Weekly Market Review

Earnings are not all about the technology sector

Much has been written about the dominance of the technology sector in 2026, and this is certainly merited given that about two-thirds of the positive earnings revisions this year have come from technology companies.  However, that still leaves one-third from other sectors of the market.  In recent weeks the positive revisions for technology stocks have begun to slow, and investors have been questioning the level of spending on artificial intelligence (AI) infrastructure, how it is funded and what the returns will be.  This has now become full blown scepticism, and the NASDAQ index fell 2.9% on Friday, leaving it 8% below its recent highs, with many individual stocks now down significantly.  The largest technology companies are still reporting strong profits, but upgrades are increasingly scarce.  For example, Alphabet, which owns the Google search engine, saw its shares fall 13% on its reporting day after some rather tepid results compared to expectations.  The advent of AI will no doubt be transformational for many businesses, but if we are entering an ‘air pocket’, as seems increasingly likely, what does this mean for the market?

It won’t be easy for the rest of the market to take up the slack if technology stocks continue to falter, but sectors that are doing well include energy, industrials and healthcare.  Energy companies are currently generating large amounts of free cash flow, benefiting from high oil prices in a fraught geopolitical environment.  For example, Shell reported free cash flow of $16.3bn in the third quarter, up 60% year-on-year, and many peers have reported large increases in earnings.  However, energy is still a small sector in the market, with a weighting of just 4% compared to technology at 31%, so too small to plug the gap.   

Healthcare stocks have also performed better in recent months, especially pharmaceutical companies which are regarded as defensive in volatile markets.  Some of the growth reported by pharma giants such as Eli Lilly has been impressive, driven by its diabetes and obesity drugs such as Mounjaro.  The company just reported third quarter sales growth of 39%, sending its shares up 11% on the week.  Other pharma companies have also reported strong results recently, although some areas of healthcare that are more exposed to elective procedures, such as certain hip and knee replacements, have found it tougher going due to the squeeze on consumer incomes from the rising cost of living.

Finally, the industrials sector looks set to enjoy around 20% earnings growth this year, as the US industrial recovery continues to broaden out, even if some companies do benefit from the AI infrastructure build out as well.  After many years of destocking, industrial growth has accelerated in recent months, and long-term drivers such as reshoring of semiconductor and healthcare factories, and the modernisation of the creaking US electricity grid, remain firmly in place.  With the healthcare and industrials sectors both representing close to 10% of the index, sustained growth in these areas helps support the index, unless technology earnings growth slows dramatically.   

Technology stocks across the globe have dominated investor attention in recent years and for good reason.  However, the benefits of diversification have not disappeared, and when one sector begins to falter it is important to see if other sectors are starting to perform better, which seems to be the case currently.  Economic growth remains solid, the jobs market is healthy, and as long as inflation expectations don’t rise too fast, investors shouldn’t get too pessimistic, despite the possibility of higher market volatility in the near term.

United States

US markets are entering a period in which earnings quality and breadth matter as much as headline index returns. Investors are questioning the pace and financing of AI infrastructure investment, even as the broader economy continues to show resilience. A slower rate of technology earnings upgrades does not necessarily imply a weaker outlook for all companies: industrial investment, grid modernisation, energy production and healthcare innovation offer alternative sources of profit growth. Bond yields have eased from recent peaks, potentially relieving some pressure on valuations, although inflation and the path of Federal Reserve policy remain important. The coming manufacturing and employment data will help investors judge the durability of the expansion. Over time, a broader contribution from sectors outside technology would be a healthy development for the US equity market.

Europe

European markets continue to balance fiscal and political concerns against the resilience of internationally diversified businesses. The European Central Bank's decision to hold rates highlights the difficult trade-off between inflation control and maintaining economic momentum. Meanwhile, UK policymakers face the challenge of supporting households while preserving credibility in government bond markets, and investors will watch closely for the Bank of England's next decision. Across the region, companies in healthcare, industrial manufacturing, consumer products and financial services have different drivers of profitability, which can provide valuable diversification when technology shares are volatile. Although growth is uneven, selective opportunities remain in businesses with strong cash flows, manageable debt and the ability to pass on costs. A more stable policy backdrop would support confidence, but company fundamentals remain central.

Global Markets

The global investment picture is becoming more balanced as investors look beyond the technology sector for sustainable earnings growth. Energy companies have benefited from higher commodity prices, while healthcare and industrial businesses have demonstrated their ability to grow profits for reasons that extend beyond the AI investment cycle. At the same time, different central banks are responding to their own inflation and growth conditions, creating a varied backdrop for currencies, bonds and equities. These differences are not simply risks: they create opportunities to combine assets with distinct sources of return. Higher-quality fixed income can provide income and potential resilience, while diversified equity exposure offers participation in innovation, infrastructure investment and long-term consumption trends. Maintaining flexibility across markets and asset classes is particularly valuable when leadership changes.