Highlights

Stocks

✓ What is Outperforming: AI-related tech, cyclical sectors.

✓ What is Underperforming: Defensive sectors, energy, small caps.

Can the Rest of the Market Rally If Tech is Weak?

U.S. equities rallied into the middle of the month on progress toward ending the government shutdown. Still, concerns about stretched valuations and uncertainty around delayed economic data erased most of those gains. The S&P 500 is now up 15.77% year to date on a total return basis.

Within that backdrop, the technology sector declined again last week and has been a drag on the S&P 500's performance for the month. Investors are growing more uneasy about the scale of AI-related capital expenditure and what could happen to both tech stocks and the broader economy if that spending slows.

Importantly, there was no clear systemic shock in the overall tech sector. Within our VEM Large Cap Growth portfolio, CoreWeave (CRWV) sold off after earnings on a revenue miss that was driven largely by timing rather than a collapse in underlying demand. At the same time, in our International ADR and Large Cap Value Portfolio, other key holdings such as Applied Materials (AMAT) and Cisco (CSCO) delivered solid results, and the fundamental outlook for AI spending is essentially where it was three weeks ago, when markets were cheering almost every AI headline.

What has changed is the narrative, not the data. A growing wave of commentary is now questioning the durability of the AI capex boom. As a result, selling in large-cap tech has invited additional selling, and skepticism has become the dominant story of the month. Against this backdrop, investors are focused on Nvidia (NVDA) earnings on Wednesday after the close, hoping the report will halt the slide, re-anchor expectations around earnings growth, and reaffirm the extraordinary capital spending that has powered the AI cycle so far. In effect, markets are implicitly asking NVDA to calm this new burst of AI doubt that has weighed on both tech and the S&P 500.

Historical Context

The key risk is straightforward: what if that does not happen? What if NVDA’s results are strong in absolute terms but not strong enough to reverse the incremental rise in skepticism toward AI spending and mega-cap tech leadership? If that is the case, the next question becomes whether the rest of the market can rally, or even hold steady, while tech and AI-related names decline.

History suggests that it is difficult, though not impossible. Over the past three years, there have been three episodes in which Nasdaq declined by more than 10% over several weeks. These were the main pullbacks within what has otherwise been an exceptionally powerful tech bull market.

During two of those periods, the rest of the market did not provide meaningful shelter: July 2023 - October 2023 and February - April 2025.

The Nasdaq 100 ETF (QQQ) fell about -10.5% in the first episode and about -23% in the second, while the equal-weight S&P 500 ETF (RSP) declined roughly -13.2% and -16.4%. In other words, rotating out of tech and into the broader index did not significantly reduce drawdowns.

There was, however, one notable exception! From early July 2024 through early August 2024, QQQ declined about -12.5% while RSP was roughly flat. In that instance, tech weakness was driven by underwhelming 2nd Quarter earnings and a broader concern that the economy was slipping toward a stagflation-style mix of softer labor data and rising inflation. That environment punished the most expensive and speculative growth names, while more value-oriented and economically sensitive sectors held up and delivered relative outperformance. (VEM Large Cap Value is more heavily weighted in these sectors.)

Bottom Line

The durability of this bull market increasingly hinges on whether AI spending continues at a pace that justifies current expectations. If the latest bout of skepticism toward AI capital expenditure remains contained and NVDA reassures the market, leadership can remain concentrated in tech for longer. If not, investors may need to lean more deliberately into our VEM Large Cap Value and VEM International portfolios or become more defensive, utilizing Structured Notes in order to weather a deeper AI-driven pullback into year-end.

Economic Data

Economic Data (What You Need to Know in Plain English)

So far, economic data has been unusually light, even though the government shutdown has ended. The few reports we have received suggest that both business sentiment and the labor market are softening, while recent Federal Reserve comments make it clear that a December rate cut is far from guaranteed.

Two Meaningful Data Points

1. NFIB Small Business Optimism Index - Slipped to 98.2 vs. 98.3 expected, which keeps optimism essentially moving sideways.
2. ADP jobs report - Showed an average loss of about 11,250 jobs per week over the four weeks ending October 25. That is equivalent to roughly 45,000 jobs lost over that period and suggests the labor market may be weakening more than previously thought.

These numbers pressured the dollar, and 10-year Treasury yields lower, as investors focused on the possibility that labor is becoming a vulnerability for the expansion. For now, the broader set of data still points to a labor market that is stable but cooling, a view that will be tested as delayed government reports begin to roll out in the coming weeks.

Looking Forward

The key to upcoming reports (Flash PMI, Empire Manufacturing, Philly Fed) is simple: As long as conditions remain broadly stable and do not show a sudden drop in activity, they should help support risk assets. A sharp downside surprise would revive concerns that growth may be hitting a wall.

Finally, our investment team will be watching the release of the Federal Reserve's October meeting minutes. Our team will be looking for how divided officials were about the last cut and how much support remains for another move in December. If the minutes show that most Fed members are still open to a December cut, that would be supportive of equities. If they reveal increased resistance to further easing or hint that the rate-cutting cycle may be nearing an end, that would be a headwind, because expectations for ongoing Fed support have been an important pillar for this market so far this month.

Special Reports and Editorial

November Market Multiple Table (MMT)

The November MMT underscores how essential AI Enthusiasm is to this market. If we focus strictly on the underlying facts from the past month, they do not naturally support the S&P 500 moving to new highs, or even meaningfully higher levels.

Federal Reserve and interest rates: The Federal Reserve is now less dovish than markets expected. The Fed did cut rates in October and offered a modest dovish surprise by announcing an end to Quantitative Tightening in December. However, much of that was already reflected in equity prices. The larger surprise over the past month was Chair Powell directly pushing back on the perceived certainty of another rate cut in December.

Bottom Line: The market remains expensive on a fundamental basis, even after we factor in AI Enthusiasm at its most optimistic. That does not mean the market cannot grind higher into year-end. It can, supported by momentum and seasonal factors (Santa Claus rally). However, it is very important to recognize the risk on the downside. If there is meaningful disappointment in AI Enthusiasm or deterioration in other factors, the market could decline sharply.

A Game of Multiples (Updated 11/10/2025)

Current Situation: AI Enthusiasm got even more intense over the past month, supporting the rally; the Fed cut rates in October but pushed back on December rate-cut expectations (leaving it possible but uncertain), while the private measures of economic growth and inflation were mostly stable (although the market was without government data). AI Enthusiasm is helping to stretch the multiple investors are willing to pay, and that helped to offset slightly negative shifts in the other two market influences (the Fed got less dovish and the shutdown caused a lack of economic data).

Things Get Better If: AI Enthusiasm stays in place through important earnings, the Fed signals a rate cut is likely in December, and the release of backlogged economic data shows that growth and inflation metrics are stable. This would be a near-perfect scenario for stocks as AI Enthusiasm would push the multiple higher, while macroeconomic fundamentals would support a run-hot market scenario. A rally towards 7,000 in the S&P 500 should be expected.

Things Get Worse If: AI-related earnings disappoint and cause some multiple contraction, the Fed makes markets think a December rate cut is not likely, and the release of backlogged economic data shows a weaker-than-expected economy. This outcome would essentially negate all the reasons for the YTD rally, and beyond that, raise the prospects of elevated inflation and an economic slowdown. This should result in a substantial decline in the S&P 500 as both earnings and the market multiple would fall, and that would be compounded by the bursting of any AI bubble.