Highlights:
- The S&P 500 gained 2.3% in October, lifting year-to-date returns to 17.5%, though gains were driven by mega-cap AI-focused stocks.
- Beneath headline gains, the median S&P stock fell 1.7%, reflecting investor unease amid government gridlock, inflation, and slowing economic signals.
- Markets largely ignored October’s quarter-point rate cut, anticipating additional easing despite Chairman Powell’s cautionary tone.
- U.S.–China trade tensions eased after new tariff compromises, though consumers may still feel the cost in the coming months.
- Massive AI-related infrastructure spending continues, fueling optimism but raising questions about energy use, monetization, and long-term winners.
Once again, the major stock indices showed strong returns in October with the S&P 500 Index rising 2.3%, bringing the year-to-date return to 17.5%. The broader market, which saw the median stock in the S&P move down -1.7% for the month and the equal-weighted index dip -0.9%, may have done a better job of capturing the underlying economy and investor mood, which was colored by the government shutdown, persistent inflation, and indications of a slowing economy. The five largest companies in the S&P contributed 2.5% to the index return. The S&P’s top 10 stocks account for nearly 40% of the index, the highest concentration yet recorded. The underlying theme for the rising mega-caps was artificial intelligence and confidence that the billions and trillions of investment in AI would eventually pay off. This trend was also evident among smaller stocks as the broader market was challenged, while speculative stocks with exposure to AI flourished.
Given the built-in expectations, the quarter-point drop in the Federal Reserve’s benchmark interest rate in October was hardly a blip on the radar screen. Of more import may be the market’s high confidence in another drop in December and at least two more in 2026. Lame duck Fed Chairman Powell made a strong effort to moderate these expectations, saying a December cut is “not a foregone conclusion – far from it.” Powell cited mixed opinions on the governing board and challenges posed by the absence of government-collected data during the shutdown. An interruption in the expected rate-cut trend could shake up investors.
Meanwhile, the on-again, off-again stress around tariffs and trade wars saw at least some temporary relief as President Trump and Chinese President Xi appeared to reach a compromise. In exchange for lower tariffs, China offered to resume soybean purchases, ease restrictions on rare-earth exports, and tighten efforts to curb fentanyl production. Nevertheless, there was increasing evidence that tariff costs were making their way to consumers. This is likely to become more evident as we enter the holiday shopping season.
Finally, we want to return to the massive build-out in data processing. Expectations remain high and widespread about AI’s potential impact. The rabid spending on high-end processors and massive data centers confirms this consensus, even as it evidences some circularity as the world’s largest companies spend among themselves. What remains in doubt is how all this capacity will be powered, and more to the point, how it will be monetized. The arms-race-like build-out suggests a scramble to be the biggest, best, and earliest, with the suggestion that a winner will emerge. But regular users of AI have become accustomed to AI’s inability to distinguish reliable data from fabrications, and produce odd results known as hallucinations. This suggests that more discriminating, specialized AI engines may be required for specific applications, such as medical diagnostics. Instead of one winner, there may be room for many. As with past technological advances, from railway tracks to personal computers to fiber optics, the earliest and most aggressive spending may not portend the ultimate winners.