Institute Alert

• Markets face converging pressures, including questions about artificial intelligence (AI) monetization, rising Treasury yields, broadening inflation, Federal Reserve (Fed) policy, the midterms, and energy prices.
• These factors have caused equities to lose momentum since the summer rally. The S&P 500 Index has remained within a 3.5% range since September 1, while market breadth weakened to 51% of stocks trading above their 200-day moving average as of October 14.
• Nasdaq 100 futures extended their decline this morning (October 15) and were down roughly 3% since October 13.
• September Consumer Price Index (CPI) rose to 3.7%, potentially reversing the steady-to-lower trend since June. The increase pushed market-implied odds of a year-end rate hike to 89.6% and supported the 2-year Treasury yield at 4.72% as of October 15. Fed minutes also kept another 2026 rate hike on the table.
• U.S. retail sales and the Producer Price Index (PPI) were stronger than expected in September. Year-over-year PPI rose 6.3%, the fastest pace since December 2022.
• U.S. 10- and 30-year Treasury yields are near multidecade highs of 5.06% and 5.39%, respectively. Abroad, fiscal concerns are pressuring bond markets, with France’s 10-year yield rising to 4.74% as of October 15.
• The U.S. 10-year Treasury yield is down 12 basis points (100 basis points equal 1 percent) from yesterday’s close as of October 15. If the move is sustained through the day, it would mark the sixth-largest decline in yields this year.
• The $9.29-per-barrel spread between Brent and West Texas Intermediate crude oil prices as of October 15 reflects investor concerns that Persian Gulf oil flows could continue to improve.
• Meanwhile, refining constraints have pushed refined-product prices to multiyear highs.

• Broadening inflation and narrowing market breadth leave equities vulnerable to volatility, favoring quality and diversification. However, our earnings-supported outlook remains intact.
• The S&P 500 Index is down only 1.3% from its all-time high on October 6. We expect strong earnings growth for the third quarter, while valuations in technology-related sectors have declined meaningfully since September 30.
• Inflation pressures, heavy issuance, and a rising term premium should keep long-term yields elevated, while a bear-flattening yield curve (short-term rates rising faster than long-term rates) points to further Fed rate hikes.
• The recent rally in bonds suggests that the 40-basis-point surge in the term premium (the extra yield investors demand for holding longer-term bonds) since September 21 may have been too much, too fast.
• We expect inflation pressures to ease in 2027. For now, we favor short-term, high-quality bonds over longer-duration bonds. Although higher yields are attracting buyers, they do not yet signal an all-clear for long-term bonds.
• An uneven recovery in Middle East supply, depleted inventories, and constrained global refining capacity should maintain a risk premium in oil and upward pressure on fuel prices and inflation over the near term.

• We view AI sentiment concerns as a reassessment, not a deterioration in earnings, as S&P 500 estimates continue to rise, led by Information Technology.
• Avoid chasing rallies; add selectively on pullbacks to durable earners with pricing power.
• We are neutral on Information Technology, given stretched valuations, and rising debt-funded capital expenditures. We favor Communication Services, Industrials, and Materials and remain cautious on rate-sensitive Real Estate.

We remain overweight equities relative to fixed income and would buy on meaningful pullbacks. Within equities, we remain neutral on Information Technology, given stretched expectations, and favor Industrials, Materials, and Communication Services.

In fixed income, we favor keeping duration (a measure of a bond’s interest rate sensitivity) short and quality high, adding duration gradually as yields rise rather than trying to time a peak. Taxable investors can harvest losses in longer-duration holdings and reallocate to shorter-maturity securities with higher yields rather than hold cash. We prefer to remain overweight commodities because energy disruptions can pressure stocks and bonds simultaneously, reinforcing commodities’ diversification benefits. Even if the acute phase of the war with Iran eases, damaged infrastructure, depleted inventories, and a lingering risk premium could continue to support crude oil prices. Structural refining constraints should also continue to support fuel prices. Finally, rising global debt concerns support a favorable risk-reward profile for gold, despite our modestly lower 2027 target.

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. 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. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. 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. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. 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.

Consumer Price Index (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

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.

NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.

Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time.

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

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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