What recent market shifts mean for Netwealth portfolios

Market update 

Some leading equity markets in Asia and the US have corrected sharply in the past couple of weeks as concerns about the sustainability of earnings growth related to Artificial Intelligence have intensified. The Democrats’ convincing midterm election win this week have amplified volatility as markets try to price in the prospect of a much less friendly regulatory environment for the sector in coming years, which results in a slowing pace of spending on AI related infrastructure. 

The election has also prompted a reassessment of the other major theme driving markets in 2026: the outlook for unpopular conflict in the Middle East, its direct knock-on impact on energy markets and an indirect influence on inflation and interest rates. For now, the likelihood of repeated escalation has fallen and government bond markets have reassuringly offered some respite from the trend of rate increases that Gerard Lyons sees ahead, here. 

Rotation underway 

The biggest markdowns have been felt in those areas most exposed to previous optimism about AI investment and fears of future energy costs. This has meant that market leadership has rotated away from the AI complex in the US and into the perceived safety of consumer staples, utilities and healthcare companies. In Asia, the picture has been reflected in the sharp falls of memory and semiconductor stock beneficiaries of AI capex on Korean, Taiwanese and Japanese markets.  

Companies operating in sectors which had been overlooked due to either more pedestrian earnings outlooks or due to distance from AI spending and disruption have come to the fore. 

European markets offer plenty of both, and for now are showing some welcome resilience. Holding an additional allocation to the unloved UK real estate sector has also benefited from stability in bond yields. 

Diversification matters, within and across markets 

As investors in ETFs, we are very aware of growing concentration of leading indices in the US and emerging markets around leading tech ‘winners’. For this reason, we have deliberately diluted exposure to the biggest stock names, and broadened holdings across other sectors, previously discussed here and here. 

Against a fast-changing backdrop, we have been encouraged to see the better performance come from these additions to portfolio positioning across both regions. The further reduction of emerging markets ex-China in July towards this diversified US allocation missed some earlier froth but reduced the recent drawdowns. 

The rationale for retaining market exposure 

A change in market leadership, or a broadening of stock performance can be healthy. Our view is that it is too soon to draw conclusions that the positive cyclical environment for equities is over, as economic growth is strong in the US and stable elsewhere. Corporate profitability remains better than usual and has been broadening; helping companies grow into their valuations. Increasing interest rates have started to challenge lower quality borrowers and companies valued on overly-optimistic projections. Meanwhile, crowded investor positioning can often exaggerate fundamental reassessments, and our initial view is that has been a factor this week, but it is unlikely to last.  

Focus on earnings 

For investors, the most important question will be whether the future delivery of profits earnings growth maintains its strong tone. The market gains of the past year have been driven by uplifts in corporate profits, while the value placed on each dollar earned has fallen. Our outlook for corporate profitability is constructive. Expectations are for slowing growth in 2027 from the breakneck pace earlier this year, but not for retrenchment. To our mind, a key characteristic of recent years has been improving guidance as each quarter’s reporting season approaches and delivers, in stark contrast to usual analyst behaviour of lowering expectations to provide corporate clients an easier hurdle to beat, shown by the 20 year average line in the chart below.  Equally important for now is that earnings for future quarters have also continued to rise. 

Source: Bloomberg, with Netwealth calculations 

A consistent approach pays off 

The Netwealth approach remains focused on offering diversified, intentional market exposure as efficiently as possible; there is no such thing as a passive decision. We have not made changes to portfolios this week. A difficult week is a reason for us to reassess the evidence, not to abandon a long-term strategy. 

As ever, we continue to evaluate current positioning, assessing growing risks as well as looking to exploit opportunities from recent price movements. 

Please note, the value of your investments can go down as well as up. This article is provided for information purposes only and does not constitute personal financial advice. Investment decisions should be based on your individual circumstances.