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After months of relentless gains, equity markets started November on shaky footing as investors took a cautious stance on the AI-driven rally while market breadth worsened. Concerning statements from OpenAI mid-week led to a lot of speculation that the company may be in trouble. The tech-heavy Nasdaq led the pullback, but none of the major U.S. indices were spared.
Despite the drop, the market fundamentals remain solid and less than 4% from all-time highs. Strong corporate earnings continue to surprise to the upside, with 82% of S&P 500 companies beating expectations and profits rising roughly 12% year over year.
The market shakeout wasn’t about fading innovation but more about investors blinking after recognizing a few red flags. Tech earnings are still a standout, jumping 22% in the last quarter. Companies like Amazon, Apple, and Microsoft reaffirmed plans to keep spending heavily on AI. However, with the top 10 stocks now making up more than 40% of the S&P 500, investors are increasingly uneasy about market concentration and the incestuous tie-ups throughout the industry. NVIDIA alone is worth more than the entire GDP of Japan—a statistic that boggles the mind.
Bubble talk may be back, but today’s market leaders demonstrate stronger management, better margins, and healthy businesses. Companies of the early 2000s were neither profitable, cash-rich, nor did they fund their growth mainly from earnings. While current valuations are undeniably lofty, the rally has been powered more by genuine profit growth than by pure speculation. Rising profitability must change the calculations on what is a reasonable multiple. The Fed is also now easing, although the exact timing of the next cut is increasingly hard to predict.
On the economic front, job market data offered mixed signals. Private employers added just 42,000 jobs in October (per ADP), following two months of declines. Other reports showed a gloomier picture, with Revelio Labs reporting -9K payrolls for October. Interestingly, AI itself was cited as a factor in only 6% of announced job cuts, and mostly in tech-heavy roles. While this may sound ominous, history shows that disruptive technologies tend to create new opportunities over time, even if the short-term labor market feels the sting. A deeper reading of the Challenger, Gray, and Christmas employment report shows that hiring expectations dwarfed the announced job cuts within the technology sector.
The government shutdown stretches on, limiting the release of key data and compounding the uncertainty and discontent. Federal workers, including TSA and air traffic controllers, are missing multiple paychecks and pressuring the country’s air travel.
Treasury yields fluctuated as investors digested the Fed’s latest comments, while gold prices marked a third straight week in the red. Bitcoin and other cryptocurrencies also struggled to regain their October highs, inching closer to bear market territory.
What this means for investors
Markets are catching their breath after a record-breaking run, and a little breather can be good for the market, especially if fundamentals hold up. I think this pullback looks more like a healthy pause than a reversal. Risk-on trades are feeling more pain than the index as a whole, so for the hundredth time, manage your risk exposure against your risk capacity, not just your risk tolerance.
Investors should stay invested, maintain exposure to the market leaders (yes, still AI and innovation), but resist the urge to overconcentrate. If you are overconcentrating, then recognize the lesson and learn it. The losses may not be over yet. In an AI-fueled market where just a few giants drive the story, diversification and rebalancing remain remarkably easy ways to keep your portfolio future-proof. In a year where most everything is up double-digits, there is no excuse to be myopic.
Market Activity
Stocks
Fixed income
Economic Reports
We missed JOLTS, initial unemployment claims*, continuing unemployment claims*, and nonfarm payrolls this past week. This is the second-straight month of missed reports. Next week we would be getting CPI data if the government were open, but we will not be since none has been collected.
*We can figure this out from aggregating state data, but it’s tedious. In a nutshell, IC and CC are normal.
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Earnings Releases
The S&P 500 will likely report its fourth-straight quarter of double-digit year-over-year earnings growth. The Q3 earnings growth rate is projected to be 10.7% based on the companies already reported. Profit margins are also very strong, coming in just shy of the 20-quarter (5-year) high of 13.0% from Q2 2021.
Give Duality Research a follow and check out this great piece on valuations and why they aren’t nearly as stretched as you think.
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Recommendations
The Laboring Market
- A Curious Kind of Cycle | The labor market is still normalizing, but has been remarkable not for its weakness, but its fast recovery.
- Falling demand suggests further labor market deterioration | The evidence is adding up that the labor market is treading water, but that isn’t necessarily a precursor to drowning (we’re deteriorating from a 2021-2023 sugar high, remember).
Other Stuff
- China rose, but who fell? | China is eating Europe’s lunch. The US is next if we don’t get our act together and focus on innovation and pressing our advantages now.
- Brokers and bubbles | Interesting view of how advancing brokerage stocks can foretell market exuberance. I personally think the growth in Robinhood has more to do with the unlocked cryptocurrency market than with excessive exuberance in the stock market, but it’s all worth monitoring (disclosure: I own Robinhood).
- The Kyle Busch Insurance Scam Explained | Sketchy social media insurance salespeople should be quaking. This is a big deal, and the Busch family is being loud about it.
Chart(s) of the week
This is exactly the kind of shrill, panic-inducing content that is counterproductive. The future, according to the FT:
- We get a mild boost to productivity and GDP that compounds over many years, lifting us above the past long-term trend line
- WE ALL BECOME GODS
- WE ALL DIE
Are these three scenarios really equally likely? [Sigh]
The next three charts are all about the labor market. We missed our 2nd round of monthly labor market reports this past week, so as a means of replacement, here are a couple of useful proxies.
ADP and Revelio didn’t correspond at all, so take each with a grain of salt. We may never get the official BLS data for October, so this is the best we’ve got. What can we take away? Hiring is very slow, and average new payroll growth has been nearly non-existent for the past 3-4 months. But remember, past performance is no indication of future results.
Source: Sam Ro
Source: Sam Ro
The Challenger, Gray, and Christmas report showed some scary numbers for announced job cuts. However, what was lost is the fact that Technology firms announced their highest level of announced hiring plans in the history of the report. Yes, headline-making cuts are being announced, but as these companies right-size their workforce and make plans to grow more efficiently, they will hire (in 2026).
Source: @marthagimbel
Related: A Midlife Bull: The S&P 500’s Rally Is Older, Wiser, and Still Running Strong