Breadth Stirs as AI's Gains Stay Concentrated

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" while Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

Investors will want to keep an eye on whether recent signs of improved market breadth signal a sustained broadening of participation as the S&P 500^® Index and Nasdaq Composite^® look to reclaim record highs. Multiple breadth indicators that had fallen to levels not seen since the April 2025 market correction turned higher earlier this week. That's a good sign—any market advance is healthier and likely more durable when more than just a handful of mega-cap stocks participate. Though metrics still point to poor breadth overall, those that have improved recently include the percentages of S&P 500 stocks trading above their 50- and 200-day moving averages, which, respectively, have increased from 19.7% to 31% and from 38.4% to 46.7% so far in October. To this point, the recent market imbalance hasn't marked a classic rotation to defensive sectors such as utilities and consumer staples, said Liz Ann Sonders, chief investment strategist at Schwab Center for Financial Research (SCFR). "This is less about rotation and more about concentration, with money crowding into a narrow set of stocks," Sonders said.

Schwab clients grew modestly more bullish in September but favored diversified exposure over individual stocks. The Schwab Trading Activity Index (STAX) rose 2.47% to 58.92, reversing much of August’s 3.85% decline and finishing just below July’s 12-month high of 59.8. That was better than the S&P 500 Index's 0.41% gain. Exchange-traded fund (ETF) buying broadened, options activity remained constructive, and clients generally bought pullbacks while trimming recent winners. The investment mix indicated that clients wanted to participate and maintain exposure even while trying to mitigate some risks of buying individual stocks. For the first time since tracking began in 2019, an individual equity didn't lead the net-buy list, while ETFs accounted for five of the top 10 net buys. The top five equity net-buys were SpaceX (SPCX), Amazon (AMZN), Broadcom (AVGO), Nvidia (NVDA), and Alphabet (GOOGL). The top five equity net-sells were Meta Platforms (META), Advanced Micro Devices (AMD), Intel (INTC), Microsoft (MSFT), and Palantir (PLTR).

It's quite early, and the evidence is limited, but AI-driven job destruction has so far been contained to a few industries, particularly information technology and finance. Those two alone have shed a combined 120,000 positions since February, at a time when overall nonfarm payrolls grew by about 600,000 positions. The total number of positions in information tech has fallen to near the lowest level since 2015, with a marked decline starting after ChatGPT's introduction in late 2022. Meanwhile, more than 500,000 AI-related positions were created from 2024 until now, but more than half were data annotation roles, often lower-paying contract positions. The data center buildout has also created more than 100,000 jobs, while a similar number of AI engineer positions have been created; other high-skilled AI jobs number in the tens of thousands. The good news for investors: Productivity is rising, and prices are rising faster than labor costs, fattening profit margins.

Besides big banks, next week features quarterly reports from a handful of firms heavily exposed to AI, including ASML (ASML) and Taiwan Semiconductor Manufacturing (TSM). Once again, tech is expected to run away in terms of annual earnings growth as a sector, trailing only energy—which of course enjoys a stiff tailwind from oil prices. Third quarter annual technology earnings growth is seen up 65%, FactSet said. That obviously reflects the AI build-out, but also one-time investment gains enjoyed by some large chip makers and hyperscalers. These factor into earnings but don't reflect business performance and should be taken in context. While overall estimated S&P 500 earnings growth of 29.5% is also remarkable, tech and communication services leave other sectors in the dust. Six of the 11 are seen growing earnings by just single digits. Some are consumer-oriented with vast exposure to sentiment struggles. This growing gap between haves and have nots bears watching, because next year tech faces tough comparisons. If the rest of the economy can't catch a break, earnings growth could dip noticeably from current levels.

The unanimous vote to raise interest rates at last month's meeting masked some differing views on key topics, minutes from the Fed's September meeting showed Wednesday. While most agreed another rate hike would be needed this year, "some participants" took a more hawkish view of the risks they faced, saying higher rates were needed to tamp down emerging demand-driven inflation rather than simply limit the impact of higher oil prices and other supply-related shocks. Some also said higher rates were needed to prevent inflation expectations from becoming unanchored. Several said they viewed the current policy rate as not restrictive or only mildly restrictive. Market expectations of another rate hike at the Fed's October 27-28 meeting tumbled last week, though, after two top Fed officials said there was little urgency to act again this month. On Friday morning, futures trading priced in a 17% chance of a rate hike this month, down from 24% one week ago, according to the CME FedWatch Tool.