BofA believes technology stocks’ reactions to earnings have outpaced the widening of earnings surprises. Meanwhile, election volatility implied by European equity index options is below historical levels, while South Korean stocks face a tug-of-war between memory fundamentals and short-term investor sentiment.
Morgan Stanley believes Democratic victories in both chambers of Congress and the Texas gubernatorial election will increase data center permitting risks in some regions, but will not interrupt the overall AI capital spending cycle; fiscal and debt ceiling negotiations will also become a market focus.
BofA’s model shows that weakening trends and rising volatility are prompting CTAs to cut equity exposure. Systematic flows could differ sharply over the coming week depending on whether global equities fall, remain flat or rise.
Value stocks and the S&P 500 Equal Weight Index rebounded, while the AI sector weakened on a relative basis. JPMorgan believes that if the economy and earnings remain resilient and inflation concerns stop intensifying, a peak in yields will support a continuation of the equity market rally.
S&P 500 companies that have reported posted year-on-year third-quarter earnings per share growth of 33%, while European growth is expected to reach 23%; Goldman Sachs says weaker upward earnings revisions and harsher market penalties for earnings misses point to slowing growth momentum in 2027.
JPMorgan tracking shows that European companies that have reported earnings are growing faster than their US counterparts, with energy the main driver. At the same time, the shares of companies beating earnings and revenue expectations fell from the previous quarter in both regions.
The U.S. cycle indicator is near a four-year high. Morgan Stanley maintains its preference for global equities over fixed income and for U.S. equities; historically, risk assets can still rise if the cycle turns defensive, but drawdowns deepen significantly in the market stress phase.
Global interest rate hikes and rising bond yields are weighing on the AI stock rally. BofA believes tech debt has become more attractive after its relative return fell to a 30-year low, while a new round of risk-asset allocation must wait for rate hikes to end and oil prices to fall.
Barclays observes that overall global equity positioning remains slightly above normal, while demand for the safety of U.S. Treasuries has recovered, European equities have been sold, and significant rotation has emerged within technology and cyclical sectors.
As the AI trade falters, money is shifting into healthcare and consumer staples. BofA’s price indicator shows that the two defensive sectors are approaching the bubble-risk zone. Meanwhile, actual post-earnings moves in large US stocks have exceeded options expectations, while the opposite has been true in Europe.
Global equities fell about 1% over the week, with AI-related stocks and capital expenditure beneficiaries lagging. Goldman Sachs has turned its attention to borrowing costs: interest burdens have already eroded profits, and refinancing could also crowd out investment and shareholder returns, although overall leverage in Europe remains manageable.
Global long-only funds reversed their earlier selling of software, banks, and media, while outflows from semiconductors and technology hardware continued; net buying in developed markets was driven mainly by passive funds. “Crowded positive” stocks continued to outperform on a relative basis, although their absolute return in September remained negative.
