First light: A brighter market setup comes into view
October 22, 2026
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3 min
October 2026 highlights
The Bear: At least once a year, it seems markets collectively fret about narrow breadth foretelling and impending correction in the broad market. But breadth isn’t the panacea investors like to believe it is. More often than not, breadth tends to follow price, not the other way around. Furthermore, the narrowing in breadth is exactly what one should expect to see as the AI trade began to kick back into gear and the continued selloff in rates pressured more rate-sensitive areas of the market. But that narrowing appears to be giving way to the potential for a broadening catch-up trade.
Golden: Markets have been increasingly dominated by an either–or dynamic as a function of the strength and breadth of the AI trade. And that dynamic has even emerged within the tech sector itself as we’ve seen markets discount the cash flow transfer from hyperscalers to semiconductors, pushing their correlation to the lowest level over the past ten years. But we’re increasingly witnessing a resynchronization of the two key cohorts. A unified tech trade would provide a powerful tailwind to headline equity indexes into year-end against a backdrop of robust fundamentals, cleaner positioning, and healthy skepticism.
Hopefully: Inflation prints have certainly been disappointing for much of this year, but parsing through the details reveals a more encouraging outlook with respect to the future path of inflation. The upside this year has largely been idiosyncratic and narrow in nature as opposed to a broad-based inflationary impulse. With further shelter disinflation still in the pipeline and tariff effects set to fade further, any stabilization in AI-related prices and softening in energy passed through to airfares could provide a meaningful boost to the disinflation process. The renewed tightening is likely to be a modest recalibration of policy as opposed to a renewed and lengthy tightening cycle.
Just One Thing: As we close in on 2027, the Ho-Hum and narrow growth that defined 2026 looks set to continue in the new year. Housing remains stalled, non-AI capex is muted, manufacturing activity trails PMI optimism, and the fiscal tailwind that supported consumption in early 2026 is poised to become a meaningful drag next year. But the big story remains the AI CapEx boom. While investment is likely to continue at a robust clip, the pace of growth is set to slow to nearly half the pace seen in 2026. Growth is a flow measure, and while AI spend will continue to support growth, the impulse is likely to cool meaningfully.
Steam Engine: At long last, the overshoot in yields appears to have arrived. Much of the selloff has been justified by fundamentals – stronger nominal growth prompting a repricing of a tighter policy path. But the latest push higher in yields has divorced from those fundamental drivers, suggesting we may finally be in the technically driven overshoot phase of the move. At the highs, 10-year yields were trading nearly 40 basis points wide to our fair value estimate, a threshold from which we’ve seen prior selloffs reverse sharply. With yields unable to sustain the push higher despite hawkish Fedspeak, renewed upside in crude prices, and upside surprises on the inflation front, selling exhaustion may finally be manifesting.
