Size, Style and Sector Rotation. Continued AI scrutiny saw investors punish growth and reward value.
KEY OBSERVATIONS
Follow the Leader – U.S. equity leadership shifted sharply. Greater scrutiny of AI-related capital spending weighed on many of the largest technology companies, while small-cap and value stocks moved higher, broadening participation beyond the market’s recent leaders.
Rebound – The decline in Treasury yields helped bonds rebound from September’s selloff. With weakness concentrated among large technology stocks, fixed income provided a meaningful source of diversification and helped offset some of the volatility in equities.
Higher Energy Prices – Geopolitical tensions continued to reverberate through energy markets, keeping oil prices elevated and volatile.
Ready, Set, Pause – The Federal Reserve held its target rate at 3.75% to 4.00% in October as strong economic growth and elevated inflation kept policymakers cautious. Even so, Treasury yields retreated from September’s highs, easing pressure on markets.
RECAP
October marked a partial reversal of September’s market dynamics. Treasury yields declined as expectations for further Federal Reserve tightening eased, providing relief to bonds and other rate-sensitive assets. At the same time, concerns surrounding AI-related capital spending drove a sharp shift in equity market leadership.
U.S. equity returns were mixed but generally positive. The S&P 500 declined -0.9%, with historic dispersion across sectors. The spread between the strongest (energy) and weakest (communication services) large cap sectors was the widest since March 2020. Value, as represented by the Russell 1000 Value Index, notably outperformed their growth counterparts, as represented by the Russell 1000 Growth Index (4.4% versus -6.1%). Large technology companies came under pressure as investors placed greater scrutiny on the scale of AI investment and the prospective return on that spending, while small-cap, value, and defensive stocks benefited from the rotation. Real estate markets also benefited from the shift in interest rates. Listed real estate gained 4.7% as declining Treasury yields eased a key headwind.
International markets told two distinct stories. Developed markets declined 0.7%, while emerging markets fell 8.1%. Emerging markets fell sharply, with weakness concentrated in technology-heavy Asian markets following the reversal in AI-related stocks. Broader declines across several major emerging markets added to the index’s losses.
Fixed income rebounded following September’s selloff. The Bloomberg U.S. Aggregate Bond Index gained 2.4%, while high-yield bonds advanced 0.3%. Falling Treasury yields provided the strongest support to longer-duration securities, allowing core bonds to provide diversification as large-cap technology and emerging-market equities came under pressure.
OUTLOOK
On the heels of the midterm elections, Democrats will now control both chambers of Congress while also winning gubernatorial races in traditionally Republican states. The results raise questions about potential policy changes and their implications for economic growth, financial markets and asset classes. As referenced in our recent communication, earnings, interest rates, and the discipline of a well-built plan matter far more than which party controls Congress. We are approaching the calendar with the same principles that served you through this year’s twists: stay balanced, own the income that higher yields now provide and diversify globally.