(Oct 24): A resurgence in oil prices dragged down stocks and bonds on Friday, stoking concerns about inflation just days ahead of the US Federal Reserve (Fed) decision on interest rates.

Brent crude settled near US$117 as a flare-up in Middle East violence threatened supplies. Most S&P 500 firms fell even as selling pressure on tech shares abated. A gauge of chipmakers edged up, but posted its longest weekly drop since November. The Dow Jones Industrial Average slipped 1.2%. Treasuries relinquished a portion of the previous session’s rally.

Investors’ risk-off mood is likely to continue well into November, according to Bank of America Corp’s Michael Hartnett, a sign of how jitters around the artificial-intelligence (AI) trade and the midterm elections have held back US equities.

“We stay tactically risk-off until mid-November,” the strategist wrote in a note to clients on Friday. “Expect down-in-yields, down-in-stocks, down-in US dollar trade.”

The recent sell-off in AI-linked stocks is a reminder that the most popular trades tend to hurt the most when sentiment turns. When everyone owns the same story, even a small disappointment can set off a rush for the exits, according to Brian Jacobsen at Annex Wealth Management.

“The practical takeaway is not to abandon growth stocks, but to check whether one theme has quietly grown to dominate your portfolio after a long run,” he said. “Rebalancing, which means trimming what has grown too large and adding to what has lagged, is a simple way to keep risk in check without trying to predict the next move.”

“Four forces explain this week’s yo-yo: a solid earnings season and attractive bond yields on one side, the cost of financing and more selective sovereign stress on the other,” said Florian Ielpo at Lombard Odier Asset Management.

The problem is not that equities are pricey, it’s that bonds are no longer expensive, he said.

“The latest moves do not alter our view that robust earnings should continue to support equities,” said Ulrike Hoffmann-Burchardi at UBS Chief Investment Office. “AI demand remains strong, current bond yields provide attractive income, and geopolitical developments alone do not justify a broadly defensive investment stance.”

The Fed has been clear that it’s aware AI is boosting US demand. With inflation above target across a range of measures, leaning against that impulse through modest rate adjustments and tighter financial conditions is sensible policy, according to Tiffany Wilding at Pacific Investment Management Co.

“However, the economic adjustments now underway could evolve in several ways, and inflation is elevated but not accelerating,” she said. “This likely gives the Fed room to take a measured approach.”

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