The Nasdaq 100 lost more than 3% on Friday and is down almost 10% from its October all-time high. In comparison, the S&P 500 is down around 3% from its October high, as defensive and dividend stocks have attracted buyers.

The S&P 500 Equal Weight Index gained up to 5% during October, while US Treasuries also rallied after a heavy sell-off as investors sought safety. European bonds faced a different challenge, with French fiscal and political tensions keeping borrowing conditions tighter there.

Overall, November begins carrying all these worries on its shoulders, as earnings announcements continue at full speed this week. On the menu, Apple and Palantir report today, while AMD, Arm and Cloudflare will be in focus later in the week.

So far, the blended earnings growth rate for the S&P 500 stands at a solid 30.2%. What’s interesting, however, is that the Magnificent Seven companies are on track for a weaker-than-expected performance.

According to FactSet, Mag 7’s blended earnings growth rate has declined to 22.6% from the 33.6% estimated on September 30. On the other hand, the earnings growth rate for the other 493 S&P 500 companies has increased to 32.6% from the 27.8% forecast on September 30.

These figures combine reported results with estimates for companies yet to report. As a result, Q3 2026 earnings growth for the Magnificent Seven is now on track to fall below that of the other 493 S&P 500 companies.

Beyond those earnings figures, the concern is not that tech revenues are growing slowly. On the contrary, cloud revenues still beat sky-high expectations. But spending is spiralling, returns on AI spending in areas such as search and advertising have yet to reassure investors, and free cash flow is under pressure.

When capital spending rises faster than operating cash flow, the outcome is more money coming in, but less cash left over — and more pressure to prove that today’s spending will generate tomorrow’s profits. Look, S&P just revised Meta’s credit outlook to negative from stable, citing concerns about high capex and squeezed cash flow.

AI trade’s next challenge

Moving to this week, Big Tech’s next challenge will be political, with the US midterm elections on Tuesday. The latest Reuters/Ipsos poll puts the President’s approval rating at just 32%.

Among likely voters, 44% say they would vote for or lean towards the Republican candidate in their district, compared with 53% who favour the Democratic candidate, leaving Republicans fighting to retain control of Congress.

And here is an issue for the AI trade: the Trump administration has been so supportive — so very supportive — of AI and its infrastructure buildout over the past two years that investors haven’t paid much attention to growing concerns about jobs, energy consumption and the broader environment. The primary motto was, and still is, ‘Bring Manufacturing and Jobs Back to America’ and win the AI race against China!

So the risk is that if Republicans lose their majority in either chamber, it would become harder to push through Trump’s legislative agenda, and support for the AI boom could face greater scrutiny.

Of course, a divided Congress wouldn’t automatically reverse those executive measures or cancel privately financed projects, but it could complicate new funding and legislation, raising the risk that some projects are delayed or scaled back.

That’s a potential political headwind for a trade already struggling with snowballing spending, rising borrowing costs, falling free cash flow and uncomfortable questions about when the returns will arrive to justify massive spending.

That said, if we leave the AI stress aside for a minute — and if history is any guide — the S&P 500’s average annual return has been strongest under a Republican president and a divided Congress since 1950, according to Bloomberg. Investors are apparently just fine with political gridlock.

In any case, President Trump will retain his veto power — and he said that if things went wrong, he would become 'Mr Veto'! Even if Democrats gain control of Congress, they are unlikely to secure the two-thirds majority in both chambers needed to override it.

That would limit their ability to legislate a major reversal of the current AI strategy, although they could still obstruct new funding and legislation. That should offer some comfort to investors worried that a weaker Republican position could derail the aggressive AI trade. But it offers no guarantee of an improvement in sentiment amid mounting AI worries and a worsening macro backdrop.

More rotation

As mentioned at the beginning, October was marked by rotation out of tech. Despite the bond stress, the STOXX 600 and the FTSE 100 benefited from that rotation. European stocks’ cheaper valuations have certainly encouraged a narrowing of the valuation gap, and earnings are supporting further convergence. MSCI Europe’s EPS growth is close on the heels of the S&P 500’s so far this quarter, with European energy companies and banks delivering another quarter of strong growth.

In the US, meanwhile, strong tech earnings no longer seem enough to satisfy investors, as Big Tech’s growth engine keeps asking them to throw more cash at a story that is beginning to sputter.

Broadly, sector composition and stronger longer-term growth prospects have traditionally justified a US valuation premium. But that premium becomes harder to defend when spending keeps accelerating while confidence in future returns weakens.

Unless the US and other tech-heavy markets, such as the KOSPI and TAIEX, can revive investors’ appetite for AI, the rotation towards cheaper and less tech-heavy markets could continue.