Executive Summary
In October, global equities had negative returns as markets soured on the AI trade. Equities started the month on a positive note after a choppy September as, despite high oil prices, persistent inflationary pressures and high bond yields, traders focused on the upcoming corporate earnings season which was expected to show continued double-digit growth. However, by mid- month, markets got spooked as the cost of debt to fund the AI infrastructure buildout rose and semiconductor stocks saw a broad sell-off. Disappointing earnings for key AI-related stocks (Alphabet, Amazon Intel) and broader concerns around the expected capex spending to fund the AI infrastructure buildout led to a broad sell-off among AI-related names at the end of the month.
The S&P 500 Index returned -0.9% in October, but the index’s decline masked broad strength across the market. The equal-weighted S&P 500 gained +5.0% and Large Cap Value rose +4.4%, while Large Cap Growth declined -6.1% and the Nasdaq 100 fell -6.6% as technology stocks traded lower.
Energy (+14.0%) led all S&P 500 sectors as oil prices rose. Consumer Staples (+11.6%), Utilities (+10.2%), and Health Care (+9.9%) followed, as defensive sectors outperformed. Nine of the eleven sectors traded higher and outperformed the index, while Technology (-6.8%) and Communication Services (-15.1%) traded lower.
Bonds traded higher as Treasury yields declined, with the U.S. Bond Aggregate returning +2.4%. Investment-grade corporate bonds gained +2.0% and outperformed high-yield’s +0.3% return as falling yields lifted higher-quality bonds.
International stocks traded lower, led by emerging markets, which declined -8.0% as the selloff in semiconductor stocks weighed on South Korean and Taiwanese stocks. Developed markets were little changed, returning -0.7%.
Rates fell sharply in other developed markets as well other than in France, where the spread between OATs and German Bunds remains wide at 165bps; the spread between Italian and German 10Y bonds is 1.19%. 5-year breakeven inflation expectations rose 9bps to 2.47% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations fell 3bps to 2.34% (vs. recent high of 2.52% on May 4, 2026); the 10Y real yield fell 33bps to 2.59%. For the remainder of 2026, markets now expect one additional rate hike. At year-end 2026, the market expects the Fed Funds rate to be 4.07%.
The dollar index rose 0.4%. The commodities complex rose 4.8% with energy prices rising 12.0% amid renewed tensions in the Middle East. Brent prices rose 13.6% to $118/bbl. US natural gas prices fell 4.2% while European gas prices jumped 41.2% based on low inventories and continued supply uncertainty due to the Iran war. Gold fell 6.8% to $3,875/oz, silver fell 18.7% to $49/oz. Bitcoin fell 8.2% in October to $76,782.
Market Breadth Improves Even as Large Cap Tech Stocks Trade Lower
October was a better month for most stocks than the S&P 500’s small decline suggests. The index set a new all-time high early in the month, then traded lower as the largest technology companies came under pressure. The pressure carried into the final day of the month, when a weak outlook from Intel weighed on semiconductor and other AI-related stocks. However, the decline was relatively concentrated, with most of the market trading higher. The equal-weighted S&P 500, which gives every company the same weight, outperformed the traditional index by nearly +6%, the widest margin in a single month since 2009. The performance gap comes from the way the traditional index gives its largest companies the most weight, so a pullback in a handful of mega-cap technology stocks can outweigh gains across hundreds of other companies.
The shift centered on artificial intelligence. Earlier this year, investors began asking whether the heavy spending on AI would pay off. October’s earnings reports sharpened that question. Demand for AI infrastructure remains strong, with cloud revenue at the largest technology companies growing rapidly. At the same time, investors drew a clearer line between companies that can pay for their capex with the cash flow their businesses generate and those that rely more on borrowing and issuing new shares. Alphabet’s shares fell sharply after its quarterly spending exceeded the cash its business brought in. In contrast, Microsoft’s shares held steady after the company reported strong cloud growth and generated more than enough cash to cover its spending. Even after October’s market decline, semiconductor stocks are still up more than +50% this year, and the S&P 500 has gained more than +10%. Overall, the month looked less like a retreat from stocks and more like rotation, with gains broadening beyond the largest companies.
The S&P 500 returned -0.9% for the month (+11.8% YTD), though the headline masked significant underlying sector rotation: the S&P Equal Weight Index rose 5.0% for the month (+15.0% YTD) – its best monthly performance relative to the market-weighted index since April 2009. Mid cap stocks (+3.2%, +15.4% YTD) and small cap stocks (+0.6%, +14.4% YTD) outperformed large caps amid strong economic growth and falling interest rates. Within the S&P 500, communication services (-15.1%) and technology (-6.8%) were only sectors with negative returns for the month; energy (+14.0%) and consumer staples (+11.4%) were the best performing. EAFE markets returned -0.7% in October (+9.5% YTD) amid continuing uncertainty around both the Ukraine and Middle East wars with gains in the U.K. (+1.5%) and Europe (+0.4%) offset by losses in Japan (-4.2%). EM returned -8.0% in October (+13.5% YTD) with election-related losses in Brazil (-12.0%) and AI-related losses in Korea (-15.6%) and China (-7.0%).
Bonds Rally as Treasury Yields Fall from Multi-Decade Highs
After a difficult third quarter, bonds rebounded in October and provided balance as technology stocks traded lower. The month didn’t start that way. Treasury yields rose in early October on concerns about inflation and heavy government borrowing, and the 30-year yield reached its highest level in more than two decades. Yields then reversed lower as investors turned to bonds during the stock market rotation. The 10-year Treasury yield ended the month just below 5%, down from about 5.3% in early October. Because bond prices rise when yields fall, the decline lifted bond returns, with long-term Treasuries gaining more than +5%. Corporate bonds also traded higher, led by investment-grade bonds, which benefited most from falling yields. High-yield corporate bonds produced modest gains as corporate credit spreads widened, particularly among the lowest-rated high-yield borrowers.
The Federal Reserve held interest rates steady at its late-October meeting after raising rates in September, though two policymakers voted for another increase. The split reflects a tension that has run through much of this year. The economy remains on solid footing, growing at a +3.4% annual rate in the third quarter as consumers kept spending and businesses kept investing in AI. However, inflation is still running above the Fed’s 2% target. Oil prices added to the pressure, rising about +14% in October after attacks on Saudi energy facilities renewed concerns about supply from the Middle East. Against this backdrop, markets expect another rate increase at the December meeting, and the inflation reports between now and then will help shape that decision.
Investment grade fixed income asset classes had their best months since the end of 2023 as rates fell sharply across the curve. Municipals returned +4.5% (-0.8% YTD), the Bloomberg Aggregate Index returned +2.4% (-0.5% YTD) while investment grade corporates returned +2.2% (-1.0% YTD). High yield bonds returned +0.3% (+0.4% YTD) even as spread widened 29bps while leveraged loan returns returned -0.2% (+3.0% YTD). Emerging Market debt returned +0.4% (+1.7% YTD) as the U.S. dollar rose 0.4% even and spreads widened 45bps.
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
