Market Recap: October Closes Strong as Fed Eases, Earnings Impress & Stocks Rally

 Author: Montecito Capital Management. 

U.S. stocks finished October with broad gains, extending a steady rally that carried through both the week and the month. Renewed optimism over interest rates and stronger corporate results gave investors reason to stay constructive on risk assets. The S&P 500 added 3.4% in October, the Nasdaq advanced 4.7%, and the Dow Jones Industrial Average climbed 1.8%, marking another month of incremental progress across major indexes. For the final week, the S&P rose 1.9%, while the Dow and Nasdaq each gained just over 2%, continuing a stretch of upward momentum.

A major tailwind came from the Federal Reserve’s second rate cut in more than a year, signaling a clear pivot toward easier policy. The Federal Reserve lowered its target range for the federal funds rate by 0.25 percentage point to 3.75%–4.00%. The move was widely seen as confirmation that inflation pressures have moderated and that the Fed is comfortable with the economy’s trajectory. Lower borrowing costs tend to lift valuations by reducing discount rates and enhancing the relative appeal of equities versus bonds — dynamics that played out quickly across markets.

Earnings season has also provided meaningful support. Third-quarter results have generally outperformed expectations, reinforcing the view that U.S. companies remain resilient despite earlier cost and rate headwinds. According to LSEG IBES data, S&P 500 profits are tracking up 13.8% from a year ago, the best pace since 2021. Growth has been strongest among technology and communication services firms, where demand linked to artificial intelligence and digital infrastructure continues to drive results.

The combination of a more accommodative Fed and healthy profit growth has created a favorable backdrop for equities. Investors appear increasingly confident that inflation is cooling without derailing economic activity — a balance that supports the soft-landing narrative. With earnings momentum intact and policy turning friendlier, markets head into year-end with cautious optimism and renewed focus on how sustainable this recovery trend may prove to be.

• Reason for the cut: The Fed is prioritizing the struggling labor market, as job growth has slowed significantly. The ongoing government shutdown has created a data vacuum, forcing the Fed to rely on older data and anecdotal evidence.
• Powell’s comments on the future: While the Fed has cut rates twice, Powell emphasized that a December cut is not guaranteed. He noted that there are “strongly differing views” among policymakers about the next steps.
• The Fed’s dilemma: The central bank is navigating a difficult situation where inflation is cooling, but the labor market is weakening.
• Impact of the cut: The decision to lower borrowing costs could provide some relief to consumers and businesses facing high interest rates, but the overall economic outlook remains uncertain.