US markets experienced a turbulent week as a decisive midterm election result, renewed concerns over AI and stronger than expected employment data triggered sharp swings in investor sentiment.
Technology stocks led the selloff, pushing the Nasdaq into correction territory, while Treasury yields continued to decline despite economic resilience. European markets proved more defensive, Asian markets diverged sharply and attention now turns to upcoming US inflation data.
Key Insights
- US equities experienced sharp volatility following the Democratic midterm victory and renewed AI concerns, with the Nasdaq falling 3.4%, the S&P 500 declining 2.7% and the Dow slipping 0.9%, while Thursday’s 5.5% Nasdaq plunge pushed the index into correction territory and the VIX rose 32% to 25.6.
- Technology stocks led the selloff, with semiconductor shares falling more than 12% and the Magnificent Seven losing over $1 trillion in market value in a single session, while forecast third-quarter earnings growth of 22.6% for the group now trails the 32.6% expected for the rest of the S&P 500.
- The US economy remained resilient as October payrolls increased by 165,000 and unemployment eased to 4.1%, yet the 10-year Treasury yield declined for a fifth consecutive week to 4.86%, while US crude oil fell 12% to around $90 a barrel amid hopes of easing tensions with Iran.
- European equities outperformed, with the STOXX 600 gaining 0.24% and France’s CAC 40 rising 2.13%, while the Bank of England raised interest rates by 25 basis points to 4.0% and signalled further tightening could follow as UK inflation is forecast to approach 5% in 2027 and eurozone inflation reached 4.0%.
- Asian markets diverged sharply, with Japan’s Nikkei plunging 9.25% into bear market territory and the 10-year government bond yield falling to 2.63%, while Hong Kong’s Hang Seng gained 5.1% on increased Chinese policy support and South Korea’s KOSPI briefly slipped below 5,000.
- Markets turn to Tuesday’s US inflation report and Friday’s wholesale price data for further direction on interest rates and Treasury yields, with ongoing AI investment concerns, shifting corporate earnings leadership and geopolitical developments likely to remain key drivers of investor sentiment.
US Markets: Volatility Returns with a Vengeance
Volatility returned with a vengeance to US markets. A decisive Democratic victory in the midterm elections, fresh anxiety over AI and a surprisingly strong jobs report combined to produce a week of violent reversals: a rally on Wednesday, a rout on Thursday and a partial recovery on Friday. The Nasdaq lost 3.4% over the week, the S&P 500 fell 2.7% and the Dow slipped 0.9%.
Thursday did the damage. The Nasdaq dropped 5.5%, its worst day in 19 months, and closed more than 10% below its record of 6 October, the technical definition of a correction.
Semiconductor shares fell more than 12%, and the Magnificent Seven shed over $1 trillion of market value in a single session. Investors had initially welcomed the election result, hoping a changed Washington might ease tensions with Iran.
They then thought again, fearing tighter regulation of AI just as several chipmakers issued disappointing outlooks. The VIX jumped to 28.4, its highest in more than seven months, and finished the week up 32% at 25.6.
Earnings Leadership Broadens Beyond Big Tech
The earnings picture has quietly shifted too. For the first time since late 2022, analysts expect the Magnificent Seven to grow third quarter profits more slowly than the other 493 members of the S&P 500, at 22.6% against 32.6%.
Leadership is broadening, whether investors like it or not. History offers some comfort: the S&P 500 has risen over the six months following every midterm election since 1970.
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US Economy Remains Resilient as Bond Yields Fall
The US economy, meanwhile, showed little sign of cracking. Employers added 165,000 jobs in October, far above the 12 month average of 48,000, with earlier months revised up by 84,000 and unemployment easing to 4.1%. Manufacturing strengthened further.
Treasury yields nonetheless fell for a fifth consecutive week, the 10 year closing at 4.86%, well below its early October peak above 5.30%. Haven buying helped, as did a 12% slide in US crude to around $90 a barrel on hopes of easing tensions with Iran.
European Markets Hold Firm as Inflation Pressures Persist
Europe held up better, with the STOXX 600 up 0.24% and the CAC 40 gaining 2.13%, helped by lighter exposure to AI stocks.
The Bank of England raised the Bank Rate by a quarter point to 4.0%, its first increase since 2023, and Governor Andrew Bailey flagged December as a live meeting, with inflation forecast to approach 5% by the second quarter of 2027. Eurozone inflation hit 4.0% in October while business activity cooled, with French output contracting.
Asian Markets Diverge as Japan Enters Bear Territory
Japan bore the brunt of the technology rout. The Nikkei fell 9.25% and entered a bear market, more than 20% below its June peak, while the 10 year government bond yield dropped to 2.63%.
Chinese shares bucked the trend, with the Hang Seng up 5.1% as Beijing stepped up support for equity purchases. South Korea’s KOSPI briefly dipped below 5,000.
Week Ahead: US Inflation Takes Centre Stage
Looking ahead, Tuesday’s US inflation report and Friday’s wholesale prices will test whether the fall in bond yields can continue.
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