Executive Summary
- U.S. equities hit record highs in October, led by large-cap growth stocks and the “Magnificent Seven”
- Market breadth narrowed, with value indices and midcaps lagging but remaining in technical uptrends
- The Federal Reserve delivered a hawkish rate cut, surprising markets and impacting rate expectations
- Robust Q3 earnings (+10.7% YoY for S&P 500) and seasonal tailwinds support a constructive outlook for year-end
- Seasonal headwinds now become a tailwind
U.S. equities ascended into record territory in October amid easing U.S.-China trade tensions, a hawkish Fed rate cut, robust corporate earnings, and an ongoing government shutdown.
The large-cap S&P 500 (+2.3%) and Dow Jones Industrials (+2.6%) indexes, along with the small-cap Russell 2000 (+1.8%), each recorded their respective sixth consecutive monthly gain, while the Nasdaq-100 (+4.8%) and Nasdaq Composite (+4.7%) indexes extended their streak to seven.
There was a noticeable deterioration in market breadth, with an increasing number of industries consolidating prior gains. While large-cap growth (+3.6%) and small-cap growth (+3.2%) led the way, in particular the Magnificent Seven (+4.9%), large-cap value (+0.4%) and small-cap value (0.3%), they were only marginally higher. Furthermore, the S&P 500 Equal Weight and the S&P Midcap 400 indices declined 0.9% and 0.5%, respectively.
Narrowing breadth can signal increased risk for a market reversal; however, last month’s underperforming benchmarks remain within a few percentage points of all-time highs and are in technical uptrends as defined by a 50-day simple moving average (sma) being higher than their respective 200-day sma. While there remains a wide gap in relative performance, the underperformers are largely still in uptrends with positive returns.
The S&P Midcap 400 Index is the worst performing broad equity benchmark with a 5.3% total return YTD, and it is also the only broad index to not reach new 52-week highs in 2025. From a glass-half-full perspective, the benchmark has spent the prior two months in a sideways consolidation range along an expected resistance level representing the previous high set in January 2025. While it currently stands about 6% below its 52-week high, it could simply be a matter of time before it is the beneficiary of investor rotation and joins the other benchmarks in making new highs.
Investor sentiment was supported by a mix of macro and sector-specific developments. A meeting between Presidents Trump and Xi produced a modest easing in trade tensions, including a reduction in U.S. tariffs on fentanyl and a one-year delay in China’s rare earth export controls. While these measures helped reduce near-term uncertainty, they were largely anticipated and did not address deeper structural issues in the bilateral relationship. The agreement was viewed as a temporary reprieve, with another meeting scheduled for April.
The technology sector continued to benefit from strong investor interest in artificial intelligence. New partnerships and deal activity helped sustain momentum leading to another robust performance by the semiconductor industry. In October, the SOX Index gained 13.5%, marking its fourth double-digit gain in six months, measuring a combined +118% total return from the April lows.
The Federal Reserve delivered a widely expected 25 basis-point (bp) rate cut in the final week of October and announced plans to end quantitative tightening (QT) on Decc1. Chair Jerome Powell previously telegraphed the end of QT was coming at his Oct. 14 speech at the Blockworks Digital Asset Summit (DAS) in London:
“Some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates. The Committee’s plans lay out a deliberately cautious approach to avoid the kind of money market strains experienced in September 2019.”
However, Chair Powell delivered a strongly hawkish tone during the post-FOMC press conference:
“Further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.”
The hawkish tone caught the market off guard leading to a repricing for another rate cut in December from 90% to 60%.
October was also marked by disruptions stemming from a prolonged government shutdown, which delayed the release of key employment and inflation data. September’s CPI report was eventually published and came in cooler than expected, driven by easing rent and owners’ equivalent rent figures. This reinforced the narrative of shelter-driven disinflation and offered a potential tailwind for the Fed’s inflation outlook. Political pressure intensified as SNAP benefits approached expiration on November 1, adding urgency to negotiations and raising hopes for a swift resolution.
Sector Performance
Bifurcated performance was more visible at the sector level with five of 11 groups finishing in the red in October. Semiconductors fueled the outperformance by the Technology sector (+6.2%). The previously underperforming Healthcare sector (+3.6%) had its third consecutive monthly gain. The Materials sector (-5%) was the laggard and marked its second consecutive month in the red. Financials gave back 2.8% amidst emerging “one-off” credit concerns at select banks.
At the small-cap level, Healthcare (+8.4%) returned its best month in 2025, driven by the resurgence in biotech stocks. The Nasdaq Biotech Index (+10%) registered its best monthly return since December 2023. Staples and Discretionary each declined 7%, driving both groups into the red YTD. Five of the 11 sectors are down 10% or more from their respective 52-week high.
Corporate earnings season is in full gear with 64% of S&P 500 companies reporting results through the end of October with 83% reporting a positive earnings surprise and 79% reporting a positive revenue surprise, according to FactSet. For Q3 2025, the blended earnings growth rate (YoY) for the S&P 500 is 10.7% better than the 7.9% expected growth rate at the beginning of the season, and on pace for a fourth consecutive double-digit gain. The forward 12-month P/E ratio for the S&P 500 is 22.9 vs. the 5-year and 10-year averages of 19.9 and 18.6, respectively.
Looking Ahead
The message of the market has been quite bullish in the six months following last spring’s tariff tantrum and concerns over fading U.S. exceptionalism. Since then, the U.S. dollar (DXY) has stabilized. Long rates are closer to 4% vs. highs of 4.8% at the start of the year. The Fed eased another 50bps and will end QT on Dec. 1. Corporations are delivering double-digit earnings growth.
Seasonality is a tailwind for equities for the remainder of 2025. Since 1970, November and December have been the top performing months for the S&P 500 with average returns of 1.8% and 1.4%, respectively. Carson Research notes the best six-month window since 1950 is November through April, which has an average return of 7%, while the worst six-month window is May through October (“Sell in May”), with an average return of 2.1%. The S&P 500 just finished this worst six-month window where it gained 22.5%. Logically, one may assume that it could steal gains from the usually bullish months that follow; however, historically that has not been the case. The previous 10 best “Sell-in-May” periods were followed by six months of gains nine of 10 times for an average return of 13.9%.
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