Institute Alert

• Several Federal Reserve (Fed) officials (Governors Michael S. Barr, Stephan I. Miran, and Vice Chair Philip N. Jefferson) wondered out loud this week whether a December rate cut is necessary. Interest rate markets quickly priced in the view that a rate cut is now unlikely.
• Uncertainty about U.S. interest-rate policy combined with the slowing economy and questions about valuations in technology firms to trigger losses across U.S. and most international equity markets on November 13. The S&P 500 Index and the Nasdaq 100 Index were down sharply again in pre-market futures trading on November 14.
• The S&P 500 and Dow both declined 1.7% yesterday, with the Nasdaq 100 down 2.3%. The S&P 500 Index is on track to post its largest two-week decline since June.
• Yesterday’s volatile session was a widespread derisking with sharp declines in the S&P 500 Information Technology sector (-2.4%) and the Russell 2000 small caps (-2.8%), while defensive S&P 500 sectors such as Consumer Staples and Health were essentially unchanged.
• Additional momentum trades such as gold and Bitcoin posted sharp losses yesterday, but yields on U.S. Treasuries rose slightly and the U.S. dollar was stable – signaling no perceived flight to safety.

• The rationale for the Fed’s last two rate cuts was a weak labor market, and the resumption of government economic data is unlikely to change that. We believe the trend in rates is still lower into early 2026.
• We expect higher equity markets by year-end 2026, fueled by positive policy trends already in place, including lower interest rates, sizable tax refunds, and deregulation.
• We are also positive on technology and the artificial intelligence theme, but our guidance (see below) is mindful of elevated valuations.
• For more details, please see our November 11 report that tackles the top questions we have heard from investors about recent market volatility: “Q&A – Headlines hide fundamental market supports.”
• The S&P 500 Index (nearby futures contract) is in an uptrend. The Index may find support at 6736 (50-day moving average) and 6174 (200-day moving average).

• We favor neither chasing rallies nor selling on weakness. Instead, we believe long-term investors should consider incrementally adding exposure on pullbacks to high-quality U.S. equity asset classes and sectors and be selective in fixed income (see below).
• If the bounce carries further, investors may want to consider trimming defensive equity sectors, such as Health Care, Consumer Staples and Consumer Discretionary.

We have been expecting that the technology spending trend may at times run too far too fast, and we stay focused on valuations. We trimmed profits and downgraded the S&P 500 Communication Services sector to market weight on August 5, and on October 30 we did the same in the Information Technology sector. In each case, we noted our preference to reallocate to Utilities, Industrials, and Financials, key sectors for building data processing centers that are ancillary to the technology trend but that have lower price-to-earnings ratios — in other words, more attractive valuations — than the two sectors we downgraded.

The economic slowdown currently in progress should be temporary but creates an opportunity to reallocate some (but not all) of our overweight in U.S. Intermediate Term Taxable Fixed Income into Emerging Market Equities, which we have upgraded from unfavorable to a neutral weighting. We see Emerging Market Equities as another opportunity to invest in technology but with more attractive valuations than are available in the S&P 500 Index Communication Services or Information Technology sectors.

While the economy slows, our unfavorable equity sectors include the typical cast of defensive characters — Consumer Staples and Health Care —both of which we view as likely to underperform the S&P 500 if stocks move higher as we expect. We are also unfavorable on the Consumer Discretionary sector as tariffs ratchet higher and lower-income consumers continue to struggle. To the extent that any of these rebound while worries about technology company earnings persist, we favor trimming these exposures and reallocating to our favored sectors.

To reiterate, our reallocation into equities out of U.S. Intermediate Term Taxable Fixed Income reduces but maintains an overweight to maturities of 3 to 7 years in investment-grade corporate securities. These maturities appear more attractive to us than shorter and longer maturities. Short-term rates should fall if the Fed cuts interest rates further. We also foresee potential volatility risks to long-maturity fixed-income returns. In short, we prefer these intermediate-term maturities in an effort to lock in higher yields than short-term securities offer and with less return volatility than long-dated maturities. We also favor investment-grade municipal fixed-income securities in the general obligation and revenue categories.

Volatility due to policy and corporate earnings uncertainties may continue in coming weeks. Our recent guidance changes favor viewing market pullbacks as opportunities to rebalance funds toward our favored asset classes and sectors. The goal of rebalancing is to reduce exposure where prices have become extended and to recycle the proceeds into potentially better values. In this way, rebalancing seeks to reduce near-term risk and to look for new potential opportunities as markets enter a likely volatile period. This process of rebalancing may be easier to do when one focuses more on the fundamental trendlines than on headlines.

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

NASDAQ 100 Index consists of the 100 biggest companies listed on the NASDAQ Composite Index. The list is updated quarterly and companies on this Index are typically representative of technology-related industries, such as computer hardware and software products, telecommunications, biotechnology and retail/wholesale trade.

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

S&P 500 Communication Services Index comprises those companies included in the S&P 500 that are classified as members of the GICS® communication services sector.

S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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