Market Recap October 2025: The seasonals did not seasonal, as a historically known weak month, had strong returns for risk assets. In October 2025, the U.S. stock market delivered robust gains, with the S&P 500 climbing about 2.3% and setting new all-time highs, outpacing small caps and driven primarily by technology and AI-related sectors. Persistent optimism stemmed from the Federal Reserve’s rate cut in September, resilient corporate earnings, and growing capital expenditures in artificial intelligence. Bond markets also rallied as yields eased, while global equities benefited from a softer U.S. dollar and easing monetary conditions. Despite lingering concerns over inflation and macroeconomic uncertainties, market momentum held strong through the month, thanks especially to renewed investor confidence in growth and technology leadership.
Federal Reserve Meeting Update: The Federal Reserve cut interest rates by 0.25% to 3.75% – 4.00%, marking a 150bp reduction since rates began coming down last September. But, Fed Chair Powell gave markets a hawkish surprise when he pushed back directly on the inevitability of a December rate cut. While Powell pushed back on expectations for a December rate cut, it’s entirely possible we still get one. To that point, the official FOMC statement, which reflects the consensus of the FOMC, kept forward guidance unchanged and clearly exhibited an easing bias. That tells us the consensus of the FOMC still sees rate cuts as appropriate. Powell did little to imply the rate-cutting cycle has ended. That’s important because it’s not so much which month the Fed cuts rates as it is the fact that they are still cutting rates. Bottom line, if Powell and other Fed officials imply that we’ll be on another extended pause, that would be more negative for markets. Bottom line, a December cut may not be a foregone conclusion, but the Fed is still cutting rates, and that’s what matters most to stocks.
Earnings Season Recap: The following are eight observations from the earnings season so far: (1) The frequency of earnings “beats” has been unprecedented outside of the COVID period; (2) Earnings beats have been driven by both sales and margins; (3) Investors are not rewarding most earnings beats; (4) S&P 500 Q3 2025 EPS growth is tracking at 8% year-over-year, a continued deceleration; (5) Company guidance and analyst earnings revisions have been solid; (6) Mega-cap AI capex spending continues to exceed expectations; (7) Large-cap US companies are increasingly focused on labor efficiency; (8) Bank lending and the corporate credit cycle are under scrutiny. Lastly, coming into the earnings season, investors expected S&P 500 earnings growth would surpass the bottom-up consensus forecast due to unrealistically low consensus estimates for sales growth and the investors’ expectation for positive surprises from mega-cap tech stocks. Although reported earnings growth has indeed exceeded the consensus forecast so far, the 8% run-rate of S&P 500 EPS growth in Q3 represents a deceleration relative to the 11% growth rate reported in Q2 and a smaller EPS beat than during the last few quarters.
Are We in an AI Bubble? Only time will tell if we are in a bubble, but let’s frame this question differently. Fears of asset bubbles popping have been drilled into every investor’s head since the “tulipmania” of the 1630s. Specifically, we’re taught that all booms lead to busts. But are all frenzies bad? Bubbles both create and destroy wealth. Perhaps a more nuanced approach is needed. Many modern technologies were accompanied by overenthusiastic investment (railroads, cars, airlines, computers). So, is there a way to do a cost-benefit analysis, rather than just a cost analysis, on bubbles? The key lies in what the boom produces and how it is financed. The worst possible kind of bubble is a bubble in unproductive assets (gold, land, tulips) financed by banks. The best possible kind of bubble (i.e., one that does not hurt growth too badly) is a bubble in productive assets, financed by capital markets. The Japanese bubble of the late 1980s and the US real estate bubble of the mid-2000s were ‘bad’ bubbles. By contrast, the “dot.com” bubble of the late 1990s was a ‘good’ bubble. A bubble in a productive asset financed by equity can work out without too much trouble (equity is known to be a “risky” asset). There’s a short-term cost, but a long-term benefit (i.e., a new technology).
The Market Moving Forward: It does feel like each week is its own ecosystem, and given how high the stakes are right now, especially heading into earnings, it feels like a lot of investors are going to be prisoners of market context. Now, we don’t want to sound uber bullish, because there are probably plenty of things to worry about right now, but we think everyone needs to hear the key tenets of this market: The Fed is easing financial conditions into a cyclical acceleration, as the capex train rolls down the tracks. And if an investor wants to be a serious bear right now, we suspect one’s timing needs to be impeccable, or the fundamental setup needs to change – otherwise you’re fighting the Fed, fiscal stimulus and U.S. mega cap tech. So, we think that it’s prudent to remain “reasonably bullish” heading into the next few months, with admittedly more seasonal confidence in November and December than in the current month.
Politics and Markets → The Government Shutdown: In my opinion, the market is not political. It doesn’t care about draining swamps, political retribution, woke or anti-woke campaigns, or DEI initiatives. The market only cares about policies that:
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- Increase (or decrease) earnings, and
- Support growth (or hinder it).
Any political movement or agenda that is viewed by the market as getting in the way of better earnings and growth will be viewed as negative and be a headwind on risk assets, regardless of whether those policies are from Republicans or Democrats. This is the way we must view political coverage over the next year (and likely four years), and this will help us cut through the noise and stay focused on the policies that will impact markets.
S&P 500 EPS: ’26 (Exp.) EPS = $294.22 (+10.9%). ’25 (Exp.) EPS = $265.30 (+8.2%). ‘24 EPS = $245.16 (+11.5%). 2023 = $220 (+8.6%). 2022 = $219 (+0.5%).
Valuations: S&P 500 Fwd. P/E (NTM): 22.8x, EAFE: 15.7x, EM: 13.7x, R1V: 17.4x, and R1G: 30.4x. *
*Source: Bloomberg and FactSet, Data as of 10/31/2025
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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 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.
Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.
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.
Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The Bloomberg Barclays 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. ACA-2511-1.
