AI Alarm Rattles the Cages as a Big Fed Decision Awaits
Oh, the pain. The pain will be real. Very real. As financial markets price in an almost certainly tighter trajectory for monetary policy as well as potentially more constricted global crude oil supply lines, the AI trade now comes under fire.
By the time most readers have made it to my early morning column, I would think that a majority have at least glanced at where U.S. equity index futures are trading. You, the readers, have certainly noticed the pressure, especially the pressure on Nasdaq-related futures markets. It’s a Sunday night/Monday morning bonfire.
The real rattle started this weekend with Anthropic CEO Dario Amodei calling for a slowdown in the development of artificial intelligence-driven capabilities. That came after Jacob Coxon, a researcher at Anthropic who had also previously worked at OpenAI, said that he had resigned over his concern that Anthropic and OpenAI were “gambling with our lives.” Coxon stated that the people building AI “earnestly believe that it could kill us all by the end of the decade.”
Current Anthropic researcher Evan Hubinger added that he thinks that there is a greater than 10% chance that AI will “kill all humans” within the next decade. That is when Anthropic CEO Amodei published an essay on Saturday. He opined… “We must slow the pace at which we improve the capabilities of AI models.” Other AI leaders spoke up as well.
On Saturday as well, OpenAI (ChatGPT) CEO Sam Altman said that he agrees with Amodei that AI companies need to “pace the frontier.” SpaceX ($SPCX) CEO Elon Musk, who has been ringing this alarm bell for years, posted to social media, “Dario is right.” The AI chatbot “Grok” is owned and operated by SpaceX.
To much less fanfare, weeks ago, OpenAI’s chief scientist, Jakub Pachocki wrote a public warning at a blog, claiming that no AI company had yet “solved alignment and monitoring to a sufficient degree to continue responsibly scaling at maximum speed for much longer.” In the industry, the term “alignment” refers to the efforts of developers to ensure that AI systems behave in accordance with human values and intentions. Pachocki did add at that time that he expects (and hopes) that there will be a voluntary slowdown that becomes “commonplace until safety bars are established.”
Expect the memory stocks, hyperscalers, high-end chip designers and semiconductor equipment providers to lead the charge lower this morning. This is going to at least start out ugly.
On Sunday
U.S. President Donald Trump more or less dismissed these warnings. The president spoke from Ireland, “We’re leading China in AI. We’re the most sophisticated country in the world, and frankly, I want to keep it that way because whoever wins AI wins.”
The president added, “And we can put guardrails. We can do this and that. But I think you have a lot of negative forces that are bringing it up that shouldn’t be bringing it up.”
This (Monday) Morning
OpenAI CEO Sam Altman posted to social media, “When we talk about ‘pacing’, we do not mean ‘stopping’. Progress has been rapid and will continue to be. But it should be slower than it otherwise could be; interventions like safety cases and monitoring have significant costs. Pacing will be well worth this cost; no amount of American competitive pressure should justify recklessness or let capabilities get ahead of alignment and monitoring. Where we will need the help of our government is for international coordination. But first we should do what we can ourselves.”
Altman posted further… “There are two ways AI progress could go very badly and that we must avoid. First, we could lose control of the future to AI. This is unacceptable; we are unapologetically on Team Humanity, and AI must always serve people. To ensure that, we need ways to ensure that alignment and safety techniques stay ahead of progress in model capabilities.
“Second, we could end up in a world with too much concentration of power. If an extraordinarily powerful AI is used by one person or company to impress their worldview onto everyone else, the results could be extremely dystopian. Avoiding these two threats requires walking a narrow middle path; for example, one country could gain too much power. Another example is one lab ending up with too much power.”
Good Thing
Consider the cages sufficiently rattled, at least for now. Good thing we don’t have anything else to worry about besides, worst case, the end of humanity driven by maniacs developing technology that “best case” only puts half of us out of a job. It’s not like August PPI and CPI, published last week, don’t support the probability for increased short-term interest rates.
It’s not like the Kingdom of Saudi Arabia wasn’t forced to shutter a key pipeline over the weekend, due to terrorist attacks by Iranian-backed proxies that would allow oil to bypass the Strait of Hormuz. That took crude prices sharply higher overnight. Front-month Brent is trading with a $108 handle. Front-month WTI is trading close to $104.
Good thing, the markets don’t have those kinds of things to worry about.
The Week That Was
Equity markets rallied on Friday, but the holiday-shortened week did not really go all that well in its entirety. Stocks, broadly, posted their second losing week in the past four across the indexes as oil prices and Treasury yields moved sharply higher.
This is how last week went for U.S. equities:
– The S&P 500 gained 0.86% on Friday but lost 0.8% for the week.
– The Nasdaq Composite added 0.96% on Friday but still lost 0.66% for the week.
– The Nasdaq 100 tacked on 0.91% on Friday but dropped 0.59% for the week.
– The Russell 2000 gained 0.45% on Friday but took a 2.41% hit for the week.
– The S&P Small Cap 600 moved 0.55% higher on Friday but gave up 2.2% for the week.
– The S&P Midcap 400 gained 0.83% on Friday but lost 1.87% for the week.
– The Dow Transports added just 0.32% on Friday but gave back 1.82% for the week.
– The Philly Semis popped for 1.81% on Friday, gaining 0.76% for the week.
– The KBW Bank Index added 0.59% on Friday but dropped 0.8% for the week.
On Friday, nine of the 11 S&P sector SPDR ETFs closed out the session in the green, led by Technology ($XLK) and the Industrials ($XLI). The Utilities ($XLU) led the losers.
For the week, just three of the 11 S&P sector SPDR ETFs finished the five-day period in the green. Energy ($XLE) was obviously the big winner. Health Care ($XLV) and the Materials ($XLB) suffered heavy losses. Growth outperformed both cyclicals and defensive sectors over the four-day period.
The Week Ahead
As we race ahead into the oncoming week…
The Geopolitical
The war will end after the midterm elections, says the U.S. president. Oh, boy.
Macro
The headline economic numbers for this week will be Wednesday’s release by the Census Bureau of August Retail Sales data and the release of August Industrial Production results on Friday by the Federal Reserve.
On top of those releases, the New York Fed will post its regional manufacturing-focused survey results on Tuesday, and the Philadelphia Fed will do the same on Thursday. August Housing Starts and Building Permits will also cross the tape on Tuesday morning.
The Federal Reserve
The Fed could be the focus of attention this week. This Wednesday afternoon, the FOMC will release its latest official statement on monetary policy. Alongside that publication, the committee will publish its quarterly economic projections for GDP, inflation, unemployment and the fed Funds Rate.
We also know at this time that influential Fed Governor Michelle Bowman is scheduled to speak publicly on Friday morning.
Upcoming Earnings
There are almost no publicly traded companies set to report financial results this week. Tonight, you will hear from Dave & Busters ($PLAY). On Tuesday afternoon, Trip.com ($TCOM) will report to be followed up by Lennar ($LEN) on Wednesday afternoon. That’s it. That’s all we have.
Earnings Review
As of September 11, still according to FactSet, for the third quarter, Wall Street now sees an estimated year-over-year earnings growth rate for the S&P 500 of 28.7%, up from 28.5% last week. Wall Street also sees revenue growth of 11.9%, flat from a week ago.
For the full year of 2026, the Street now looks for earnings growth of 31.6%, up from 31.5% last week. This would come on revenue growth of 12.1%, up from 12% a week ago.
The outlook for the fourth quarter is also very positive. Fourth-quarter S&P 500 earnings growth is now estimated at 26.3% year over year, up from 26.1% last week.
At the moment, the Energy, Technology, and Communication Services sectors are projected to have grown earnings by 105.7%, 63% and 50.8% respectively for the third quarter.
Valuation
Still using data provided by FactSet, the S&P 500 ended last week trading at 19.1x 12-month forward-looking earnings, down from 19.5x last week and down from 21.6x more than two months ago. This is still below the five-year average of 19.9x for the index, but also above its 10-year average of 19x.
The S&P 500 also ended last week trading at 25.9x trailing 12-month earnings, down from 26.5x a week ago. This still stands well above the five-year (24.4x) and 10-year (23.5x) averages for the index.
Currently, six of the 11 sectors are now trading below their five-year average valuations. Only five sectors, led by the Industrials (22.8x) are trading at a premium to their five-year average valuation. The six “undervalued” sectors, according to their historical averages over five years, are the Discretionaries, Technology, the Utilities, the REITs, the Materials and Communication Services.
Fed Funds Futures
Fed Funds futures trading in Chicago are now pricing in an 86% probability for a 25-basis point rate hike to be made to the current target range (3.5% to 3.7%) for the Fed Funds Rate at the culmination of this Wednesday’s FOMC policy statement. That’s up huge from a 60% likelihood a week ago at this time.
There is now a 75% likelihood priced in for a second 25-basis point rate hike as soon as December 9. There are now a full 100 basis points of rate hikes being priced in (53% probability) over the next 10 months.
Economics (All Times Eastern)
No major domestic macroeconomic datapoints scheduled for release.
The Fed (All Times Eastern)
Fed Blackout Period.
Today’s Earnings Highlights (Consensus EPS Expectations)
After the Close: $PLAY (0.19)
At the time of publication, Guilfoyle had no positions in any securities mentioned.
