“There are more things, Lucilius, likely to frighten us than there are to crush us; we suffer more often in imagination than in reality.”Seneca
October was rough on the market’s leaders and far kinder to nearly everyone else. The S&P 500, the index of America’s 500 largest companies, fell 0.93 percent, its second straight monthly decline, and the technology-heavy Nasdaq dropped 5.30 percent, its worst month since March 2025. Semiconductor stocks fell 15.4 percent and memory chipmakers more than 20 percent. Yet the average stock had a good month. The equal-weight S&P 500, which gives every company the same say rather than letting the giants dominate, rose 4.95 percent, beating the headline index by roughly 590 basis points, or 5.9 percent, and nine of the eleven major sectors finished higher. The Dow gained 1.70 percent, and the Russell 2000, which tracks smaller companies, edged up 0.54 percent. Last month we described a market leaning on a narrow group of leaders. In October, those leaders stumbled and the rest of the market picked up the load, which is a rotation, not a retreat. Below, what shook the leaders, why the Fed held as we expected, and why we see the weeks after this week’s elections as a turning point rather than a threat.
From the Desk.
What shook the leaders was not a collapse in demand but a debate about money. Early in the month, the worry was whether artificial intelligence could live up to sky-high expectations. By mid-month, it had shifted to how the enormous buildout will be paid for. Credit stress at CoreWeave, a company that rents out AI computing power, and Meta’s warning that its capital needs could run into the hundreds of billions of dollars sent chip stocks lower for eight straight sessions. Yet the businesses at the center of it all keep growing at a remarkable pace. In their latest results, Microsoft’s Azure cloud grew 48 percent, Google Cloud 103 percent, and Amazon Web Services 39 percent, and all three reported sharply larger backlogs of orders still to be filled. The demand did not crack; the stocks ran into a wall of worry about financing. Goldman Sachs even reported record selling of technology shares, the kind of washed-out positioning that leaves little selling left to do.
Meanwhile, money did not leave the market; it moved within it. Energy rose 14.0 percent, consumer staples 11.4 percent, utilities 10.1 percent, and health care 9.8 percent, and by late October nearly 60 percent of S&P 500 stocks were trading above their 50-day moving average, a simple gauge of short-term trend, up from about 21 percent in late September. The bond market turned as well. The 10-year Treasury yield, the benchmark for mortgages and loans across the economy, began October at its highest level in 24 years, peaking at 5.349 percent intraday, then fell 35 basis points over the month to finish back below 5 percent, helped by strong demand at government bond auctions and investors seeking safety as technology sold off. That is welcome relief for anyone with a mortgage, a car loan, or a business to finance.
The Federal Reserve held rates steady on October 28, just as we said it would in last month’s letter, keeping its target range at 3.75 to 4.00 percent in a 10 to 2 vote, with the two dissenters preferring another hike. Fed Chair Kevin Warsh made a case worth understanding. September’s hike, he argued, is already doing its work, tightening borrowing conditions for some businesses and households, while expectations for future inflation remain anchored and stronger productivity is letting the economy grow without overheating. That last point is the one we highlighted last month, and it is encouraging to hear it from the chair himself. When workers produce more each hour, companies can pay higher wages and grow faster without raising prices as much, which is exactly the kind of growth the Fed can live with. Warsh said politics played no role in the decision and declined to commit to anything for December. Markets now price roughly a 75 percent chance of a hike at that meeting. Inflation is still too high, and the Fed is right to watch it closely, but a meaningful part of it traces back to energy and the conflict with Iran, and higher interest rates cannot pump more oil. The task forces Warsh set up to review how the Fed operates are working toward a year-end deadline, though he cautioned that not all of them will make it, and the group studying productivity and jobs holds a public hearing on November 16.
The economy, meanwhile, is giving the Fed plenty to chew on, and most of it is good. Output grew at a 3.4 percent annual pace in the third quarter, ahead of expectations and the strongest quarter in a year. Look past the swings in trade and inventories, and spending by American consumers and businesses grew 4.9 percent, the fastest since 2021, powered by steady consumer spending and a surge in business investment in computers and equipment tied to the AI buildout. Weekly claims for unemployment benefits fell to their lowest four-week average since 1969. Earnings remain the bedrock of our case. With third-quarter reporting season well underway, S&P 500 earnings are growing 30.2 percent from a year ago, and 82 percent of companies have beaten analysts’ estimates. As we wrote last month, earnings growth is one of the highest correlators with stock market growth over time. When profits grow this quickly while prices pause, the market becomes cheaper relative to what it earns, and that is how the next leg higher gets built.
The conflict with Iran remains the main source of inflation pressure, for the reason we explained last month: oil and diesel flow into the cost of nearly everything we buy, whether they move the product to us or go into making it. Oil rose 15.2 percent in October, its fourth straight monthly gain, and pushed back above $100 a barrel as attacks on shipping in the Strait of Hormuz increased and reports surfaced that Washington was weighing a short, intensive campaign after the elections. There are reasons for hope as well. Middle East oil exports have climbed back near prewar levels as producers route around the strait, Iran has just floated a plan to reopen it within days if its conditions are met, and the administration says a diplomatic settlement is still possible. Our hope is that the conflict moves toward resolution once the elections are behind us. Until it does, energy will keep inflation stickier than it would otherwise be.
On the Radar.
The midterm elections arrive this week, and with them, an end to one of the market’s biggest sources of uncertainty. Markets do not need any particular outcome; they need to know the outcome, so they can price it and move on. That is a large part of why stocks have historically done so well once the votes are counted. Since 1950, the S&P 500 has posted a gain in the twelve months following every one of the nineteen midterm elections, and since 1980, U.S. stocks have averaged a gain of about 17.5 percent over those twelve months. We expect positive momentum to build from here, supported by an economy growing well above 3 percent and earnings growing near 30 percent. We remain bullish, and if anything, we see pullbacks like October’s as opportunities to buy quality at better prices rather than reasons to step aside.
Between now and the next issue, we are watching the rest of third-quarter earnings season, including the remaining technology reports, to see whether strong results begin to win back investors’ confidence. The Federal Open Market Committee, the group of Fed officials who vote on interest rates, meets again December 8 and 9, and we will be listening for any early findings from the task forces around year-end. Beyond that, we are watching oil and the path of the conflict with Iran after the elections, the monthly jobs reports, and whether the broadening of the market continues, which would be a healthy sign heading into the new year.
On a personal note, October was a good month away from the markets. I ran the Cape Fear Marathon on Bald Head Island on October 18 and finished third, in 3 hours and 24 minutes, into a north wind blowing better than 20 miles per hour. Then, on October 31, I passed the CFP® exam. CFP Board is still reviewing my work experience, the final step, so I cannot put the letters after my name quite yet, but the hard part is behind me, and I look forward to bringing what I learned to the planning work we do for our clients. Next up is the Panama City Ironman this Saturday.
Yours in confidence,
John Bennett Woodard IIIInvestment Advisor Representative
Always Buy Quality and Diversify®