October 17, 2026 | Unsubscribe
Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a tough week for stocks, especially technology. The S&P 500 fell about 2% and the Nasdaq dropped about 4.5%, its worst week since late June. The Dow, however, rose for a second straight week, and the average stock held up much better than tech, a sign that money is rotating out of AI names into the rest of the market.
The biggest story was inflation, which came in hotter than expected. Consumer prices rose 3.7% from a year ago in September, up from 3.4% in August, with gasoline accounting for more than half of the monthly increase. Core inflation, which excludes food and energy, also rose more than forecast, to 2.6%. Wholesale prices came in hot as well, and retail sales were lifted largely by higher gas prices rather than stronger demand. Inflation is moving in the wrong direction again, and energy remains the main driver.
That hot data reignited concerns about the cost of financing the AI buildout. With the 10-year Treasury yield holding above 5%, investors are questioning whether the huge amounts being borrowed to build data centers will pay off. Chip stocks fell for eight straight sessions, tying their longest losing streak since 2006, and that selling weighed heavily on the Nasdaq.
The Fed offered some relief. Despite the hot inflation numbers, Fed Chair Kevin Warsh did not signal another rate hike in his comments this week. Markets read that as a sign the Fed is willing to wait, and the odds of a hike at the October 27-28 meeting fell below 15%, down from around 30% before he spoke. Treasury yields eased a bit as a result, though they are still near their highest levels in more than two decades.
Bank earnings opened third-quarter reporting season with mixed results. Stock trading revenue was very strong, and some of the largest banks beat expectations, but bond trading slowed and at least one major bank missed estimates. Bank executives also noted that dealmaking is cooling as borrowing costs rise. Overall, the large banks are holding up, but higher rates are starting to show in their results.
For small caps, it was a mixed week. They rallied strongly when yields dipped midweek, a reminder of how sensitive smaller companies are to interest rates, but they gave back those gains in Friday’s broad selloff. The rotation away from big tech is a positive for smaller companies over time, but they need yields to come down for that to show up in their performance.
What’s Coming Next Week
Earnings season moves into full swing, with more than 200 companies reporting across industrials, defense, energy, healthcare, consumer goods, housing, and some major technology names. After this week’s AI selloff, investors will want evidence that strong profits can justify current valuations with borrowing costs this high. Homebuilder and industrial results will be especially relevant for small caps, since they show directly how higher rates are affecting the real economy.
The economic calendar is lighter, so earnings, oil, and yields will set the tone. With the Fed meeting now less than two weeks away, any comments from Fed officials will get close attention. The final October consumer sentiment reading on Friday will also show how households are handling rising gas prices.
The bottom line: inflation is heating up again, tech is under pressure, and the Fed is in wait-and-see mode. A pause in October is now the base case, but stocks need yields and oil to ease before small caps can benefit from the rotation underway.
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SmallCapStocks Team
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