Over the past week, U.S., Japanese, and emerging market equities underperformed Hong Kong and European stocks. Markets worried that Democratic control of both chambers of Congress could slow the expansion of AI infrastructure. President Trump said he accepted the Republican defeat and was willing to seek bipartisan cooperation with Democrats, but this did not ease concerns, and major U.S. indices broadly closed lower. In Europe, some investors moved money into European markets as a safe haven amid the global tech valuation correction, helping European stocks rebound after steep losses. In Asia, Japanese equities fell in line with the U.S. because of their close ties to the AI supply chain, while Hong Kong stocks were lifted by Tencent’s launch of a new AI model, which sent related sectors sharply higher.
The U.S. midterm results gave Democrats majorities in both the Senate and the House, which is expected to limit fiscal expansion. Policy is likely to focus on easing rising living costs for households and resolving the U.S.-Iran war more quickly, which pulled energy prices down from their highs. Expectations of cooling inflation, lower interest rates, and rising risk aversion drove money into bonds and lifted global bond prices. U.S. 2- and 10-year Treasuries, global investment-grade bonds, high-yield bonds, and emerging market bonds all rallied. Gold also rebounded sharply from its lows as safe-haven buyers stepped in.
Gold prices have rebounded sharply after a consolidation in the second quarter. After the U.S. midterm elections, markets grew worried that AI regulation would tighten. Together with a sharp correction in chips and tech stocks, this pushed some investors into defensive assets such as gold.
Health Care showed strong earnings resilience in the U.S. third-quarter reporting season. Among major sectors, it posted the largest margin of earnings beats versus expectations. Results were driven mainly by large drugmakers such as Eli Lilly, Regeneron Pharmaceuticals, and Gilead Sciences, where demand continues to grow for obesity drugs, cancer treatments, and innovative therapies. This helped the sector beat market expectations overall.
In the near term, high-volatility segments such as U.S. growth stocks, Information Technology, and Communication Services clearly underperformed the broader market during the recent sell-off. IT and Communication Services were the most volatile and fell the most. Several concerns drove money out of these sectors: disappointing earnings from U.S. tech giants, negative free cash flow, the risk that Democrats could slow AI infrastructure build-out after the midterms, and signs that capex may be peaking. The money moved into defensive sectors such as Consumer Staples, Health Care, and Utilities, which delivered steadier returns and attracted investor interest.
