November 2026 edition

Key takeaways

• From narrow leadership to narrow weakness: In September, technology (tech) and communication services (comm services) were the only sectors to gain. October was nearly the mirror image: both declined while the other nine sectors advanced.
• The love-hate relationship with tech continues: After being the only sector at a new high in early October, tech suffered a 10% pullback, its sixth double-digit decline of this bull market, as AI enthusiasm shifted toward concerns over whether future earnings will justify rising capital and financing needs.
• The range of outcomes remains wide, yet our work suggests tech’s longer-term risk-reward has improved. Valuations are near where the bull market began, while tech’s premium to the S&P 500 has fallen from 35% a year ago to just 1%, its lowest level in a decade. Earnings momentum remains twice as strong as the broader market, while our analysis indicates 2% to 9% potential additional downside versus an average 47% rebound following prior corrections.
• Core bonds reasserting themselves amid tech jitters: The reversal in U.S. Treasury yields helped previously beaten-up areas rebound and allowed high-quality bonds to provide ballast as concerns around AI intensified.
• Elections matter. Other factors matter more: The president’s party has lost congressional seats in 21 of the past 24 midterm elections, a pattern that continued this year.
  • Since 1946, stocks have been higher one year after every midterm election, including all four instances when both the House and Senate flipped to the party opposing the president. Moreover, simply moving past the uncertainty of the midterms has often led to a relief rally.
  • That supports our base case of giving the bull market the benefit of the doubt, but earnings, the economy, interest rates, valuations, and market trends remain more important to our view.
  • From a portfolio perspective, it is back to the basics: the weight of the evidence supports positioning for our base case that the AI theme and tech-led bull market have further to run, while diversifying to help weather alternative outcomes. Maintain the growth overweight, balanced with small caps and high-quality bonds; hold a smaller high-yield position to capture a roughly 8% yield; and remain underweight international developed markets equity.

When we wrote last month’s letter, the S&P 500 was near an all-time high, but that strength masked considerable weakness beneath the surface. Tech was the only sector at a new high, while much of the broader market had already experienced a meaningful reset, leaving many areas deeply oversold and due for a bounce.

October was nearly the mirror image. Tech and comm services went from the only two sectors to advance in September to the only two to decline in October, while the other nine sectors were flat or higher.

The reversal was even clearer beneath the headline index. The equal-weighted S&P 500 gained 4.9%, compared with a 0.9% decline for the capitalization-weighted index. This was less a broad retreat from equities than a powerful rotation within the market.

Broader participation is constructive, but the rapid rotation may be stretched. Health care and consumer staples outperformed the S&P 500 by more than 10 percentage points over the past month, a historical extreme, just as tech became stretched to the downside.

The interest-rate inflection

The reversal in interest rates was the hinge connecting many of October’s market moves.

As U.S. Treasury yields moved lower, previously beaten-up cyclical, defensive, smaller-cap, and rate-sensitive areas rebounded. Core bonds also performed better as tech weakened. Higher starting yields created a stronger income foundation, while the rally allowed high-quality bonds and modestly longer duration to reassert their traditional diversification benefits.

Tech’s setback was not driven by a collapse in AI or cloud demand. Instead, investors raised the burden of proof around the capital and financing needs required to support the AI buildout. The central question is whether the investment required to meet strong AI demand will generate durable profits and cash flow quickly enough.

Investing means weighing probabilities amid an unpredictable future rather than waiting for certainty. Our work suggests the tech setback has been a healthy, albeit uncomfortable, reset within a longer-term uptrend.

Tech declined 10% from its peak, marking its sixth double-digit pullback of this bull market. The five previous corrections ranged from 12% to 27%, yet tech has still gained approximately 230% since the bull market began, compared with 112% for the S&P 500.

The range of outcomes remains wide, yet our work suggests tech’s longer-term risk-reward has improved. Valuations are near where the bull market began, while tech’s premium to the S&P 500 has fallen from 35% a year ago to just 1%, its lowest level in a decade. Earnings momentum remains twice as strong as the broader market.

Our stress test indicates approximately 2% to 9% of potential additional downside, compared with an average 47% rebound following prior corrections. These are historical and analytical guideposts, not forecasts or guaranteed floors. Earnings remain the most important underlying support.

The corrective process may not be complete, but many AI-related concerns are now better reflected in share prices, supporting a more favorable risk-reward.

The president’s party has lost congressional seats in 21 of the past 24 midterm elections, a pattern that continued this year.

Notably, since 1946, stocks have been higher one year after every midterm election, including all four instances when both the House and Senate flipped to the party opposing the president. Simply moving past the uncertainty of the midterms has also often led to a relief rally.

That supports our base case of giving the bull market the benefit of the doubt, but we would not use the election pattern in isolation. Earnings, the economy, interest rates, valuations, and market trends remain the primary drivers of longer-term returns.

Despite meaningful policy differences, the S&P 500 generated annualized returns of 12% to 16% under the four most recent administrations, all above long-term averages.

Moreover, sector performance has often defied conventional political narratives. Tech consistently ranked among the strongest-performing sectors, while health care and industrials remained resilient across different political agendas.

Policy matters, but companies adapt as the rules become clearer.

Compelling arguments exist on both sides of the bull-bear debate, but the weight of the evidence supports giving the bull market and tech the benefit of the doubt.

Equities: Maintain the growth overweight, balanced with small caps, which remain a partial hedge against sharp mega-cap rotations.

Fixed income: High-quality bonds and modestly longer duration provide ballast against a less favorable AI outcome, as evidenced over recent weeks. A smaller high-yield allocation offers a roughly 8% yield and should benefit if our base case of an economy that continues to plod along holds.

International markets: Remain underweight international developed markets given weaker economic and earnings trends and elevated geopolitical risks.

Sector overweights: Maintain the technology preference, paired with health care for its defensive characteristics and improving fundamentals, and energy as a partial geopolitical hedge.

Alternatives^*: Can expand the opportunity set for qualified investors, particularly amid greater market dispersion and global crosscurrents.

Bottom line

A once-in-a-generation technological shift is creating both excitement and anxiety. Market rotations have been sharp, and narratives continue to shift as each new data point is amplified. The AI story matters not only for stocks, but also for the economy and the path of interest rates.

We are keeping an open mind, but the weight of the evidence still supports giving the bull market and tech the benefit of the doubt. From a portfolio perspective, it is back to basics: position for our base case that the AI theme and tech-led bull market have further to run, while diversifying to help weather alternative outcomes.