Week In Review 

Markets moved lower at the headline level this week, but internal leadership shifted. The S&P 500 finished the week in negative territory, masking pronounced dispersion beneath the surface. The Dow Jones Industrial Average and small caps were the clear outperformers, while the Nasdaq was a notable laggard. Value outperformed growth across market caps, and sector leadership rotated decisively toward cyclical and economically sensitive areas.

Recent research from both Goldman Sachs and JPMorgan aligns with this shift. Both firms have highlighted improving participation outside of mega‑cap growth, pointing to strengthening relative performance, stabilizing earnings revisions, and more favorable valuation dynamics across cyclical sectors. Their work emphasizes that leadership transitions like this—when supported by credit stability and a cooling but intact labor market—can be durable rather than tactical.

Small‑cap leadership reinforced that signal. With monetary policy moving closer to neutral and financial conditions easing modestly, investors increasingly favored companies with greater sensitivity to domestic growth and financing costs. Historically, early easing phases that do not coincide with recession have tended to support small caps and value‑oriented stocks, particularly when credit markets remain constructive.

Technology weakness was concentrated in areas most exposed to AI‑driven capital spending. Several high‑profile AI beneficiaries delivered solid demand signals but also highlighted elevated capital expenditures and pressure on near‑term free cash flow. The market response underscores a broader change in psychology: AI demand is no longer being debated, but investors are placing greater weight on profitability, margins, and capital discipline.

That shift does not imply a retreat from the AI theme itself. AI development and adoption continue to advance, particularly in enterprise and content‑focused applications. However, equity markets are increasingly differentiating between companies with clear monetization pathways and those still in a capital‑heavy build‑out phase. As a result, AI exposure has become more selective, contributing to the underperformance of Information Technology and Communication Services at the sector level.

Outside of tech, cyclicals benefited from a combination of improving fundamentals and capital‑return activity. Financials gained support from resilient credit conditions, steady consumer behavior, and improving capital‑markets activity. Industrials and Materials were bolstered by infrastructure‑related demand, ongoing inventory normalization, and optimism around nominal growth. Buyback activity across multiple sectors reinforced investor preference for cash returns and balance‑sheet strength.

In fixed income, yields were mixed – short-term yields fell, while long-term yields rose – resulting in a twist. The 10‑year Treasury rose 5bps to 4.19%, while the 2Yr fell 4bps to 3.52%. While the Fed cut rates, messaging emphasizing data dependence rather than a pre‑set easing path, as well as political uncertainty—including reports surrounding the future leadership of the Federal Reserve—contributed to term‑premium volatility.

The Federal Reserve was a highlight this week and cut the fed funds target range by 25 bp to 3.50%–3.75%, marking the sixth cut of the cycle and a cumulative 175 bp of easing, with dissents reflecting both calls for more aggressive cuts and no change. The Fed’s assessment of the economy was largely unchanged, noting moderate growth, slower job gains, and elevated inflation, while emphasizing downside risks to employment and removing language that described unemployment as “low.” Policymakers reinforced a data‑dependent, meeting‑by‑meeting approach, signaling no preset pause and leaving the door open to additional cuts, even as the median longer‑run rate outlook remained stable. The Fed also announced renewed Treasury bill purchases to maintain ample reserves, while updated projections showed slightly stronger growth, steady unemployment expectations, and modestly lower inflation, supported in part by higher productivity.

Credit markets continued to send a constructive signal. Investment‑grade and high‑yield spreads remained historically tight, suggesting that investors are not pricing in a recessionary shock. Stable credit conditions have been a key underpinning of the equity rotation toward cyclicals and value.

Economic data supported a “cooling, not collapsing” outlook. Job openings held steady, worker turnover remained low, and continuing jobless claims moved lower despite a seasonal uptick in initial claims. The sharp narrowing in the trade deficit provided an additional tailwind to near‑term growth calculations.

Overall, the week reinforced a shifting market structure rather than a deterioration in fundamentals. While headline indices were mixed to lower, leadership broadened meaningfully toward value, cyclicals, and small caps. Looking ahead to next week, investors will be focused on the remainder of data being released to catch up from the government shutdown. The November Jobs reports will be released on Tuesday, and November’s CPI report will be released on Thursday and will provide the next directional drivers before things quiet down leading into the holidays.

Key events to watch next week
FactSet estimates in parenthases unless otherwise noted.

Monday: US Empire State Index (10.5), US NAHB Housing Market Index (38.0)
Tuesday: US Non-Farm Payrolls (40k), US Unemployment Rate (4.4%), US Industrial Production (m/m: 0.1%)
Wednesday: US Retail Sales (m/m: 0.1%)
Thursday: US CPI (m/m: 0.25% | y/y: 3.1%), US Core CPI (m/m: 0.3% | y/y: 3.1%), US Initial Claims (prev. 236k), US Continuing Claims (prev 1,838k), US Philadelphia Fed Index (3.5)
Friday: US Existing Home Sales (SAAR: 4,140k), US Core PCE Deflator

Past performance does not guarantee future results, which may vary.
Source: FactSet, MidWestOne Private Wealth.
All returns presented are total returns, which include the reinvestment of income and dividends.
For style performance, Large, Mid, and Small for US Equity refer to the Russell 1000, Russell Midcap, and Russell 2000 indices, respectively. Value refers to companies with lower price-to-book ratios and lower expected growth values, and Growth refers to higher price-to-book ratios and higher forecasted growth values. Real Estate refers to the DJ Equity REIT Total Return Index. Commodities refer to the Bloomberg Commodity Index. US Dollar refers to the value of the United States dollar relative to a broad basket of trade-weighted foreign currencies. Developed: MSCI EAFE; Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East. Emerging: MSCI Emerging Markets; Morgan Stanley Capital International Index designed to measure the performance of the emerging stock index of China, Brazil, India, and other emerging market countries.
Diversification does not protect an investor from market risk and does not ensure profit.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Views and opinions expressed are current as of the date of this publication and may be subject to change, they should not be construed as investment advice.