Weekly Market Update October 5, 2026

Inflation remains elevated. The Personal Consumption Expenditures (PCE) Price Index showed as much in August. Specifically, the PCE and core PCE, which excludes food and energy components, increased 0.3% and 0.2%, respectively, on a month-to-month basis, with the core figure running a tenth of a point below expectations. From a one-year perspective, the PCE and core PCE rose 3.4% and 3.0%, respectively, with both metrics still above the central bank’s target rate of 2.0%. 

At least one more increase to the benchmark short-term interest rate seems likely before year’s end. The solid performance of the U.S. economy, bolstered by firm consumer spending and anticipated decent growth in payroll positions, gives the Fed leeway to take a more-aggressive approach in raising its interest rate. However, the October Federal Open Market Committee (FOMC) meeting takes place right before the midterm elections, which might push the next hike to December. 

Third-quarter earnings season is at hand. This should provide another indication that the U.S. economy is expanding at a solid pace. The consensus forecast is that profit growth for S&P 500 companies averaged nearly 30% in the three-month period. If realized, it would mark the third-straight quarter of plus-25% growth for the Index. 

Meanwhile, artificial intelligence (AI) remains both a catalyst and potential risk for the economy and stock market. The astronomical spending on AI infrastructure has been a big boost to the nation’s gross domestic product (GDP) in recent years. However, if those investments don’t produce the desired tangible revenue results quickly enough, or if safety concerns or difficulties in sustaining the rapid pace of data center construction force the AI buildout to slow, either development could have a detrimental effect on GDP and on a stock market that has received a huge boost from private investment in AI-driven companies. 

Conclusion: Investors continue to weigh the benefits of a likely strong third-quarter earnings season against stubborn inflation, additional Fed interest-rate hikes, wars in the Middle East and Ukraine, and potential existential threats from AI. Given this backdrop, we think investors should maintain a well-diversified portfolio of stocks in sector-leading companies with strong cash flows.

Source: Valueline.com