Both economic and market uncertainty increased in October, driven more by oil, inflation, and politics than by weak growth. Crude prices hit a post-war high, with Brent crude increasing to $117 a barrel, and energy commodity prices rose about 12% for the month, which kept inflation worries alive. The Federal Reserve held interest rates steady as those worries weighed on sentiment. Geopolitical tension and the approaching midterm elections added to the uncertainty. Beneath that, the business backdrop remained strong. Companies reporting third-quarter results are on track for profits 33% higher than a year ago, and profit margins for the average S&P 500 company hit a record. The main pressure point is rising energy and input costs, which have led analysts to trim their margin estimates. Artificial intelligence continues to drive activity, with the largest technology companies on track to invest roughly $800 billion this year, although the growth in that spending looks to be peaking. Economists have also noted early signs of AI-related disruption in the job market.
Bonds had a good month as investors sought safety when technology stocks stumbled. Municipal bonds led with a 3.3% return, followed by high-quality corporate bonds at 2.4%, US Treasuries at 2.1% and the broad U.S. bond market at 2.0%. Lower-quality credit was flatter, with high-yield bonds up 0.4% and floating-rate loans down 0.3%. Even after October’s gains, bonds are roughly flat to slightly lower over the past year (broad market 0.0%, US Treasuries down 0.7%, municipals down 0.2%), so the main appeal today is income. US Treasuries yield about 5.1%, the broad bond market 5.3%, high-quality corporates 6.2%, and municipals 4.1% tax-exempt. With the Fed on hold and oil prices high, inflation remains the main risk to bond prices.
U.S. stocks slipped in October, with the S&P 500 down 0.9%, and the index is still up 11.8% for the year. However, the headline hid a sharp rotation. The average US stock did far better than the biggest ones: the equal-weight S&P 500 gained 5.0%, mid-sized and small companies rose 1.9% and 3.2%, respectively, and the 50 largest stocks fell 3.3%. Energy (+14.0%), consumer staples (+11.6%), utilities (+10.2%) and health care (+9.9%) led, while technology (-6.8%) and communication services (-15.1%) lagged. Disappointing reactions to big technology earnings revived worries about artificial intelligence, and steady dividend payers and low-volatility stocks outperformed while momentum (-10.0%) and high-beta stocks (-8.8%) fell back. Overseas results were mixed: developed markets outside the U.S. fell 1.2% and emerging markets 5.3%, respectively, while Europe edged up 0.4%. Earnings remain strong, but growth is no longer accelerating, and since this earnings season began, the S&P 500 is down about 3% while the index excluding AI-related stocks is up about 5%. Outside of technology, companies that beat expectations have generally been rewarded. We remain overweight equities since earnings are strong, sentiment has turned cautious, a good deal of speculative positioning has already been cleared out, and year-end seasonality is typically favorable. In tactical accounts with no tax consequences, we recommend an equal-weight S&P 500 approach within U.S. large companies, which owns the same 500 stocks but cuts exposure to AI-related companies from roughly 37% of the index to about 12%, so portfolios keep the earnings growth without depending on a handful of giants. Beyond that, we favor adding value-oriented stocks in developed markets outside the U.S., along with U.S. small- and mid-sized value companies, which trade at discounts to fair value and have little exposure to AI. In all other accounts, we will make these changes gradually and with care to minimize the income tax impact.
Robertson Stephens paid no fee to obtain recognition but has paid licensing fees to reference its appearances on the Newsweek, USA Today, and FA Magazine rankings lists. See Awards Disclosures
