Tech Gets Hammered On AI Disappointments While Small Caps Benefit From Lower Yields, Strong GDP Data: Oct. 29, 2026 — 2026-10-29
What moved & why: Google and Microsoft earnings disappointed on heavy AI capex weighing on free cash flows, triggering a 1.5%+ Nasdaq decline. Simultaneously, better-than-expected GDP (3.4% vs. 3.2% forecast) and unemployment claims data, combined with Fed Chair Warsh's patient tone and Middle East deescalation, drove a broadening rally in cyclicals and a bull-steepening yield curve.
Cross-asset:
- Equities: Nasdaq down >1.5%; Russell 2000 up >1.3%; 9 of 11 sectors advancing; Nasdaq 100 off ~7% from recent highs on midterm election concerns over potential AI regulation
- Rates/Treasuries: Long-end yields down >40 bps in short timespan; curve steepening in bull fashion, led by monetary-policy-sensitive shorter tenors
- Commodities: Declining across the board on Middle East deescalation
- Dollar & crypto: Flat
Econ / Fed angle: Q3 GDP beat at 3.4% (consumer spending +2.5%, business investment +1.8%) signals robust growth despite import drag from data-center buildout. PCE inflation matched expectations (0.5% headline, 0.3% core m/m; 3.6% and 3.1% y/y), but households dipped into savings as spending outpaced income growth; personal savings rate fell to 47-month low of 3.8%. Claims remain near historical lows (194k initial, 1.701M continuing). Fed Chair's patient stance and strong data suggest no near-term hikes; policy likely accommodative into potential AI slowdown.
Watch next: U.S. midterm elections Tuesday; market pricing risk of Democratic "blue wave" tightening AI oversight and regulation. Key question: whether 7% Nasdaq haircut is sufficient hedge or if further downside warranted if both chambers flip.