Stocks down and bonds up over the week. The MSCI EAFE outperformed the S&P 500 and the MSCI Emerging Markets indices. The S&P 500 returned -2.7% last week (+8.8% YTD) in a dramatic week. Post the election on Tuesday, stocks initially rose as oil traded lower on bets the Democratic sweep on Congress would speed an end to the Iran war. But stocks reversed sharply on Thursday amid fears that Congressional regulation of AI and local measures against data centers would slow the AI infrastructure buildout; the NASDAQ fell 5.5%, its worst performance in 19 months. Markets saw a rotation out of AI-related names and into defensive sectors; the S&P 500 Equal Weight index fell only 1.0% (+13.8% YTD). Mid cap stocks (-2.1%) and small cap stocks (-2.0%) both fell but outperformed large caps. Within the S&P 500, energy (-11.9%) and technology (-6.9%) were worst performing sectors; consumer discretionary (+2.7%) and communication services (+2.3%) were the best performing. EAFE markets returned -1.8% with small gains in Europe (+0.1%) offset by losses in Japan (-7.5%) while EM markets returned -4.1% as a semiconductor-related plunge in Korea (-15.4%) more than offset strong gains in India (+8.8%) and China (5.4%).
As for fixed income, the 10-year Treasury yield fell to 4.86% over the week, and the 2s/10s Treasury yield spread stayed at +34 bps. The best-performing parts of the bond market were emerging market debt, municipals, and MBS. High-yield bond spreads tightened to 335 bps over the week vs. 500bps long term average. Investment grade fixed income sectors had positive returns as rates fell across the curve. Municipals returned +1.1%, US AGG returned +0.4% and US IG returned +0.4%.
The Italian BTP-German Bund spread is 1.07%; French OATs-Bund spread is 1.50%. 5-year breakeven inflation expectations fell 18bps to 2.29% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations fell 10bps to 2.24% (vs. recent high of 2.52% on May 4, 2026); the 10Y real yield rose 3bps to 2.62%. For the remainder of 2026, markets now expects one additional rate hike.
Brent prices fell 16.4% to $98/bbl. U.S. natural gas prices rose 3.5% while European gas fell 17.8%; both remain volatile based on war and weather-related headlines. Gold rose 5.1% to $4,071/oz, while silver rose 5.7% to $52/oz. Bitcoin fell 1.3% to $75,822.
Volatility rose for equites and fell for bonds (VIX = 26, MOVE = 93); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek).
Key Takeaways
1. The midterm elections shifted control of Congress to Democrats, establishing a divided government in Washington.
Democrats won majorities in both the House and Senate, which means major legislation will need support from both parties during the final two years of President Trump’s term. Markets initially welcomed the outcome, with the S&P 500 gaining +1.6% on Wednesday as election uncertainty eased and investors anticipated fewer major policy changes. Treasury yields declined, reflecting expectations of more constrained fiscal spending, although falling oil prices also contributed to the move. Policy uncertainty did not disappear, however: as discussed below, tech stocks weakened amid concerns about potentially tighter AI regulation.
Implication
Divided government makes major legislative changes more difficult. Attention now turns to deadlines that need bipartisan agreement, such as the debt limit in 2027, while the White House can still act on trade through executive action.
2. Semiconductor stocks experienced a sharp selloff this week as investors weighed new risks to the pace of the AI buildout.
The pressure started last Friday, when Intel fell about – 29%, its worst day since 1974, after a weak outlook. The selling spread across chipmakers, and it continued this week despite strong earnings results from AMD, a chipmaker whose data-center revenue nearly doubled from a year ago. Tuesday’s midterm elections, in which voters approved local ballot measures that restrict data-center construction, added pressure as investors weighed the prospect of tighter AI regulation and delays to planned data-center projects. An index of semiconductor companies fell more than -12% on Thursday and closed at its lowest level since April of this year.
Implication
The debate over AI has broadened from whether the spending will pay off to whether the buildout can continue at its planned pace, a question that can’t be settled simply by strong earnings results.
3. Oil prices fell this week on hopes that the Strait of Hormuz, the waterway that carries a large share of the world’s oil, could reopen.
Under a plan drafted with Qatari mediators, Iran said it could reopen the strait within two days of a deal if the U.S. meets Iran’s conditions, including lifting sanctions. The U.S. hasn’t accepted the terms, but oil prices fell as traders priced in the probability of a negotiated settlement. West Texas Intermediate crude fell -11.1% for the week, and Brent, the international benchmark, fell below $100 after hitting a six-month high last Friday.
Implication
Lower oil prices ease one of the main sources of this year’s inflation pressure, and the decline helped pull Treasury yields lower.
4. Economic data showed continued strength in manufacturing and hiring, keeping pressure on the Federal Reserve to raise interest rates in December.
The ISM manufacturing index rose to 55.5 in October, above expectations and one of its strongest readings since 2022, while its prices index remained elevated at 75.2. In the labor market, employers added +86,000 jobs according to ADP, above the roughly +75,000 economists expected, and initial jobless claims fell to 189,000, matching their lowest level of the year. A separate survey showed that services activity slowed slightly but continued to grow. Abroad, the Bank of England raised its policy rate to 4.00%, its first increase since 2023.
Implication
The weakness in technology stocks hasn’t impacted the broader economy so far, which helps explain why the market continues to price a 70% probability of a December rate hike.
RSAward-Winning Financial Advising
Robertson Stephens paid no fee to obtain recognition but has paid licensing fees to reference its appearances on the Newsweek, USA Today, and FA Magazine rankings lists. See Awards Disclosures
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Executive Summary
Stocks down and bonds up over the week. The MSCI EAFE outperformed the S&P 500 and the MSCI Emerging Markets indices. The S&P 500 returned -2.7% last week (+8.8% YTD) in a dramatic week. Post the election on Tuesday, stocks initially rose as oil traded lower on bets the Democratic sweep on Congress would speed an end to the Iran war. But stocks reversed sharply on Thursday amid fears that Congressional regulation of AI and local measures against data centers would slow the AI infrastructure buildout; the NASDAQ fell 5.5%, its worst performance in 19 months. Markets saw a rotation out of AI-related names and into defensive sectors; the S&P 500 Equal Weight index fell only 1.0% (+13.8% YTD). Mid cap stocks (-2.1%) and small cap stocks (-2.0%) both fell but outperformed large caps. Within the S&P 500, energy (-11.9%) and technology (-6.9%) were worst performing sectors; consumer discretionary (+2.7%) and communication services (+2.3%) were the best performing. EAFE markets returned -1.8% with small gains in Europe (+0.1%) offset by losses in Japan (-7.5%) while EM markets returned -4.1% as a semiconductor-related plunge in Korea (-15.4%) more than offset strong gains in India (+8.8%) and China (5.4%).
As for fixed income, the 10-year Treasury yield fell to 4.86% over the week, and the 2s/10s Treasury yield spread stayed at +34 bps. The best-performing parts of the bond market were emerging market debt, municipals, and MBS. High-yield bond spreads tightened to 335 bps over the week vs. 500bps long term average. Investment grade fixed income sectors had positive returns as rates fell across the curve. Municipals returned +1.1%, US AGG returned +0.4% and US IG returned +0.4%.
The Italian BTP-German Bund spread is 1.07%; French OATs-Bund spread is 1.50%. 5-year breakeven inflation expectations fell 18bps to 2.29% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations fell 10bps to 2.24% (vs. recent high of 2.52% on May 4, 2026); the 10Y real yield rose 3bps to 2.62%. For the remainder of 2026, markets now expects one additional rate hike.
Brent prices fell 16.4% to $98/bbl. U.S. natural gas prices rose 3.5% while European gas fell 17.8%; both remain volatile based on war and weather-related headlines. Gold rose 5.1% to $4,071/oz, while silver rose 5.7% to $52/oz. Bitcoin fell 1.3% to $75,822.
Volatility rose for equites and fell for bonds (VIX = 26, MOVE = 93); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek).
Key Takeaways
1. The midterm elections shifted control of Congress to Democrats, establishing a divided government in Washington.
Democrats won majorities in both the House and Senate, which means major legislation will need support from both parties during the final two years of President Trump’s term. Markets initially welcomed the outcome, with the S&P 500 gaining +1.6% on Wednesday as election uncertainty eased and investors anticipated fewer major policy changes. Treasury yields declined, reflecting expectations of more constrained fiscal spending, although falling oil prices also contributed to the move. Policy uncertainty did not disappear, however: as discussed below, tech stocks weakened amid concerns about potentially tighter AI regulation.
Implication
Divided government makes major legislative changes more difficult. Attention now turns to deadlines that need bipartisan agreement, such as the debt limit in 2027, while the White House can still act on trade through executive action.
2. Semiconductor stocks experienced a sharp selloff this week as investors weighed new risks to the pace of the AI buildout.
The pressure started last Friday, when Intel fell about – 29%, its worst day since 1974, after a weak outlook. The selling spread across chipmakers, and it continued this week despite strong earnings results from AMD, a chipmaker whose data-center revenue nearly doubled from a year ago. Tuesday’s midterm elections, in which voters approved local ballot measures that restrict data-center construction, added pressure as investors weighed the prospect of tighter AI regulation and delays to planned data-center projects. An index of semiconductor companies fell more than -12% on Thursday and closed at its lowest level since April of this year.
Implication
The debate over AI has broadened from whether the spending will pay off to whether the buildout can continue at its planned pace, a question that can’t be settled simply by strong earnings results.
3. Oil prices fell this week on hopes that the Strait of Hormuz, the waterway that carries a large share of the world’s oil, could reopen.
Under a plan drafted with Qatari mediators, Iran said it could reopen the strait within two days of a deal if the U.S. meets Iran’s conditions, including lifting sanctions. The U.S. hasn’t accepted the terms, but oil prices fell as traders priced in the probability of a negotiated settlement. West Texas Intermediate crude fell -11.1% for the week, and Brent, the international benchmark, fell below $100 after hitting a six-month high last Friday.
Implication
Lower oil prices ease one of the main sources of this year’s inflation pressure, and the decline helped pull Treasury yields lower.
4. Economic data showed continued strength in manufacturing and hiring, keeping pressure on the Federal Reserve to raise interest rates in December.
The ISM manufacturing index rose to 55.5 in October, above expectations and one of its strongest readings since 2022, while its prices index remained elevated at 75.2. In the labor market, employers added +86,000 jobs according to ADP, above the roughly +75,000 economists expected, and initial jobless claims fell to 189,000, matching their lowest level of the year. A separate survey showed that services activity slowed slightly but continued to grow. Abroad, the Bank of England raised its policy rate to 4.00%, its first increase since 2023.
Implication
The weakness in technology stocks hasn’t impacted the broader economy so far, which helps explain why the market continues to price a 70% probability of a December rate hike.
Robertson Stephens paid no fee to obtain recognition but has paid licensing fees to reference its appearances on the Newsweek, USA Today, and FA Magazine rankings lists. See Awards Disclosures
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