A hotter-than-expected September CPI report pushed Treasury yields higher, and Chris Versace sees another shoe to drop with the September PPI report, as core producer prices have run above 4% year over year every month since April. With oil prices tied to the U.S.-Iran conflict, he argues duration is the key word: the longer energy prices stay elevated, the more the Fed may need to do.

Higher borrowing costs pose a particular risk to small-caps, the capital-intensive AI build-out and the consumer heading into the holidays. Even so, he places the AI investment cycle in roughly the third or fourth inning, points to strong demand signals from ASML (ASML), Applied Materials (AMAT) and Dell (DELL), and advises investors to stay unemotional, triangulate management Q3 2026 earnings commentary and build positions gradually as opportunities emerge.

Transcript

Julie G: Hey everyone, it’s Julie here with TipRanks. Once again, I have the pleasure of being joined by Chris Versace from TheStreet Pro, and we’re diving into some of the biggest headlines in the market this week. Chris, how are you doing today?

Chris Versace: You know, Julie, normally I’d say I’m okay on a Wednesday, but we’ve got a hotter-than-expected CPI report weighing on the market, Treasury yields moving a little higher and the PPI report coming tomorrow. We’ll see how it goes.

Julie G: That brings us straight into our first topic, the September CPI report. Both headline and core inflation came in hotter than expected. What do you think the market may have been underestimating, or getting a little wrong, heading into this inflation report?

Chris Versace: I can’t necessarily say what other folks were thinking when they came up with their forecasts, or how those get rolled up into the consensus forecast. But step back and look at the move we saw in oil and other energy prices, like gasoline and diesel, during September. We also reviewed the monthly PMI reports for September, as we always do, and saw an uptick in price pressures. That left us concerned the market might be underestimating the CPI print on both a year-over-year and month-over-month basis. Lo and behold, it did, and Treasury yields are moving higher.

But I would argue, Julie, that there’s another shoe to drop. Producer price indices, particularly core, have been running above 4% on a year-over-year basis every month since April. I think that’s going to happen again tomorrow when we get that data. The market has to readjust to the fact that these inflation pressures are blowing a little harder than previously thought.

Julie G: You’ve also warned that the market could be underestimating the risk of additional Federal Reserve rate hikes. How much does this latest CPI report change your outlook for monetary policy over the coming months?

Chris Versace: Look, what we’re seeing is a reflection of the continued move higher in oil prices and related areas such as petrochemicals, transportation and diesel. To the extent they remain at elevated levels, I think the Fed is going to have to do more. Whether that’s two rate hikes or three is to be determined. The biggest factor is what we’re seeing with oil prices, and therefore with the U.S. and Iran. If the fighting renews itself, either before or after the midterms, and oil prices go higher, I think we could see more from the Fed. If it all of a sudden comes to a grinding halt, which is not what I expect, that would probably take some of the pressure off, and expectations might be for one hike, maybe two.

So the short answer, Julie, is that there are a couple of moving parts here that will make it very difficult. As I’ve said since the very beginning of the U.S.-Iran war, the word is duration. If oil prices stay higher for an extended period of time, the Fed will have to do more.

Julie G: You’ve also pointed out that higher Treasury yields could pressure tech stocks and some small caps. Why are these areas particularly vulnerable when interest rates rise?

Chris Versace: The long and the short of it comes down to one simple word: borrowing. Small-cap stocks tend to require more capital. On the tech side, there’s a massive build-out happening, and there’s a lot of supporting data for it. We talked last time about the strong outlooks from Nvidia, AMD, Marvell and others. To that we can now add Applied Materials, which said yesterday that it sees robust demand out to 2030, and ASML, which said this morning that it’s taking orders out to 2030. These are clearly very strong demand patterns, but the build-out requires financing, and I think this gets to what Broadcom CEO Hock Tan was saying about capital.

If capital costs continue to march higher, hurdle rates for these projects will move higher as well. In some cases, demand is so robust that companies will keep spending regardless. The concern is that, at the margin, some demand may go unfulfilled because of higher borrowing costs. So we’ll have to see. I think the outlooks we get from the hyperscalers and neoclouds over the next two to three weeks will be very telling.

But remember too, Julie, there are areas of the market outside of tech and small caps, like the consumer, where higher borrowing costs could weigh on spending as we head into the holiday season. As I like to say, we have to keep following the data and position ourselves accordingly.

Julie G: Speaking of the AI build-out, you mentioned ASML, which is signaling that demand for chipmaking equipment will exceed supply for years. We also have Microsoft planning a massive expansion of its data center capacity. What do these developments tell you about where we are in the AI investment cycle?

Chris Versace: I won’t say early days, because that sounds like the first or second inning. I’d say we’re somewhere between the third and fourth inning. As we’ve discussed before, the metrics we’re watching are AI adoption and, more importantly, usage. We’re starting to get some interesting usage figures for Meta’s Muse. Sensor Tower had some data, which we wrote about earlier this week for TheStreet Pro members, showing that the share of people coming back to use Muse seven and 14 days later is pretty good, at over 20%. That’s roughly on par with other applications we’ve seen. It’s not as high as you might see for Google or Instagram, but it’s still very supportive and suggests adoption is starting to pick up.

I’d like to see similar supporting data for OpenAI’s competing offering and for other agentic AI, because I think that’s really where we start to see the explosion in data and content creation and consumption that will pressure data centers and networks, keeping this cycle spinning and demand high.

Julie G: One concern investors have raised is whether AI capital spending can continue at this pace. What evidence would convince you that the spending is translating into sustainable returns rather than becoming an increasingly expensive arms race?

Chris Versace: What you’re really asking is, “Sounds good, but where does the rubber hit the road, Chris?” On the one hand, it’s the AI adoption and usage metrics we just talked about. On the other, when the hyperscalers and neoclouds report, what are they seeing in terms of growth in their cloud businesses? What are we seeing in margins and cash flow? In other words, companies are spending, but are they starting to reap the benefits of that AI spending?

If they show that, I think the market will breathe a bit of a sigh of relief, understanding that these same companies are also going to say, “Demand is robust, and we have to spend more because the opportunity is bigger.” To the extent that monetization is happening, I think the market will have an easier time going along with it. Not necessarily bump-free, just an easier time over time.

Julie G: That’s fair. For investors who believe in the long-term AI growth story, how do you balance the risk of missing further upside against the possibility of buying into a market that could see a valuation reset soon?

Chris Versace: We’re only in the early days of the September-quarter earnings season. Combine that with the risk I mentioned around the September PPI report, which could reaffirm that inflation pressures are blowing harder and the Fed may need to do more, and I would say this: pick your spots and get your shopping list ready. And remember, you don’t have to buy a full position in one fell swoop.

I’d also keep monitoring not only key support levels for the individual stocks you’re looking at, but relative strength index data as well. When a stock has strong demand dynamics, is testing key support levels and is oversold, that’s a pretty powerful combination, and it’s something we at the Portfolio would look to take advantage of. There are one or two names in the Portfolio where that’s lining up, and in the coming days, as we get past some of the events I just mentioned, we may start to put more capital to work.

Julie G: All right, to wrap it all up, Chris: for investors trying to navigate this market with persistent inflation, uncertain interest rates and continued AI enthusiasm, what’s the biggest mistake they should avoid right now?

Chris Versace: Being emotional is always a mistake to avoid. The other thing is that there’s a lot of noise in the headlines. Even though this video will go out over social media, I’ll say that social media is a contributing factor to that noise. So you’ve got to sit back and collect your data points from what management teams are saying. Don’t rely on any one management team; triangulate them.

Case in point: we talked about the back-to-back favorable comments from ASML and Applied Materials. We can add Michael Dell, who said in an interview yesterday that demand for Dell’s products is very strong, that customers are putting what they receive to work immediately and that they want more. It’s an anecdotal comment with no hard numbers, but it speaks to what the other companies are saying. When we see that, it tells us we’re on the right path with our thinking, and now we’re just waiting for the right opportunity to make a move.

Julie G: Perfect. Sage advice as always, Chris. Thank you so much for your time today. I look forward to chatting with you again in a couple of weeks, when we have a few more earnings reports under our belt.

Chris Versace: Sounds like a plan.

Julie G: For all of our viewers, if you want to hear more of Chris’s insights, head over to TheStreet Pro. We’ll have links in the description below, and we’ll see you back here next time.

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At the time of publication, TheStreet Pro Portfolio was long AMAT shares.