Rearview to Windshield, October 2026

Market Recap – Rotation, Not Retreat

October was a reminder that the index isn’t the market. The S&P 500 slipped -0.87% and the NASDAQ fell ‑5.28%, its worst month since March 2025, yet the S&P 500 Equal Weight Index gained +5.00%. That’s the equal-weight index’s widest monthly lead since April 2009, and every sector rose except Technology and Communication Services. The trigger was the AI trade’s real report card. Several mega-cap reports disappointed on spending and search-ad worries, and chipmakers sold off as investors questioned how a debt-funded expansion pencils out with the 10-year above 5%. But the money rotated rather than left. Health Care, Financials, Staples, and Energy carried the load, value stocks hit a record, and Treasuries had their best month since 2023. The S&P 500 finished about 3% below its October 6th all-time-high record. When the generals retreat and the soldiers advance, that’s breadth, not breakdown.

Bond Recap – A Month of Reprieve

Bonds performed well in October. The Agg gained +2.44% and investment grade jumped +2.16% as the 10YR fell 35bps to 4.94%, its biggest monthly drop since December 2023, after peaking near 5.36% mid-month. Duration was rewarded, as floating rate exposure reprices to lower rates. This was a flight to quality out of tech, not a growth scare: Q3 GDP printed 3.4% while core PCE cooled to 2.5%. Credit was less convinced. High yield returned just +0.42% as spreads widened, most in debt-funded corners of the AI build-out. Our line holds: 5% is stress, 6% is credit risk. Getting back below 5% buys breathing room, but with a December hike priced in, don’t expect a straight line lower.

Get Back to the Market Basics

• Earnings Growth Continues to Trend Higher: Q3 growth is tracking 30.2% with 60% of the S&P 500 reported and 82% beating, the third straight quarter above 25%. Analysts raised Q4 estimates 1.4% in October instead of the usual ~1% first-month cut, and ’26 growth is now 32.9%.

• Profitability Is Climbing Across the Index: Forward margins sit at records for both the cap-weighted S&P 500 (21.5%) and the equal-weight index (15.2%). The average company is getting more profitable, not just the mega-caps, so October’s rotation has earnings behind it.

Why Has the Market Remained So Resilient?

• Monetary: The Fed held at 3.75%‑4.00% in a 10‑2 vote, with both dissents favoring a hike, and a December hike is ~80% priced. Policy is less easy, not tight.

• Fiscal: The deficit is near 6% of GDP and OBBB’s 100% expensing keeps rewarding capex; real private domestic demand grew 4.9% in Q3.

• Private: The hyperscalers guide to ~$730B of 2026 capex, none signaled a slowdown on Q3 calls, and Alphabet says 2027 will rise significantly.

Prices Fell, Earnings Didn’t

October’s AI selloff wasn’t a fundamental problem. Technology’s Q3 earnings are growing at a 67.5% clip, while revenue jumped 41.9%. Semiconductors are up 132%, and the hyperscalers still describe themselves as capacity constrained. What changed was the price investors were willing to pay, not the profits they’re buying. With prices down and estimates up, the NASDAQ Index now trades at 19.4x forward earnings, about one turn above the S&P 500 and below the Russell 1000 Growth. That’s not a broken growth story; it’s a cheaper one. Leadership can rotate without the earnings engine stalling.

Strong Growth, Cooler Prices

Q3 GDP grew at a 3.4% annualized pace, up from 2.2% in Q2, with consumer spending steady at 3.8% and AI-related equipment investment doing the heavy lifting. Real final sales to private domestic purchasers, the cleanest read on underlying demand, rose 4.9% (from 4.6%). Better yet, inflation cooled: core PCE ran at a 2.5% annualized rate, down from 3.3% in Q2. Strong demand with cooling prices isn’t an overheating economy. It’s the mix the Fed wants, and it’s why a December hike would be insurance, not an emergency.

The Warsh Fed: Fewer Votes, Bigger Moments

The biggest Fed news in October wasn’t the hold; it was the calendar. Starting next fall, one of the Fed’s eight meetings becomes a strategy session with no rate vote and no statement, rising to two in 2028. Pair that with Warsh’s lighter touch on forward guidance and each decision carries more weight. Markets have been spoon-fed the Fed’s next move for over a decade. Under Warsh, investors will have to read the data themselves. Expect more volatility around each meeting, and more reward for getting the call right.

Midterms: Clarity Is the Catalyst

Voters head to the polls November 3, and markets have historically cared less about who wins than about the uncertainty ending. 2026 has already broken the midterm-year script, with the S&P 500 up 11.75% YTD. What comes next has been the most reliable stretch of the presidential cycle: since 1950, the S&P 500 has been higher from November 1 of the midterm year to April 30 of the following year 19 out of 19 times. History doesn’t guarantee a 20th, but it puts the burden of proof squarely on the bears.

Moving Forward – Remain Optimistic

As long as earnings grow, the burden of proof stays with the bears, and earnings are growing 30%. October didn’t break the bull market; it widened it. A market where the NASDAQ falls -5% while the average stock gains +5% has more legs, not fewer. The risks are real, from $110 oil to a December hike to the cost of financing AI, but so far they’re showing up as rotation, not liquidation. With the forward P/E at 18.4x, down from 22.0x to start the year, treat volatility as opportunity. It’s better to be patient than clever.

Disclosures

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Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

Forward price-to-earnings (P/E) (NTM) is a valuation metric dividing a stock's current price by its projected earnings per share over the next twelve months. It measures how expensive a stock is relative to its expected near-term profitability.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security's U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The S&P 500® Equal Weight Index holds the same constituents as the S&P 500® but assigns each company an equal weight at each quarterly rebalance rather than weighting by market capitalization. References in this commentary to the “average stock” or the “equal-weight index” refer to this index.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Russell 1000® Value Index measures the performance of US large cap value stocks. The index includes companies with relatively lower priceto-book ratios, lower 2-year I/B/E/S forecast growth and lower historical 5- year sales growth. The index is reconstituted fully in June to ensure accurate representation of the US large cap value style, with updates for parent index membership changes in December and quarterly IPO inclusions in March and September. Since March 24, 2025, the index applies quarterly capping if constituent weights exceed target RIC thresholds.IPOs with investable market cap above the Russell Top 500 breakpoint are eligible for fast entry; breakpoints are set semi-annually and market-adjusted quarterly.

The Russell 1000® Growth Index measures the performance of US large cap growth stocks. The index includes US large cap stocks with relatively higher price-to-book ratios, higher 2-year I/B/E/S forecast growth and higher historical 5-year sales growth. The index is reconstituted fully in June to ensure accurate representation of the US large cap growth style, with updates for parent index membership changes in December and quarterly IPO inclusions in March and September. Since March 24, 2025, the index applies quarterly capping if constituent weights exceed target RIC thresholds.IPOs with investable market cap above the Russell Top 500 breakpoint are eligible for fast entry; breakpoints are set semi-annually and market-adjusted quarterly.

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity market. It is composed of approximately 2,000 of the smallest companies in the Russell 3000® Index and is reconstituted annually. References in this commentary to “small caps” refer to this index.

The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities.

The Bloomberg U.S. Corporate Bond Index tracks U.S. dollar-denominated, investment grade, fixed-rate, taxable corporate bonds publicly issued by industrial, utility and financial companies, both U.S. and non-U.S. domiciled. Investment-grade bonds are believed to have a lower risk of default and receive higher ratings from the credit rating agencies; they tend to be issued at lower yields than less creditworthy bonds.

The Bloomberg U.S. Corporate High Yield Bond Index tracks U.S. dollar-denominated, fixed-rate corporate bonds rated below investment grade (Ba1/BB+ or lower, based on the middle rating of Moody’s, S&P and Fitch). Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

The Bloomberg U.S. Treasury 20+ Year Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury with 20 or more years remaining to maturity. References in this commentary to “20+ year Treasuries” refer to this index.

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