“The history of markets is one of overreaction in both directions.” – Peter Bernstein
Markets posted mixed results in October, with large-cap U.S. equities continuing their upward momentum—led by the S&P 500’s 2.58% gain and the Dow’s 2.02% rise—while mid and small caps continued their year-long trend of underperformance. International markets outperformed, as emerging markets surged 7.98% and developed markets (MSCI EAFE) added 1.35%. These gains came even as the US dollar strengthened by more than 2% for the month. Bonds continued to rally, with the Bloomberg Aggregate Bond Index up another 0.67% this month and up 6.80% YTD, reflecting easing rate pressures. Commodities remained stable, and global diversification proved beneficial as non-U.S. equities continued to lead year-to-date returns.
All data as of 11/03/2025, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
October continued to reinforce the prevailing market narrative of 2025: a year favoring offensive positioning, with growth-oriented and large-cap equities leading the charge. Investors have continued to favor scale, stability, and earnings resilience, driving strong performance in large-cap U.S. stocks while mid and small-cap equities have struggled to keep pace. This divergence has been a consistent theme throughout the year, reflecting a broader preference for companies with global reach and robust fundamentals.
Looking ahead, we anticipate continued market strength into year-end. We believe there is a high likelihood of the 2025 highs being reached in December. In part because of seasonal tailwinds, but also due to resilient corporate earnings. Historically, the final months of the year tend to favor equities, and this year’s leadership in large-cap and growth-oriented sectors suggests that momentum could carry through to the end of the year. We see the current economic backdrop as constructive for further upside, particularly in areas that have already demonstrated relative strength.
Over the past few months, we have taken a broader view of market dynamics to give you a better understanding of the forces we see shaping long-term investor outcomes. In September, we dove into the mega trends driving structural growth, followed by October’s discussion of the current secular bull market. This month, we get more granular as our attention shifts to the three key factors we’re considering as we begin to think about 2026.
Chart #1: www.stockcharts.com Data 01/01/2025 – 10/31/2025 as of 11/03/2025. An index is not managed and not available for direct investment. MA 13 = 13-week moving average MA 40= 40-week
Short-Term Interest Rates, Federal Reserve Policy, and Bonds
On Wednesday, October 29, 2025, the Federal Reserve (The Fed) announced a 25-basis-point cut to the Federal Funds interest rate¹ while also revealing that it would stop “quantitative tightening” on December 1, 2025.”² This was not a surprise. What was unexpected was Chairman Jerome Powell’s statement that the market’s assumed December rate cut was “not a foregone conclusion.” While this is not a commitment in either direction, we read this in “Fed speak” to mean a rate cut at the Fed’s December meeting is low probability.
Looking into 2026, the Fed’s interest rate policy could be a major factor in stock market performance for a number of reasons. A change in interest rates affects borrowing costs for individuals and businesses. Specifically, the prime interest rate is based on the fed funds rate, and the basis of mortgage loan rates, credit card annual percentage rates (APRs), and other consumer and business loans. Higher or lower borrowing costs affect corporate earnings, with capital-intensive sectors like utilities and materials the most vulnerable in a higher rate environment.
In addition, Chairman Jerome Powell’s term is over in May 2026, and President Trump has stated his intent to nominate someone else for the position. Who gets the position and how much influence the new chairperson has over policy direction could become a big market story.
International Stocks have outperformed in 2025. Trend or aberration?
To the surprise of many market observers, international stocks have so far outperformed their U.S. counterparts. For years we have been hearing about this change in leadership from market mavens. As we think about 2026, we have to ask ourselves, is this the start of a lasting shift or just a temporary anomaly? Several compelling factors help explain the strength we’ve seen abroad. We see three key drivers behind this year’s international equity rally:
- Weak dollar tailwind: Down all year, the dollar has been a tailwind for US investors in overseas investments to the tune of almost half the returns for the MSCI EAFE index. Does the weakness continue, or does the dollar rebound against foreign currencies?
- Earnings recovery in Europe: The S&P500 is dominated by high-growth technology companies. European exchanges, on the other hand, are dominated by more value-oriented sectors. In 2025, the growth rate for European companies changed for the positive, with growth comparable to the US. We believe the earnings trend is favorable as banks and the defense sector appear to have a tailwind.
- Reasonable valuations: For years, we have been hearing about how “cheap” Europe is vs. the US. This remains the case with the MSCI EAFE (developed international) trading around 15x 2026 estimated earnings, while the S&P 500 trades around 22x next year’s expectations.
While we believe the recent outperformance of international markets is encouraging, it remains to be seen whether this leadership will persist into 2026 and beyond. Currency trends can reverse, and earnings momentum may stall. Geopolitical risks remain a wildcard. Valuations alone are not a catalyst, and the durability of these tailwinds against the structural advantages of U.S. markets is a question mark. We believe international equities offer attractive diversification and upside potential—but whether this marks the beginning of a sustained trend or a cyclical anomaly is still an open question we are considering.
The Real Economy vs. the Stock Market
The stock market is a market of stocks, not an index, that encompasses all parts of the economy. This is easily forgotten in times when one or two sectors dominate. Over the past few years, the technology sector has dominated, driving the performance of the S&P 500. In 2025, that domination is directly related to the buildout of AI.
While more Americans are using AI, it is not the real economy. Construction, retail, healthcare, transportation, and agriculture are sectors where we spend our money, and employers hire workers. Physical products and services are exchanged. It is the world you and I live in. Different than the stock market, there is overlap.
That overlap is what we are watching. In third-quarter reports, we have noticed a trend among companies tied to the real economy. Some examples:
- Several fast-food chains have reported lower earnings but better same-store sales, suggesting people are stepping down, but margins are tightening due to higher costs.
- In the fast casual space, a number of companies have reported tightening margins and reduced frequency from middle- to lower-income guests.
- Some home builders had poor quarterly performance due to increased incentives and price cuts, due to weakening sales.
- Annualized new car sales have started to slip after a pre-tariff consumer purchasing spree that peaked in May 2025.
All the above could potentially be a result of the changing economy that stabilizes. Or not.
With inflation hovering around 3% and a weak labor market, our concern is that the problems consumer-facing companies currently face today become a persistent problem in 2026.
Final Thoughts: What should you be doing?
Marty McFly had access to future newspapers. We, unfortunately, do not live in the Back to the Future movie franchise and do not have access to such resources. What we can do, is continue to review these areas and adjust client investment plans as needed. We can also help you with the following:
Update Your Plan: After three years of above-trend returns in the S&P 500, it’s natural to feel confident—but that confidence can lead to complacency. Now is an ideal time to revisit your investment plan and work to ensure your asset allocation still aligns with your long-term goals. Markets evolve, and so should your strategy.
Rebalance Your Asset Allocation: Strong performance in certain sectors may have shifted your portfolio’s balance. Rebalancing helps manage risk, lock in gains, and maintain alignment with your intended investment mix. It’s a disciplined step that reinforces long-term success.
Review Your Holdings: Take a close look at your individual stock and ETF positions. Consider trimming speculative holdings and addressing any overconcentration. Don’t hesitate to realize gains—even if it means paying taxes. Remember, unrealized profits aren’t real until they’re captured.
When markets are rising, it’s easy to underestimate the value of professional guidance. But true planning goes beyond picking investments—it’s about navigating changing conditions, managing risk, and staying focused on what matters most.
As always, we’re here to help you navigate the path ahead—whether it’s updating your plan, rebalancing your portfolio, or thinking through the next chapter of your financial journey. If you have questions or want to explore your options, don’t hesitate to reach out.
If you would like to discuss your current strategy, or how to build such a strategy, Contact Our Team Of Financial Advisors Today!
Sources:
¹ The interest rate that banks charge each other for overnight loans and a tool The Fed utilizes to control inflation and the economy through the money supply.
² Quantitative Tightening is defined as selling bonds from its portfolio in a maneuver that will tend to tighten financial conditions
On behalf of Magellan Financial, we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner
Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner
Jon.Soden@wfafinet.com
Cassandra Queen, CFP®,ChFC®, Senior Wealth Planner
Cassandra.Queen@wfafinet.com
Susan C Schupp, MBA, Senior Wealth Planner
Susan.Shupp@wfafinet.com