Year-end rally after the midterms or further AI doubts?
Last month, we highlighted the support that earnings seasons have historically provided to equity markets. That thesis has played out only partially over recent weeks: the S&P 500 fell 0.87% in October, with a steeper decline across the tech sector as a whole. Europe fared better, with the Stoxx 600 gaining 1.87%.
Yet earnings season has been broadly solid, with upward revisions to margins, revenues and earnings in the US. However, this has not been enough to reassure investors who are questioning whether the rally in all things AI-related can continue. Some companies were punished severely: Intel plunged more than 45% on disappointing Q4 guidance, Sandisk lost 35% despite strong results and upward revisions, and Google fell 13% in a single session after search revenues came in below expectations.
Behind these sharp sell-offs lie growing investor doubts about the pace of AI investment more broadly, its future return on investment, and the sustainability of lofty earnings expectations. These doubts are also clearly visible when comparing index performance this year with earnings growth: the S&P 500 is up "only" 11.7% through end-October, while earnings are expected to grow 33%. As a result, the 12-month forward P/E has fallen below 18x, down from 22x at the start of the year. As we noted in our asset allocation video earlier this month, we remain broadly constructive on hyperscalers and semiconductors, but we are cautious on the most highly leveraged players, such as neoclouds.
What also keeps us reasonably confident on equities despite recent volatility is that growth forecasts remain broadly positive across the major economies. Global growth is expected to end 2026 at around 3%, most leading indicators are accelerating, and labor markets remain in good shape. This positive picture applies above all to the US, but conditions also appear to be improving in the UK and Germany, while Southern European economies are holding up well overall.
A contrasted market resilience
However, risks remain, with the Middle East as complex as ever and continued pressure on energy commodity prices: oil rose by 19% over the month and natural gas by 43% in the eurozone. This will drive electricity prices higher across much of the eurozone in 2027 and raise the risk of second-round effects on inflation. These effects remain limited for now, both in the US and the eurozone, but the risk is rising.
Higher energy prices also pose a risk to consumer spending over the coming months and quarters, especially as wage growth is failing to pick up. Consumption remains very robust in the US, supported by financial markets that have performed very well until now, but the volatility seen in recent weeks could weigh on it. This risk is even greater in the eurozone, where real wages have now turned negative. The situation in the Middle East remains key in the current environment.
We will also need to assess the implications of the US midterm election results: the Democratic wave is likely to lead to a confrontational relationship between the President and Congress, with a possible government shutdown this December. How will Trump respond on tariffs or on relations with Iran? Nothing is certain at this stage. With multiple uncertainties ahead in the coming months, we have moved to a more neutral stance, after having been positive for many months.
Market drivers
- ✓ Hormuz: Changes in commodity prices will be key for bond markets.
- ✓ French budget: In the current environment, the adoption of a budget has become a necessity.
- ✓ USmidterm elections: How will Trump behave post election?
Our positioning
EQUITY - Solid earnings season, but strong doubts over Tech. Positioning has already come down significantly but is not yet at extreme levels. Broadly neutral view.
CREDIT - Doubts over the tech sector stem mainly from excessive capital needs, which are pushing credit spreads wider. Cautious view.
RATES - Inflationary risks remain very much present, and following the decline in yields in recent weeks, expectations for monetary easing have moderated. Positive bias removed.
Sources: Bloomberg, as of 04/11/2026. Historical market trends are not a reliable indicator of future market performance.
Given the subjective nature of certain analyses, it should be emphasized that some forward-looking statements are prepared based on certain assumptions, which may likely differ either partially or entirely from reality. Any hypothetical estimate is, by nature, speculative, and it is possible that some, if not all, of the assumptions underlying these hypothetical illustrations may not materialize or may do so differently from current expectations.
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