AI and earnings keep driving markets as focus shifts to Trump-Xi summit

Investing.com - The Nasdaq 100 posted its best session since early August on Monday, surging 2.8% to a record close as investors concluded that AI-driven earnings growth has made the Federal Reserve's latest rate hike a secondary concern.

AI infrastructure spending seems to be moving from narrative to revenue, and the companies building the picks and shovels are being repriced accordingly. Meta added approximately 12% on the same session, boosted by the breakout success of its AI agent app Muse.

On the other hand, U.S. crude oil tumbled 4.5% and Brent fell 3.4%, pulling the 10-year Treasury yield down more than four basis points to 4.95%.

Lower energy prices ease the inflation outlook directly; a falling long yield loosens the discount rate applied to growth stocks' future cash flows. Both moves arrived as a gift to the Nasdaq's most rate-sensitive names.

The Fed raised its benchmark rate by 25 basis points last week to a target range of 3.75%-4.00%, its first rate increase since 2023. Projections released alongside that decision show the policy rate peaking at 4.00%-4.25% by year-end before holding steady through 2027 — a terminal rate well below the 5.5% ceiling hit in the prior tightening cycle.

That ceiling matters because long-duration equities are extraordinarily sensitive to where rates stop, not just where they are going. A plateau at 4.25% is a fundamentally different environment than one at 5.5%.

The Bank of Japan raised rates to a 31-year high of 1.25% last week, the European Central Bank has hiked twice in 2026, while the Reserve Bank of Australia has raised three times this year to 4.35%. The pace is calibrated rather than the emergency campaign that followed Russia's invasion of Ukraine, and markets are treating it as such.

Market focus shifts from rates and oil to Trump-Xi summit

The week's central event is the Trump-Xi summit scheduled for Thursday at the White House. Boeing orders, rare earths, and AI regulation are all on the agenda, with markets focused above all on whether the U.S.-China tariff truce, currently set to expire on November 10, will be extended into 2027.

A truce extension would remove the single largest binary risk overhanging US multinationals and could serve as the trigger for a broader year-end equity advance before November midterm election results reshuffle the fiscal policy outlook.

"It’s arguably the most consequential encounter of either man’s presidency. The stakes for both economies couldn’t be higher," Yardeni Research analysts said.

Failure to extend the truce by November 10 risks reigniting triple-digit tariff escalation that would disproportionately hit semiconductor supply chains — the same stocks that led Monday's rally.

"It’s unlikely that any “grand bargain” will be struck on trade, semiconductors, currency policy, artificial intelligence, or Taiwan. Yet after 17 months of escalating rancor between Washington and Beijing, even a modest stabilization of ties and an extension of an increasingly fragile commercial ceasefire would qualify as a victory for global markets," analysts added.

Yardeni also noted that Trump’s camp can hardly be pleased with Chinese exports, which surged 25% year over year in August after rising 23.9% in July. Even more striking, Chinese shipments to the United States are up 6.1% so far this year, despite U.S. tariffs aimed at curbing them.

"Investors hoping for a game-changing breakthrough this week may be disappointed. Yet an extended trade truce, a handful of commercial deals, and a commitment to keep talking may be win enough."

"The real test isn’t whether Trump and Xi can solve their deepest frictions; it’s whether they can keep them from boiling over for another year," Yardeni wrote in the summit preview note.

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