Mill Street Research

Stocks up today, led by Tech and Semis after the recent declines. A lot of hope for strong Q3 earnings reports from the big players coming up, along with hope that the Anthropic IPO generates more enthusiasm. I remain skeptical as risk appetite is clearly fading, but we'll see.

Was visiting clients in Europe last week, much of the talk was about AI (of course) and why risk appetite is fading even though earnings are still very strong (at least for US large-caps). Companies are grabbing money while they can, with Meta raising $95B in equity and Anthropic going public soon.

And responses to strong earnings have also shifted. The huge upside surprises in Q1 earnings in April produced a big stock price response and analyst EPS upgrades. Q2 was also strong but showed less dramatic responses, with analysts still raising estimates. Q3 so far . . .

Was visiting clients in Europe last week, much of the talk was about AI (of course) and why risk appetite is fading even though earnings are still very strong (at least for US large-caps). Companies are grabbing money while they can, with Meta raising $95B in equity and Anthropic going public soon.

Markets showing more red this afternoon, as the rotation from Tech into "everything else" has now broken down and most indices are down on the day. Tech/AI areas leading the way down, CoreWeave back down -12%, SOX -3%, along with Tesla falling sharply after its silly flying car news.

The main issue is whether investors are seeing more cracks in the AI theme, with neoclouds and companies like Oracle that are highly leveraged to OpenAI are under pressure. Anthropic didn't produce much enthusiasm with their latest financial leaks.

Markets showing more red this afternoon, as the rotation from Tech into "everything else" has now broken down and most indices are down on the day. Tech/AI areas leading the way down, CoreWeave back down -12%, SOX -3%, along with Tesla falling sharply after its silly flying car news.

Oil prices rising again after news of declining crude and refined product inventories. The crude oil 12-month strip price is making a new high, getting very close to $90/bbl. Front-month WTI at $98. No signs so far that the inflation pressure from energy prices is going away any time soon.

PPI report today also showed a worse inflation picture, even outside of food and energy. Final demand ex food and energy was +0.7% vs 0.3% expected. Ex food, energy, and trade it was +0.5%. So Y/Y headline PPI now 6.3%, core PPI at 5.0%.

However, retail sales looked more mixed. Headline was +0.8%, but ex autos and gas was up +0.2% and "control group" that goes into GDP was +0.1%. So spending outside of autos and gas slowed down in September after a big month in August.

Russell 2000 still getting beat up, now down more than 2% on the day and down -11% from its August peak. Currently matching the May lows, now notably below the 200-day average while the 50-day has crossed below the 100-day. Small-caps have gone from just underperforming to actually falling.

Stocks still under pressure despite moderation of the bond yield moves. Weakness in AI cloud provider Coreweave (CRWV) seems to be part of the problem, stock is down sharply today, and from 90 to 65 in the last week or so. Its bonds are also doing very poorly.

First batch of Q3 earnings out today, and getting a mixed response. All technically "beat" Q3 EPS estimates except JPM. GS +1.5% JPM +0.7% UNH -0.5% C -1.7% WFC -2% DPZ -3.2% JNJ -5% S&P 500 down a fraction, NASDAQ-100 off -0.6%, Russell 2000 -0.5%, Semiconductors (SOX) -1.9%.

US stocks have had a rapid run of outperformance over the last month, with the S&P 500 now ahead of the MSCI ACWI Ex-US index for the first time this year. The equal-weighted versions of the indices also show US stocks outperforming lately. Coincides with a significant dollar rally as well.

Consumer spending growth has been stronger than expected, and much better than personal income growth (falling saving rate). But that has not helped projected profit margins for Consumer stocks (Discretionary or Staples) because costs are also rising, especially energy/transportation.

Our aggregate data on analyst earnings estimate revisions shows Consumer sectors, along with Materials, Utilities, and Communication Services being well below the US average (based on % of analysts raising vs lowering estimates). Tech, Industrials, Energy, and Financials are the leading sectors.

Stocks, and particularly Semis/AI names, got a bit of jolt from some headlines about OpenAI. Per Bloomberg, OpenAI's revenue projections are lower than what some had assumed ($50B annualized vs ~$70B) And Google has a new Gemini agent for the workplace, adding to competition in that space.

While the US large-cap indices have held up, there are underlying signs of easing risk appetite. We track our own index of returns to the top decile of stocks globally by volatility as a proxy for risk appetite, and it has recently gone below its 200-day average for the first time since last March.

The S&P 500 is also showing signs of slowing momentum -- there is little selling but the rallies are not producing the same upward momentum as measured by the RSI technical indicator. H2 2025 was peak risk appetite/momentum, April/May 2026 was a lesser move, and momentum has eased further since.