October 2026 Market Review – Paying for the Build-Out

The month ended with a pronounced sell-off, the S&P 500 closing at 7,580 and the Nasdaq Composite at 25,437 on 30 October, with healthcare and selected consumer shares attracting buyers as leadership rotated. Yet beneath the headline the equal-weighted S&P 500 rose by roughly 3.5% in October whilst the standard, market cap weighted, index fell by around 1.7% in sterling terms.

Asia takes the strain

Asia Pacific and emerging market equities fell sharply over the month, with Korean technology shares reversing gains from earlier in the year despite strong results from Samsung and SK Hynix, modest valuations, and healthy near-term profit expectations. However, the question remains how long those profits can last if AI developers struggle to raise capital and infrastructure spending slows.

The Baillie Gifford Pacific Fund, with a sizeable allocation to Samsung, TSMC, SK Hynix and MediaTek, fell 12.7% against 7.9% for the average Asia Pacific ex Japan fund, whilst the HSBC MSCI Emerging Markets ETF fell 9.4%. The Merlin Fidelis Emerging Markets Fund fell a more modest 4.2% against 9.1% for the average emerging market fund as its manager owns relatively few of the chipmakers that dominate the index, albeit that has meant lagging in months such as August and September when such shares rallied strongly. In Japan, WS Zennor Japan Equity Income (-4.3%) again fell by less than the more growth-oriented JK Japan Fund (-6.8%).

Rates and bonds under pressure

The US Federal Reserve held its policy rate at 3.75-4.00% a month after its first increase since 2023, with two committee members voting for a further rise and Chair Kevin Warsh offering little reassurance that the cycle has ended, so that markets continue to expect an increase in December. Recent economic data explains the caution, as September payrolls slowed to 29,000 and unemployment rose to 4.2%, yet third-quarter GDP grew at an annualised 3.4% and consumer prices rose 0.6% in September, lifting annual inflation to 3.7% with petrol accounting for more than half of the increase.

Other central banks faced similar dilemmas, with India and Canada raising rates, the ECB holding its deposit rate at 2.5% with a December increase still expected, and the Bank of Japan holding at 1.25% whilst signalling that it could tighten as soon as December.

Government bonds were volatile, with long-dated yields approaching multi-decade highs early in the month before a flight to safety helped US Treasuries recover, the 10-year yield falling back below 5% on 22 October and recording its largest monthly decline since 2023, which lifted the iShares $ Treasury Bond 7-10yr ETF (GBP hedged) by 2.7% and recovered most of September's loss. As we argued in our weekly update of 5 October, higher yields have restored income without making every maturity equally attractive, which is why we continue to prefer short and intermediate maturities rather than a wholesale return to long duration.

Fiscal credibility remained the concern in the UK, where the 30-year gilt yield briefly exceeded 6% and the 10-year reached about 5.53% early in the month, as inflation rose to 3.5% and public debt passed £3tn ahead of John Healey's first Budget on 28 October. The Budget proved cautious, meeting the government's borrowing rules (albeit with fiscal headroom reduced from £24bn to £15bn), raising taxes on banks, savings and landlords, and easing energy bills. The market reaction was muted, with the 10-year yield easing to around 5.3%. France was a further concern, with the 10-year yield rising above 5%, a wider spread over Bunds, and negative outlooks from both Moody's and Fitch.

Oil and gold

Energy remained the link between geopolitics and the economic outlook, with repeated attacks on Saudi facilities and Gulf shipping taking Brent to over US$117 by the month end. While emergency stock releases have provided some relief, with America's Strategic Petroleum Reserve close to a forty-year low, there is little cushion left. Higher fuel costs supported refiners but squeezed households and make life harder for central banks.

Gold fell for a second month, the iShares Physical Gold ETC losing 7.1% in sterling terms following a 6.8% fall in September to leave it down 9.2% for the year, with the metal ending October at just under US$3,900 an ounce, which is unusual for a safe-haven asset in a month when the Gulf conflict escalated and oil spiked. In the short term, this looks more like the behaviour of a rate-sensitive asset than a geopolitical hedge, as higher energy prices strengthened the view that US rates will stay higher for longer and investors seeking safety bought US Treasuries instead. We continue to hold gold as a diversifier for fiscal stress and geopolitical shocks, supported by central bank buying, but two consecutive falls are a reminder that it will not diversify in every environment. The WisdomTree Copper ETC, our other real asset, fell 2.7% although it remains up 11.9% this year.

How our holdings fared

October rewarded those holdings whose earnings are not tied to AI spending whilst penalising those that are. The Polar Capital Artificial Intelligence Fund was the most significant detractor with a fall of 12.3% after a 5.7% gain in September, albeit the fund remains up 26.9% for the year to date. The Lansdowne Developed Markets Fund (-6.5%), Polar Capital UK Value Opportunities (-4.5%), the First Trust Nasdaq Cybersecurity ETF (-4.5%), on which we took profits in September, and the listed private equity holdings Chrysalis (-8.6%) and IP Group (-3.2%) were also lower.

Gains came from holdings with little exposure to AI spending, with Polar Capital Global Insurance returning 10.8%, more than recovering September's 4.7% fall since its earnings come from premiums and the income earned on them rather than from data-centre budgets. Polar Capital Healthcare Opportunities added 2.5% and WS Havelock Global Select (+2.6%), Regnan Sustainable Water and Waste (+2.0%) and Ranmore Global Equity (+1.6%) all rose in a month when the average global equity fund fell 1.5%. The absolute return holdings provided less protection than we would have liked, with AQR Adaptive Equity Market Neutral losing 3.4% and the Man and Fulcrum funds falling by between 0.8% and 1.6%, against a fall of 0.6% for the IA Targeted Absolute Return sector, although the recently added Tycho Calibrate Macro Fund gained 0.7%.

Where we stand

October left markets facing two connected tests, whether elevated energy costs will require further monetary tightening and whether AI-related earnings can justify the vast investment commitments being made. We are not relying on either resolving in any particular way. We remain invested in AI's development without relying on it as the only source of growth, with our exposure shifting towards businesses using AI to improve their own operations alongside selected Asian chip and memory suppliers whose valuations are less demanding. Lower valuations do not insulate them from financing pressures elsewhere in the industry, which is why sizing matters at least as much as selection.

October also demonstrated that returns are available beyond the market leaders of recent years, with healthcare, insurance, water and waste, and global quality strategies earning their returns from different sources. In bonds we remain selective while inflation is above target in the US, UK and euro area, central banks are still tightening and governments are borrowing heavily, whilst gold and copper remain in the portfolios as diversifiers and for their long-term value.