Fed's Rate Hike Squeezes Stock Pickers
The Federal Reserve raised its benchmark interest rate by a quarter percentage point on Wednesday, the first increase in three years, bringing the target range to 3.75% to 4%. Fed Chairman Kevin Warsh said inflation remains too high and has persisted for too long, and that the hike would help guide inflation back to the central bank's 2% goal. Although the move was widely anticipated, Warsh's repeated emphasis on price pressures sent stocks sharply lower on Wednesday. Equities rebounded on Thursday and ended Friday nearly flat.[S1]
Higher rates tend to dampen economic activity by raising borrowing costs and making bonds more attractive relative to stocks. The 10-year Treasury yield ended the week back at 5%, after climbing above 5.04% on Tuesday amid an oil price surge, nearing two-decade highs. Yields have been tracking crude prices. Jim Cramer said the hike makes it harder to profit in stocks because investors are now fighting the Fed. Still, past hiking cycles have often shifted market leadership, with defensive sectors holding up early and technology typically rebounding later, making stock selection more critical.[S1]
The Dow Jones Industrial Average dropped 1.7% over the week, its third consecutive weekly loss. Banks bore the brunt of the rate increase among the 30 components. Goldman Sachs shed almost 8.5%, making it both the weakest Dow member and the portfolio's biggest loser. Other Club holdings — Wells Fargo, BNY, and Capital One — also declined substantially. Meanwhile, the S&P 500 edged down only 0.08%, and the Nasdaq rose 0.7% as investors rotated back into artificial intelligence names following an early-week slump. Salesforce, up over 50% quarter-to-date after earlier heavy losses, experienced profit-taking.[S1]
Oil prices added another layer of uncertainty and inflation worry. On Tuesday, U.S. benchmark West Texas Intermediate and international Brent crude reached their highest points since mid-May amid Middle East conflict supply fears. A three-session decline then pulled both benchmarks back near unchanged for the week, yet oil-sensitive stocks had already suffered. Boeing, FedEx Freight, and FedEx ranked among the biggest decliners. The portfolio increased its BNY stake on Tuesday and again Thursday, since roughly 70% of the bank's revenue comes from fees, leaving it less vulnerable to rising deposit costs and sluggish loan growth. BNY fell alongside bank stocks but remains the year-to-date leader in that group.[S1]
AI Safety Debate Tests Investor Conviction
Last week, a steady stream of headlines debating both sides of AI safety unsettled the artificial intelligence trade. The discussion, which split some of tech's most powerful figures, began with Anthropic CEO Dario Amodei's Sept. 12 essay urging a slowdown in frontier model development. OpenAI's Sam Altman and SpaceX's Elon Musk promptly backed Amodei's worries, while Nvidia CEO Jensen Huang and other industry players resisted broad coordination. Huang's side maintained that companies can self-impose safeguards. In a Tuesday Mad Money interview, Huang told Jim Cramer that products must be built and thoroughly tested, and if not ready for launch, they should be withheld while testing and engineering continue.[S1]
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The ambiguity initially punished AI shares. Chipmakers Intel and Micron each slid just over 5% Monday, while data center names GE Vernova and Eaton fell about 9% and 8%, respectively, on worries that slower model development might reduce data center spending. Those losses were largely recovered as the week progressed, with investors becoming less worried that the debate would alter the AI buildout's trajectory. The portfolio bought more Micron during Monday's sell-off, expecting no significant slowdown in AI development or spending. Rivalry among AI firms and between the U.S. and China, plus huge financial incentives, should sustain the buildout. After talking with AI executives at Salesforce's Dreamforce, including Huang, Jim said spending should continue apace.[S1]
These worries could prove a tailwind for cybersecurity. As AI agents grow more capable, they introduce fresh threats that companies must counter, reinforcing the argument for higher security budgets. CrowdStrike and Palo Alto Networks posted the week's strongest gains, climbing almost 15% and 10%, respectively.[S1]
Salesforce Counters 'SaaSpocalypse' Narrative
At its annual Dreamforce conference this week, Salesforce made the case that AI is turning into an opportunity for enterprise software rather than the threat investors had feared. The so-called SaaSpocalypse battered software shares earlier this year, but together with last month's solid earnings, the Dreamforce announcements further undermine that narrative. During Wednesday's Investor Day at Dreamforce, Salesforce projected fiscal year 2030 revenue above $63 billion, exceeding the $59.2 billion analysts had anticipated. The software giant also introduced AIforce, a live interface spanning the Salesforce ecosystem, and Koa, its first…[S1]
