Today
Equities and bonds are moving lower this morning as escalating tensions in the Middle East pushed Brent crude above $104 per barrel, reigniting inflation concerns and driving yields higher. S&P 500 and TSX futures are both down, along with the Nasdaq, as investors reassess equity valuations ahead of earnings season. Even Samsung reporting surging profits and Taiwan Semiconductor posting record quarterly revenue and highest-ever September sales failed to support the AI trade this morning. Higher energy prices are reinforcing expectations for further monetary tightening, with markets fully pricing a 25 bps Fed hike in December and one Bank of Canada rate hike before year-end, adding to concerns about domestic financial conditions. Overseas, European markets face growing pressure from France’s worsening fiscal and political situation, which is driving borrowing costs higher, weighing on bank stocks, with the Stoxx 600 Banks Index falling as much as -2.2%.
All on the same page. Fed officials maintained a preference for tightening at their September meeting, with all 19 policymakers supporting the 25 bps rate increase to 3.75%–4% and most expecting another hike before year-end as inflation remains above target and the economy continues to show resilience. Sixteen of the 18 officials who submitted forecasts anticipated another increase in 2026, although the minutes didn’t hint at whether that move would come at the Oct. 28 or Dec. 9 meeting. Policymakers viewed the labour market as close to maximum employment and economic momentum as having strengthened, while many argued that higher rates would provide insurance against inflation, stronger-than-expected demand, or additional supply shocks. Despite the hawkish stance, softer August inflation data (with core PCE at 3% and headline inflation at 3.4%) and comments from senior Fed officials have reduced expectations for an October move, with markets now giving only about a 20% probability to a hike. Inflation risks remain elevated, as short-term consumer inflation expectations have risen to their highest level since May 2023 and Treasury yields have climbed to levels not seen since 2002.
S&P 500 earnings remain strong, but some strategists expect the pace of growth to slow next year as several current tailwinds begin to fade. Forward earnings are growing about 35% YoY, supported by the AI investment boom, semiconductor shortages and pricing, elevated energy profits, and large investment gains at mega-cap technology companies. Much of the outlook now rests on technology, which is expected to generate almost 80% of S&P 500 earnings growth in 2027. Semiconductor forecasts are particularly strong, with consensus calling for earnings to rise 72% next year after 107% growth in 2026. Those expectations could prove difficult to meet as new chip capacity comes online and shortages ease. The outlook also depends on continued AI spending and financing, with any pullback in capital expenditures potentially affecting earnings across semiconductors, data centres and hyperscalers. For now, however, Q3 S&P 500 earnings are expected to grow around 30%, so the concern is less about current earnings and more about whether today’s pace of growth can be sustained into 2027.
Wall Street remains bullish on the S&P 500 into year-end, with most major brokerages forecasting the index will finish 2026 around 8,000 or higher despite geopolitical and inflation risks. The optimism, however, rests on continued AI-driven earnings growth, with strategists expecting strong corporate profits to outweigh the near-term economic effects of the Iran war and disruptions to global energy markets. Citigroup, HSBC, UBS, and Oppenheimer are among the most optimistic with 8,100 targets, while Goldman Sachs, JPMorgan, Morgan Stanley, Deutsche Bank, and Jefferies all have their targets sitting around 8,000 while more cautious forecasts are around a 7,400 target. The relatively narrow 7,400–8,100 range indicates that strategists generally expect the bull market to remain intact, although like we said up top, there is uncertainty over how much additional upside is achievable.
Demand for short-term U.S. Treasuries is declining as money-market fund inflows slow, contributing to higher T-bill yields and creating some potential pressure in short-term funding markets. Money-market funds attracted $158 bln through the first three quarters of the year, compared with over $800 bln in each of the previous two full years, partly because strong equity markets have reduced investors’ appetite for holding cash. At the same time, Treasury supply is increasing, with some estimating $225 bln of bill issuance in October and another $160 bln in November, forcing yields higher to attract demand. Three- and six-month T-bills are trading at large premiums to comparable overnight-index swaps, indicating investors are demanding more to hold short-term government debt. Rate uncertainty is also pushing money-market funds to shorten portfolio maturities so they can reinvest at higher yields if the Fed continues tightening, suggesting elevated Treasury issuance and expectations for further rate hikes could keep front-end yields under upward pressure.
Humming and hawing over that big purchase? Try the “1,000-Hour Test,” a framework for deciding when spending more may actually be worth it. The idea is to look beyond the price tag and ask three questions. Will it save you meaningful time? Will you use it enough to justify paying for quality? And how much time are you wasting trying to find the perfect option? A snowblower makes more sense if your driveway is a kilometer long, while spending more on a mattress, laptop or ergonomic chair can be easier to justify when the cost is spread across thousands of hours of use. The final rule may be the most useful: good enough is often good enough. Spending five hours researching a purchase to save $20 rather defeats the purpose. And if you’re buying something to save time, try not to give all those hours back to your phone.
Diversion: Different approaches
