AI earnings drive US equities despite oil and rate hike concerns

US equities (^DJI, ^IXIC, ^GSPC) are trading optimistically into October as artificial intelligence growth offsets fears over rising oil prices (CL=F, BZ=F) and global interest rate hikes. Market participants are divided on whether macroeconomic headwinds will stymy growth or if AI-driven earnings will continue to dominate performance.

The divergence in sentiment was highlighted on the Market Hang panel, featuring host Turney Duff alongside Kyle Reidhead of Milk Road, Eric Wallerstein of Clocktower Group, and Chad Morganlander of Washington Crossing Advisors. Wallerstein argued that the combination of higher commodity prices compared to 2022 and global rate hikes creates a difficult environment for equities. While he did not predict an immediate recession or total market collapse, he maintained a bearish stance, suggesting a standard bear market could begin now or emerge next year.

Reidhead offered a contrasting view, asserting that the market is seeing through macroeconomic noise because third-quarter earnings are expected to be strong. He attributed current market momentum primarily to AI, noting that as long as companies like OpenAI and Anthropic continue to generate revenue, macro factors like rate hikes become less significant. Reidhead stated that small changes in interest rates do not materially impact the market given the scale of AI growth and capital expenditure. He observed that the market has already absorbed previous peaks in bond yields and oil prices near $100 to $110, and he expects further declines in oil and yields to provide additional upside for equities.

Morganlander agreed with the bullish perspective but noted that market leadership remains narrow, concentrated in AI-related companies across utilities, industrials, and hyperscalers. He reported that his firm is slightly overweight equity risk within its tactical allocation. Morganlander pointed to high-yield credit spreads as a key indicator of financing conditions. He noted that despite recent widening, these spreads remain historically tight, comparable to levels seen in 1999 and 2007. This tightness indicates that financing remains easy for companies seeking capital. The massive wave of capital spending is driving operating margin expansion and earnings growth for this narrow group of companies.

However, Morganlander identified a specific risk to this bullish case. He warned that if major players such as Microsoft signal a slowdown in capital expenditure, similar to the adjustments seen in 2008, the current market dynamic would end.