Renewed trade tensions with China and then a trade truce, an extended U.S. government shutdown, a Fed meeting without employment data, new Russian sanctions, and no end in sight for the Ukraine war, demolition of part of the White House without a planning permit, nothing seems to bother the equity investors, as the market continues to move higher.
Of course, a key driver for the equity markets is the strong third-quarter corporate earnings, which might show the positive impact of AI on corporate profit margins.
The U.S. economy is being powered by the AI capex boom. The boom has limited impact on the labor market as data centers do not need a lot of employees. This means that the Fed will be able to ignore this growth, given the continued deterioration of the labor market.
How is this a positive? Because there is nothing that will stand in the way of further Fed rate cuts. There is some inflation risk in 2026 due to tariffs. But with little fiscal stimulus to support higher prices, the Fed will look through the price increases, and be correct to do so, this time. Not because the Trump administration pressures it, but because it is the right thing to do.
With the Fed easing and fiscal policy in neutral, borrowing rates will continue to settle lower. This will be positive for bond markets, but it will also provide a new boost to the economy, and therefore, be positive for equity markets as well.
- U.S. Consumer Confidence is Weak
- The AI Boom: Getting Long in the Tooth?
- The Fed’s Quantitative Tightening
- U.S. Government Shutdown
- China’s Fourth Plenum Signals Continuity
- A U.S.–China Trade Truce
- Gold: A Correction
- Will Russian Sanctions Lift Oil Prices?
- Our Portfolio Positioning
U.S. Consumer Confidence is Weak
The October Conference Board Consumer Confidence survey beat estimates but fell slightly, showing stable current conditions and softer expectations. The headline number declined to 94.6 from an upwardly revised 95.6. Consumers’ assessment of their present situation improved to 129.3 from 127.5, while future expectations fell to 71.5 from 74.4. Confidence remains near cyclical lows, as policy uncertainty continues to weigh on sentiment.
Respondents reporting jobs as “plentiful” versus “hard to get” ticked up, signalling some stabilization in October. However, the broader trend remains one of deterioration, consistent with a slowing but not collapsing labor market. Similarly, the share of small businesses citing poor sales, another leading indicator of unemployment, has stabilized in September after trending higher near cyclical peaks. Consumer spending, while slower this year, has also avoided contraction.
This data flow remains bullish for risk assets: Mildly negative readings secure further Fed easing without threatening earnings. While policy uncertainty still weighs on growth, the absence of outright contraction in October, alongside progress in U.S.-China trade talks and ongoing enthusiasm for AI, remains a tailwind for equities.
The AI Boom: Getting Long in the Tooth?
There are good reasons to be optimistic about AI stocks. However, the good news may already be fully priced in. A recent study by Bain & Co. concluded that AI-linked companies would need to generate new annual revenue of $2 trillion by 2030 to profitably monetize all the capital expenditures they have undertaken or plan to undertake. For context, Microsoft’s trailing 12-month revenue is only $282 billion; Meta’s is $179 billion. The problem for value-conscious investors is that FOMO could propel AI stocks to even higher levels before they eventually come back down to earth. Thus, some signposts are needed to determine when to get out. During the dotcom era, deteriorating free cash flow among telecom companies proved to be a red flag. This is one measure to watch.
Another sign during the dotcom period that the end was nigh was the boom/bust episode in low-quality internet stocks. The surge in speculative dotcom names in late 1999, followed by their subsequent collapse, preceded the selloff in “blue chip” internet stocks by several months. The past few months have seen a similar rally in the shares of smaller AI companies. Many of these companies have experienced a recent pullback. If this sell-off persists, it would be a red flag for the broader tech sector.
The trend in artificial intelligence is reflected in Amazon’s recent layoff announcement, which will reduce its corporate staff of 360,000 by 14,000, with a target of 30,000. They employ over 1.5 million, with less costly warehouse workers unaffected by this cost-saving move. While many will point to these and similar layoffs at other firms as a threat to the U.S. economy, the reality is likely closer to the impact of earlier technology layoffs, which had little effect on overall GDP growth. These workers are more skilled and can find new positions, albeit at lower incomes. This process is unlikely to result in the same kind of cascading of bad outcomes that comes from laying off production workers, who have no savings buffer, and when receiving only unemployment insurance, may miss payments on rent, mortgages, car payments, etc., that impact the financial sector.
In 2001, falling equity prices led to a severe decline in equity wealth and a pullback in capex spending. Could the same thing happen to the AI boom?
What consumers do have is paper wealth, thanks to a record-high stock market and elevated home prices. In the case of home prices, they have been falling since March, despite a drop in mortgage rates since the start of the year. If equity prices start to fall too, the economy could experience a recession similar to the one in 2001. That recession was more the result of a stock market collapse than its cause.
The Fed’s Quantitative Tightening
In October, the Fed cut rates by 25 bps to 3.75%–4.00% and announced that Quantitative Tightening would end on December 1st. The market expected the decision. The committee remains divided between a “reactive” camp, which favors caution as inflation remains above target, and a “proactive” camp willing to look through tariff-driven inflation to address slowing labor market growth.
Despite concerns about increasing economic growth and weak employment data, alongside contained inflation pressures, Chair Powell pushed back on market expectations for a December rate cut, emphasizing that it was “far” from a foregone conclusion. He described Fed policy as “modestly restrictive”. A gradually cooling economy and stable inflation expectations still point to further policy easing over time.
September CPI came in cooler than expected, reinforcing disinflationary pressures. Headline Consumer Price Index rose 0.3%, down from 0.4% in August. The report confirms that tariffs remain the primary driver of inflation, with no signs of overheating. Inflation is a lagging indicator, and leading measures continue to point to further disinflation. Lower inflation should enable the Fed to continue cutting rates in December.
U.S. Government Shutdown
The U.S. is experiencing the longest government shutdown in history, and as its effects start to bite, Democrats and Republicans both have incentives to compromise. Democrats initiated the standoff to energize their base ahead of the elections, but with victories secured, the Democrats now have more room to negotiate while saving face. A deal still depends on Republicans agreeing to a one-year extension of the enhanced Obamacare subsidies.
Republicans have reasons to compromise. President Trump’s net negative approval rating has fallen into double digits, and polls show the GOP, as the governing party, bearing more blame for the shutdown. At the same time, Senate Republicans rejected Trump’s idea of abolishing the filibuster to bypass Democrats, leaving him little option but to negotiate. Several Republican senators also opposed his tariffs on Canada and Brazil in a symbolic vote, highlighting dissent within the party.
The shutdown is expected to end before Thanksgiving, as both parties reassess public sentiment following this November’s elections. Rising health insurance premiums tied to the expiration of ACA subsidies will likely increase pressure for a temporary bipartisan deal. While the shutdown itself is unlikely to move markets, repeal of the filibuster would carry far greater long-term implications; yet it remains an improbable outcome.
The filibuster is likely to survive, limiting the long-term policy impact of the current government shutdown. Despite President Trump’s call to repeal the filibuster to end what will soon be the longest government shutdown on record, Senate Majority Leader John Thune’s office quickly rejected the idea. At least eight Republican senators have publicly supported maintaining the 60-vote rule in the past.
Finally, allowing health care subsidies to lapse would amount to a $30 billion fiscal tightening by 2026, hitting working-class voters ahead of the midterm elections. Rising health insurance premiums since November are likely to push moderates toward a compromise. The shutdown’s market impact remains limited, though economic data releases once operations resume could momentarily stoke volatility, especially if the new macro picture shows a rise in unemployment or inflation.
China’s Fourth Plenum Signals Continuity
China’s Fourth Plenum outlined priorities for its 2026–2030 plan, emphasizing household consumption and technological upgrading but prioritizing continuity over change. The document highlights a rebalancing toward consumption as a share of GDP, but concrete targets will not be known until March 2026 at the National People’s Congress. Historically, China has made more progress on supply-side goals than on demand-side reforms, often resulting in overcapacity in targeted sectors and a reliance on external demand.
While the plan contains pro-growth language, our China strategists noted it also stresses anti-corruption, echoing past plenums that preceded regulatory crackdowns in key industries. Beijing appears to favor a stronger or more stable RMB versus the USD, partly for geopolitical signaling and to support President Xi’s economic objectives. The PBoC has been setting stronger fixings even as the RMB has appreciated, an unusual pattern.
Recent Chinese equity strength likely reflects optimism around a potential U.S.-China trade deal rather than improved domestic fundamentals. The Fourth Plenum underscores policy continuity, rather than a decisive pivot toward consumption-led growth, yet. RMB appreciation remains opportunistic rather than strategic, and entrenched deflationary pressures will be magnified by a stronger currency, supporting Chinese local-currency onshore bonds.
In October, China’s leadership held its Fourth Plenum conference, which outlined priorities for its 2026–2030 plan, emphasizing household consumption and technological upgrading but focusing on continuity rather than change. The document highlights a rebalancing toward consumption as a share of GDP, but concrete targets will not be known until March 2026 at the National People’s Congress. Historically, China has made more progress on supply-side goals than on demand-side reforms, often resulting in overcapacity in targeted sectors and a reliance on external demand.
While the plan contains pro-growth language, it also stresses anti-corruption, echoing past plenums that preceded regulatory crackdowns in key industries. Beijing appears to prefer a stable RMB versus the USD, partly due to geopolitical considerations and to support President Xi’s economic objectives.
The Fourth Plenum underscores policy continuity, rather than a decisive pivot toward consumption-led growth, yet.
A U.S.–China Trade Truce
At the recent APEC summit in South Korea, President Trump and President Xi announced a one-year trade truce, but differences remain too wide for a lasting deal. The agreement includes a pause on rare-earth restrictions, allowances for blacklisted Chinese firms to import chips through subsidiaries, and modest adjustments of the so-called fentanyl tariffs. China also signaled potential purchases of U.S. soybeans and energy products.
Average tariff rates remain high, with no progress on Taiwan or Russia. Renewed U.S. nuclear testing rhetoric also adds to the tension. The takeaway is clear: Beijing keeps its options open, Washington preserves leverage, and both sides leave room to extend the truce before US midterms a year from now.
The details of the U.S.-China trade deal appear to reset the clock to the Geneva Accords with China now paying the same 20% tariff increase as everyone else. The Chinese had entered this negotiation seeking three key objectives: access to U.S. technology, lower tariffs, and assurance that the US would remain neutral on Taiwan.
These were the same three goals they sought in Geneva. To bring Trump to the table in Geneva, China had stopped buying U.S. agricultural products and energy, and threatened to restrict access to rare earth minerals, which proved to be the pain point.
Meanwhile, Treasury Secretary Bessent indicated that China would purchase 12 million metric tons of soybeans over the remainder of this year and 25 million tons annually for the next three years. In 2024, China purchased 27 million tons of U.S. soybeans, accounting for just over half of all U.S. soybean exports. Bessent indicated that other nations would purchase 19 million metric tons, which aligns with recent trends. At roughly $400 a metric ton, China’s commitment amounts to about $10 billion per year. Meanwhile, the 10% reduction in tariffs on their $300 billion trade surplus with the U.S. is $30 billion. Some estimates suggest that 25% of the cost is borne by China, 25% by U.S. businesses, and 50% by consumers. Trump had promised to use part of the tariff income to support U.S. farmers, but now it seems China will pay the farmers directly.
Gold: A Correction
Gold’s current correction is likely technical in nature. Historically, gold has been driven by three primary forces: the path of the U.S. dollar, real interest rates, and the prices of other commodities. A falling dollar leads to inflows into gold and other money alternatives. Low real interest rates reduce the opportunity cost of holding gold. Finally, commodity prices tend to move in long waves, especially as an inflation hedge. For gold specifically, the new catalyst has also been relentlessly bought by central banks to diversify currency reserves away from the U.S. dollar.
Why do we think it is a correction? The ratio of gold to the S&P 500 is still relatively low on a historical basis. And to turn negative on gold, we would need to see retail demand reach a crescendo. So far, that has not happened. On the contrary, the physical volume of gold held in ETFs remains below its 2022 level. Currently, about 4.3% of global wealth is held in gold. This is significantly below the peak of 22% reached in the early 1980s.
Will Russian Sanctions Lift Oil Prices?
New U.S. sanctions on Russian oil producers sparked an oil price spike, but sustained upside is unlikely unless the global economy re-accelerates. The latest sanctions target Rosneft and Lukoil after President Putin rejected U.S. ceasefire terms, marking a diplomatic breakdown. While EU LNG sanctions remain delayed until 2027, stricter enforcement on Russia’s shadow fleet will squeeze oil revenues.
U.S.-Russia tensions add a bullish tailwind for oil, but the key factor is how long it lasts. Despite intermittent geopolitical shocks, the broader crude price trend this year has been lower amid a weak supply-demand backdrop. Second-round effects on ex-Russia production will depend on price persistence. U.S. shale output growth typically lags price changes by about six months. Prices would need to stay higher for longer to elicit a material supply response.
Our Portfolio Positioning
As markets have continued to perform well, we have not made changes to our core portfolio allocation. The fact that markets have been trending higher with elevated volatility increases the short-term risks for a minor correction. Therefore, in stocks, we remain slightly defensively positioned, with overweight positions in healthcare, commodities, European, and Chinese equities, to create a diversified portfolio that can profit in various market circumstances.
Within fixed income, we keep a slightly longer duration positioning in government bonds and an overweight in local currency emerging market debt.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
