MARKET UPDATE
Equity markets have navigated a challenging environment with notable stability, as the S&P 500 notched its 36th record close of the year on October 28, posting a year-to-date gain of over 17%. This strong performance comes despite the ongoing government shutdown, now entering its fourth week, which has created a data blackout and complicated both economic forecasting and policy decisions. Nevertheless, investor enthusiasm has been fueled by strong third-quarter earnings, particularly from technology giants, even as concerns about regional bank credit and lingering trade tensions have occasionally rattled markets.
The Federal Reserve delivered its second interest rate cut of the year on October 29, lowering the federal funds rate by 25 basis points to a range of 3.75%-4.00%, the lowest level since 2022. Fed Chair Jerome Powell struck a cautious tone, pushing back on expectations for another rate cut in December, saying additional reductions are “far from” a foregone conclusion. His remarks sent Treasury yields higher. The Fed also announced it would end its quantitative tightening program in December, halting the reduction of its securities holdings. Meanwhile, September inflation rose to an annual rate of 3.0%, up from 2.9% in August and slightly below expectations of 3.1%. Collected just before the government shutdown, it was the only official economic data available during this period, providing the Fed with just enough input to support its rate decision.
Earnings season has continued to highlight strength in technology and AI-driven sectors. Nvidia made history by becoming the first company to surpass a $5 trillion market capitalization, driven by massive AI chip orders and plans to build supercomputers for the U.S. government. Broader tech earnings have exceeded expectations, reinforcing investor optimism despite macroeconomic headwinds. On the trade front, Presidents Trump and Xi reached a deal at the APEC summit to reduce U.S. tariffs on Chinese goods, suspend rare earth export controls, and pause port fees for a year. In return, China agreed to resume U.S. agricultural purchases and cooperate on fentanyl controls. Markets responded positively, viewing the agreement as a temporary easing of tensions, though key structural issues remain unresolved.
ADVISORS’ PERSPECTIVE
The market closed October 2025 with a tone that was more stable and fundamentally grounded than many expected earlier in the year, even as investors navigated the real-world impact of a federal government shutdown that temporarily added uncertainty to the outlook. While the shutdown created short-term volatility in Treasuries, delayed several key economic data releases, and introduced operational challenges for a range of federal agencies, markets quickly recognized that the broader economy remained intact. Consumer spending softened only modestly, furloughed workers were positioned to receive back pay once funding was restored, and the private sector showed enough momentum to cushion the temporary loss of government activity.
At the corporate level, earnings continued to outperform expectations, reinforcing one of 2025’s defining themes: the resilience of profitability. As illustrated by the accompanying data, S&P 500 net margins have trended higher for more than three decades, averaging 10.3% in the 2020s and rising to roughly 11.3% in the most recent quarter. These elevated margins reflect long-running structural shifts such as automation, AI-enabled productivity gains, and scalable business models that require far fewer incremental costs to generate additional revenue. This profitability strength has played a major role in keeping valuations supported despite both macro turbulence and the temporary economic drag from the shutdown.
The shutdown also reignited the broader debate around how much political risk markets are willing to tolerate. Despite the noise, investors appeared far less reactive than in past episodes. Many viewed the shutdown as more of an inconvenience than a systemic threat, particularly because inflation has moderated, the labor market remains stable, and the Federal Reserve has signaled a shift toward a more neutral stance heading into 2026. The episode ultimately highlighted a market that is more anchored by fundamentals than by short-term political fluctuations.
Another major theme this year has been comparing today’s AI-driven market leadership to the late-1990s dot-com bubble. While headline valuations at the top of the index may appear high, the underlying fundamentals are starkly different from 2000. The companies leading the market today — semiconductor designers, cloud platforms, data center operators, and AI-infrastructure leaders — generate substantial earnings, strong free cash flow, and maintain comparatively healthier balance sheets. The data reinforces this point clearly: the top 10 companies in the S&P 500 today are significantly more profitable and less leveraged than those at the dot-com peak.
Valuations also deserve context. The premium being paid today is supported by earnings growth that is faster and more durable than what existed 25 years ago. Revenue growth is broader, margins are stronger, and innovation, particularly around AI and automation, is translating into real productivity gains rather than speculative hopes. The shutdown may have introduced a temporary sentiment shock, but it did little to change the underlying trend of strengthening corporate fundamentals.
As we enter the final months of the year, we remain cautiously optimistic. The market is transitioning from a rate-sensitive environment to one increasingly shaped by earnings, innovation, and productivity improvements. Despite political disruptions and periodic volatility, the foundation of today’s market remains meaningfully stronger than in past cycles, where valuations were elevated for less defensible reasons.
