October 2026
Market Recap

October reversed much of what defined September. Third-quarter earnings exposed fresh vulnerabilities across the artificial intelligence (AI) complex, mega-cap technology sold off, and capital rotated toward value, cyclical, and defensive stocks. Treasuries regained their safe-haven appeal even as crude oil climbed further, breaking the pattern of oil prices and bond yields rising together that had held since the outbreak of the Iran war. The S&P 500 Index slipped 0.87 percent for the month, and once again the headline concealed the underlying picture. In September, a handful of mega-caps carried the index while most stocks lagged. In October the reverse held, with the typical stock rising while the largest names fell.

On the policy front, the Federal Open Market Committee (FOMC) voted 10 to 2 to hold the federal funds target range at 3.75 to 4.00 percent, one month after its first rate hike in more than three years. Governor Cook and Cleveland Fed President Hammack dissented in favor of an additional 25-basis-point increase (one basis point equals one hundredth of a percentage point). The hold came despite a hotter-than-expected September Consumer Price Index (CPI) reading of 3.7 percent year-over-year and core Personal Consumption Expenditures (PCE) inflation, the Fed’s preferred gauge, approaching 3.1 percent on elevated services and AI-related equipment costs, according to Bloomberg. The timing of the decision, days before the US midterm elections, drew attention, as a hike would have risked market turbulence and political controversy just ahead of the vote.

Energy remained a source of pressure. Front-month West Texas Intermediate (WTI) crude, the nearest-dated futures contract, rose 10.7 percent to $102.81 per barrel from $92.87 as supply disruption threats and Middle East hostilities persisted.

Breadth returned in force. The S&P 500 Equal Weight Index, which gives every company the same weight regardless of size, gained 5 percent and outperformed the cap-weighted S&P 500, where the largest companies carry the most weight, by nearly 6 percentage points. A month earlier it had trailed by about 4.5 points. The Bloomberg Magnificent 7 Index, which tracks Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla, fell 4.67 percent. The Nasdaq 100 Index dropped 6.63 percent and the Russell Top 50 Index declined 3.07 percent. This was a rotation rather than a broad collapse, as money moved out of top-heavy technology and into the rest of the market. Year-to-date, the equal-weight index has returned 15.51 percent against 11.75 percent for the S&P 500, while the Magnificent 7 Index is up just 4.08 percent.

Large versus small. Small caps posted a modest gain. The Russell 2000 Index rose 0.58 percent and outperformed the S&P 500 by about 1.5 percentage points, helped by lower Treasury yields, though it trailed the equal-weight index by a wide margin. Year-to-date, the Russell 2000 Index is up 14.53 percent, ahead of the S&P 500.

Value versus growth. Value regained the lead decisively. The Russell 3000 Value Index rose 4.31 percent while the Russell 3000 Growth Index fell 5.89 percent, a spread of more than 10 points that more than erased September’s growth advantage. Year-to-date, value has returned 24.33 percent, while growth is essentially flat at 0.10 percent.

International. Results overseas were mixed. The MSCI World ex USA Index was down 0.17 percent and the MSCI Europe Index gained 2.17 percent. The MSCI Emerging Markets Index fell 8.04 percent, as its heavy weighting in semiconductor and hardware names left it exposed to the AI selloff. Emerging markets remain the strongest major equity region for the year at 13.76 percent, followed by Europe at 12.67 percent.

Nine of eleven sectors advanced, and leadership came from outside Technology. Energy led with a gain of 13.85 percent on higher oil prices, bringing its year-to-date return to 59.71 percent. Defensive sectors followed as Consumer Staples rose 10.94 percent, Utilities 10.12 percent, and Health Care 9.77 percent. Utilities more than recovered September’s 5.92 percent loss as falling yields restored the sector’s income appeal. Health Care drew support from strong results, posting the largest aggregate earnings surprise of any sector, according to FactSet.

Cyclicals participated as well. Materials gained 8.30 percent, Consumer Discretionary 6.01 percent, Financials 5.82 percent, and Real Estate 5.52 percent. Industrials barely advanced, up 0.25 percent, as Caterpillar’s 10 percent decline weighed on the group.

Communication Services and Technology were the only sectors to finish lower. Communication Services fell 9.98 percent and is now down 14.37 percent for the year. Technology dropped 8.30 percent, trimming its year-to-date gain to 25.13 percent.

Corporate fundamentals held up well in aggregate. With 60 percent of S&P 500 companies having reported, the blended third-quarter earnings growth rate stands at 30.2 percent, up from 29.1 percent on September 30, according to FactSet. Of the companies that have reported, 82 percent beat earnings per share (EPS) estimates, above the five-year average of 78 percent. The beats are smaller. Earnings have come in just 1.9 percent above estimates in aggregate, the lowest since the fourth quarter of 2022.

All eleven sectors are reporting year-over-year earnings growth. Energy leads at 146.4 percent, up from 114.4 percent on September 30, and Information Technology follows at 67.5 percent. Communication Services has seen the sharpest deterioration, with expected growth falling to 20.5 percent from 51.5 percent. The blended net profit margin of 14.9 percent would be the second highest FactSet has recorded since 2009, behind only the prior quarter’s 17.0 percent.

The Magnificent 7 have become a drag. For the first time since the fourth quarter of 2022, these companies are reporting lower earnings growth than the other 493 S&P 500 companies, at 22.6 percent versus 32.6 percent. GAAP charges, including the paper loss at Alphabet and the litigation charge at Meta, explain much of the shortfall.

Valuations have compressed further. The forward 12-month EPS estimate rose 2.5 percent since September 30, and the forward 12-month price-to-earnings (P/E) ratio declined to 18.7 from 19.0. The trailing P/E stands at 25.9. Analysts’ sentiment remains positive. The bottom-up target price of 9,327.80, built from analysts’ individual stock targets, implies 20.8 percent upside from the recent close of 7,720.39, and 59.9 percent of ratings are Buys.

The defining market relationship since the Iran war began, in which crude oil and bond yields rose together, broke down in October. The rotation out of the AI trade, driven by soft technology earnings and rising credit concerns, revived demand for Treasuries. The 10-year Treasury yield fell from 5.24 percent to 4.93 percent during October, even as oil climbed above $100.

Fixed income recovered much of September’s loss. The Bloomberg US Aggregate Index rose 2.14 percent and is now down 0.83 percent for the year. Long-dated Treasuries led the rebound, with the iShares 20+ Year Treasury Bond ETF gaining 5.64 percent, which narrowed its year-to-date loss to 2.82 percent. High-yield bonds lagged, rising just 0.49 percent, as concerns about AI-related borrowing weighed on credit.

Gold fell 6.80 percent in October despite lower yields and a renewed flight to safety, a notable departure from its traditional role. The metal is now down 10.30 percent for the year and 26.60 percent since the end of February. The Bloomberg Commodity Index slipped 0.41 percent as the rally in oil was offset by weakness in precious metals, and the index remains up 28.73 percent year-to-date. Crypto, September’s best performer, was October’s worst. The Bloomberg Galaxy Crypto Index fell 13.98 percent, extending its year-to-date loss to 21.54 percent and its twelve-month decline to 38.23 percent.

Investors exit October with a healthier market structure but a more demanding one. Broadening participation, rising estimates, and a forward multiple below its long-term averages argue that the bull market does not depend on a handful of names. The burden of proof on AI spending has shifted, and investors now want hyperscalers to show returns rather than ambition. Inflation running well above target keeps another rate hike on the table, and the decision to hold before the midterms may only defer that question. Results from Apple and NVIDIA, the election outcome, and the December FOMC meeting will shape whether October’s rotation becomes a durable trend or a pause in mega-cap leadership.