Why Diversification Matters as Stock Market Leadership Shifts 

Dear Valued Investor,

As the last few votes are tallied in the midterm elections and a strong performance by the Democrats
brings divided government, the same crosscurrents that have shaped markets this year remain in place:

• The artificial intelligence (AI) spending boom has drained excess cash flows from some of the biggest
  U.S. technology stocks and added to their debt loads. However, the investment has also contributed to
  solid economic and profit growth. Free cash flow, which deducts capital expenditures from operating
  cash flow, is still expected to increase 11% over the next year (source: FactSet).
• Interest rates are higher than in recent decades, and the Federal Reserve (Fed) may hike rates in
  December, but the 10-year Treasury yield has fallen 0.4% over the past month to below 5% and well
  within historical norms.
• Oil prices are too high, and inflation remains elevated, but we believe the chances of a diplomatic
  solution in the Middle East may have increased now that the election is behind us. Market-based
  measures of inflation expectations remain well anchored, and the Kevin Warsh-led Fed has credibility
  as an inflation fighter.
• Midterm elections have historically brought uncertainty and increased market volatility, but that
  uncertainty has tended to fade quickly once votes are counted. The S&P 500 has been positive in the
  12 months after midterms 19 times in a row, dating back to 1950, averaging a gain of over 15%.
  Against that backdrop, the average S&P 500 stock gained 5% in October even as the more common
  market capitalization-weighted index fell 0.9%. As the technology and AI-heavy communication services
  sectors fell, the other nine sectors rose. As the Russell 1000 Growth Index slipped 6.1%, its value
  counterpart gained 4.4%. As U.S. large cap benchmarks dipped, small caps eked out a gain. The benefits
  of diversification were also evident in bonds, as the Bloomberg Aggregate Bond Index gained 2.4% for the
  month.
   

The earnings picture is also diversifying, bolstered by a strong U.S. economy that grew at a 3.4%
annualized pace in the third quarter, adjusted for inflation. While S&P 500 companies are on track to grow
earnings 30% overall in the third quarter, including the big AI spenders, excluding technology, earnings are
still growing at a solid mid-teens pace. That’s a key benefit of diversification. * There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.​
Our message for investors is this: Stay diversified. Own companies using and benefiting from AI, not just
those building computing capacity. Keep your focus on strong stock market fundamentals — a resilient U.S.
economy and healthy corporate sector. Finally, don’t make portfolio decisions based on political outcomes.
Any election-related volatility will likely present an opportunity for long-term investors.
As always, please reach out to me with questions.
Thank you for your continued trust.
 

Warmest Regards,

Shane Terry, ChFC®

President & LPL Registered Principal

Terry Wealth Management

2710 Loker Avenue West

Suite 220

Carlsbad, CA 92010

Phone/Fax  760.858.2080

CA Insurance Lic. #0K26885

shane@terrywealth.com

www.terrywealth.com