By Fahad Kamal, Coutts Chief Investment Officer

• The market reaction: Technology and semiconductor shares have fallen sharply, but weakness has not been uniform across equity markets. 

• Retaining perspective: Technology is a volatile part of the US equity market. Recent moves also need to be considered alongside resilient economic and corporate fundamentals.

• Our investment view: While recognising the potential for further near-term volatility, we remain constructive on equities. 

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.

Recent market moves have reflected greater investor scrutiny of some of the areas most exposed to artificial intelligence (AI) investment, including semiconductors, hyperscalers and AI infrastructure. In this short update, we look at what is driving the rotation, put recent moves in context and explain what they mean for our investment view.

What’s happening in markets? 

Technology-related shares came under pressure on Thursday, led by a 12.2% fall in the Philadelphia Semiconductor Index, which tracks 30 major US-listed semiconductor companies. The technology-heavy Nasdaq 100 declined 6.4%, compared with a 4.4% fall in the broader S&P 500, which tracks 500 of the largest US-listed companies. 

Investors have rotated out of AI-related areas and towards more defensive sectors such as healthcare, consumer staples and utilities. Yet the sell-off has not been uniform: perhaps surprisingly, seven of the 11 S&P 500 sectors are positive so far in November, while the overall index has fallen by around 3% and remains 8.4% higher year to date on a total return basis. This suggests recent weakness has remained concentrated around AI and technology rather than signalling a broader deterioration in equity markets. 

Retaining perspective

Investors have been questioning the scale, cost and potential returns from AI infrastructure spending. This week’s US midterm elections have added to the debate, with a Democrat-controlled Congress raising the prospect of greater scrutiny of AI and data-centre development. But investors were already reassessing valuations, their exposure to technology shares and the potential returns from AI infrastructure spending.

Markets are still assessing what the change in Congressional leadership could mean for US policy, including the AI buildout. Periods of volatility are a normal part of investing and, in retrospect, bring greater clarity around such developments. The broadening in market leadership predates the election. During October, the equal-weighted S&P 500 gained 5%, while 76% of S&P 500 constituents outperformed the index. Alongside strong earnings growth outside technology, this suggests investors were already finding opportunities beyond a relatively small group of mega-cap technology companies. 

Historically elevated valuations can make some technology shares particularly sensitive when expectations change. However, the longer-term AI theme has not disappeared. In our view, investors are instead becoming more selective about which companies can turn substantial investment into durable earnings and returns. 

The economic backdrop also remains relatively robust. US consumer spending grew at an annualised 3.1% in the latest quarterly data, and the latest US jobs report showed employers added 165,000 jobs in October, ahead of expectations, while unemployment remains low at 4.1%. Monthly surveys of US manufacturing and services businesses also remain consistent with expansion, with both ISM indices above 50, the level that separates expanding from contracting activity. 

Economic growth may be slowing, but slower growth is not the same as contraction and does not necessarily imply a poor environment for equity markets. With economic activity still expanding and corporate earnings remaining resilient, in our view the fundamental backdrop remains supportive for equities. 

How our portfolios are positioned

As multi-asset investors, our portfolios often include bonds, gold and liquid alternatives, where appropriate for our clients, as well as equities. In November so far, to yesterday’s market close, US Treasuries (represented by Bloomberg’s US Treasury 7-10 year index) returned 0.6% and gold rose 5.5%, while the S&P 500 fell 3.0%. This illustrates how diversification can help cushion the impact of equity market falls rather than leaving investors fully exposed to movements in stock markets. 

Our approach does not depend on a small number of US technology companies continuing to lead equity markets.

Strong earnings growth is evident across global markets. Forward earnings per share for the FTSE All-World Index, which includes US and non-US companies, have risen 34% year to date, slightly ahead of the 33% increase for the S&P 500, while the respective indices have returned 9.3% and 8.4%. As a result, valuations have fallen despite markets rising: the FTSE All-World now trades at 14.6 times forward earnings, below its 10-year average of 16.2 times, while the S&P 500 trades at 17.8 times, below its 19.2 times 10-year average. 

Against this backdrop, we continue to favour emerging-market equities, where we see attractive valuations alongside long-term growth opportunities including AI. 

Overall, we remain constructive on equities. Recent moves reinforce the importance of selectivity: we are focused not simply on where investment is being made, but on where that investment has the best potential to be transformed into attractive long-term returns. 

How we’re responding

We remain constructive on equities, while continuing to be selective about where we take risk. The economic and corporate backdrop remains resilient, while diversification across asset classes is helping portfolios navigate recent volatility.

We will continue to follow our established investment process, adjusting where the fundamentals warrant it rather than reacting to short-term market moves.