October proved to be a volatile month for stocks, even as year-to-date gains remained solid. Major indices posted mixed results, with declines in technology shares weighing on overall performance. Meanwhile, the bond market saw gains across many segments as long-term interest rates retreated from recent peaks. These movements reflected investors reassessing key themes including artificial intelligence, interest rate trajectories, Federal Reserve policy, and broader economic conditions.
More specifically, markets contended with questions about whether AI investments will translate into meaningful financial returns, how energy-driven inflation is shaping the Fed's approach, and whether consumer and business spending can sustain the broader economy. These are not entirely new concerns; many of them have served as both tailwinds and occasional sources of turbulence throughout the year. As always, maintaining a long-term perspective and avoiding knee-jerk reactions to short-term movements remains essential.
What were the key forces at work in October, and what should investors keep in mind looking ahead?
Key Market and Economic Drivers in October
• The S&P 500 and Nasdaq fell -0.9% and -5.3%, respectively, while the Dow Jones Industrial Average rose 1.7% in October. Year-to-date, they have gained 10.7%, 9.4%, and 7.7%, respectively.
• Volatility, as measured by the CBOE VIX index, ended the month at 19.4, after falling as low as 14.2 in September.
• International developed markets returned -0.8% based on the MSCI EAFE Index in U.S. dollar terms, while emerging markets returned -8.1% based on the MSCI EM Index.
• The 30-year Treasury yield fell from its recent highs, closing the month at 5.31%. The 10-year Treasury yield ended the month at 4.93%, falling below 5%. The Bloomberg U.S. Aggregate Bond Index returned 2.4% for the month.
• Oil prices rose significantly in October, driven by renewed geopolitical tensions in the Middle East. Brent crude closed the month at $118 per barrel and WTI just below $103.
• The U.S. Dollar Index fell to 101.9 at the end of October. Gold ended the month at $3,873 per ounce, a recent low.
• The Fed held rates within the range of 3.75% to 4.00% at its October meeting, with two officials favoring a 25-basis point increase.
Investors weigh AI spending against a backdrop of strong earnings
Artificial intelligence has been a defining theme for financial markets in recent years, and today its influence is felt across both business investment and market performance. At present, the primary driver is not greater productivity within companies or increased token usage, but rather the large-scale buildout of AI infrastructure. This requires substantial spending on data centers, semiconductors, and the energy systems needed to support them. While this spending has contributed to broad economic growth, it also means that free cash flows for companies making these investments may appear weaker than investors would prefer.
This dynamic contributed to market swings throughout October, as several large technology companies reported negative free cash flow attributable to infrastructure investments, once again prompting questions about whether spending of this scale will generate a sufficient return on investment.
At the same time, this level of capital deployment supports a wide range of industries, including construction firms, electricity providers, equipment suppliers, and semiconductor hardware manufacturers. This is one reason corporate earnings growth has accelerated in recent quarters, as illustrated in the chart above. Beyond supporting broad market returns and GDP growth, stronger earnings have also helped moderate equity valuations. The forward price-to-earnings ratio for the S&P 500, for instance, has improved from a high of 23.3 a year ago to 18.9 today.
It is worth keeping in mind that AI is just one of many forces influencing markets. Technology stocks also tend to be sensitive to interest rate movements, given that their cash flows are projected well into the future. Trends in long-term rates, Fed decisions, and other factors can therefore affect both these sectors and the broader market. As investors continue to assess the long-term economic impact of AI, maintaining balance across sectors, investment styles, and geographies remains an important part of pursuing financial goals.
Understanding the Fed's hawkish hold
Elevated energy prices continued to present a challenge in October as geopolitical tensions in the Middle East intensified. According to the International Maritime Organization, October recorded the highest number of commercial shipping attacks on record in the Strait of Hormuz and surrounding waterways, even as more shipments flowed through the region. Continued attacks on Saudi Arabian energy infrastructure added further pressure on supply. In response, Brent crude, the global benchmark, climbed to a six-month high near $118 per barrel, while WTI reached approximately $103.
Against this backdrop, inflation has remained higher than economists and policymakers would prefer. The Personal Consumption Expenditures (PCE) price index rose 0.5% in September and 3.6% from a year earlier. Core PCE, which excludes volatile food and energy prices, increased 0.3% for the month and 3.1% from a year earlier. Inflation has now remained above the Fed's 2% target for 67 months and is near a three-year high.
This context helps explain why the Fed's October decision to leave its policy rate unchanged at 3.75% to 4.00% has been characterized as a "hawkish hold." Although the federal funds rate was not adjusted, a rate increase is anticipated at the final FOMC meeting of the year, with the possibility of one more in 2027. The vote to hold was 10 to 2, with two FOMC officials preferring an immediate quarter-point increase. The official statement described economic activity as expanding at a strong pace, while noting that additional information would help determine the appropriate policy stance.
Fed Chair Kevin Warsh also announced a change to the Fed's meeting calendar. The Fed will continue to meet eight times in 2027, but one session will be devoted exclusively to broader monetary policy strategy, without a rate vote or official statement. While there is no immediate effect on investors, it does mean there will be fewer market-moving announcements to react to in the coming year.
Economic growth accelerated even as consumer sentiment stayed weak
A key economic report released in October revealed that the economy expanded more rapidly in the third quarter than analysts had expected. According to the Bureau of Economic Analysis, real GDP grew at a 3.4% annualized rate in the third quarter. This was the strongest quarterly growth since the third quarter of last year, and as the chart above illustrates, it represents a healthy figure relative to historical norms.
Growth was driven largely by strong consumer spending of 2.5% and business investment that rose 3.3%. Government spending increased by only 0.9%, while net exports fell -3.3%, reflecting a period in which imports exceeded exports and therefore subtracted from GDP.
Consumer spending has held up well in recent quarters despite persistently weak sentiment. Households have expressed concern about inflation and the job market, pushing confidence in the economy to historic lows. Yet spending remains resilient, possibly supported by positive trends in financial markets and low unemployment rates.
Business investment rose sharply in part because of the AI data center buildout. This also helps explain the decline in net exports, as data centers and other AI infrastructure require semiconductor hardware imported from abroad. Together, these forces produced a meaningful boost to economic growth.
Collectively, these factors point to a healthy economy with low unemployment, even as energy-driven inflation keeps conditions somewhat stickier than policymakers would prefer. No economic environment is without its challenges, and investors must always navigate evolving uncertainties. The current backdrop is supporting strong earnings growth, which over the long run is a positive development for financial markets and investment portfolios. Maintaining a longer-term perspective and not overreacting to individual news headlines or earnings reports is therefore as important as ever.
The bottom line? October brought volatility due to questions around AI spending, energy-driven inflation, and Fed policy. Staying balanced and focused on long-term goals, rather than reacting to monthly headlines, remains the most important principle for investors navigating today's environment.