Friday’s reversal erases last week’s rebound, dampening short-term sentiment but earnings and stock prices diverge
The S&P 500, after setting a closing record of around 7,819 points on October 6, has retreated for two consecutive weeks. AI companies' funding pressures, rate-hike expectations, and higher oil prices following the Saudi attack have all suppressed risk appetite, with the Philadelphia Semiconductor Index falling about 15% in October. Early last week, the Supreme Leader of Iran proposed conditions to end the war, and Anthropic filed for an IPO, leading to a market rebound: the S&P 500 rose for three consecutive days, recovering all losses from the previous week, and the Philadelphia Semiconductor Index gained about 7% over the first four trading days. Hedge fund net leverage also increased from about 72% on October 22 to about 74% on October 29. Large tech earnings failed to confirm returns on AI investments, and the four-day rally was erased in one day on Friday: the S&P 500 fell 1.82% on the day, closing below the previous week's level, while the Philadelphia Semiconductor Index dropped 7.2% in a single day, and the Nasdaq 100 briefly fell about 10% from its record high. The Investment Department believes that the correction has yet to confirm a bottom, and short-term trends will be driven by sentiment and macro events before the election, non-farm payrolls, and CPI releases. However, from a medium-term perspective, this correction is mainly due to valuation and position adjustments, rather than deteriorating earnings: as of October 29, the third-quarter net profit of S&P 500 companies that have reported grew by about 24% year-on-year, with even higher growth in semiconductors; the forward P/E ratio of the Philadelphia Semiconductor Index had fallen to about 19 times by late October. The Investment Department believes that some AI hardware and large platforms with high earnings visibility have seen their valuations fall to more attractive levels, such as SK Hynix, which, even if 2027 earnings estimates are halved, trades at about 5.6 times earnings, and Meta is now suitable for gradual accumulation; Intel, where consensus estimates are still being revised downward, has not yet reached the most attractive valuation range, and selection should be based on the stability of earnings forecasts rather than the magnitude of the decline. On Monday during the Asian session, Korean and Hong Kong tech stocks initially fell but then recovered, and U.S. futures also rose, indicating a slight recovery in sentiment after Friday's sell-off.
Growth and inflation data support continued tightening by the Fed, with major global central banks remaining hawkish
Most of the U.S. data released last week were stronger than expected: third-quarter GDP grew at an annualized rate of 3.4%, above the expected 3.2%; September core PCE rose 3.1% year-on-year and 0.3% month-on-month, in line with expectations but still significantly above target; the October consumer confidence index rose to 91.7, well above the expected 81. The Fed maintained rates at 3.75% to 4.00% in October, but the statement upgraded the description of economic growth from 'solid' to 'strong,' and two members advocated for an immediate 25 basis point hike; Dallas Fed President Logan stated that at least two more hikes are needed, and St. Louis Fed President Bullard also called for further tightening. In the same week, French and Italian October inflation were both higher than expected, with the ECB's December rate hike probability at about 90%; although the Bank of Japan kept rates unchanged, some members have advocated for a rate hike. The Investment Department believes that the Fed's decision to maintain rates in October does not mean the end of the hiking cycle, and a December rate hike remains the base case. It is important to note that employment and consumption are starting to weaken: real consumption was flat in September, and the market expects only about 65,000 new jobs in the October non-farm payrolls, with an unemployment rate of 4.2%; if employment weakens significantly, rate-hike expectations may cool, otherwise, tightening expectations will persist. The U.S. Treasury yield curve steepened last week, with the two-year yield falling about 12 basis points to around 4.60%, while the 30-year yield remained flat at around 5.31%: the short-end decline was mainly due to safe-haven buying and expectations of weaker employment, while the long-end did not follow, reflecting ongoing concerns about fiscal deficits and Treasury supply.
Oil risk premium eases before the election, but uncertainty shifts to the post-election period
Brent crude rose about 15% in October, reaching around $118 per barrel on Friday, the highest since April, due to repeated tensions in the Strait of Hormuz and the Persian Gulf; it fell on Monday with diplomatic progress. The Supreme Leader of Iran proposed conditions to end the war on October 27, including the lifting of the maritime blockade and easing of sanctions by the U.S., and officials from Saudi Arabia, Turkey, and Pakistan went to Tehran to mediate, with some of this reflected in the oil price. However, prediction markets (Polymarket, as of November 1) show that the probability of another U.S. strike on Iran before November 3 is only about 5.5%, rising to about 47.5% by November 15; UBS also cited a Wall Street Journal report that the U.S. has informed Gulf countries to prepare for a short military operation after the election. The Investment Department reminds that the conclusion of the election does not equate to the resolution of geopolitical risks; if oil prices remain above $100, it will sustain inflationary pressure and support the Fed's tightening stance, which is the main macro variable that equity and bond markets will face in the two weeks after the election.
The impact of the midterm elections on the market is primarily transmitted through interest rates
As of November 1, prediction markets (averaging Kalshi and Polymarket) show a 71% probability of Democrats winning both the House and Senate, up from about 62% at the end of September. The Investment Department believes that a Democratic sweep would make it difficult to introduce new fiscal policies and to repeal existing ones, which would help lower U.S. Treasury yields, benefiting rate-sensitive assets rather than the overall stock market. Industry-level regulatory expectations have been partially priced in: Reuters reports that a sweep could strengthen regulation of data centers, Wall Street banks, and crypto firms, but analysts generally believe that related legislation would not substantially threaten AI investment; CoreWeave has fallen about 39% in the past month, Coinbase fell 12.7% last week, and the KBW Bank Index rose 0.9%. If there is a non-base outcome, such as Republicans retaining the Senate (probability about 25%), regulatory expectations for data centers and banks may be corrected more quickly. The Investment Department reminds that the direction of the stock market after the election will depend on the U.S.-Iran situation, the November 6 non-farm payrolls, and the November 10 CPI, rather than the election results themselves.
October cross-asset performance: equities and gold sold off, U.S. Treasuries and energy bought
In October, the 10-year U.S. Treasury yield fell from about 5.25% at the beginning of the month to about 4.93%, the largest monthly decline this year; Brent crude rose about 15%; gold, however, fell about 7%, breaking below $4,000 to around $3,904, and silver fell 7.8% last week. The Investment Department believes that in an environment of rising rate-hike expectations and high real rates, the safe-haven role of gold has clearly diminished, with safe-haven funds flowing into U.S. Treasuries. Within equities, funds shifted from large tech to healthcare, energy, and consumer staples, rather than a full exit from the stock market: on the day Alphabet fell, more than 400 S&P 500 components rose; the equal-weighted S&P 500 fell only about 0.8% on Friday, significantly less than the 1.82% drop in the market-cap-weighted index. For Chinese assets, southbound funds have been net sellers of Hong Kong stocks for 11 to 12 consecutive trading days, and the CSI 300 Index recorded its worst monthly performance since January 2016, with China's official manufacturing PMI falling to 49.3 in October, and funds have not yet returned to Chinese assets.
Large tech earnings show strong demand, with the market re-pricing based on whether investments can be funded by internal cash flow
Three cloud platforms saw synchronized acceleration in growth, with Google Cloud growing 103%, Azure growing 48%, and AWS growing 39%, indicating that AI demand has not weakened, and capex has not been cut, with Amazon stating that it will increase significantly by 2027. The market's reward or punishment depends on the source of the investment funds, not the revenue growth rate: Microsoft's free cash flow for the third quarter was about 18.6 billion dollars, and its stock price fell only 0.5% for the week; Oracle's stock rose 10.6% in a single day after announcing a timeline for positive free cash flow in the second half of fiscal 2028; Amazon's free cash flow over the past 12 months was about negative 42.4 billion dollars, with credit default swaps rising from about 63 basis points to about 90 basis points, and its stock price fell 3.1%. Alphabet fell 12.6% for the week, with the market interpreting the slowdown in search revenue growth from about 17% in the previous quarter to 12% as AI eroding the search business; the Investment Department has a different view, attributing the slowdown to currency effects and ad timing, with query volume growth at its fastest in five years, and no sustained erosion of search profitability by AI yet observed, though continuous tracking is needed for the two consecutive quarters of negative free cash flow and share dilution from additional issuances. The Investment Department believes that large tech stocks should be viewed in layers based on their ability to self-fund: Microsoft and Oracle, with positive or soon-to-be-positive cash flow, are more stable; Amazon is neutral in the near term but has positive long-term allocation value; Alphabet and Meta are currently constrained by downward revisions in earnings expectations and equity financing, but have positive long-term allocation value. The software sector also came under pressure, with IGV falling 5.7% for the week, and ServiceNow dropping about 27% after earnings, with valuations entering the lower end of the long-term range, but organic growth needs to accelerate again.
The electronics industry shows a clear AI vs. non-AI divergence, rooted in memory capacity being occupied by AI
The Investment Department refers to AI-benefiting electronics as segments whose revenue mainly comes from AI data center construction, including AI accelerator chips, high-bandwidth memory (HBM), server DRAM, advanced packaging and substrates, semiconductor equipment, and optical communication and data center power equipment; non-AI electronics refer to products with demand from personal and enterprise terminals, including PCs, smartphones, and consumer electronics, as well as the general-purpose chips and components that supply these products. These two segments have historically moved in tandem, but this quarter they have diverged: AI servers consume a large amount of DRAM and HBM, and memory manufacturers prioritize higher-margin AI orders, leading to a significant rise in memory prices, with the same memory price increase being revenue for the AI supply chain and a cost for terminal products. Intel's fourth-quarter revenue guidance of 15 billion to 16 billion dollars was below the market expectation of about 17 billion dollars, with the company forecasting a 12% decline in the PC market in 2026 and a further 10% decline in 2027, primarily due to memory price increases, and its stock fell 24.4% for the week. Conversely, the equipment and optical communication segments rose, with KLA and Lam Research up 8.5% and 3.9% respectively, and Lumentum up 11.2%. The Investment Department believes that the fundamentals of AI-benefiting segments remain positive, while non-AI electronics such as PCs and smartphones should be approached with caution; for companies with both types of businesses, the focus should be on the proportion of AI-related revenue, rather than treating them as a single sector. AMD's upcoming data center and PC guidance this week will be the next data point to observe whether this divergence continues.
Memory and storage need to be viewed by category, with different supply and demand dynamics and pricing mechanisms for each type
The first category is DRAM and HBM, the operational memory for AI servers, with demand directly driven by AI accelerator chip shipments, represented by companies like SK Hynix, Samsung, and Micron. SK Hynix reported third-quarter operating profit of about 83.3 trillion won, announced shareholder returns of about 100 trillion won, and stated that capacity is booked until 2029, with its local stock rising 13.7% for the week. The Investment Department believes that long-term agreements have improved revenue visibility, but the agreements do not set a price floor, and the supply-demand balance after capacity expansion remains unclear, with strong demand but the cyclical nature of memory pricing unchanged, making structural revaluation premature at this stage. The second category is hard disk drives (HDDs), a low-cost solution for storing large amounts of cold data in data centers, dominated by Seagate and Western Digital, with cautious capacity expansion and relatively stable prices and cash recovery, rising 2.2% and 6.5% respectively last week. The third category is NAND flash memory and solid-state drives (SSDs), with AI inference driving demand for enterprise SSDs, but consumer electronics still accounting for a significant portion, leading to greater price and shipment volatility; Sandisk's long-term agreements cover about two-thirds of its 2028 fiscal year supply, but its stock still fell 7.0% for the week, and Kioxia also fell 6.9% due to lower-than-expected quarterly guidance. The Investment Department believes that among the three categories, DRAM and HBM have the strongest demand, HDDs have the most stable cash recovery, and NAND is currently affected by shipment timing, and the storage sector should not be treated as a single whole.
※ Extracted from the Investment Research Weekly (2 November 2026) prepared by our Investment Department. For general reference only; this does not constitute investment advice or an offer. Please refer to the Disclaimers.
