Tech earnings remain robust despite sticky inflation

The S&P 500 and Nasdaq stock indices dipped slightly in October, weighed down by concerns over the increase in capital expenditure by tech firms and over elevated valuations. US small-cap stocks kept doing well, helped by the Fed’s rate cuts, showing that investors are leaning toward domestic companies and looking for good value.

Meanwhile, bond markets saw increased activity, with yields rising across longer maturities, reflecting concerns over fiscal deficits and inflation persistence.

Modest growth, sticky inflation

Global economic growth remains solid. The International Monetary Fund’s October outlook highlighted a modest upward revision to near-term growth.

In the US, the economic picture is clouded by a prolonged government shutdown that began on 1 October. With over 900,000 federal employees furloughed and key agencies running at limited capacity, the government shutdown has disrupted everything from school funding to the release of important economic data. Tracking the labour market has become especially difficult, raising concerns about the health of the US economy. As the shutdown drags on, it is expected to weigh on investor confidence.

Global inflation expectations remain sticky and government debt and borrowing levels are elevated. This is particularly concerning for the UK where growth has stagnated and inflation remains sticky, leaving the Bank of England in a tough position.

Fed restarts rate cuts

The Fed proceeded with another rate cut despite no availability of key official economic data. A slowdown in job hiring has prompted the Fed to restart its cutting cycle in September. In our view, the Fed’s rate-cutting cycle – while the economy remains strong and avoids recession – creates a supportive environment for risk assets like equities and commodities.

Lower rates could ease borrowing costs for mortgages, credit cards, and business loans, offering some relief to consumers. However, the Fed is walking a tightrope – trying to stimulate growth without reigniting inflation.

Corporate earnings: Tech in the spotlight

Earnings season was dominated by Big Tech. Alphabet impressed with strong revenue growth and a healthy ad market, while Microsoft posted solid results but faced investor concerns over rising costs. Meta’s earnings were overshadowed by a one-time tax charge, though underlying performance remained robust.

Apple and Amazon delivered mixed results, with Apple benefiting from strong product demand and Amazon facing margin pressures. Tesla returned to revenue growth, driven by buyers rushing to take advantage of expiring tax credits for electric vehicles.

Outside tech, financials continued to perform well, supported by higher interest margins and stable credit quality.

Cautious confidence in things to come

As we head into the final months of 2025, markets are grappling with a complex mix of optimism and risk. For long-term investors, the message remains clear: stay diversified, focus on quality, and avoid being swayed by short-term noise. While October reminded us that markets do not move in straight lines, the underlying fundamentals still offer reasons for cautious confidence.