Market Commentary

• Artificial intelligence (AI) demand remains durable, but regulatory and execution risks reinforce our preference for high-quality equities.
• Maintain equity exposure but await a potentially better entry point before committing additional capital.

The election delivered a clear result in Washington, but Wall Street’s verdict has been less straightforward. Stocks initially rallied the day after Election Day with the Nasdaq Composite Index rising 1.4% and the S&P 500 Index gaining 1.6%. That optimism proved short-lived. On Thursday, November 5, renewed concerns about regulation, data-center development, and the durability of spending sent the S&P 500 Index down 4.5%, its worst session since April 2025. The contrasting sessions capture a market still debating the election’s implications. Every trading day is its own election with investors casting ballots among stocks, bonds, commodities, and cash. Recently, the Nasdaq Composite Index has resembled an undecided voter with a bearish lean, moving at least 1% in either direction in eight of 10 sessions through November 9. The declines have carried more force, but the rallies show that investors have not abandoned AI. They are demanding clearer evidence that substantial investment can produce returns.

That evidence is beginning to emerge among some of the largest AI participants, in our view. Demand for cloud computing continues to exceed available capacity while AI-related revenue is expanding across cloud services, enterprise applications, and cybersecurity. Growth is also spreading through the physical data-center supply chain, including semiconductors, networking equipment, memory, electrical systems, and cooling. However, the election could complicate the next stage of the physical buildout by increasing uncertainty around power usage, utility costs, permitting, and new development.

That does not mean the AI opportunity is ending. End demand remains strong, and industry backlogs support growth into 2028. Data centers also provide construction jobs and tax revenue, potentially encouraging compromise among companies, communities, and regulators. Still, not every project will be completed on its original schedule, and not every company will generate attractive returns. We favor financially strong companies with established competitive positions, disciplined capital allocation, and the capacity to absorb delays and higher costs while converting investment into durable revenue, earnings, and free cash flow (cash from operations less capital expenditures).

That emphasis on quality supports our favorable view of U.S. Large Cap Equities. Compared with other equity asset classes, we believe U.S. large caps can potentially offer better profitability and lower leverage along with strong earnings growth and meaningful AI exposure. However, we believe a favorable longer-term outlook does not necessarily make today the best time to buy. The recent selloff has not yet produced convincing evidence of capitulation or a durable bottom, in our view, and the pullback may require more time to develop rather than producing a quick V-shaped recovery. We would maintain existing equity exposure, emphasize quality and growth, and avoid aggressively buying the initial decline. If selling persists, investors may consider adding capital gradually or rearranging favored positions. We are watching the S&P 500 Index near 7,000 as a potentially more attractive risk-reward entry point. Until then, we believe patience and selectivity appear more important than broadly buying the pullback.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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