Institute Alert

• Technology-led selling intensified on Friday, October 30 as investors questioned returns on Artificial Intelligence (AI) capital spending after major earnings reports. The Nasdaq Composite fell more than 3%, the S&P 500 Index declined more than 2% and the SOXX fell by more than 9%.
• Several Magnificent 7 (Mag 7) hyperscalers reported mixed third-quarter earnings and sales results last week, and investor concerns focused on higher-than-expected capital spending and lower free cash flows (cash remaining after expenses).
• The selloff concentrated on AI-related shares, consistent with the trading pattern seen for October: Nasdaq -5.3%, S&P 500 (-0.9%), S&P 500 Equal Weight +5%, with 9 of 11 sectors positive led by Energy and defensive sectors.
• Overnight November 1 into November 2, Japanese stocks slipped with the Nikkei 225 Index down 0.3% on mixed Tech earnings. European stocks are mostly flat while U.S. futures are rebounding this morning on President Trump’s comments to give diplomacy with Iran a chance.
• Investors lately have sought defensive assets, pulling the 10-year yield down from its 20-year high on October 5 (5.30%) to 4.92% overnight November 1 into November 2.
• In addition to concerns related to AI spending, markets face converging pressures from midterm election uncertainties and upside risks to borrowing costs and energy prices.

• We see several reasons why financial market volatility may extend in the coming days and weeks:
• First, we continue to expect more AI spending and earnings growth, but supply-chain bottlenecks, higher yields and potential new regulation on data centers likely will keep investors demanding proof of earnings.
• Second, the 10-year U.S. Treasury yield on October 30 had retraced all its gains since September 10. Massive short covering and a perceived flight to safety are key factors behind the reversal, but our 10-year Treasury yield target between 5.25%-5.75% signals higher yields from here.
• Third, despite latest optimism for US-Iran talks, front-month contacts for European Brent crude oil remain near year-to-date highs on Mideast tensions, including fear of escalation after the U.S. midterm elections.
• Fourth, the midterm elections could trigger near-term volatility around uncertainty about potential policy changes. However, we foresee divided government after the midterms, which we believe could limit lasting policy changes. Please see our report, "2026 midterms: Policy paths, economic outlook, and portfolio implications."
• We view AI spending as exceptionally strong, but investor focus is shifting away from the broad-based momentum buying of the past several years and toward greater differentiation among companies based on their ability to translate AI spending into revenue, free cash flow, and returns.
• We believe greater scrutiny of capital spending does not signal a weakening AI cycle. Our view is that differentiating productive investments from less valuable spending is positive for the sector over the long term.
• We’re favorable on U.S. large-cap stocks, and the selloff in technology is not showing up as broad weakness; the S&P 500 Equal Weighted Index was +5% in October versus -5% for Nasdaq. We expect 2027 economic growth near its post-WWII trend and do not believe the rotation into defensive stocks signals economic weakness.

• We view AI sentiment concerns as reassessment, not a deterioration in earnings, as S&P 500 estimates continue to rise, led by Information Technology. Near-term volatility is likely to persist as investors scrutinize capital intensity and returns.
• Rather than chasing rallies, we believe a selective approach on pullbacks may be appropriate, focusing on higher-quality companies with durable earnings and pricing power. Areas of interest include hyperscalers focused on cloud infrastructure and advertising execution, subsectors addressing infrastructure bottlenecks — including semiconductor equipment — and select systems software such as cybersecurity.

We remain overweight equities versus fixed income and would look for opportunities in our preferred S&P 500 sectors during meaningful market pullbacks. We remain neutral on Information Technology given stretched valuations and rising debt-funded capital expenditure (capex), with a preference for 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 timing a peak. Taxable investors can harvest losses in longer-duration holdings and reallocate into shorter-maturity securities for their higher yield, rather than holding cash. We prefer to stay overweight Commodities, since energy disruptions can pressure stocks and bonds simultaneously, reinforcing their diversification benefits. Even if the Iran war’s acute phase eases, damaged infrastructure, depleted inventories, and a lingering risk premium could continue to support crude oil prices, while structural refining constraints could remain supportive of fuel prices. Lastly, rising global debt concerns may support the outlook for gold, despite our modestly trimmed 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. Concentration within certain sectors, industries or companies within the economy may present more risks than if a portfolio were broadly diversified over numerous sectors of the economy. This will increase the portfolio’s vulnerability to any single economic, political or regulatory development affecting the sector and may result in greater price volatility. Technology and internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market. 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. 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.

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.

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 Equal Weighted Index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.

SOXX is an exchange traded fund (ETF) issued by BlackRock that provides exposure to the semiconductor sector by tracking a semiconductor equity index. It is commonly used as a benchmark or proxy for the “semiconductor index,” even though SOXX itself is an ETF rather than an index.

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.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.