Markets extended their winning streak in October despite some early-month volatility.
Tensions between the U.S. and China over rare earth metals briefly rattled investors,
causing the market’s worst single-day drop since April. The situation was quickly de-
escalated, allowing strong earnings and continued AI enthusiasm to propel the market
higher.
The S&P 500 rose 2.3% for the month, though gains were concentrated in a handful of
large-cap technology names. The equal-weighted version of the index lagged by more
than 3%, showing just how concentrated the rally remains. The AI trade was a tailwind
for the Nasdaq, which climbed 4.7%. Nvidia, the largest weighting in both the S&P 500
and Nasdaq, reached a remarkable $5 trillion market cap by month-end. For context,
only the U.S. and China have annual GDPs that large. Outside the U.S., returns were
mixed. The MSCI EAFE Index increased 1.1%, while emerging markets performed
better, gaining 4.1%.
The ongoing government shutdown, now nearing record length, clouded the economic
outlook. Key data releases were delayed, leaving the Fed to operate with an incomplete
view of the economy. Interest rates drifted lower until mid-October, when the Fed cut its
benchmark rate by 25 basis points to a range of 3.75%–4% in response to labor market
softness. Rates then edged higher after Chairman Powell noted divisions within the
committee about future policy, reducing the market’s implied probability of another cut in
December from over 90% to 65%. Despite a late-month uptick, rates ended mostly
lower, supporting fixed-income performance as the Bloomberg U.S. Aggregate Index
rose 0.6%.
In the absence of official government data, private indicators provided valuable insight.
The ADP Employment Report showed a loss of 32,000 jobs in September, while the
Challenger Report recorded 54,000 cuts. Inflation remained sticky, with both headline
and core CPI up 3% year over year. Consumer spending data showed a bifurcated
consumer: credit card activity slowed after a strong summer, as lower-income
households cut back and sought discounts, while higher-income households continued
spending freely on travel, entertainment, and other discretionary items.
October highlighted both the resilience and fragility of the market. Strong earnings and
the AI trade lifted equity markets to new highs, yet uncertainty remains amid the
government shutdown, a weakening labor market, and a growing divide among
consumers. As valuations remain stretched and concerns about a possible AI bubble
rise, markets seem to be weighing optimism against caution.
Brendan Molesk, CFA
Head of Trading & Analytics