Despite good news from both US corporate earnings and positive government economic data, Wall Street finished the week lower. Consensus was that the sell-off appeared to be driven by worries over lofty stock price valuations and doubts as to whether AI will actually generate enough profits to justify the massive investments that companies have poured into it.
However, the S&P 500 has reported the highest revenue growth in three years; and at sector level, all eleven sectors have reported year-on-year growth. Furthermore, three sectors – Information Technology, Healthcare and Communication Services – have reported double-digit revenue growth for the quarter.
As has been the case for some time now, the most anticipated corporate earnings report came from NVIDIA, the largest company by market capitalisation in the S&P and the MSCI World Indices. It was published on Wednesday evening and exceeded analysts’ expectations. Demand for NVIDIA’s chips shows no sign of waning, and its revenue forecast for the fourth quarter has also surpassed projections.
While this news was initially received positively on Wall Street, pushing up NVIDIA’s share price, the enthusiasm was short-lived: the company’s share price, along with the major US benchmark indices, soon started to decline.
Then on Thursday, Walmart (the largest retailer and private employer in the US) delivered its own results – again, better-than-expected. Its e-commerce business in particular has done well, and the company has revised its full-year financial outlook.
But although many companies are announcing healthy upbeat revenue forecasts for Q4, many Wall Street analysts now believe that the wider market (the S&P 500) will report lower revenue growth over the next five quarters – starting from Q4 2025 through to Q4 2026.
Investors are now focused on December and what the Federal Reserve Bank will do with interest rates when it next meets. The minutes from its October meeting show a measure of scepticism about the need for an additional rate cut next month. But comments last Friday from John Williams, the president of the New York Fed, seemed to support a near-term rate cut. The likelihood of a cut has boosted sentiment across the equity markets.
The Japanese government has approved an economic stimulus package worth ¥21.3 trillion (about US$135 billion), signalling progress in sanctioning the expansionary fiscal spending that investors had been expected under new prime minister Sanae Takaichi. The package, which comprises spending, tax breaks and investment targeted at key segments of the economy (shipbuilding and AI) is aimed at boosting economic growth and helping to cushion households against the negative impacts of inflation. However, there are some concerns over Japan’s finances: some investors fear that massive spending has the potential to undermine the country’s fiscal health and subsequently weigh heavily on the Japanese Yen.
The latest UK inflation figure shows that the CPI figure slowed to 3.6% in October, down from 3.8% in September. This immediately boosted market expectations of another interest rate cut in December.
Meanwhile, Bank of England Chief Economist, Huw Pill, who voted to keep interest rates on hold in November, said that he did not expect his views on policy to change much in the short term – given that wages were still growing significantly above the 2% inflation target. And Governor Andrew Bailey is on record as having said that further policy easing is likely to come if disinflation becomes more “clearly established”.
However, traders and economists now expect the Bank of England to announce a fourth and final interest rate cut for the year when its Monetary Policy Committee meets next month. But there is one more major event on the horizon before the MPC votes in December: the Autumn Budget on 26 November.
The Autumn Budget on Wednesday 26 November is expected to deliver a mixture of targeted tax rises and spending restraint: Rachel Reeves will seek to correct a £20bn-£50bn fiscal gap, all without breaking Labour’s pledge on headline income tax, VAT or National Insurance.
Likely measures include freezing income tax thresholds to boost revenue through fiscal drag, capping tax-free pension salary sacrifice at £2000 a year and tightening rules for Limited Liability Partnerships to reduce advantages for high earners. Other “probables” include new levies such as “tourism tax” on hotel stays and extending the sugar tax to milk-based drinks, as well as possible property tax reforms.
Chancellor Reeves has also evoked “fair choices” to cut debt and fund priorities like the NHS, while markets fully expect her to create a bigger buffer under strict fiscal rules. Furthermore, business groups are lobbying for small-business support and R&D incentives, warning that excessive tax hikes could suppress growth.
This eagerly-awaited budget will likely be painful for the country; will Labour somehow manage to uphold its manifesto pledge not to raise income tax, national insurance on individuals or VAT? Only the major taxes have the revenue-raising potential to “fill a large portion of the black hole in the government’s finances”.
Whatever is announced in Wednesday’s Budget, the latest British Retail Consortium-Opinium Consumer Sentiment Monitor shows that confidence among UK shoppers remains fragile. This does not bode well for high street retailers in the run-up to Christmas. Persistent cost-of-living pressures and inflation concerns are preoccupying consumers, suggesting that households are juggling tighter budgets and prioritising their essential spending habits rather than trying to save money or build up their reserves up for challenging times.
The AI-led sell-off over recent weeks has triggered some rotation in the markets both from a geographical and from a sector perspective. Like many other asset allocators, we have increased our exposure towards Emerging Markets and Asia. This has already paid off in generating positive investment returns. Unloved sectors – such as healthcare, industrials, and consumer staples where we do have exposure – have become more appealing and the recovery in commodities (excluding gold) has paid off in portfolios.
We continue to believe that these areas, regionally and sectorially, offer some excellent investment opportunities as we move into 2026. More broadly, we think that exposure to US small caps offers great potential as the Federal Reserve Bank cuts interest rates. Emerging Markets can provide additional diversification, especially since an improving outlook and more attractive multiplies will likely provide a happy hunting ground for investment returns. And we still think that AI will continue to power the technology sector and those AI large-cap US stocks.
A conversation with your financial advisor about the potential for future investment returns – and buying on the dips – is always worth having. With inflation continuing to be sticky (running at around 3%), the real return on cash-like investments is now running at less than 1%. Depending on a client’s time horizon and risk tolerance, we believe that any significant pullback could offer long-term investors a valuable uplift in investment returns based upon a sensible strategic and tactical asset allocation in equities, bonds and alternative investments.
Realistically after a three-year bull market, a meaningful correction at some point soon is not inconceivable. But we believe that this bull market has further potential to run through into 2026 and possibly beyond. So we still advocate buying or adding to positions on any weakness.
