October 2026
Market Commentary
Strength The Home Stretch
As October came to a close, investors could be forgiven for taking their eyes off the markets to watch the World Series, where the Milwaukee Brewers captured their first championship, defeating the Tampa Bay Rays in five games. It is always exciting to see an underdog win! We may be seeing a similar story unfold in the markets, as investors look beyond some of the biggest technology winners of recent years and diversify into areas of the market that have been sitting on the bench.
A Changing Lineup
October's rotation away from technology stocks reflected growing concerns about elevated valuations, concentrated positions, and whether substantial investments in artificial intelligence (AI) will deliver expected returns. Investors increasingly focused on companies' ability to translate AI spending into earnings and free cash flow, rather than relying on promises of future growth.
Information Technology declined 6.8%, while the semiconductor index fell 15.3%. Communication Services suffered the largest sector decline, falling 15.1%, driven largely by weakness in Alphabet and Meta. Concerns about slowing growth and mounting AI-related capital expenditures weighed on both companies. The Nasdaq Composite declined 5.3%, while the S&P 500 slipped 0.9%.
Beneath the surface, however, the broader market showed considerable strength. The equal-weighted S&P 500 gained 5.0%, while the Dow Jones Industrial Average advanced 1.8%. Energy led with a 14.0% gain, followed by Consumer Staples (+11.6%), Utilities (+10.2%), and Health Care (+9.9%). This broadening of market leadership suggests investors are finding opportunities beyond the technology sector.
Keeping an Eye on Risk
Concerns about AI financing also extended into credit markets. As companies increasingly borrow to finance data centers and other AI infrastructure expansion, investors began reassessing credit risks. Cloud computing provider CoreWeave attracted attention as the cost of credit protection on its debt surged. Rising credit default swap spreads reflected growing concerns about leverage and the ability of highly indebted AI companies to generate sufficient cash flow to meet their obligations.
Meanwhile, Treasuries benefited from a flight to quality as technology shares weakened. After reaching elevated levels early in October, the 10-year Treasury yield declined from 5.31% to 4.92%, while the 30-year yield fell from 5.66% to 5.31%. Because bond prices generally rise when yields fall, this provided some welcome relief to fixed-income investors.
Looking Toward Year-End
The Federal Reserve took a seventh-inning stretch at its October meeting, holding the federal funds target range steady at 3.75%–4.00%. With inflation remaining elevated, policymakers face a delicate balance between maintaining economic momentum and restoring price stability. Additional rate increases remain a possibility, potentially contributing to further market volatility.
As we enter the final two months of 2026, investors will also be watching the implications of the midterm elections and potential policy shifts, particularly regarding tariffs. Greater clarity on trade policy could reduce uncertainty for businesses and investors, although the path forward remains unclear.
As always, our focus remains on maintaining diversified portfolios, managing risk, and seeking singles and doubles rather than swinging for the fences. We believe a consistent, disciplined approach remains one of the best ways to pursue long-term wins, regardless of which sectors are leading the market. If you have questions about recent market developments or your portfolio, we encourage you to reach out to your Wealth Management team.
These facts and opinions are provided by the Cape Cod 5 Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION AND MAY GO DOWN IN VALUE.
