Investment Weekly: Profits power ahead
9 November 2026
Key takeaways
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A "blue wave" has swept Washington, with Democrats flipping both Houses of Congress. Historically, the year following midterms is the strongest of the presidential cycle for US stocks. In theory, passing the vote lifts election uncertainty, and when the result produces divided government, the gridlock further reduces policy risk by blocking major legislative shifts.
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An old adage holds that when global markets sneeze, emerging markets (EM) catch a cold. Since mid-August, they have faced a barrage of shocks: elevated oil prices amid Middle East tensions, an AI-led global equity sell-off, and a hawkish repricing of US interest rates.
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After years chasing returns abroad, Japanese capital is flocking back to native shores. With domestic yields at multi-decade highs, local institutions are stepping in to absorb supply, offering a counterweight as the Bank of Japan shrinks its bond portfolio.
Chart of the week – Profits power ahead
Global equities have demonstrated remarkable resilience this year, holding near record highs despite a barrage of macroeconomic headwinds. Markets have had to contend with surging oil prices, 10-year US Treasury yields exceeding 5%, renewed Fed rate hikes, and growing scrutiny over the durability of the AI boom.
Part of this resilience reflects powerful buffers within the broader macro system. More activist fiscal and industrial policy, cushioned energy reserves, market flexibility and rapid private-sector supply-chain adaptation have enabled economies to absorb external shocks that might previously have triggered a downturn.
At the market level, booming corporate profits have done the heavy lifting. The Q3 reporting season has underscored this fundamental strength, with the S&P 500 on track for a third consecutive quarter of earnings growth above 25%, backed by near-record margins and broad-based revenue expansion. Surging forward earnings estimates have outpaced index price gains in 2026, resulting in a P/E valuation de-rating.
Beneath the surface, however, profit leadership is shifting. Mega-cap earnings momentum is slipping against lofty expectations, leaving the "Magnificent Seven" trailing the broader index. This leaves markets in a delicate balancing act. With cash and short-duration bonds yielding around 5%, the opportunity cost of equities has risen. Amid elevated rates and geopolitical uncertainty, fading mega-cap dominance could test market resilience – reinforcing the need to broaden exposure across sectors and regions.
Market Spotlight
More than the parts
Traditional portfolios can suffer from an illusion of diversification. Managed in isolated silos, they often double up on the same underlying risks, only discovering the overlap when markets sell off together.
Rather than viewing investments through isolated labels, a Total Portfolio Approach (TPA) aims to balance four core macro forces driving returns: economic growth, duration (interest rate sensitivity), inflation and defensive resilience.
Because stocks, credit, and private equity all rely on economic growth, while government and corporate bonds share duration risk, traditional portfolios are often lopsided, leaving them short of inflation and crisis protection. Under a "one portfolio, one purpose" mindset, teams break down walls to plug those gaps, making room for inflation hedges like commodities and crisis buffers like gold and defensive hedge funds.
Rather than a disruptive overhaul, TPA could be considered as a pragmatic evolution, combining specialist building blocks with agile, factor-aware decisions for stronger long-term returns.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific company, country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 06 November 2026.
Lens on…
Beyond the blue wave
A "blue wave" has swept Washington, with Democrats flipping both Houses of Congress. Historically, the year following midterms is the strongest of the presidential cycle for US stocks. In theory, passing the vote lifts election uncertainty, and when the result produces divided government, the gridlock further reduces policy risk by blocking major legislative shifts. Yet investors face choppy waters: without a 2027 budget, a mid-December shutdown looms, the economy is still absorbing a big energy shock, and questions surround AI regulation. Broad stock markets have been consolidating since mid-year, but powerful churn is building beneath the surface. Rapid profit tailwinds are cooling, interest rate headwinds are intensifying, and AI spillovers are reshaping market leadership. Investors will need to get used to a "rolling rotation" between sectors and countries – moving beyond Technology to include value and defensive stocks. |
Shifting tides also reach the dollar. Roughly 15% above its long-run real average, the greenback rode the tech trade; if tech cools and the Fed underdelivers on 2027 rate hikes, the "dollar down" theme might return.
No longer catching a cold
An old adage holds that when global markets sneeze, emerging markets (EM) catch a cold. By that logic, EM local-currency bonds should be reeling. Since mid-August, they have faced a barrage of shocks: elevated oil prices amid Middle East tensions, an AI-led global equity sell-off, and a hawkish repricing of US interest rates. Adding to the pressure, fiscal jitters have rattled Brazil, one of the largest EM debt markets. However, the JPMorgan GBI-EM Global Diversified Index has edged only modestly lower since its August peak, staying roughly flat over the past six months. Since 2024, some EM local bonds have eked out slight average gains during global equity sell-offs, while currency drops have softened. |
Crucially, Brazil's fiscal fever hasn't triggered indiscriminate selling across peers. This resilience lets investors look past isolated country flare-ups.
No place like home
After years chasing returns abroad, Japanese capital is flocking back to native shores. With domestic yields at multi-decade highs, local institutions are stepping in to absorb supply, offering a counterweight as the Bank of Japan shrinks its bond portfolio. This homecoming is gathering momentum. Domestic investors bought a net ¥18.8 trillion of Japanese government bonds (JGBs) during April–September, their strongest first-half spree in 17 years, with pension-backed trust banks accounting for nearly half of those purchases. October’s 20-year auction also drew record demand, with bids nearly six times the competitive allocation. Fiscal risk in France, where Japanese investors hold an estimated ¥23 trillion in bonds, could spur further repatriation. |
Yet what makes sense for yen-based institutions looks less compelling for global portfolios. Locals can now match long-term liabilities at home while avoiding steep FX-hedging costs on foreign debt. For global investors, however, JGB yields still lag those in other major markets, offering scant cushion against a poor fiscal trajectory and the risk of an inflation overshoot.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 06 November 2026.
Key Events and Data Releases
Last week
This week
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 06 November 2026.
Market review
Global equities were mixed amid market and sector rotations, with semiconductor and AI-related shares weakening noticeably after the Democrats secured a clean sweep in the US midterm elections. In the US, the S&P 500 and Nasdaq fell, while the Philadelphia Semiconductor Index recorded mid-teen percentage losses amid growing concerns over AI regulation. Meanwhile, the Euro Stoxx 50 advanced, led by gains in banking stocks. Asian bourses delivered a mixed performance. Liquidity-support measures from the regulators revived policy optimism and lifted Chinese equities, while Indian equities led regional gains on the back of lower oil prices. However, semiconductor-heavy markets, such as the Kospi, declined notably. In fixed income, US Treasury yields fell as inflation concerns eased. The dollar index was broadly stable, although the US dollar diverged against its major peers. Gold prices rose, while copper prices fell.
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