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Market Commentary
Market Commentary – October, 2025
Trick or Treat
U.S. large-cap stocks gained 2.3% in October, while small-caps rose 1.8%
Overview
U.S. large-cap stocks, as measured by the S&P 500 index, gained 2.3% in October. Since 2000, October returns for U.S. large-cap stocks have averaged 1.7%, making 2025 a year of relatively strong monthly performance. The Russell 2000, an index of U.S. smallcap stocks, gained 1.8% over the month. U.S. intermediate-term bonds, as proxied by the Bloomberg U.S. Aggregate Bond Index, finished October up 0.6%.
Since 2000, U.S. large-cap stocks have averaged 1.7% returns in October, marking 2025 as relatively strong
The shutdown has delayed and disrupted key economic data releases
Trick or Treat
The September CPI report was the only release allowed
State-level jobless claims remained steady throughout October
Although official Bureau of Labor Statistics payroll and other labor market data have been suspended, state-level initial jobless claims continue to be reported throughout the government shutdown. According to J.P. Morgan, aggregated state-level initial claims have remained steady, easing from around 219,000 to 205,000 in the week ending October 25.5 For context, the last officially reported national figure was 218,000 for the week ending September 20.6 During the October 29 Federal Open Market Committee (FOMC) meeting, Federal Reserve Chair Jerome Powell noted that:
“We’ll have a picture of what’s going on in the labor market. And the fact that we’re not seeing an uptick in claims, or a downtick really in openings, suggests that you’re seeing maybe continued very gradual cooling [of the labor market], but nothing more than that. So that does give you some comfort.”7
Powell has downplayed the chance of a December cut, but markets still priced in a 70% likelihood
The Supreme Court has yet to decide whether the April 2 ‘Liberation Day’ tariffs are invalid
Monetary policy will likely remain supportive, particularly since inflation has hovered between 3.7% and 2.4% for the past 27 months—chronically above the Fed’s 2% inflation target. Further, lower interest rates provide an immediate benefit to the ever-present U.S. fiscal debt burden. On October 16, the full fiscal 2025-year Treasury statement was released. It showed the fiscal deficit reaching $1.76 trillion in 2025, a marginal improvement over the $1.83 trillion deficit racked up in 2024.9 The modest improvement was largely due to a boost in tariff revenues: $30 billion was collected in September, which contributed to the largest September surplus on record of $197.9 billion.9,10 On November 5, the Trump administration headed to the Supreme Court to defend the legality of the April 2 “Liberation Day” tariffs.11 If the court rules them invalid (pulling a “trick,” not a “treat” for the administration), billions in tariff revenue may have to be refunded to trade partners. Net interest payments—which would benefit from lower interest rates—rose to $970 billion in the 2025 fiscal year, up from $882 billion in 2024.9
The 2025 fiscal deficit improved slightly from 2024
Meta’s one-time tax charge under the OBBBA dragged the communication services sector’s Q3 earnings down
Earnings growth expectations for the third quarter notably improved through October, rising from 8% at the end of September to 11% by month-end. Information technology (+27%) and utilities (+21%) are expected to drive overall earnings growth.12 Despite beating expectations, Meta’s share price fell more than 10% after it recorded a one-time, non-cash income tax charge related to the implementation of the “One Big Beautiful Bill.” This charge reduced the company’s earnings per share, which in turn pulled down the communication services sector’s third-quarter earnings expectations from +3% to -7%.12 Excluding Meta, the sector would be showing a 13% year-over-year increase.12
Looking ahead, full-year S&P 500 earnings growth expectations continue to edge higher, rising from 10.7% at the end of September to 11.2% by the end of October.12 Full-year 2026 earnings for the S&P 500 are currently projected to rise by 14%. U.S. small-cap stocks, which have gained 12% year to date, are also expected to see strong earnings growth. Russell 2000 earnings are expected to rise by 27% in 2025, and by a notable 40% in 2026.
The technology, utilities, and financials sectors are expected to be key drivers of Q3 earnings growth
AI capital expenditures remained a dominant theme across earnings calls
Meta, Amazon, Microsoft, and Alphabet all reported earnings in October. Artificial intelligence–related capital expenditures (capex) remained a dominant theme across earnings calls, and all four companies signaled plans to increase their spending in 2026. Together, Meta, Amazon, Microsoft, and Alphabet—some of the largest U.S. AI hyperscalers—reported a combined $100 billion in capex during the third quarter of 2025 and an estimated $384 billion year to date. Looking ahead, these companies show no signs of slowing their investments. Meta’s management noted that their “current expectation is that capex dollar growth will be notably larger in 2026 than 2025,” while Alphabet executives said they “expect a significant increase in capex.” 13,14 Similarly, Amazon stated in its earnings call that it “expects full-year cash capex to be approximately $126 billion in 2025, and that amount will increase in 2026.”15 Microsoft’s CFO, Amy Hood, added that “…total spend will increase sequentially, and we now expect the full-year 2026 growth rate to be higher than 2025.”16
Mega-cap companies’ AI-related spending is expected to reach $400 billion in 2025
Company earnings calls show that U.S. consumers remain resilient
Other insights from company earnings calls have thus far revealed interesting consumer spending-related trends. Most notably, both Visa and Mastercard highlighted the resilience of consumers. According to Visa CFO Christopher Suh:
“U.S. payments volume was up 8%…reflecting resilience in consumer spending. We saw a broad-based strength, including improvements in retail services and goods, travel, and fuel.” 17
Mastercard CFO Sachin Mehra echoed a similar sentiment, pointing to healthy consumer spending across income cohorts:
“What we’re seeing is continued steady growth, both across affluent and mass market, through in the U.S. through across the globe. So overall, the consumer continues to spend.”18
High-income spending growth continues to outpace low-income spending growth
According to Bank of America’s consumer insight report, total credit and debit card spending increased by 2% year-over-year in September.19 However, the report notes that the difference in the pace of spending between low-income spending (at 0.6% year-overyear in September) relative to high-income spending (2.6% year-over-year) remains stark.19 The Johnson Redbook Index, which measures weekly same-store sales growth at large U.S. retailers, posted a robust 5.2% year-over-year increase in the last week of October.20 The index has been steady, hovering between 4% and 7% since March 2024.
The 10-year Treasury yield dropped below 4% on October 22
Despite concerns, bank credit default swaps remained contained
Markets
U.S. large-cap stocks ended October up 2.3%, outperforming foreign peers by 1.1% as international developed market stocks ended the month up 1.2%. U.S. small-cap stocks gained 1.8% over the month while developed market small-cap stocks ended October down 0.8%. Emerging market stocks gained 4.2%.
The 10-year Treasury yield eased to 3.95% on October 22. Then, after Fed Chair Powell’s post-FOMC press conference comment that a December interest rate cut was “far from” a forgone conclusion, it rose back above 4%, where it remained for the rest of the month. Despite credit concerns in the U.S. banking sector stemming from alleged fraud at two auto companies (Tricolor and First Brands), bank credit default swaps remained contained relative to history. In addition, high-yield spreads ended the month at 2.78%. These signs indicate that the developments were idiosyncratic and do not reflect broader systemic issues.
Gold, which remains a top performer year to date (gaining 54% since January), ended the month up 5.4%, and reached a new record high of $4,366 per ounce on October 20. After dropping to $56 per barrel, West Texas Intermediate (WTI) crude oil prices ended October back above $60 per barrel while national average gas prices eased to the lowest price for this time of year in five years.
The U.S. held key trade talks with both Japan and China in October
The U.S.–China deal appears to be a tactical pause rather than a comprehensive solution
At the end of October, U.S. President Trump held key trade talks with both Japan and China. The U.S. and Japan announced a $550 billion deal that will see Japanese investment in industries such as energy infrastructure, AI, and critical minerals.21 Japan has also committed to tariff adjustments and the opening of markets that benefit both countries. Meanwhile, the U.S.–China agreement marks a tactical truce that includes tariff reductions, a suspension of export controls on rare earths essential to U.S. industry, and resumed Chinese purchases of U.S. agricultural products.22 Although the U.S.-China deal provides breathing room to avoid supply chain disruption and trade damage, as well as raises hope for improved trade dialogue, it has been widely viewed as a tactical pause rather than a comprehensive solution to the trade imbalances between the two countries. The MSCI Japan Index ended October up 3.4% (up 25% year-to-date) while the MSCI China Index ended the month down 3.8% (up 36% year-to-date).
Gold prices gained 5.4% in October
Consider the potential for the Fed to become more supportive into 2026
Looking Forward
While government shutdowns have historically had limited market impact, the duration of the current shutdown has intensified the sense of disruption and may be spurring consternation among investors. That said, its eventual resolution will likely calm markets and allow a vast amount of money to continue to flow from government coffers. Bond yields, a pivotal signal, are in a curious balance, caught between a softening labor and housing market on one side and continued elevated inflation on the other. Investors also need to consider the potential for the Fed to become increasingly supportive as we head into 2026. After the Fed cut rates at the October 29 FOMC meeting, Treasury Secretary Scott Bessent noted:
“The decision to cut rates by 25 basis points, I applaud. But the language that went with it tells me that this Fed is stuck in the past. Their inflation estimates have been terrible so far this year. They keep coming down, inflation keeps coming down, and their models are broken. And I’m just not sure what they’re thinking here in terms of signaling that they may not want to cut rates at the December meeting. They’ve got a lot to answer for, not only for this year but for many years past, both in their GDP estimates and their inflation estimates, which are consistently wrong. And we’re going to find a leader who is going to revamp the entire institution in terms of process and inner workings.” 23
Artificial intelligence remains a dominant market theme, and there is a reasonable debate over whether current enthusiasm reflects a trick-or-treat, an AI bubble or a sustained transformational growth opportunity. On one hand, technology sector valuations keep climbing, and the price-to-sales (P/S) ratio ended October well above Tech Bubble levels. The S&P 500 information technology sector now trades at 10.7x sales, compared with a peak of 7.0x in the early 2000s.
Debate continues over whether current enthusiasm is a trick-or-treat, an AI bubble, or true transformational growth
On the other hand, when valuation is adjusted for earnings growth, the sector looks less extreme. Using one version of a PEG ratio—price-to-earnings divided by three-year trailing earnings growth—the sector stands at 1.4x versus roughly 4.1x at the height of the Tech Bubble. This oversimplified contrast doesn’t settle the debate, but it highlights one defining feature of the bull market: earnings growth remains key.
Earnings growth for the tech sector is expected to rise 33% in 2025 and 23% in 2026
For the S&P 500, earnings per share (EPS) fell 1% year-over-year in 2023, rose 8% in 2024, and are projected to increase 14% in 2025 and 13% in 2026. In the information technology sector, EPS declined 0.6% in 2023, rebounded 18% in 2024, and is expected to surge 33% in 2025 and 23% in 2026.
Ongoing earnings growth and easier policy should encourage investors to stay the course
While it is not guaranteed, continued earnings growth and the prospect of substantially easier policy should encourage investors to patiently stay the course, albeit in diversified portfolios.
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Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.