October was a choppy month for investors. Stocks wobbled, led lower by technology, while bonds rallied as long-term interest rates eased from their recent highs. Behind the swings were three familiar questions: Will AI spending pay off? How is energy-driven inflation shaping the Fed’s next move? Can consumers and businesses keep the economy humming?
None of these worries is new. They are the same themes that have powered markets and occasionally rattled them all year, which is why a long-term perspective matters as much now as ever.
- U.S. stocks: The S&P 500 slipped 0.9% and the Nasdaq dropped 5.3%, while the Dow Jones Industrial Average gained 1.7%. Year to date, they’re up 10.7%, 9.4%, and 7.7%, respectively.
- Volatility: The VIX ended the month at 19.4, up from a September low of 14.2.
- International stocks: Developed markets (MSCI EAFE) returned -0.8% in U.S. dollar terms, while emerging markets (MSCI EM) fell 8.1%.
- Bonds: The 10-year Treasury yield closed at 4.93%, dipping back below 5%, and the 30-year yield ended at 5.31%. The Bloomberg U.S. Aggregate Bond Index returned 2.4%.
- Energy: Brent crude finished the month at $118 per barrel and WTI just below $103, driven by renewed tensions in the Middle East.
- Dollar and gold: The U.S. Dollar Index fell to 101.9, and gold ended at $3,873 per ounce, a recent low.
- The Fed: Policymakers held rates at 3.75%–4.00%, with two officials preferring a 25-basis-point increase.
October by the Numbers
AI Spending Meets Strong Earnings
AI has been a central market theme for years, and today it’s boosting both business investment and market returns. But the benefit isn’t coming from big productivity gains inside companies or heavy usage of AI tools. It’s coming mostly from the buildout of AI infrastructure: data centers, semiconductors, and the power systems needed to run them.
That spending has supported broad economic growth, but it also squeezes the cash flows of the companies doing the building. In October, several large tech firms reported negative free cash flow because of these investments, which revived the question of whether spending at this scale will earn a sufficient return. That uncertainty drove much of the month’s market volatility.
There’s a flip side, though. This spending supports construction firms, electricity providers, equipment suppliers, semiconductor hardware makers, and more. It’s one reason corporate earnings growth has accelerated in recent quarters. Strong earnings have also helped moderate valuations: the S&P 500’s forward price-to-earnings ratio has fallen from a high of 23.3 a year ago to 18.9 today.
It’s also worth remembering that AI is only one factor driving markets. Technology stocks tend to be sensitive to interest rates because their cash flows are expected far in the future, so long-term yields and Fed decisions matter for these sectors, too. As the long-term economic impact of AI becomes clearer, staying balanced across sectors, styles, and geographies remains a sound way to pursue your financial goals.
The Fed’s “Hawkish Hold”
Higher energy prices remained a challenge in October as Middle East tensions intensified. The International Maritime Organization reported the highest number of commercial shipping attacks on record in the Strait of Hormuz and surrounding waters, even as more shipments are now moving through. Continued attacks on Saudi Arabian energy infrastructure added to supply concerns, pushing Brent crude to a six-month high.
Inflation has stayed hotter than economists and policymakers would like. The Personal Consumption Expenditures (PCE) price index rose 0.5% in September and 3.6% from a year earlier. Core PCE, which excludes food and energy, rose 0.3% for the month and 3.1% year over year. Inflation has now been above the Fed’s 2% target for 67 months and is near a three-year high.
That’s why the Fed’s October decision to leave rates at 3.75%–4.00% is being called a “hawkish hold.” The vote was 10 to 2, with two officials favoring a quarter-point hike, and markets expect the Fed to raise rates at its final meeting this year and possibly once more in 2027. The official statement described economic activity as expanding at a strong pace, while noting that more information would help determine the appropriate policy stance.
One more item: Fed Chair Kevin Warsh announced a change to the 2027 meeting schedule. The Fed will still meet eight times, but one meeting will focus solely on broader monetary policy strategy, with no rate vote or official statement. There’s no immediate impact on investors, but it does mean fewer announcements for markets to react to next year.
Growth Strengthens Despite Weak Sentiment
The economy grew faster than expected in the third quarter. According to the Bureau of Economic Analysis, real GDP expanded at a 3.4% annualized rate, the strongest quarterly growth since the third quarter of last year and a healthy figure by historical standards.
The main drivers were:
- Consumer spending, which grew 2.5%
- Business investment, which rose 3.3%
- Government spending, which added only 0.9%
- Net exports, which subtracted 3.3% because imports outpaced exports
The net export drag is partly a byproduct of the AI buildout, since data centers require semiconductor hardware imported from abroad. The same buildout helped lift business investment, so the two effects largely offset one another.
Consumer behavior is an interesting contrast. Households remain worried about inflation and the job market, and confidence sits near historic lows. Yet spending remains strong, possibly supported by positive financial market trends and low unemployment.
The Bottom Line
Taken together, the picture is a healthy economy with a low jobless rate, but with inflation made stickier by higher energy prices. No economic environment is perfect, and investors always have new uncertainties to navigate. Today’s backdrop is supporting strong earnings growth, which is positive for markets and portfolios over the long run.
October brought volatility from 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 in today’s environment.
If you have questions about how these trends relate to your own financial plan, we’re always happy to talk.