Market Monitor | October Update
Headlines and Highlights
- Trump and Xi trade deal eases tensions – for now: President Trump and Chinese president Xi Jinping agreed in late October to dial back trade tensions, at least temporarily. The U.S. will lower tariffs on imports from China by 10% in exchange for more effort by Beijing to block the flow of chemicals used to make fentanyl. China will also delay limits on rare-earth mineral exports for a year, and it will buy large quantities of U.S. soybeans. While the agreement is for a specified time period, Trump expressed optimism about his discussions with Xi, saying “on the scale from 0 to 10, with 10 being the best, I would say the meeting was a 12.”
- Fed trims rates but raises doubts about December: The Federal Reserve lowered short-term interest rates by a quarter of a percentage point to 4% at its late October meeting. Fed chair Jerome Powell justified the move by saying the U.S. jobs market had softened in recent months. But Powell stressed that another rate cut in December “is not a foregone conclusion – far from it.” A big part of that uncertainty is that the federal government shutdown, now in its second month, has impeded the collection of data that is key to Fed decision-making.
- S. stocks advance for 6th straight month: The S&P 500 rose 2.4% in October, a sixth consecutive month of positive performance. In the first 10 months of 2025, the large-cap index climbed 17.5%. Contributing to the S&P’s gains were strong earnings reports for the third calendar quarter – Bloomberg data show most companies reporting had beaten expectations. U.S. small caps (+1.8%), international developed (+1.2%) and emerging markets (+3.6%) also posted solid results. The Fed’s interest-rate cut provided a tailwind for taxable bonds (+0.6%) and municipal bonds (+0.4%) in October, while REITs (-2.6%) struggled despite lower rates.
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Our Views
- The government shutdown has cast a temporary shroud over the U.S. economy because of a lack of data, but we do not believe it poses a lasting risk. The corporate earnings outlook remains positive and consumer confidence as measured by The Conference Board dipped only slightly in October amid expectations of a strong holiday sales season.
- The Federal Reserve is likely to keep lowering interest rates, though it is uncertain whether the next cut comes in December or in 2026. Rates may be held at the current range of 3.75%-4% in December if the job market remains steady and inflation ticks higher. But ultimately we believe inflation will remain anchored so it will not be long before the Fed resumes its rate-cut cycle.
- A softening labor market is the economy’s most vulnerable area, particularly the sharp slowdown in hiring. The modest level of layoffs points to the job market being more stagnant than in crisis, however.
- The stock rally’s seeming disregard of any threat from tariffs, inflation or the government shutdown has heightened concerns about high valuations and the heavy reliance on a handful of mega technology stocks. We believe those risks are offset by resilient earnings growth, extensive capital spending tied to the artificial intelligence boom, and tax cuts and interest-rate reductions that can provide continuing momentum.
- The world economy has proven more resilient than expected in the face of U.S. tariffs but remains in flux heading into 2026. The International Monetary Fund forecasts a slight slowing in global GDP growth from an estimated 3.2% in 2025 to 3.1% in 2026. A lasting thaw in the U.S.-China trade war would go a long way toward reaccelerating the global expansion.
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