by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of OpenAI’s pivotal shift from a non-profit structure and its broader implications for the AI sector rally. We then explore the market’s optimistic anticipation of potential rate cuts at the upcoming Federal Reserve meeting. Our discussion extends to the latest round of US-China trade negotiations in Madrid and the notable warming of relations between the US and India.

OpenAI Goes Public: The AI company is restructuring its relationship with parent company Microsoft, moving toward a more traditional for-profit model. It will gain greater control over a new public benefit corporation, allowing it to balance generating profits for shareholders with its public-benefit mission. This shift away from its unconventional structure comes as market focus intensifies on AI companies .

• In recent months, the market’s reliance on tech companies for growth has accelerated. A prime example is the “Magnificent 7,” which, despite initially dragging on the broader S&P 500 Index this year, has since surged and now outperforms the combined growth of the other 493 companies.

• This pattern echoes the “safety trade” observed in 2023 and 2024, wherein investors flocked to established tech giants for capital appreciation. This strategy was driven by the companies’ robust earnings power, which provided a haven during a period of significant economic uncertainty caused by concerns over high interest rates and persistent inflation.
• Much of the hype around these companies has come from the optimism that they will become monopolies within their sector and generate substantial future returns. However, there are signs that this may not happen.
• Although some firms, such as Adobe, have shown that AI can boost profits, evidence suggests its practical impact remains limited. An MIT study revealed that a mere 5% of AI implementations have yielded significant returns or productivity gains — a finding supported by census data indicating that AI adoption rates among large companies have begun to fall.
• While we believe the AI momentum trade may still have legs, adding some exposure to value stocks could be a beneficial portfolio addition. During the equity sell-off earlier this year, value stocks outperformed their growth counterparts, suggesting they could act as a shock absorber if AI sentiment were to unexpectedly reverse.

Rate Cut Optimism: Equities rallied on Thursday as fresh economic data bolstered investor confidence that the Federal Reserve remains on track to cut rates next week. The rally occurred despite a key labor market report showing initial jobless claims jumping to their highest level in nearly four years, signaling continued softening. Furthermore, the latest inflation reading rose precisely in line with forecasts, reassuring markets that price pressures remain within expected bounds.

• Although this data all but guarantees a rate cut at the next meeting, it also raises serious questions about what follows. The primary headwind for future cuts is somewhat elevated inflation, with the monthly increases in July and August marking the highest in two years. Conversely, the startling jump in jobless claims may be less sinister than it appears; it could simply be a seasonal anomaly exacerbated by the unusual clustering of holiday weekends, which notoriously distort the data.

• The mixed economic data will likely fuel vigorous debate among FOMC members as significant concerns over persistent inflation remain. Several Fed officials — including voting members like St. Louis Fed President Alberto Musalem, Kansas City Fed President Jeffrey Schmid, and Chicago Fed President Austan Goolsbee — have already expressed reluctance to cut rates, citing inflationary pressures exacerbated by recent tariffs.
• The upcoming FOMC meeting will be pivotal for the sustainability of the current market rally. Markets have currently priced in 75 basis points of rate cuts for this year, with an expectation that the Fed will start with a 50-basis point cut next week. Consequently, the updated “dots plot” will be scrutinized as it outlines the projected path of future policy rates. A signal of aggressive easing is likely to buoy risk assets, while any suggestion of a moderate approach to easing could dampen investor risk appetite.

Brazil President’s Sentence: A Brazilian Supreme Court justice has sentenced former President Jair Bolsonaro to 27 years in prison for his role in plotting a coup after his 2022 election defeat. The ruling is poised to strain relations with the United States, where some lawmakers have called the arrest politically motivated. Prior to the sentencing, the US had imposed 50% tariffs on Brazilian steel, and Secretary of State Marco Rubio suggested further trade penalties could follow.

US and China Meet in Madrid: The US and China will meet in Madrid next week for talks on trade and TikTok. This follows the White House’s decision to extend the deadline for a trade agreement until November 10. The discussions will offer insight into the progress made over the past month, with both sides seeking concessions. While we do not expect a full resolution, the apparent unwillingness of either side to escalate tensions going into the meeting is a positive signal for markets.

ECB Holds Rates Steady: The European Central Bank decided to hold rates steady at its latest meeting, expressing optimism that growth and inflation remain broadly consistent with its goals. The bank revised its annual growth outlook upward by 30%, while acknowledging upcoming headwinds. Conversely, it revised its inflation forecast downward to 1.9% for the year. This strong outlook will likely boost the euro against the dollar but may act as a headwind for US investors holding European equities.

US and Poland Disagree: Polish Prime Minister Donald Tusk has rejected the White House’s assertion that a recent Russian incursion into Polish airspace was unintentional. This disagreement coincides with Poland’s request for additional military assistance to defend against future Russian provocations. The US willingness to give Russia the benefit of the doubt may suggest a hesitancy to getting more deeply involved in European security. The incident provides more evidence that the EU needs to shore up its own defenses amid the lack of US assurances.

US and India: Washington and New Delhi are close to finalizing a trade agreement, according to the White House. It also stated that the US views India as one of its most important strategic trade partners as it seeks to shape a future economic order. Simultaneously, the US is reportedly advocating for G-7 nations to impose tariffs on India due to its support for Russia’s invasion of Ukraine. This announcement aligns with the US employing a “carrot-and-stick” approach to encourage India to distance itself from China.

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