executive Summary
- US stocks hit record highs in October, led by large-cap growth stocks and the “Magnificent Seven”.
- Market scope narrowed, value indices and midcaps lagged behind but technical bullishness remained
- Federal Reserve makes massive rate cut, surprising markets and impacting rate expectations
- Strong Q3 earnings (+10.7% YoY for the S&P 500) and seasonal tailwinds support a constructive outlook for year-end
- Seasonal headwinds now become tailwinds
US stocks hit record highs in October amid easing US-China trade tensions, a sharp Fed rate cut, strong corporate earnings and the 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 sixth consecutive monthly gains, while the Nasdaq-100 (+4.8%) and Nasdaq Composite (+4.7%) indexes extended their streak to seven.
Market breadth declined significantly, with a growing number of industries consolidating prior gains. While large-cap growth (+3.6%) and small-cap growth (+3.2%) led the way, especially the Magnificent Seven (+4.9%), large-cap value (+0.4%) and small-cap value (+0.3%), they were only marginally higher. Additionally, the S&P 500 Equal Weight and S&P MidCap 400 indexes declined 0.9% and 0.5%, respectively.
Narrowing the breadth may increase the risk of market reversal; However, the benchmarks that underperformed over the past month remain within a few percentage points of all-time highs and are in a technical uptrend, as defined by the 50-day simple moving average (SMA) rising above their respective 200-day SMA. Although there remains wide variation in comparative performance, the underperformers are still in a bullish trend 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 the only broad index not to reach a new 52-week high in 2025. From a half-glass perspective, the benchmark has spent the past two months in a lateral consolidation range with the expected resistance level representing the previous high set in January 2025. While it is currently about 6% below its 52-week mark. higher, it may just be a matter of time before it is a beneficiary of the investor rotation and joins other benchmarks in making new highs.
Investor sentiment was supported by a mix of macro and sector-specific developments. A meeting between President Trump and Xi led to a modest reduction in trade tensions, including a reduction in US tariffs on fentanyl and a one-year delay in China’s rare earth export controls. Although these measures helped reduce near-term uncertainty, they were largely anticipated and did not address deeper structural issues in bilateral relations. The agreement was seen as a temporary relief, 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 maintain the momentum leading to another strong performance from the semiconductor industry. In October, the SOX index rose 13.5%, recording double-digit gains for the fourth time in six months, representing a total return of +118% from the April low.
The Federal Reserve delivered a widely expected 25 basis-point (bp) rate cut in the last week of October and announced plans to end quantitative tightening (QT) on December 1. Chairman Jerome Powell previously telegraphed that the end of QT was coming in his October 14 speech Blockworks Digital Asset Summit (DAS) in London:
“Some signs are beginning to emerge that liquidity conditions are gradually tightening, including more noticeable but temporary pressure on selected dates as well as a general strengthening in repo rates. The Committee’s plans take a deliberately cautious approach to avoid the money market stress experienced in September 2019.”
However, during the post-FOMC press conference, Chair Powell took a strongly hawkish tone:
“Further policy rate cuts at the December meeting are not a foregone conclusion, far from it.”
The hawkish tone caught the market off guard, leading to a rate cut from 90% to 60% in December.
October also faced disruptions caused by the prolonged government shutdown, which led to delays in the release of key employment and inflation data. The September CPI report was finally published and came in better than expected due to the decline in rents and owner-occupied rental figures. This reinforced the haven-driven deflation story and offered a potential tailwind to the Fed’s inflation outlook. As SNAP benefits were set to expire on November 1, political pressure intensified, increasing the urgency of negotiations and raising expectations for a quick resolution.
sector performance
The divided performance at the sector level was more visible, with five out of 11 groups ending in the red in October. Semiconductors drove the outperformance of the technology sector (+6.2%). The previously underperforming healthcare sector (+3.6%) posted its third consecutive monthly gain. The materials sector (-5%) lagged behind and remained in the red for the second consecutive month. Financials gave a return of 2.8% amid emerging “one-off” credit concerns at select banks.
At the small-cap level, Healthcare (+8.4%) returned its best month in 2025, led by a resurgence in biotech stocks. The Nasdaq Biotech Index (+10%) recorded its best monthly return since December 2023. Staples and discretionary each declined 7%, pushing both groups into the red YTD. Five of the 11 sectors are down 10% or more from their 52-week highs.
According to FactSet, corporate earnings season is in full swing and 64% of S&P 500 companies have reported results by the end of October, with 83% of them reporting a positive earnings surprise and 79% reporting a positive revenue surprise. For Q3 2025, the blended earnings growth rate (YoY) for the S&P 500 is 10.7%, better than the expected growth rate of 7.9% at the start of the season, and on track for its fourth consecutive double-digit gain. The forward 12-month P/E ratio for the S&P 500 is 22.9, while the 5-year and 10-year averages are 19.9 and 18.6, respectively.
looking ahead
The market message has been largely bullish in the six months following last spring’s tariff tantrum and concerns over fading American exceptionalism. Since then, the US dollar (DXY) has stabilized. Long rates are near 4% versus a high of 4.8% at the start of the year. The Fed eased another 50 bps and will end QT on December 1st. Corporations are delivering double-digit earnings growth.
There is a tailwind for seasonal 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 says the best six-month window since 1950 is November to April, with an average return of 7%, while the worst six-month window is May to October (“Sell in May”), with an average return of 2.1%. The S&P 500 recently ended its worst six-month period, where it gained 22.5%. Logically, one can assume that this could steal profits from the usually bullish months ahead; However, historically this has not been the case. The last 10 best “sell-in-May” periods followed nine out of 10 gains over the six months, for an average return of 13.9%.
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