Weekly Market Review

Halloween fears drive rotational stock market

The risk-off atmosphere continues to drive a rotation away from technology and AI-related stocks towards health care and consumer staples. Elevated oil prices are also casting a shadow across equities, with Brent oil closing the week at US$117 per barrel.

Beyond the rise in oil prices, the fundamentals of this market remain robust. Earnings reports have been good, expectations were revised higher last week and the global economy appears relatively steadfast.

There is a tendency among strategists to reach for ‘uncertainty’ as a catch-all explanation and it is generally too easy a point to make. Investing is, by definition, uncertain; uncertainty is inherent in taking risk and investment returns are the reward for that uncertainty. It is always present. That said, the short-term weakness across equities is compounded by a period of peak near-term uncertainty. From the trajectory of the Iran conflict and the US midterm elections to the UK Autumn Budget, corporate earnings, key interest rate decisions across the US and Europe, AI funding fears and social unrest in Europe, the next few weeks are particularly fraught. This is driving prices lower and the uncertainty/risk premium higher, even as fundamentals remain solid.

This dynamic is partly why index-level performance has been relatively resilient, masking the rotations under the bonnet. In October thus far, seven of eleven global equity sectors have delivered positive returns. Technology is the outlier, falling more than -6.5% month-to-date, with tech related communication services also down -6.5%. Energy is at the top of the pack thanks to higher oil prices, up 10.8%, while consumer staples (+9.1%) and health care (+6.0%) are the other standout performers, a classic defensive rotation.

There is an interesting seasonal element to this too. Midterm election cycles are typically volatile periods for equities. The average US equity market drawdown during midterm election years since 1962 is -19.4%. The average one-year return following the drawdown is +31.0%. While a statistical pattern alone should not form the basis of an investment decision, it is nonetheless a worthy point.

A final, live illustration of uncertainty being priced into markets: the CBOE Volatility Index, the VIX, sometimes called the ‘uncertainty index’, closed Friday at 19.45, up nearly 19% in October alone but well away from a level that implies any systemic concern. According to Laurent Laskowski of Strategas, asset managers’ short positioning in VIX futures is at the 3rd percentile. In simple terms, a large proportion of managers are actively hedging their equity risk. This VIX and positional data reflects a rotational and uncertain market but not one with any major fault lines.

United States

US investors are balancing strong reported earnings with questions about the durability of AI investment, the path of inflation and the next Federal Reserve decision. Recent market weakness has been concentrated in technology-related companies, while defensive sectors have provided a counterweight, illustrating that conditions can differ substantially beneath the headline indices. The forthcoming third-quarter GDP and PCE releases should help determine whether growth and consumer demand remain sufficiently firm to support corporate profits. Higher energy costs and financing rates present challenges, but continued business investment and the potential for productivity improvements offer important longer-term support. The key for the market will be whether earnings strength becomes more widespread and whether businesses can sustain margins as funding costs remain elevated.

Europe

European markets face a combination of political uncertainty, fiscal scrutiny and pressure from higher energy prices. The widening spread between French and German government bonds has underscored the importance investors attach to credible public finances, while the UK budget and forthcoming Bank of England decision will provide additional signals about the policy outlook. At the same time, European businesses span a wide range of sectors and revenue markets, and defensive industries have recently attracted renewed investor interest. Investors will be watching how companies protect margins and how policymakers respond to changing inflation and growth conditions. Despite near-term challenges, Europe offers meaningful opportunities across internationally competitive companies and different national economies, making selective and diversified exposure valuable.

Global Markets

Across global markets, sector rotation has become a defining feature of the investment environment. Investors have moved away from some of the most highly valued AI-linked businesses toward more defensive areas, even as corporate earnings and underlying economic activity remain broadly resilient. Sovereign bonds have again demonstrated their potential to provide diversification during equity-market weakness, although the outlook for inflation and interest rates remains important. Energy prices, geopolitical developments and central-bank decisions may continue to influence sentiment in the coming weeks. Longer term, the combination of technological innovation, infrastructure investment and varied regional growth drivers creates opportunities beyond any one theme. Maintaining exposure across regions, sectors and asset classes should help portfolios participate in that growth while managing periods of volatility.