Diamond Capital Management's Market Commentary
November, 2026
Gavin J. England
Vice President and Senior Portfolio Manager
Executive Summary:
- Sharp reversal: Markets rallied after Democrats won both chambers, then fell on Thursday as the S&P 500 dropped 4.4% and the NASDAQ entered correction territory, driven by an AI-stock selloff.
- Broadening leadership: Money is rotating away from AI toward Energy, Health Care, Consumer Staples, small caps, and European equities.
- Restrictive Fed, higher volatility: With rates at 3.75%–4.00%, a strong jobs report, and a strong chance of a December hike, we expect more volatility and emphasize diversification, security selection, and valuation.
Democrats won control of both the House and Senate in last Tuesday’s midterm elections, setting up divided government in Washington beginning in January. 
Markets initially welcomed the result, but the relief did not last. On Wednesday, the first trading day after the election, the S&P 500 Index rose 1.6% and the NASDAQ Composite gained 1.4% as the end of election uncertainty, lower oil prices, and hopes for an end to the Iran conflict lifted sentiment. On Thursday, those gains were more than erased: the S&P 500 fell 4.4%, its worst session since April 2025, and the NASDAQ dropped 5.5% into correction territory. Concerns that a Democratic Congress and newly elected governors could tighten regulation of data-center construction triggered a broad selloff in AI-linked stocks, accelerating a rotation that began in October.
The Philadelphia Semiconductor Index fell about 12% on the day, while Treasuries rallied on expectations that a divided Congress will limit new tax and spending initiatives. By the end of the week, the year-to-date total return for the S&P 500 and the NASDAQ Composite was 8.77% and 6.26%, respectively.
Leadership is broadening as money moves away from AI-related stocks. Energy (+40.9%), Health Care (+20.9%), and Consumer Staples (+19.4%) lead all sectors in the S&P 500 Index year-to-date while Communication Services (9.3%) lags the most.
Monetary policy remains restrictive. The Federal Reserve held rates steady at its October meeting, keeping the target range at 3.75%–4.00% after September’s 25-basis-point increase. Markets now imply roughly a 75% probability of another increase in December, a view reinforced by Friday’s October jobs report, which showed 165,000 jobs added versus roughly 65,000 expected.
Taken together, the election outcome, a still-restrictive Fed, and broadening market leadership point to a 
market in transition. The key uncertainties are the return on AI investment, the Fed’s December decision, and policy actions during the lame-duck session. Thursday’s reversal and jump in the VIX to the high-20s suggest investors are still adjusting. We see the potential for additional bouts of higher volatility through the end of the year and continue to emphasize diversification, disciplined security selection, and attention to valuation.
