October Market Update: A Rebound in Bonds and a Shift in Stock Market Leadership

 

Bonds Recover After September’s Selloff

One of October’s most significant developments was the recovery in the bond market.

After September’s sharp losses, U.S. core taxable bonds gained 2.40% in October, municipal bonds advanced 3.56%, and international bonds returned 1.33%.

The primary driver was a decline in market interest rates. The 10-year U.S. Treasury yield fell from 5.29% at the end of September to 4.94% at the end of October, a decrease of approximately 0.35 percentage points.

As discussed in last month’s commentary, bond prices and interest rates generally move in opposite directions. Rising yields caused substantial bond price declines in September, while October’s falling yields produced the opposite effect.

Demand for relatively safer investments, including U.S. Treasuries, increased as technology stocks experienced selling pressure. Changing expectations for economic growth and future interest rates also influenced bond prices.

Although October’s gains were encouraging, most major bond categories remain slightly negative for the year. Nevertheless, today’s higher yields provide a more meaningful source of income than investors received during much of the previous decade, even if bond prices experience additional volatility.

A Shift in Market Leadership

October’s U.S. stock market performance revealed a significant difference between the largest technology companies and the broader market.

U.S. large-cap stocks declined 0.69%, while mid-cap stocks gained 1.90% and small-cap stocks advanced 3.18%. However, these broad returns mask an even more dramatic divergence.

The S&P 500 Information Technology Sector Index declined approximately 6.8% during October. More broadly, the Russell 1000 Growth Index, which includes many of the largest technology-oriented companies, fell approximately 6.1%.

In contrast, the Russell 1000 Value Index, which tracks larger U.S. companies generally trading at lower valuations, gained approximately 4.4%. That represents a performance difference of approximately 10.5 percentage points between large-cap growth and value stocks in a single month.

The divergence was also evident within the S&P 500 itself. While the traditional, market-capitalization-weighted index declined, the S&P 500 Equal Weight Index gained approximately 5.0%. This indicates that companies outside the index’s largest holdings generally performed considerably better than the mega-cap companies dominating the traditional index.

Nine of the S&P 500’s eleven sectors posted gains during October. Energy, consumer staples, utilities, and healthcare were among the strongest performers, while weakness was concentrated primarily in technology and communication services.

Much of the selling pressure centered on technology companies associated with artificial intelligence. Investors have become increasingly focused on the enormous amounts being invested in AI infrastructure and whether those investments will ultimately generate sufficient earnings to justify current valuations.

 

 

Can Technology’s Extraordinary Returns Continue?

October’s decline provides an opportunity to consider technology’s remarkable performance over a much longer period.

Over the ten years ending October 2026, the S&P 500 Information Technology Sector generated an annualized total return of approximately 25%, including reinvested dividends. For perspective, the broad U.S. stock market has historically delivered annualized returns closer to 10% over very long periods.

The difference is substantial. At a 25% annual return, an investment would grow more than ninefold over ten years. At 10% annually, the same investment would grow to approximately 2.6 times its original value.

Technology’s exceptional performance has been supported by substantial earnings growth, improved profitability, and the expansion of major technology platforms. More recently, enthusiasm surrounding artificial intelligence has provided another powerful source of investor optimism.

However, strong business performance and strong investment returns are not necessarily the same thing.

A stock’s return depends not only on how much a company’s earnings grow, but also on how much investors are willing to pay for those earnings. When valuations rise substantially, future returns become increasingly dependent on companies continuing to meet exceptionally high expectations.

History offers examples of industries and investment styles experiencing prolonged periods of exceptional performance, followed by extended periods of more modest returns or relative underperformance. This does not necessarily require the underlying businesses to deteriorate. Even continued earnings growth may not be enough to support previous stock market returns if valuations decline.

This does not mean technology stocks are destined to underperform over the next decade. Their earnings may continue growing faster than those of the broader market. Nevertheless, assuming that any sector can consistently generate annual returns of 20%–25% indefinitely would be an aggressive expectation.

October’s performance offers a reminder that investor expectations can change quickly, particularly when valuations already reflect considerable optimism about future growth.

Other Market Developments

International stocks experienced a difficult October. Developed international markets declined 1.96%, while emerging markets fell 5.88%, affected in part by weakness in technology-oriented Asian markets and a modest strengthening of the U.S. dollar.

Despite October’s declines, developed international markets remain up 12.39% for the year, slightly ahead of U.S. large-cap stocks. Emerging markets have gained 4.11%.

The Federal Reserve also remained in focus. Following its quarter-percentage-point interest rate increase in September, the Fed left its target interest rate unchanged at 3.75%–4.00% during its October meeting.

Economic activity and consumer spending have remained resilient, while inflation continues to exceed the Fed’s 2% objective. Two Federal Reserve policymakers favored another rate increase, illustrating the continued concern about inflation.

Interestingly, longer-term Treasury yields declined significantly despite the Fed leaving short-term rates unchanged. This highlights how longer-term interest rates respond to factors beyond Federal Reserve policy, including inflation expectations, economic growth, and investor demand for bonds.