S&P 500 gains 2.3% in October as momentum persists into year-end

The S&P 500 recorded its sixth straight monthly gain in October as bullish views on corporate earnings, inflation and monetary policy boosted equity market sentiment into the end of the year.

The large-cap index increased 2.3% for the month following a 3.5% gain in September, according to S&P Global Market Intelligence data. The Dow Jones Industrial Average slightly outperformed the S&P 500 with a 2.5% rise in October, while the small-cap focused Russell 2000 improved 1.8%.

Stock investor sentiment strengthened in October, supported by tame inflation data and expectations for strong third-quarter corporate earnings. The US Federal Reserve's October interest rate cut provided another near-term jolt, although equity markets are still digesting Fed Chair Jerome Powell's recent hawkish comments that a subsequent rate cut in December is not guaranteed.

"In the short term, this lack of clarity could trigger a pause or mild pullback in the market, particularly following several months of exceptional gains during what's typically a volatile period, but I don't expect any decline to be substantial," Todd Morgan, chairman of Bel Air Investment Advisors, told Market Intelligence. "Once investors digest the Fed's messaging and the uncertainty clears, I anticipate markets will trend higher into year-end and the early part of next year."

Equity market volatility did pick up in October with the CBOE Volatility S&P 500 Index, known as the market's "fear gauge," reaching 25.31 mid-month. This was its highest point since April, when new tariffs and trade tensions roiled global economic sentiment. However, spikes near this level are unlikely to weigh on market performance in the coming months, Arnim Holzer, global macro strategist at Easterly EAB, told Market Intelligence.

"The VIX's recent rise is primarily about shifting expectations and risk management," Holzer said. "It's not panic because volatility hasn't spiked to levels associated with market stress."

Monetary policy amid shutdown

Uncertainty regarding the Fed's December decision could pressure markets if the ongoing US government shutdown prevents the publication of key economic data.

"This will be even more challenging for the Fed next month, as we do not expect the Bureau of Labor Statistics to release October data on inflation or the job market," Katie Klingensmith, chief investment strategist at Edelman Financial Engines, told Market Intelligence. "It's very hard for them to make decisions with incomplete information, especially when there is so much tension in meeting both of their mandates."

The Fed's dual mandate involves adjusting monetary policy to promote stable price inflation and maximum employment. Amid a lack of government data and uncertainty over key economic trends, any "big data surprises from private sources and Fed speak could make for more volatility in market moves," Klingensmith said.

The length of the government shutdown and data blackout will influence the magnitude of these concerns, although near-term fears may still be overblown.

"The Fed would certainly rather have official government data, if only to augment what we see from the private sector, but there's still a decent amount of data that policymakers can look to as guideposts," Jim Baird, chief investment officer at Plante Moran Financial Advisors, said in an interview. "Some suggest that the Fed is flying blind at this point... rather, they've got one eye covered, and there's still plenty for them to look at to try to set policy."

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New inflation paradigm

The consumer price index, the market's preferred inflation gauge, increased 3% year over year in September. This was slightly below expectations of a 3.1% increase but still represented the largest annual jump since January and remained 1 percentage point above the Fed's 2% target.

However, the Fed has increasingly signaled in recent months that its focus has shifted to labor market concerns, suggesting that the central bank may be more likely to cut interest rates to support employment conditions even as inflation remains sticky and above target.

"It's interesting that the Fed now seems to be accepting 3% inflation as the working norm, not because it's ideal, but because inflation isn't spiraling up and a return to 2% appears less urgent," Klingensmith said. "Investors responded to the CPI release with delight, given that the Fed can likely live with stable-but-higher inflation and focus on labor weakness."

A near-term return to a 2% target inflation rate is likely unrealistic, and a 3% rate is not unreasonably high enough to prevent the Fed from issuing a rate cut amid its labor market concerns, Easterly EAB's Holzer said.

"Our view is that the Fed likely settles around 3.25% to 3.5%, meaning that this year's cuts may represent the bulk of the easing cycle unless inflation improves further," Holzer said. "By 2026, the Fed may need to acknowledge structurally higher inflation, driven by productivity, demographics, and global resource competition."

Sector results

Six of the S&P 500's 11 sectors recorded positive returns in October.

The information technology sector reported the largest sector-level gain at 6.2%. Within the sector, 39 of the 69 constituent stocks rose, with the largest increases recorded for Advanced Micro Devices Inc. and Micron Technology Inc.

The materials sector performed the worst, dropping 5.1% during the month. Prices for 19 of the sector's 27 stocks declined during the month. The Mosaic Co. and International Paper Co. recorded the largest share price losses.

Largest gains, drops

Advanced Micro Devices was the best-performing S&P 500 stock in October, jumping 58.3% from the end of September. The stock surged early in the month after reaching a deal to supply semiconductors to OpenAI LLC for AI infrastructure.

Meanwhile, shares in Fiserv Inc. fell the most of any S&P 500 company during October, with a 48.3% drop. The company's stock price plunged Oct. 29 after it shuffled its leadership and released its earnings report, in which it cut its expected organic revenue growth to a range between 3.5% and 4% from a previous estimate of 10%.