Markets were positive in October, supported by economic growth, solid company earnings and US interest rate cuts.
These fundamentals muted growing concerns of a potential bubble following a succession of all-time highs in markets and excitement around the rapid rise of artificial intelligence (AI). Investors focused largely on solid – albeit slowing – economic growth, underpinned by resilient employment figures and well-managed, profitable businesses.
More recently, the exuberance surrounding AI gave way to the bubble concerns, causing some market volatility. In our view, while this may create short-term turbulence, we still see positive conditions for investors overall.
The current key trends of robust corporate earnings, sound economic growth and supportive central bank policy should underpin solid market performance over the long term. We recognise that some stocks have become expensive, but we believe such elevated valuations are rooted in solid company fundamentals, not speculative optimism.
Earnings beat expectations
A significant number of companies reported their quarterly performance in October amidst Q3 earnings season. Expectations going into the latest run of announcements were upbeat, and companies ultimately did even better.
At the time of writing, estimates pointed to healthy year-on-year earnings growth in the US of 15% – double initial expectations. Overall, about 81% of S&P 500 companies beat their profit expectations, which was the highest proportion in four years. US companies proved their resilience in the face of trade tensions and political uncertainty.
Fed cuts rates
Markets have also been supported by the US Federal Reserve (Fed), which cut rates for the second time this year in October by a quarter percentage point to support the waning jobs market.
Fed Chair Jerome Powell said at the central bank meeting that inflation remained a concern and the softening labour market would be closely monitored. This dampened expectations of a further rate cut in December, but the current backdrop still suggests cuts are likely to continue in 2026.
The Fed made the decision to lower interest rates despite the US government shutdown, which resulted in key economic data reports being withheld. Despite being unable to analyse key publications such as the regular US jobs report, the central bank deemed it had sufficient insight to act in October, which helped keep markets calm.
Shutdowns are not uncommon in the US and are often used as a bargaining tool when Republicans and Democrats can’t agree on a proposed spending bill. Markets remained largely unfazed by the shutdown, the longest in history, and by mid-November it had officially ended.
Lilian Chovin, Head of Asset Allocation at Coutts, says: “Solid earnings continue to underpin equity markets while the prospect of interest rate cuts adds further support.
“We can’t predict how the year will end – particularly in light of more recent, AI-led uncertainty – but we continue to see opportunities in equity markets based on the fundamentals. We are mindful of the potential risks, however, and are keeping our portfolios well diversified to help cushion them from any potential bumps along the way.”
The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs. Past performance should not be taken as a guide to future performance.
