CIO Weekly: Three Tests to the Equities Rally

Expect near-term volatility from Q3 earnings, Fed policy, and the U.S. midterms. The market has been reactive, as seen with Meta's AI spending announcement, and this could test the recent S&P 500 rally. Strategists anticipate decelerating earnings growth next year, shifting focus to margins.

AI demand remains strong, but enterprise spending margins may face pressure from higher borrowing costs and supply chain issues. While history suggests companies can find ways to earn more, selectivity is key. Large tech firms must prove their core franchises can scale with heavy capital expenditure while reducing reliance on debt.

We expect the Fed to hold rates this month, likely waiting until December. This pause, however, delays rather than resolves rate risk, so portfolio positioning needs flexibility. The period after the election through year-end looks more constructive, particularly if tech earnings hold up. Focus on companies with strong balance sheets and durable margins, and consider out-of-favor sectors like healthcare and consumer discretionary, alongside cyclicals such as energy and materials.