Equities advance despite elevated yields, US$100 oil and renewed questions around AI spending

US equities finished another volatile week higher, with the S&P 500 gaining 1.2%, the Dow Jones Industrial Average rising 0.9%, and the Nasdaq Composite advancing 0.6%. Small caps again lagged, with the Russell 2000 declining 0.9%.

Both the S&P 500 and Nasdaq reached record highs during the week before pulling back as rising Treasury yields, higher oil prices and concerns around AI spending challenged risk appetite. Friday’s broad rebound nevertheless left the S&P 500 just below its record.

Bond Yields Remain the Market’s Main Constraint

The bond market again provided the clearest counterweight to equities.

The 10-year Treasury yield ended Friday around 5.26%, after reaching a 24-year high earlier in the week. The 30-year yield also touched its highest level in 24 years.

The pressure reflects several overlapping concerns: persistent inflation, elevated energy prices, large government borrowing requirements and increasing corporate financing needs, particularly for AI infrastructure.

The Federal Reserve’s September meeting minutes added another layer of uncertainty. Although policymakers unanimously approved last month’s 25-basis-point increase, they were divided over its rationale. Some viewed the hike primarily as insurance against energy-related inflation becoming embedded, while others saw broader demand-driven inflation requiring tighter policy. Most participants nevertheless expected another increase to be appropriate before year-end.

Markets currently expect the Fed to hold rates at 3.75% – 4.00% in October, with another increase more likely in December.

This is an important distinction. Last week’s weak employment report reduced the urgency for another immediate hike, but it did not eliminate the inflation problem.

Oil Keeps the Inflation Debate Alive

Energy prices remained a major source of volatility.

Brent crude traded above US$100 throughout much of the week and settled Friday around US$104 per barrel. Oil initially declined after President Donald Trump said the US would not launch further attacks on Iran before the November midterm elections and described talks with Tehran as productive. However, prices subsequently recovered and finished Friday modestly higher.

The geopolitical backdrop therefore remains difficult to price.

Any credible de-escalation could lower energy costs relatively quickly and give the Fed greater confidence that the recent inflation shock will fade. Conversely, renewed disruption to Middle Eastern supply or shipping routes could keep oil elevated and strengthen the case for additional tightening.

This linkage between oil, inflation and Treasury yields remains one of the most important transmission channels for equity markets.

AI Leadership Meets Its First Serious Questions

Technology continued to support the broader market, but the week also exposed growing sensitivity around the economics of AI investment.

Thursday produced a sharp technology sell-off as investors reacted to concerns over OpenAI’s revenue outlook and the enormous capital requirements associated with the industry’s infrastructure build-out. The Nasdaq fell approximately 1.3% before recovering part of the decline on Friday.

The concern is not that AI demand has disappeared. Evidence continues to suggest the opposite. Lumentum, for example, said its optical components used in AI servers are effectively sold out through early 2029, sending its shares higher and lifting other optical-networking companies.

The debate is increasingly about returns on investment.

Companies are committing extraordinary amounts of capital to data centres, chips, networking and power infrastructure. Investors are consequently becoming less willing to reward spending merely because it is labelled AI. They increasingly want evidence that investment can translate into sustainable revenue and cash flow.

That is a healthy evolution of the theme, but it also raises the risk of volatility when expectations are disappointed.

A Major Disruption Hits Telecom

One of the week’s most dramatic stock-specific moves occurred on Friday.

SpaceX agreed to acquire approximately US$8 billion of nationwide low-band spectrum, strengthening its ability to develop Starlink Mobile as a direct-to-device alternative to traditional wireless networks.

The announcement triggered sharp declines across incumbent telecom operators. T-Mobile fell 13.2%, while Verizon lost around 10% and AT&T also declined sharply.

Interestingly, tower operators moved in the opposite direction. Crown Castle, American Tower and SBA Communications gained between approximately 6.5% and 13.3%, reflecting expectations that satellite-based mobile services may still require substantial terrestrial infrastructure.

The episode illustrates how technological disruption can create sharply divergent outcomes even within the same industry.

Consumers Are Becoming More Cautious

Friday also delivered a less encouraging signal from households.

The preliminary University of Michigan Consumer Sentiment Index fell to 46.3 in October from 48.1 in September, approaching historically depressed levels. One-year inflation expectations increased to 4.7%, while longer-term expectations rose to 3.5%.

This matters because consumption accounts for roughly 70% of the US economy.

The combination of high fuel prices, elevated borrowing costs and weaker employment growth could increasingly pressure households. For now, consumer spending has remained resilient, but deteriorating sentiment deserves attention if it begins translating into actual spending behaviour.

What to Watch Next (Beginning 12 October 2026)

The focus now shifts decisively towards third-quarter earnings and inflation.

Major US banks including JPMorgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Bank of America and Morgan Stanley report next week. Analysts currently expect aggregate S&P 500 earnings to rise approximately 30.6% year-on-year, with technology and energy among the strongest contributors.

That creates a high bar.

With equity indices close to records and Treasury yields above 5%, earnings need to validate current valuations. A disappointment, particularly from technology, could have an outsized market impact.

Investors will also receive September CPI data, which could materially influence expectations for the Fed’s October meeting.

The market therefore enters earnings season in an unusual position.

Equities remain close to record highs, but the underlying macro environment is far from benign. The S&P 500 has so far absorbed 5% Treasury yields, US$100 oil and renewed monetary tightening remarkably well. The next test is whether corporate earnings can continue to justify that resilience.