Institute Alert

• Technology stock prices led international equity markets lower overnight, and U.S. markets are following this morning, after a disappointing earnings report from a large technology company.
• Other global markets were mixed overnight. The 10-year U.S. Treasury note yield slipped by only a fraction. Gold fell for a third consecutive day and remains off its recent all-time high price level. The dollar inched higher to touch its highest exchange level since May, based on a composite of dollar exchange rates against six major currencies.¹

• Broadly speaking, the third-quarter earnings season has been positive. As of November 4, 82% of S&P 500 Index constituents have beaten earnings expectations so far, slightly higher than the five-year average of 78% and the 10-year average of 75%. However, expectations for technology firms seem higher, and disappointments appear to be having a disproportionately negative effect.
• We see clear trends that should promote a stronger economy and earnings-driven gains in equity prices through 2026.
• The S&P 500 Index (nearby futures contract) is in an uptrend. The Index may find support at 6648 (50-day moving average) and 6116 (200-day moving average).

• We favor neither chasing rallies nor selling on weakness. Instead, long-term investors should incrementally add exposure on down days to high-quality U.S. equity asset classes and sectors and stay 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 believe the most important step investors can take is to look through headlines. Over the past month, equity markets have experienced weakness on days of negative headlines, such as disappointing Federal Reserve policy guidance, tariff fears, and various concerns about earnings. But the headlines obscure important and positive trends. Even if the pace of Federal Reserve interest rate reductions is now in question, we see a clear path for further monetary easing in 2026. Tariffs are negative but diluted by deals with other countries and ultimately are being managed by companies and consumers. Many corporate tax cuts are retroactive to January 2025 and reinforce the strong trend in corporate spending on plant and equipment – not only in artificial intelligence, but digital assets and cybersecurity. We see these trends as not only clear and already in place but mutually reinforcing for economic and earnings growth through 2026.

We have been expecting that the technology trend may at times run too far too fast and have remained focused on valuations. We 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, sectors that are related to the technology trend but that had lower price-to-earnings ratios – i.e., more attractive valuations – than the sectors we downgraded. On October 29, we also reallocated from U.S. Intermediate Term Taxable Fixed Income into Emerging Market Equities, which we see as another way to invest in technology but with potential for more attractive valuations in our opinion.

Our unfavorable S&P 500 Index equity sectors include the typical cast of defensive characters: Consumer Staples and Health Care that are likely to underperform 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 reallocate to our favored sectors.

In fixed income, our reallocation into equities out of U.S. Intermediate Term Taxable Fixed Income does not change our preference for maturities of 3-7 years in investment-grade corporate securities. We also favor investment-grade municipal fixed income securities in the general obligation and essential service revenue categories.. We continue to see these maturities as more attractive than shorter and longer maturities. Short-term rates should fall if the Fed cuts interest rates further as we expect. We also foresee potential 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 will offer and potential for less return volatility than long-dated maturities.

Looking ahead, volatility due to policy and corporate earnings uncertainties may continue in coming weeks. We recommend using market pullbacks as an opportunity 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 one focuses more on trendlines than on headlines.

¹ The ICE U.S. Dollar Index is a weighted average of the value of the U.S. dollar relative to a basket of U.S. trade partner currencies, composed of the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc.

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. 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. 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. 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.

Digital currency also known as crypto currency or bitcoin, as an asset class is highly volatile, can become illiquid at any time, and is for investors with a high risk tolerance. Digital assets may also be more susceptible to market manipulation than securities. Crypto is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. Investors in crypto do not benefit from the same regulatory protections applicable to registered securities.

An index is unmanaged and not available for direct investment.

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.

Investment Grade bonds - A rating that indicates that a bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

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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