November ended on a positive note for equity markets
After defying historical expectations of turbulence in September and October, markets entered a softer phase during the first half of November. Most of the decline was reversed last week, driven partly by renewed expectations that the U.S. Federal Reserve could cut rates in December – an outlook that had been questioned earlier in the month.
The full-year market performance has surprised many. Few would have predicted that, despite escalating tariffs, China’s challenge to U.S. dominance in global trade and technology, intensifying geopolitical tensions, and clear signs of cooling of U.S. growth and labor markets, global equity indices in local currency terms would be up 18% by early November.
Some analysts are voicing concerns. Share prices have been rising faster than earnings, pushing valuations higher. This suggests that a significant portion of the relatively bright outlook may already be priced in. U.S. tech giants continue to dominate profit growth, equity gains, and investment flows – prompting some to warn of a potential bubble. In fact, a recent survey of major pension and fund managers revealed that nearly one-third cite “a bubble in AI-related stocks” as the biggest current market risk.
Headlines almost daily highlight massive investments in data centers, advanced chips, and related infrastructure, as tech giants reinvest substantial profits in hopes that the AI boom will translate into sustained earnings growth. We already see AI driving efficiency and revenue growth across sectors, and much indicates this is only the beginning of a long-term trend. However, not all early-stage investments in a technology shift pay off, which explains the market’s caution. While AI is likely to boost profits and productivity for years to come, whether that justifies today’s scale of investment remains uncertain. In the near term, though, most indicators point to continued growth in both investment and earnings.
Strong earnings among U.S. large caps were confirmed in Q3 reporting, with “big tech” and, to some extent, financials once again beating expectations. In Europe and Sweden, earnings remain sluggish – though better than feared and sufficient so far to support market sentiment.
Despite rising valuations, several factors suggest markets could climb further. The U.S. economy continues to grow at a reasonable pace despite challenges, and additional support is expected from monetary policy in the form of further rate cuts and from fiscal measures. Historically, lower policy rates combined with earnings growth prospects for the coming year have supported equity markets. Optimists also point to the potential embedded in the IT/AI boom.
That said, markets have already staged a significant rallied, and part of the positive outlook appears priced in. Risks remain: a sharper-than-expected slowdown in the U.S., sticky inflation, and persistent geopolitical uncertainty cannot be ruled out.
Our base case is that the strong equity trend can continue for some time, even if the risk of a correction has increased. We maintain a slight overweight in equities, combined with broad diversification to mitigate potential setbacks in parts of the market.
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