Markets hit record highs in October as investors balanced Fed rate cuts, a prolonged government shutdown, and optimism around AI spending.
October 2025 Monthly Market Update
- Stocks: The S&P 500 rose 2.3% in October, lifting its year-to-date gain to 17.5%. Large Cap growth continues to lead the rally as the major stock indices set new highs. The S&P 500, Dow Jones, Nasdaq 100, and Russell 2000 all posted their sixth straight month of gains, making new all-time highs across major sectors.
- Sector Spotlight: Technology led with 4.8% gains in the Nasdaq 100 as AI investment momentum continued. Health Care and Consumer Discretionary also outperformed, although five of eleven sectors still traded lower.
- International Stocks: Developed Markets gained 1.2% and Emerging Markets gained 4.2%, both trailing the S&P 500. Despite the underperformance in October, emerging markets and international markets remain well ahead of US markets year to date.
- Bonds: Bonds traded higher as Treasury yields eased. The U.S. Aggregate Bond Index gained 0.6%, while investment-grade corporates returned 0.4% and high-yield increased 0.2%.
Federal Reserve Cuts Interest Rates as the Government Shutdown Drags On
October marked a milestone as major U.S. indices closed at new all-time highs. Despite the government shutdown extending through month-end, markets focused on monetary policy support. The Federal Reserve cut rates for the second consecutive meeting, lowering the federal funds rate by 0.25%. The Fed’s comments about a growing concern over a softening labor market, and a shift in the Fed’s focus from inflation control to employment stability, somewhat dampens the outlook into year-end.
On the one hand the rate cut reassured investors that the Fed remains willing to act, even with limited data available due to the shutdown. On the other, Powell tempered expectations, noting that another cut in December was “not a foregone conclusion.” Markets rallied anyway, buoyed by easing yields and resilient corporate earnings.
We view the Fed’s cautious tone as an early sign that policy is shifting from inflation management to economic stabilization, which we expect to act as a support for markets.
AI Strength Keeps a Fragile Market at All-Time Highs
Technology continued to dominate the stock market, with AI infrastructure and cloud computing spending driving much of the S&P 500’s performance. Yet the rally remains top-heavy. Large technology names now account for a disproportionate share of returns, while smaller companies and cyclical sectors have lagged.
This narrow leadership highlights both the opportunity and vulnerability in today’s market. For investors, it underscores the importance of diversification beyond mega-cap exposure.
Private Credit Markets Starting to Crack
Beneath the surface, the credit backdrop told a more complex story. Losses tied to commercial real estate exposure at several regional banks, combined with high-profile auto-sector bankruptcies, and potential private credit fraud revealed the early signs of a potential new credit cycle. For the first time in years, spreads widened meaningfully before stabilizing, suggesting stress rather than panic. Commercial real estate valuations continue to face downward pressure as refinancing costs rise, and lenders are beginning to reprice risk more aggressively.
By late October, markets recovered as policymakers and analysts described the weakness as manageable, but the episode underscored that credit risk is re-emerging after a multi-year period of complacency. We believe the next several quarters will test the durability of both bank balance sheets and private credit markets as liquidity tightens and delinquencies rise.
In our view a potential credit cycle is likely to impact private credit markets disproportionately, especially given loose underwriting standards at many. For investors in private credit we suggest reviewing your own portfolio exposure to private credit, especially if used as a “safe” fixed income replacement. For any investments in the space, we suggest spending time to analyze and understand the firm’s underwriting criteria and team experience in workout scenarios.
Cautious Optimism into Year-End
Heading into the final months of 2025, investor sentiment remains positive. Seasonal strength, moderating inflation, and falling yields create a supportive environment for risk assets. Yet valuations are elevated, labor data is softening, and the policy path remains uncertain.
We expect volatility to stay contained for now but see little margin for disappointment. The market’s resilience has been impressive, but it’s also increasingly fragile. Private Credit markets remain a key variable to watch, as well as labor market softening.
In markets priced for perfection, patience, structure and discipline remain the greatest advantages.
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