Institute Alert

• In recent weeks, financial markets have seen a succession of unsettling headlines, from policy uncertainties to worries about economic growth and earnings.
• However, we see positive trends already in place that we expect to promote a higher S&P 500 Index and moderately wider spread between short- and long-term U.S. Treasury yields through 2026.

• Volatility due to policy and corporate earnings uncertainties may continue in the coming weeks, but we expect the fundamental trends to continue.
• We favor using such episodes to rebalance funds toward our favored asset classes and sectors.

The MSCI All Countries World Equity Index, which includes U.S. and global equities, closed at record-highs on nine days between October 1 and November 10, only to finish the period unchanged from its September 30 level. Likewise, the S&P 500 Index touched record highs on 8 days but also ended the period roughly even with its September 30 close. The Nasdaq 100 performed similarly. That is the most churn in global equities since the January – April period this year.

As in those early months of 2025, financial markets lately seem off balance over headlines that suggest uncertainties about the outlook. Then, China’s DeepSeek¹ impact on the U.S. technology industry combined with weak consumer sentiment and tariff policy uncertainty to leave U.S. equity and bond markets fearing an economic recession; there was also concern that investors might have overestimated the potential profitability of corporate technology outlays. Those were deeply uncertain months, but today we see solid reasons why the current fog of headlines is very likely to burn off in the coming months.

A: We continue to expect a modest slowdown into early 2026 and then an economic reacceleration through the balance of the year. Tariff impacts have been delayed and spread out but now are raising consumer goods prices perceptibly. Job creation also has slowed, as we discuss below. The recent government shutdown has weighed on consumer spending, especially among lower-income households that lost government financial support for food purchases and medical insurance premia. Household financial strains also show up in lighter restaurant traffic and rising utility rates. Consumer confidence measured by the Conference Board this year has twice touched levels not seen since 2021 and the early days of coronavirus pandemic recovery.

Taking a wider perspective, however, we view some of the growth slowdown now underway as a shift from unsustainable growth of more than 3.5% during the middle quarters of 2025, well above the economy’s long-term potential rate of about 2%. A downshift is not necessarily a recession signal. We note, for example, that the October Institute for Supply Management survey of services firms marked its highest level since February.

Most importantly, we see the slowdown as temporary. The headlines miss important policy and spending trends that we believe will re-energize household spending and extend business technology spending. The 2025 tax cuts should deliver the largest refunds in recent years, excluding the massive 2020 stimulus during the pandemic lockdown. We also believe that deregulation centered on health care, energy, and financial services will accumulate over the course of next year and support job creation and broader business expansion. Lower interest rates also should reinforce job and economic growth. Helped especially by falling interest rates, the percentage of small business survey respondents planning to hire has increased (see Chart 1). The chart also shows the percentage of job seekers who find jobs plentiful. Small businesses are the main engine for national job creation, and we expect small-business optimism to drive job seeker confidence higher in the months ahead, especially as the economy accelerates again in 2026.²

Chart 1. More small businesses say they are planning to hire; job seeker optimism should followSources: Wells Fargo Investment Institute, Conference Board (through October 2025), and National Federation of Independent Businesses (NFIB) (through September 2025). Data as of November 11, 2025.

Further, we believe the tailwinds from tax cuts, deregulation, and lower interest rates are mutually reinforcing. Business tax cuts for capital spending should promote business expansion and modernization. Lower borrowing costs should encourage hiring and raise wage growth by helping workers produce more in a day at lower average cost. In turn, improved worker productivity should limit price inflation. These converging trends should drive improved margin and earnings growth, equity market breadth, and consumer spending that we expect will push aside the current economic soft patch by early 2026. By contrast, news headlines that typically focus on part of the puzzle easily miss this bigger picture.

A: Artificial intelligence is one factor for job creation, but there are others, some negative, but likely temporary, and others positive. The fear is that artificial intelligence can perform the functions of current workers and will destroy jobs and raise unemployment. We see some of that, but more broadly we note that businesses now seem more willing to lay off workers during a slowdown than they were in the early post-pandemic years, when workers were scarce. In addition, immigration restrictions lower the supply of available workers and so limit job creation, especially in the agricultural and hospitality and home care industries.

On the positive side, initial unemployment claims remain very low (see Chart 2). Announcements of sizable layoffs, like those in the October Challenger Gray report, tend to be implemented over time, not just in the following month or two. What’s more, layoff announcements were outweighed in September and October by even larger hiring announcements. The headline about layoff announcements missed that.

Chart 2. Weekly initial jobless claims remain subduedSources: Wells Fargo Investment Institute and U.S. Department of Labor. Weekly data, January 1, 1999 – September 5, 2025. Due to government shutdown, data beyond mid-September 2025 based on analysis of unadjusted state-level filings from Bloomberg. Note the data points from mid-September 2025 through the week ending November 1, 2025 are estimates based on analysis of unadjusted state-level filings from Bloomberg, in lieu of the lack of official government data during the shutdown. *Four-week moving average data. Gray bars indicate recession periods.

Finally, non-government employment data still signal to us a gradual softening of labor-market conditions, not a collapse. Private sector hiring stabilized in October, based on Automatic Data Processing’s (ADP) report released last week, and declines decelerated in employment components of the October purchasing managers’ indexes from the Institute for Supply Management for both manufacturing and services firms.

A: Unlikely, in our view. Fed policymakers already have signaled that weak job creation is a higher priority for them than inflation that lingers around 3%. We foresee lower policy interest rates in the coming year, but we believe the headlines that speculate about the timing and pace of rates miss the Fed’s reliance on economic data. We expect the labor market to improve past the first quarter of 2026. Whether the Fed cuts in December 2025 we view as secondary. The trend in rates still appears lower. Media speculation about how any political appointments to the Fed’s Board of Governors in 2026 may affect policy also misses the central point that the economic data are paramount for policy decisions.

Likewise, headlines miss the main point when they focus on uncertainties about the tariffs now under Supreme Court review. Back-up tariff increases under other trade laws are available to fill the void if the Court strikes down existing tariffs this year or early in 2026. Those alternatives include broad but short- lived tariffs that can be implemented quickly and piecemeal, as well as more drawn-out tariff increases that require lengthy investigations and are confined to specific goods and countries. On balance, we believe these alternatives would delay and further dilute the impact of tariff increases.

There’s also the matter of refunding the tariff revenue already collected, should the Court strike down country and universal tariff increases imposed under the International Emergency Economic Powers Act. We have seen refund estimates ranging between $90 billion and $250 billion, but the consensus falls between $100 billion and $150 billion.³ Should the Court order a complete cash refund, we would expect a boost to the finances of corporate tariff payers and a wider federal deficit. More likely, in our view, government financial dislocations created by the refunds would encourage the Court to credit tariff payers against their current and future tariff liabilities.

A: We believe a durable technology spending trend is in progress. However, occasional price corrections are always part of the challenge of investing, so we approach the Information Technology sector with a discipline that tries to preserve value. Technology spending includes artificial intelligence and other categories to expand profit margins and improve cybersecurity. Our view is that important differences with the 1999 – 2000 dot-com bubble outweigh the similarities. Overall, most third-quarter earnings reports have exceeded elevated expectations in terms of profits, sales, and future capital expenditures (capex). Even so, investors still punished several market bellwethers due to high multiples and future debt financing issues.

The market’s steep rise and then recent pullbacks have encouraged comparisons to the dot-com bubble of 1999 – 2000. These two episodes are similar for their transformative technologies and concentration of gains. For example, the 10 largest stocks today represent around 44% of the S&P 500 Index total market capitalization and account for just over a third of the net income generated by the entire index.

But there are important differences, too. Today’s artificial intelligence market leaders consist largely of mega-tech companies that are highly profitable; their new capex expenditures are funded mostly through free cash flow (amount of cash left over after expenses), which dominates financing over admittedly rising debt. In contrast, stock market drivers of the dot-com era had far more exposure to consistently loss-making companies, including startups and smaller companies, and were primarily funded by debt and venture capital. We believe the economy is still closer to the beginning than the end of a robust and extended buildout in corporate technology spending.

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 the latter as another opportunity to invest in technology but with more attractive valuations than are available in the S&P 500 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 as stocks move higher. 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 while 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 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 the most 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.

¹ Chinese artificial intelligence start-up with high performing AI models.

² According to the U.S. Treasury, small businesses created nearly 64% of all new jobs between 2009 and 2019, and more than 70% of new jobs since then. Eric Van Nostrand, “Small Business and Entrepreneurship in the Post-COVID Expansion”, U.S. Department of the Treasury, September 3, 2024.

³ For example, see Megan O’Neill, “Tariff ruling could hand firms $140 billion refund: fault lines,” Bloomberg, November 3, 2025.

Each asset class has its own risk and return charact. 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. 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.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

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. Communication Services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the Communication Services sector may also be affected by rapid technology changes, pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players, reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. Consumer Staples industries can be significantly affected by competitive pricing particularly with respect to the growth of low-cost emerging market production, government regulation, the performance of the overall economy, interest rates, and consumer confidence. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Some of the risks associated with investment in the Health Care sector include competition on branded products, sales erosion due to cheaper alternatives, research and development risk, government regulations and government approval of products anticipated to enter the market. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues. Real estate investments have special risks, including possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

MSCI All Country World Equity Index is a widely used global equity index that tracks the performance of stocks from both developed and emerging markets. It includes large and mid-cap companies from 23 developed and 24 emerging countries, covering approximately 85% of the world's investable equity opportunity set

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.

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.

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