The correction in AI stocks may be close to a bottom. The semiconductor sell-off intensified on Friday when Intel fell roughly 29% after weak guidance. The Philadelphia Semiconductor Index dropped 7.2% on the day and more than 15% in October. However, positioning in growth and technology stocks is much lighter than a few months ago: recent data shows hedge funds underweight AI stocks relative to their market-cap weight for the first time since early 2023, and the semiconductor sector’s forward P/E has fallen to around 16x, the lowest of the current AI cycle. Technical signals and the historically strong fourth-quarter seasonality support a bounce into year-end, so we remain overweight on equities and expect a rebound on emerging market equities as well.
Earnings have been good, albeit not great: S&P 500 third-quarter earnings growth stands at 30.2%, and 82% of reporting companies have beaten estimates, although the size of the beats has been below average. Earnings growth is broad but concentrated: in the US, technology, industrials and energy led the way, while in Europe energy contributed 19.2 percentage points of the Stoxx 600’s 33.8% earnings growth. Estimates for this year have been raised sharply: consensus now expects S&P 500 earnings to grow 34.8% in 2026, up from 15.6% in January, and the emerging markets estimate has risen from 18.2% to 75.7%.
The midterm election uncertainty is over, and equity markets have historically risen in the months after the vote. In Tuesday’s midterms, Democrats won majorities in both the House of Representatives and the Senate. Since World War II, the S&P 500 has risen in every six- and twelve-month period following a midterm election, by an average of about 13% and 14%, respectively.
The global economy is strong, with growth accelerating to above 3% in the third quarter, driven by the investment cycle and record-strong US domestic demand. US GDP grew at an annualized rate of 3.4% in the third quarter, compared with 2.2% in the second quarter. According to J.P. Morgan estimates, domestic demand grew at an annualized rate of 6.6%, and consumer spending rose 3.8%. China’s economy grew 4.5% year-on-year. Taiwan’s 14.4% growth was the fastest in 48 years and underlines the strength of the AI investment cycle. Growth was also strong in the euro area, where, according to J.P. Morgan estimates, the economy expanded at an annualized rate of 1.7% quarter-on-quarter.
We overweight equities and underweight money markets. Within equities, we overweight emerging market equities, underweight European equities, and remain neutral elsewhere. In fixed income investments, we overweight high yield corporate bonds and underweight government bonds, while remaining neutral on emerging market bonds and investment grade corporate bonds.