Weekly house view | Midterm mal(AI)se
The week in review
The Democrats won a decisive victory in the US midterm elections on voter concerns about the cost of living, artificial intelligence (AI) and the Iran war. They took control of both chambers of Congress, winning in traditionally Republican-held territory including Kansas, which elected its first Democratic senator since 1932.
Stocks rallied initially as President Donald Trump did not contest the outcome and did not immediately escalate the conflict in the Middle East. Markets then corrected, however, on concerns the Democrats could delay or block 20 gigawatts of announced data centre capacity – a hit mainly to AI-related stocks. The S&P 5001 fell 2.7% on the week. A measure of S&P 500 stocks that weights them equally rather than by market capitalisation fell by 1%.
Fresh jobs data showed the US economy continues to grow, with nonfarm payrolls surging. Consumer inflation is outpacing wage growth, shrinking the purchasing power of workers but there are growing risks of a tighter labour market.
In the corporate world, 88% of S&P 500 companies have reported third-quarter results, and 84% of them have beaten consensus earnings per share (EPS) estimates. However, the magnitude of beats has shrunk, and the market has rewarded positive surprises in free cash flow (FCF) more than earnings beats.
With last week’s correction, the S&P 500 forward P/E (price-to-earnings) ratio dropped to 17.6, breaching the major valuation support level established during the "Liberation Day" market selloff. The compression of semiconductor valuations was the primary driver behind the rerating. As economic indicators show no immediate signs of a recession, this rerating suggests investors are pushing back against potential exuberance in earnings forecasts.
Quote of the week
"I wasn't on the Ballot and if I was, we would have won IN A LANDSLIDE!” Trump wrote. Shares in his media group fell 29.5% last week.
Key data
Nonfarm payrolls rose by 165,000 in October, well above forecasts. Job openings and the quit rate rose. The US economic surprise index, which tracks whether economic indicators beat or miss expectations, is at a three-year high.
In Europe, final eurozone inflation hit 4.0% year-on-year in October, confirming a sharp energy-driven spike. Core inflation stayed at 2.5%. The Bank of England hiked interest rates to 4%. Swiss inflation rose to 1.5%.
China's official manufacturing and non-manufacturing purchasing managers' indices (PMIs) both fell into contraction territory in October.
