Weekly market wrap

AI shakes, not breaks: Why balance still matters

Key Takeaways:

• Equity markets pulled back to start November as AI enthusiasm appeared to hit a valuation speed bump. Corporate earnings remain strong, and AI spending plans show no signs of slowing, suggesting the pullback reflects sentiment and valuation adjustments, not corporate fundamentals.
• Recent volatility underscores the risks of historic market concentration, with the top 10 stocks now representing over 40% of the S&P 500’s market cap. Bubble concerns are emerging, but today’s tech leaders are profitable and cash-rich while the Fed is loosening its policy.
• AI-related layoffs are increasing, particularly in tech-heavy roles, though they remain a small share of overall job cuts. While we think productivity gains from AI should eventually drive job creation, near-term adoption may contribute to labor-market cooling.
• We believe investors should maintain exposure to AI and innovation but avoid overconcentration. A balanced portfolio across sectors, market caps, and geographies is essential, in our view, to manage risk and capture opportunities as market leadership broadens.

November kicked off with a wobble in equity markets, triggered by renewed scrutiny of artificial intelligence (AI) valuations. While enthusiasm around AI continues to fuel innovation and investor interest, it also has the potential to amplify volatility, especially when a handful of mega-cap technology stocks dominate index performance. 

We remain constructive on AI’s long-term potential to boost corporate profits and drive economic growth through productivity gains, though with the possibility of short-term labor-market disruptions. Still, the recent sentiment swings serve as a timely reminder of the risks tied to overconcentration. In an AI-driven bull market, we think maintaining portfolio balance across asset classes, geographies, and sectors is critical.

Sentiment adjusts as hype cools - but fundamentals still deliver

Last week's equity-market pullback was sparked by renewed concerns over stretched valuations, following cautious remarks from two major bank CEOs at a financial services conference*. While the fundamentals of the AI story remain intact, the skepticism around high-flying stocks, especially after seven consecutive months of gains in the tech-heavy Nasdaq, led to some profit-taking*. In essence, AI excitement looks to have collided with valuation reality, prompting a sector rotation.

The good news, in our view? Despite the cooling of AI-related hype, corporate fundamentals continue to surprise to the upside. As of Thursday, roughly 85% of S&P 500 companies have reported third-quarter earnings, including five of the Magnificent Seven (Amazon, Apple, Meta, Alphabet, and Microsoft)*. With 82% of companies beating expectations, above the five-year average of 78%, the index is on track for 12% earnings growth, marking the fourth straight quarter of double-digit gains*.

A key driver of this strength remains the tech sector, which posted 22% earnings growth*. The Magnificent Seven earnings continue to outperform the broader market, with several mega-cap tech firms raising guidance for profits and AI-related spending*. We think this investment surge reflects not only strong customer demand and opportunity but also a strategic imperative: AI looks to be increasingly seen as essential for survival, as emerging AI competitors likely pose existential threats. 

The upshot: We see no signs of deterioration in earnings, spending plans, or forward guidance. We think this pullback appears to be a sentiment and valuation adjustment, not a change in corporate fundamentals.

Is AI an emerging bubble? 

Since ChatGPT’s release in late 2022, the Magnificent Seven have soared nearly 190%, lifting the S&P 500 by 75%, but also creating unprecedented market concentration*. Today, the top 10 stocks account for over 40% of the S&P 500’s market capitalization**. 

At the center of this rally is NVIDIA, the cornerstone of the AI ecosystem, which recently became the first company in history to surpass a $5 trillion market cap*. For context, that’s

• Larger than five of the S&P 500’s 11 sectors*;
• Equal to 60% of the entire Russell 2000 small-cap universe*;
• Half the size of the STOXX 600, Europe’s large-cap benchmark*; and
• Bigger than Germany’s GDP*.
   

As valuations and concentration climb, comparisons to the dot-com bubble are becoming more frequent.

But there are key differences this time:

1. Profitability & maturity: Today’s tech leaders are highly profitable with diverse revenue streams. Unlike the speculative startups of 2000, these firms are integrating AI into core operations that already generate substantial earnings*.
2. Spending sustainability: Most of the mega-cap tech companies are funding massive AI investments through internal cash flow, not debt*. While they are no longer capital-light, they continue to generate strong cash from operations, unlike the telecom firms of the late '90s*.
3. Valuations: While elevated, valuations are not as extreme as in 2000*. This time, it's profits, not just expanding multiples, driving the rally*. With seemingly limited room for further multiple expansion, earnings growth will likely need to carry the market forward, suggesting more moderate gains ahead, in our view.
4. Fed policy: As the saying goes, bull markets don’t die of old age—they’re likely killed by the Fed. In contrast to 2000, when rate hikes helped end the rally, today’s Fed is in rate-cutting mode, helping provide a more supportive backdrop.

As is often the case, bubbles are more clearly identifiable in hindsight. Even if we are in an AI-driven bubble, it doesn’t appear to be nearing its peak. Rising profits and strong corporate fundamentals help offer a counterbalance to concerns of irrational exuberance. In fact, we think third-quarter earnings helped reinforce the positive AI narrative rather than undermine it.
 

What's AI's impact on the labor market? 

A cooling labor market has emerged as a key shift in this year’s economic narrative, prompting the Fed to resume rate cuts in September. With official data delayed due to the longest government shutdown in U.S. history, investors have turned to private sources like ADP and Challenger, Gray & Christmas for insights.

After two consecutive months of job losses, ADP reported a modest increase of 42,000 private payrolls in October, suggesting some stabilization*. However, the broader trend still appears to point to a slowdown.

Adding to last week’s risk-off sentiment were new headlines about layoffs. Outplacement firm Challenger, Gray & Christmas noted a sharp rise in job-cut announcements in October, nearly triple the number from a year earlier. According to Challenger, while cost-cutting was the most frequently cited reason, AI emerged as the second-most common factor for the month of October. Year-to-date, AI has been linked to 6% of announced layoffs***. Though notable, this remains a relatively limited driver compared to government-related cuts and reduced federal funding.

Still, early research suggests a connection between AI adoption and rising unemployment in certain sectors. A study by the St. Louis Fed found that occupations most intensively adopting generative AI, such as computer and mathematical roles, have seen the largest increases in unemployment. For instance, software developer job openings have dropped 75% from their post-pandemic highs*. In contrast, personal service roles like child care providers and hairdressers, which are less exposed to AI disruption, have remained relatively stable*.

In our view, as with previous waves of technological innovation, some job displacement is likely during the early stages of AI adoption. However, history shows that productivity gains from disruptive technologies tend to boost overall economic activity, ultimately increasing labor demand and creating new job opportunities across the economy*.
 

How to position portfolios in an AI-driven market

We view November's recalibration in sentiment as an uncomfortable but healthy reset following a historic rally since the April lows. AI enthusiasm appeared to be overextended but is likely not over, as fundamentals remain supportive. We continue to expect robust tech earnings and relative economic strength in the U.S., supported by falling interest rates, moderate fiscal support, easing trade tensions, and sustained innovation investment. Thus, we maintain a slight overweight to U.S. large-cap equities.

AI seemingly remains a powerful long-term growth engine, but we think investors should avoid overconcentration in a single theme. We believe a balanced approach is key. We recommend broadening exposure to sectors, asset classes, and regions poised to benefit from rising productivity and a potential global growth reacceleration. Opportunities include companies in industrials, consumer discretionary, and health care, as well as those in the mid-cap space.  

At the same time, we view global diversification as another hedge against concentration risk. International small- and mid-cap stocks, as well as emerging markets, have gained momentum this year amid a more favorable global economic outlook and a softening U.S. dollar*. While the dollar has stabilized recently, it likely remains vulnerable to downside risks from fiscal and political uncertainty and the Fed’s rate-cutting cycle, factors that could further support international equities. Valuations remain attractive, in our view, especially relative to their U.S. counterparts. Emerging markets, in particular, tend to outperform during Fed easing cycles and offer meaningful exposure to global tech innovation*.

Our bottom line: Stay invested with appropriate exposure to AI and innovation; we think these are durable themes. But avoid overexposure. Diversification, in our view, remains your best defense in a concentrated and fast-evolving market.

Angelo Kourkafas, CFA
Investment Strategist

Weekly market stats

^{Source: FactSet, 11/7/2025. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *Morningstar Direct, 11/9/2025.}

^{Source: FactSet, **Morningstar Direct, *** Challenger, Gray & Christmas}

The week ahead

Important economic data for the week ahead include CPI and PPI inflation, retail sales and hourly earnings. Government data could continue to be delayed due to the government shutdown.

Review last week's weekly market update.