A late-cycle market, pressed by real rates

The FOMC raised its target range by 25bp to 3.75–4.00% on 16 September, by a 12–0 vote. Fed funds futures price:

• 28 October: 82.3% hold, 17.7% hike.
• 9 December: 81.3% chance of at least one more hike (67.6% one, 13.7% two).^1,3

Futures imply a year-end policy rate of about 4.12%, against the Fed's median projection of 4.1%. The December hike is priced; the unpriced paths are a second hike or an October move, both resting on the September CPI.^2,3

The 30-year Treasury yield closed at 5.60% on 9 October, after 5.67% on 7 October, the highest since 2002. Since 4 September the 10-year real yield has risen 48bp while the 10-year breakeven inflation rate was flat.^4,5

Stocks and bonds have fallen together since early September: daily S&P 500 returns have correlated −0.52 with daily moves in the 30-year yield (our calculation from daily closes).⁵

The S&P 500 trades at 19.1x forward earnings, its 10-year average, and its forward earnings yield is roughly equal to the 10-year Treasury yield.⁶

• About 61% of the upward revisions to Q3 estimates come from energy.
• Q2 earnings included roughly $150B of pre-tax mark-to-market gains on private AI stakes, mainly at Alphabet and Amazon.
• Net profit margins hit a record 17.0% in Q2 and are expected to ease to 15.0% in Q3, so the 19.1x multiple rests on peak margins.
• Consensus EPS growth for Q2 2027 is only +2.6%.^6,7,14

The S&P 500 and QQQ set records on 6 October with only about 30% of S&P 500 members above their 50-day average. Since 4 September, QQQ is up 4.5% while the equal-weight S&P 500 is down 2.7% and small caps are down 5.8% (our calculation from daily closes).

The Kospi is 27% below its 22 June record and SpaceX is about 20% below its June peak. We do not read this as a broad mania signal.^23,24

• The gap between CCC and BB high-yield spreads widened from 899bp (3 September) to 1,058bp (8 October).
• The broad high-yield spread, at 3.15%, is still below its 3.46% high for 2026.
• Investment-grade spreads are calm at 0.82%.
• Listed private-credit vehicles (BDCs) are near two-year lows (our calculation from daily closes).⁸

Front-month Brent futures are near $105 a barrel and physical (Dated) Brent near $125. The US has said it will not strike Iran before the 3 November midterm elections; after that, the path can break either way.^11,12,13

Net Fed liquidity is up about $92bn this year, bank reserves are $3.03T, and money-market fund assets are flat near their record at $7.96T.^9,10

Capital spending at Microsoft, Alphabet, Amazon and Meta was 96% of their operating cash flow in Q2 2026, against 69% a year earlier, and Alphabet and Meta bought back no stock in the first half. The widely quoted $1.2T of 2027 spend is Goldman Sachs' forecast of AI-related capex at five hyperscalers, not company guidance.^14,15,16

Q2 cloud revenue grew 82% at Google Cloud, 43% at Azure (constant currency) and 37% at AWS.¹⁷

• Oracle's notes carried a fair value of about 85 cents on the dollar at 31 August, reflecting both higher rates and credit.
• Project Jupiter loans are quoted at 89–91 cents after a force majeure notice.
• CoreWeave's bonds yield in the low teens.
• OpenAI's own plan, as reported, burns about $278B of free cash flow over 2026–30, on a run-rate of about $50B on a net basis.^{18,19,20,21,22}

The figure is July revenue × 12 and includes cloud-marketplace resale; at the 2025 revenue mix that is roughly $60B on a net basis (our estimate). Recognised Q2 revenue of more than $11.5B confirms the scale.^25,27,28

Monthly run-rate growth fell from about 54% (February–April) to about 12% (May–July). Prices are also falling: Ramp's effective price per million tokens is down 41% since March. Anthropic cut list prices for Opus 5.5 by 20% on 22 September and for Haiku 5.5 by up to 90% on 7 October.^{25,26,29,33,34}

On Vercel's AI gateway, open-weight models were 56% of tokens in August but 14% of spend; Anthropic has held at least 61% of spend every month since December 2025. The pressure on dollars comes from OpenAI's pricing and from customers trading down to cheaper tiers. Open-weight models trail the frontier by about four months.^30,31,32

Recognised Q3 revenue of about $16B (July's pace × 3) or less would mean growth has stalled; $18.5B or more would mean it is intact. The listing is reported for mid to late November. A fast entry to the Nasdaq-100 would likely put roughly 1% of QQQ into the stock (SpaceX entered at about 1.2%).^35,36