Market Review 2nd November 2026
Everything you need to know, Simplified!
Is tech losing its grip on the market?
Summary
Third-quarter earnings have been mixed, with technology giants such as Alphabet and Amazon struggling amid investor doubts over the returns on their huge data centre spending, while energy companies and pharmaceutical firms like Eli Lilly have reported strong profits
The US Federal Reserve, the European Central Bank and the Bank of Japan all held interest rates this week but signalled rate rises are likely soon to tame rising inflation, although longer-term government bond yields eased, with the US 10-year yield falling 7 basis points to 4.93%
The UK Budget brought mostly marginal changes, including a £100 energy payment for eligible households (although the income tax thresholds freeze will steadily erode these benefits), and gilt yields moved lower as fiscal discipline was maintained.
Market Review
Earnings are not all about the technology sector
Much has been written about the dominance of the technology sector in 2026, and this is certainly merited given that about two-thirds of the positive earnings revisions this year have come from technology companies. However, that still leaves one-third from other sectors of the market. In recent weeks the positive revisions for technology stocks have begun to slow, and investors have been questioning the level of spending on artificial intelligence (AI) infrastructure, how it is funded and what the returns will be. This has now become full blown scepticism, and the NASDAQ index fell 2.9% on Friday, leaving it 8% below its recent highs, with many individual stocks now down significantly. The largest technology companies are still reporting strong profits, but upgrades are increasingly scarce. For example, Alphabet, which owns the Google search engine, saw its shares fall 13% on its reporting day after some rather tepid results compared to expectations. The advent of AI will no doubt be transformational for many businesses, but if we are entering an ‘air pocket’, as seems increasingly likely, what does this mean for the market?
It won’t be easy for the rest of the market to take up the slack if technology stocks continue to falter, but sectors that are doing well include energy, industrials and healthcare. Energy companies are currently generating large amounts of free cash flow, benefiting from high oil prices in a fraught geopolitical environment. For example, Shell reported free cash flow of $16.3bn in the third quarter, up 60% year-on-year, and many peers have reported large increases in earnings. However, energy is still a small sector in the market, with a weighting of just 4% compared to technology at 31%, so too small to plug the gap.
Healthcare stocks have also performed better in recent months, especially pharmaceutical companies which are regarded as defensive in volatile markets. Some of the growth reported by pharma giants such as Eli Lilly has been impressive, driven by its diabetes and obesity drugs such as Mounjaro. The company just reported third quarter sales growth of 39%, sending its shares up 11% on the week. Other pharma companies have also reported strong results recently, although some areas of healthcare that are more exposed to elective procedures, such as certain hip and knee replacements, have found it tougher going due to the squeeze on consumer incomes from the rising cost of living.
Finally, the industrials sector looks set to enjoy around 20% earnings growth this year, as the US industrial recovery continues to broaden out, even if some companies do benefit from the AI infrastructure build out as well. After many years of destocking, industrial growth has accelerated in recent months, and long-term drivers such as reshoring of semiconductor and healthcare factories, and the modernisation of the creaking US electricity grid, remain firmly in place. With the healthcare and industrials sectors both representing close to 10% of the index, sustained growth in these areas helps support the index, unless technology earnings growth slows dramatically.
Technology stocks across the globe have dominated investor attention in recent years and for good reason. However, the benefits of diversification have not disappeared, and when one sector begins to falter it is important to see if other sectors are starting to perform better, which seems to be the case currently. Economic growth remains solid, the jobs market is healthy, and as long as inflation expectations don’t rise too fast, investors shouldn’t get too pessimistic, despite the possibility of higher market volatility in the near term.
The week ahead
ISM manufacturing survey
A reading of 54.7 is expected for this widely followed survey on Monday, with readings above 50 indicating expansion. The survey has been above 50 for several months as the US industrial recovery has broadened.
Mid-term elections
American citizens will go to the polls on Tuesday 3 November for the mid-term elections. The Democrats are expected to make gains in the House of Representatives, while the Senate could be a close call. With the current President’s popularity ratings struggling badly, the results could leave him as a ‘lame duck’. However, markets tend to like a balanced Congress, with Democrats and Republicans splitting control of the House and the Senate, as it means government policies are less likely to change. Either way, uncertainty will be removed.
Bank of England rate decision
After holding steady at the previous meeting, expectations are for the Bank of England to increase interest rates by 25 basis points to 4% on Thursday. This would be the first increase in interest rates since August 2023, and it comes as inflation is proving stickier than anticipated.
Nonfarm payrolls
This Friday release will be closely watched to gauge the strength of the US labour market. Recent data has indicated some softness, although the overall economy continues to perform well.
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