AI Buildout Lifts GDP to 3.4%, but the Payoff Question Lingers

AI Buildout Lifts GDP to 3.4%, but the Payoff Question Lingers

U.S. equities slipped last week, with the S&P 500 down 0.56%, the Nasdaq Composite down 1.99%, and the Dow Jones Industrial Average down 0.83%. Smaller and more value-oriented stocks again held up better, with the Russell 2000 up 1.30% and the Russell 1000 Value up 0.48%, while the Russell 1000 Growth fell 1.70%. Developed international markets gained, with the MSCI EAFE up 0.87%, while emerging markets slipped 0.72%. Year-to-date, the S&P 500 is up 11.77% and the Nasdaq is up 9.95%.

Economy Surges, Inflation Lingers

The U.S. economy grew at a 3.4% annualized pace in the third quarter, powered by a 9.4% increase in business fixed investment, the strongest quarterly growth in that category since the fourth quarter of 2020, alongside resilient consumer spending. Inflation remains elevated, with headline and core PCE up 3.6% and 3.1% year-over-year, respectively. The Federal Reserve held its policy rate steady at 3.75%-4.00%.

Treasury Yields Ease Again

Treasury yields eased again, with the 10-year at 4.94% and the 30-year at 5.31%, both down from quarter-end levels of 5.29% and 5.64%, respectively. The 2-year yield stands at 4.56%, down from 4.88% at quarter-end. The Bloomberg U.S. Aggregate Bond Index gained 0.56% for the week and is up 2.44% quarter-to-date, trimming its year-to-date loss to 0.54%.

AI Buildout Reshapes Economy

Last week’s GDP report and earnings from three major hyperscalers offered an updated read on the AI trade. The vast sums being spent on materials, equipment, and data centers are now showing up throughout the economic data. Business fixed investment as a share of nominal GDP has already surpassed the telecom buildout of the 1990s and is exceeded only by the high-inflation period of the late 1970s and early 1980s. The physical side of that buildout is visible in our accompanying chart: data center construction is running at an annual pace of $85 billion, compared with $49 billion for all other office construction.

AI Payoff Still Unclear

While the buildout’s impact on growth is evident, the payoff for the companies making the investments is less clear. The three hyperscalers that reported last week each described strong AI demand and growth in their cloud businesses, but much of that growth may already be priced in, and investors are focused on how quickly these companies can monetize their spending and generate positive cash flow. Communication Services fell 8.5% and Technology fell 1.8% last week, the only two sectors to decline. With both the economy and the market tied to the same theme, the S&P 500 trading at 18.4 times forward earnings versus 14.4 times for the MSCI EAFE is a useful reminder of why broad diversification matters.

Energy Stands Out

Energy remains the standout sector of 2026, up 59.9% year-to-date, as crude oil stays elevated: WTI is near $104 per barrel, up from about $57 at the end of 2025. Gold, by contrast, is near $3,913 per ounce, below its year-end level of roughly $4,368.

Looking Ahead

Looking ahead, the October jobs report and PMI readings headline the week’s economic calendar.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.