The key drivers of October 2025’s equity rally

Despite the falling leaves, October 2025 was a month of growth. Familiar themes helped markets power through: continued momentum in companies linked to artificial intelligence (AI) and another round of rate cuts from the Federal Reserve (Fed). Indexes like the S&P 500 rose for the sixth month in a row as global risk assets more broadly saw gains, even as investors grappled with volatility driven by concerns related to tariff policy uncertainty.

Risk assets outperform in October

Below, we explore how these themes shaped market performance over the past month and what they could mean for your portfolio as we inch ever closer to 2026.

Q3 earnings results support the October equity rally

The technology sector continues to drive market performance, with the “Magnificent Seven” (i.e., Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) leading much of 2025’s third-quarter earnings growth and continuing to dominate both headlines and market returns. Throughout October, the U.S. equity rally was once again powered by these market leaders, with the Magnificent Seven rising nearly 6% for the month, compared to just 0.6% for the rest of the index excluding these seven companies. With the Magnificent Seven up over 25% year-to-date, we’re finding that many investors may be harshing the vibe, so to speak, with some warranted skepticism – or in other words, asking the perfectly valid question of whether we’re seeing a bubble or not.

First off, we understand the concern. For example, the Magnificent Seven is trading at elevated valuations, with a next-12-months price-to-earnings (NTM P/E) ratio of 29.5 times’ versus 20.3 times’ the rest of the S&P 500 – both above their five- and 10-year averages.

But the real question is whether earnings results are backing them up. By the end of October, roughly two-thirds the S&P 500 had released Q3 earnings, with over 80% reporting results exceeding analyst estimates, well above the five- and 10-year averages. Markets welcomed the results from Magnificent Seven companies like Amazon and Alphabet, along with solid showings from Microsoft and Meta, bolstering the thesis that the AI train and associated market performance aren’t showing signs of stopping just yet.

But despite high valuations in the absolute sense, it’s worth considering the chart below. As the earnings of AI leaders have grown, their price-to-earnings (P/E) ratios have come down. Notably, this dynamic is in stark contrast to the extreme rise in valuation multiples investors saw during the dot-com bubble, when fundamentals didn’t back up the hype.

AI multiples are falling in contrast to the dot com ‘bubble’

We see potential for the AI rally to continue, but investors may want to consider diversification when participating in this theme. While 2025’s leaders have performed strongly, there may be beneficiaries beyond the tech sector as well. Think sectors like utilities or certain pockets of industrials. If you’re curious to learn more, check out the screening tools available through our Self-Directed Investing platform.

The Fed continued its rate-cutting cycle, helping to sustain the rally

The U.S. government shutdown persisted the entire month of October. With little clarity around potential compromises between policymakers in D.C., it could go down as the longest on record – a title currently held by the shutdown lasting 34 days as 2018 turned to 2019. For investors, a notable disruption related to the shutdown is the loss of access (or delay in receiving) many economic statistics such as the Bureau of Labor Statistics’ Jobs report, gross domestic product (GDP) estimates and the Producer Price Index.

These data sets are key guideposts for the Fed in setting interest rate policy. Fed Chair Jerome Powell has said that without the official data, policymaking feels like “driving in the fog” – you can still move, but you ought to do so more cautiously.

Policymakers and investors alike can leverage – and have leveraged – alternative data sources like the ADP National Employment Report, which tracks monthly changes in private-sector payrolls. The latest release showed U.S. private employers added an average of nearly 14,000 jobs per week, signaling weak but still-positive job growth. Interestingly, this rhymes with the labor market narrative that’s been in place since before the shutdown: The labor market continues to soften, but not collapse.

Latest ADP data shows continued weak payroll growth

Just days before the Fed’s meeting, the delayed September CPI report was released, since it is legally required for Social Security cost-of-living adjustments. The data showed inflation rising at 3% year-over-year – cooler than expected, which helps to give the Fed room for keeping its focus on responding to the aforementioned labor market weakness.

Thus, it came as no surprise to see the Fed continue its rate-cutting cycle in October, lowering its benchmark policy rate to a range of 3.75%–4%. We expect this cutting cycle to continue through the first half of 2026, and investors may want to review their positioning in light of the Fed’s actions. For more information, see our Fed rate-cutting playbook.

Renewed tariff uncertainties sparked market volatility in October

Although solid corporate earnings and easing monetary policy are providing support for risk assets, October was another reminder for investors that the backdrop isn’t perfect. To illustrate, renewed tariff headlines and credit concerns sparked notable market volatility throughout the month.

Markets were (seasonably) spooked in the middle of October – tensions between the U.S. and China re-escalated as President Donald Trump threatened to impose an additional 100% tariff on Chinese goods. While the two parties met and had positive talks at the end of the month, these headlines rattled markets as the news broke, causing the S&P 500 to drop over 2% in a single session, breaking its streak of 119 days without a decline of that magnitude. The CBOE Volatility (VIX) Index, a measure of market volatility, spiked to its highest level since April, reflecting heightened investor anxiety.

Separately, investors faced concerns when regional banks Zions and Western Alliance disclosed specific loan issues. Worry that these announcements were a harbinger of systematic issues with loans – especially so soon after 2023’s regional bank failures – weighed on the financials sector’s stocks. Fortunately, the investor and analyst scrutiny that followed seemed to generate a consensus that these issues were likely specific rather than systemic. As the broader financials sector reported earnings, investors were reassured that beyond the specific reported loan issues, U.S. banks’ balance sheets still appear healthy.

These episodes of market volatility serve as a timely reminder of the importance of maintaining resilient portfolios and diversification. Having a balanced portfolio with exposure to different geographies and asset classes can help buffer against shocks and bouts of volatility.

The bottom line

October’s market moves highlight the value of staying invested through uncertainty. Strong earnings, supportive monetary policy and ongoing innovation have helped justify elevated valuations and drive risk asset outperformance. At the same time, renewed tariff tensions and policy-driven volatility highlight the need to maintain focus on portfolio resilience.

With the end of 2025 quickly coming into focus, we’re bringing you our perspective on what the year – and years – ahead could have in store for investors. The world is changing each day it seems, but are you and your portfolio prepared? Be on the lookout for our Outlook 2026 later this month to get our take on what to consider.

All market and economic data as of 11/03/2025 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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