The good, the bad and the ugly
Government bonds recovered in October. US economic data, though strong, failed to surprise meaningfully to the upside. Central banks still have a job to do, and the Bank of England and the Federal Reserve are expected to raise policy rates at their next meetings. The late-cycle characteristics of the US and global economy remain a concern, with tighter policy presenting a further headwind to growth, particularly consumer spending.
The US midterm elections delivered a Democrat-controlled Congress. Gridlock with the White House is now the base case, and energy prices, a key driver of bond yields and inflation outcomes, will be a sharp focus in the weeks ahead.
Markets
Earnings season is always a highlight. You get to hear companies present their case in the cold light of day. Two-thirds of the way through the season, the overall picture looks solid, with 30% earnings growth expected for the third quarter, the third consecutive quarter of growth above 25%. A large percentage of companies continue to post revenue and earnings surprises, although the size of the beat has started to wane. With markets making no gains since the end of August, valuations have compressed. The US equity market now trades at 18.7 times forward earnings, below both its five-year and ten-year averages.
Why the compression? Current-quarter earnings are remarkably strong, but investors know growth will slow in 2027, when consensus expects earnings to grow by 16.3%, roughly half the 2026 rate. That matters for which factors outperform. 2026 has been a year in which a wide variety have delivered. High-dividend, value and size (small caps) have all had strong relative years. Momentum has been a mixed bag, with summer gains reversing in the last two months as some of the early winners in the AI trade came under pressure.
Then there is the bad. Alphabet reported Google Cloud revenue that more than doubled to $30.7 billion, but a larger-than-expected slowdown in search advertising unnerved investors. The shares fell sharply as the market questioned the returns on the $200 billion 2026 capital expenditure budget.
Intel was the ugly. Part-owned by the US government, the stock had more than doubled this year on strong server demand from new data centres. The company issued fourth-quarter revenue guidance more than $1 billion below expectations. The cost of memory (NAND and DRAM) has soared as suppliers prioritise AI customers, pushing up PC prices and stifling demand despite rising AI adoption. The stock fell 30% on the day, its largest one-day fall on record, wiping out a large part of its year-to-date excess return. The Korean market, propelled this year by memory chip demand, fell 16% in October.
AI remains a key determinant of market direction, but the list of winners continues to narrow, and the AI build-out is turning once cash-rich technology giants into heavy spenders. That places greater emphasis on staying diversified when building portfolios.
In fixed income, government bonds helped protect portfolios, but high yield fell as credit spreads widened. All-in yields are high, but these assets exhibit equity market correlation, which needs to be borne in mind when constructing portfolios.
Outlook
A large part of the portfolios’ fixed income allocation was moved to a shorter duration stance in 2026. This timely shift has helped protect returns, but at the cost of reduced downside protection in a slowdown. A further reduction in portfolio duration was therefore not considered necessary at the latest rebalance. Looking ahead, the focus remains on the trajectory of earnings growth into 2027, the capital intensity of the AI build-out, and the path of energy prices under a divided Washington.
Source: FactSet, Earnings Insight, 04/11/2026.
Historical performance is not an indication of future performance, and any investments may go down in value.
