Markets took a step backward last week, and the selling was concentrated in an area that has driven much of this year's gains: artificial intelligence and technology.
The S&P 500 declined 1.94%, while the NASDAQ fell 4.48%, its worst weekly performance since June. Technology stocks dropped more than 6%, while consumer staples and energy each gained approximately 5%.
That kind of divergence tells us something.
Investors are beginning to question whether expectations surrounding AI have gotten ahead of reality.
But while technology grabbed the headlines, I believe the more important issue remains inflation.
AI Isn't Going Away. But Investors Are Asking Tougher Questions.
There is little question that artificial intelligence is transforming businesses and driving extraordinary investment.
The five largest hyperscalers are expected to spend approximately $892 billion this year and $1.1 trillion next year, much of it supporting AI infrastructure.
Those are staggering numbers.
The question isn't whether AI will change the economy. It almost certainly will.
The question is whether companies can generate sufficient returns to justify the enormous amounts being invested.
Competition is intensifying, financing concerns are emerging, and investors are becoming more selective.
That doesn't signal the end of the AI boom. It signals a period when financial results may begin to matter more than enthusiasm.
Inflation Is Still the Fed's Biggest Problem
September's core Consumer Price Index rose 0.33%, pushing the three-month annualized inflation rate to 3.41%, its fastest pace in a year.
More concerning, the increases were spread across multiple categories rather than concentrated in a few isolated areas.
This is precisely what the Federal Reserve has been trying to avoid.
The economy remains relatively resilient, employment has held up, and inflation is still well above the Fed's 2% target.
That combination suggests additional monetary tightening remains a possibility, although the timing is uncertain.
Corporate Earnings Remain Remarkably Strong
Here is the encouraging part of the story.
Despite the volatility, corporate earnings continue to exceed historical norms.
S&P 500 earnings per share are expected to grow 31.6% in 2026, compared with a 25-year average growth rate of approximately 7.6%.
That is a meaningful foundation for the market.
But there is a catch.
Investors have become accustomed to exceptional earnings growth, particularly in technology and energy. At some point, the question shifts from how strong earnings have been to whether that level of growth can be sustained.
Strong earnings can support stock prices.
Unrealistic expectations can undermine them.
The Bond Market Finally Caught a Break
After months of rising yields, bonds showed some signs of stabilization last week.
Investors began moving back toward fixed income as concerns about AI-related investments and credit risks increased.
That provided some relief.
However, the underlying forces pushing rates higher haven't disappeared: persistent inflation, resilient economic growth, and substantial borrowing requirements.
A temporary pause in rising bond yields would be welcome.
A sustained decline is a different matter.
My Perspective
I continue to believe the economy is more resilient than many expected, and corporate profitability remains an important reason to maintain a constructive long-term outlook.
But this market is becoming increasingly selective.
The enthusiasm surrounding AI is being tested. Inflation remains stubborn. Credit conditions deserve closer attention. And the Federal Reserve may not be finished tightening.
None of this suggests that investors should abandon a carefully constructed investment strategy.
It does suggest that quality, diversification, valuation, and financial discipline are becoming increasingly important.
Bottom Line
The market continues to balance two competing forces:
The positives: Strong corporate profits, continued economic growth, and extraordinary technological innovation.
The risks: Persistent inflation, elevated interest rates, increasing credit concerns, and uncertainty surrounding returns on AI investments.
The bull market may still have room to advance.
But the days when optimism alone could drive stock prices higher may be coming to an end.
The next phase will be less about what investors hope will happen and more about what companies can actually deliver.
Planning Perspective — Is Your Financial Strategy Prepared?
Market conditions may change quickly, but the financial decisions facing successful business owners often have consequences that last for generations.
Whether you are considering selling your company, preparing a succession plan, evaluating income and estate tax exposure, or protecting the wealth you've worked a lifetime to build, these decisions should not be made independently.
At Integrated Wealth Management, we help business owners coordinate their investment, tax, estate, asset protection, and business transition strategies into one comprehensive financial plan.
If you haven't reviewed how these pieces fit together recently, I invite you to schedule a confidential conversation.
The most important financial decisions are often the ones you make before a major event occurs.
About Gary Hager
Gary K. Hager, CFP®, CBEC, CTFA is the founder of Integrated Wealth Management. He advises business owners and families on business succession, exit planning, estate strategies, asset protection, and long-term wealth structuring.