shifting affordable EV rather than stripped-down versions compensating for expired $7,500 federal tax credits. The stock's 4% decline validates market recognition that this represents price adjustment rather than innovation.

The fundamental challenge: Europe's crowded budget EV market features over a dozen models below $30,000 from European and Chinese manufacturers, including BYD Dolphin Surf starting at €23,000, Dacia Spring at €16,800, and Citroen e-C3 SUV at €23,300. Tesla's $39,990 Model Y faces intense competitive pressure in markets where the company arguably needs help most.

Analysts attribute Tesla's European struggles partly to aging product lineup and consumer backlash against Elon Musk's political positioning. The stripped-down Model Y strategy may prove insufficient for sustained market share defense without genuine innovation.

This reinforces my view that Tesla's bull case increasingly relies on AI and autonomous driving rather than vehicle sales fundamentals, a dependency carrying significant execution risk despite current market enthusiasm.

The New York Fed's September consumer survey revealed alarming deterioration, with wage raise expectations hitting lowest levels since April 2012 among employed workers and job-finding prospects souring significantly. Simultaneously, inflation expectations increased, creating the painful combination of stagnant wage growth amid rising price pressures.

This data, elevated to greater importance during the government shutdown data blackout, contrasts sharply with the S&P 500's advance into the 6,700s. The disconnect between consumer pessimism and equity optimism creates tension requiring resolution through either economic improvement validating stock prices or market correction aligning with consumer reality.

JPMorgan CEO Jamie Dimon's comments Tuesday about AI ROI provide crucial context. The bank spends $2 billion annually on AI and now breaks even saving $2 billion, demonstrating rapid return on investment. Dimon characterized this as just the "tip of the iceberg" with productivity benefits both myriad and currently invisible.

This corporate AI success contrasts with consumer labor market pessimism, suggesting technology-driven productivity gains may explain equity strength despite weakening employment indicators. However, sustained consumer spending weakness would eventually pressure corporate revenues regardless of operational efficiency.

Elon Musk's xAI raising $20 billion through unique structure combining $7.5 billion equity and $12.5 billion debt demonstrates continued AI infrastructure investment acceleration. Nvidia's up to $2 billion equity investment using strategy that accelerates customer AI deployment mirrors its OpenAI approach, though the special purpose vehicle structure purchasing GPUs for five-year rental to xAI represents innovative financing.

The debt backed by GPUs rather than company credit provides potential playbook for tech firms seeking to decrease balance sheet exposure while financing infrastructure buildout. Apollo Global Management and Diameter Capital Partners participating in debt raise validates institutional confidence in AI infrastructure asset value.

This follows Monday's OpenAI-AMD agreement and recent Meta, Oracle debt packages, demonstrating industry-wide capital deployment at unprecedented scale. The question remains whether revenue generation and profitability justify these massive investments or whether margin pressure like Oracle's cloud business foreshadows broader challenges.

SoftBank's ($SFTBY ( ▲ 7.2% )) $5.4 billion acquisition of ABB's robotics division advances founder Masayoshi Son's "Physical AI" vision combining Artificial Super Intelligence with robotics. This follows SoftBank's investments in Arm, OpenAI, AutoStore Holdings, and Agile Robots, positioning the conglomerate across multiple AI ecosystem layers.

Son's concept of ASI being "10,000 times smarter than humans" driving "groundbreaking evolution that will propel humanity forward" reflects the ambitious vision characterizing current AI investment cycle. Whether SoftBank's approach succeeds where its 2014 Pepper humanoid robot failed depends on AI capability maturation and practical application development.

ABB receiving approximately $5.3 billion cash proceeds for immediate shareholder value demonstrates established companies monetizing AI-adjacent assets at premium valuations, another data point supporting elevated market multiples across the technology ecosystem.

This afternoon's September FOMC meeting minutes become critical for understanding committee debate around the initial rate cut, particularly new Fed Governor Stephen Miran's dovish positioning advocating steeper cuts than colleagues supported. The minutes will reveal whether Miran found any sympathetic voices or remains isolated in his aggressive accommodation advocacy.

Fed's view of neutral rate, reshuffled by Miran's arguments, becomes key to inflation concerns and appropriate policy path. If the committee questions whether current rates meaningfully restrict economic activity, the cutting cycle trajectory changes substantially. Conversely, if the September near-unanimity reflected genuine conviction rather than compromise, the measured pace continues.

The government shutdown's data blackout likely keeps the Fed on its assumed path toward another quarter-point October cut, but the minutes will color how delayed data gets interpreted once released.

I maintain my 6,800 S&P 500 year-end target with conviction we reach that level, but expect the path includes October volatility creating brief uncertainty before major buyers step in. Tuesday's pullback ending the seven-day winning streak represents healthy consolidation rather than trend reversal.

This rally has power behind it and theoretically could run without significant pullback. However, the combination of stretched valuations, consumer sentiment weakness, Oracle margin concerns, and government shutdown uncertainty creates conditions for the tactical consolidation I've anticipated.

Use any October weakness strategically in quality names demonstrating operational excellence. Bank earnings beginning soon, and with PepsiCo and Delta provide critical validation of corporate profit growth supporting current valuations.

Markets concluded their impressive seven-day winning streak Tuesday on Oracle margin concerns and Tesla disappointment, creating the healthy consolidation I've expected during October. Gold's historic $4,000 breach reflects safe-haven demand coexisting with equity records, an unusual combination suggesting portfolio hedging rather than risk-off positioning.

Consumer sentiment deterioration contrasts sharply with corporate AI success stories like JPMorgan's $2 billion ROI, highlighting the disconnect between Main Street pessimism and Wall Street optimism. This tension requires resolution through either economic improvement or market correction.

I expect us to reach my 6,800 year-end target, but the path likely includes brief October uncertainty before major buyers step in. This rally has substantial power, though tactical consolidation remains probable given stretched conditions and multiple near-term uncertainties.

Today's FOMC minutes provide critical insights into Fed policy trajectory, particularly regarding neutral rate debate and Miran's dovish positioning influence. The government shutdown entering week two continues limiting data visibility, though bank earnings beginning Thursday offer fundamental validation opportunities.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.