A reckoning for risk and reward

October delivered a sharp reality check for investors and governments alike, punishing market positioning that had deviated from fundamentals, from artificial intelligence (AI) to Brazilian equities and French bonds. Central banks remained hawkish, credit spreads widened, and volatility returned.

AI spending doubt hits tech

The NASDAQ reached a year-to-date high in early October but ended the month down 5.3% as investors questioned when heavy AI capital expenditure would translate into revenue. In aggregate U.S. earnings for the third quarter were healthy but hyperscaler performance was met with mixed market reception. 80% of reported companies had beaten market expectations and 2026 full year earnings-per-share growth tracking close to 33% y/y. However, a few large misses weighed on the broader market as capex spending plans by the hyperscalers approach the net negative cashflow threshold.

This volatility is part of the maturing AI cycle, shifting from hype to a reality check where weaker links in the infrastructure chain face greater scrutiny. Neocloud companies, which rent out computing infrastructure for AI, saw their stocks and bonds battered as attention shifted from demand growth to financing sustainability.

Two mismatches stood out, construction spending precedes service revenues, and customer contracts may expire before project debt is repaid. Higher borrowing costs, competition, and uncertain equipment lifespans have raised the hurdle for profitable expansion, with power shortages and construction delays further postponing cash generation. While large hyperscalers are not immune, their diversified earnings and stronger balance sheets should offer more resilience, especially in the corporate debt space.

Meanwhile, the equal-weight S&P 500 rose 5.0% on the month, even as the AI leaders fell and dragged the cap-weighted index down 0.9% m/m. Falling yields may have cushioned the blow, as the U.S. 10-year yield fell 37bps to 4.91% at month end, marking the largest monthly decline since late 2023.

The limited direct exposure to the AI theme within ASX 200 saw it outperform and the index was 1.4% higher on the month led by utilities, financials and healthcare sectors.

Credit spreads widen

Global corporate bond spreads stared widened as investors questioned whether profits from debt-funded AI spending would arrive in time to service the borrowing. US high yield spreads were close to 330bps and investment grade at 90bps, up 10bps and 30bps over the month. The move was more about differentiation than broad stress. Credit spreads remain narrow in historical terms but there is greater differentiation with credit ratings. CCC rated high yield bond spreads have widened dramatically this year. The outlook now favours greater differentiation, with attention shifting towards robust balance sheets and revenues extending beyond AI.

Central banks hold, but stay hawkish

No major central bank tightened in October, yet none signalled the cycle was over. The Federal Reserve held at 3.75%-4.00% by a 10-2 vote, with both dissenters favouring a hike. The decision signalled a pause, not a change in direction, and markets retained an 85% probability of a December hike. The brief meeting statement upgraded economic activity from ‘solid’ to ‘strong’, while describing inflation as ‘elevated’. Chair Warsh conveyed less urgency, citing tighter financial conditions and anchored inflation expectations.

The European Central Bank kept its deposit rate at 2.50%, and President Lagarde said a rate rise was discussed. The Bank of Japan held at 1.25% and lifted its inflation forecast.

At home, the Reserve Bank of Australia (RBA) lifted the cash rate to 4.60% in September, with September CPI running at 4.3% annually. The September quarter trimmed mean rose 1.0% and unemployment held at 4.7%. The Board meets on 3 November, and markets are pricing the probability of a hike. With further tightening partly priced in, yields could stay range-bound unless the policy outlook changes materially. Income generation with fixed income is looking attractive once again.

Politics reprices risk

Brazil demonstrated how quickly political expectations can unwind. The BOVESPA was 12% higher from the end of September to 9 October as equites surged on first round voted that signalled a shift in political leadership towards Flavio Bolsonaro. However, the eventual win in the runoff by the incumbent, Lula da Silva,  saw the market record one of its worst days in years and eventually end the month 9.9% lower.

France’s October social unrest highlighted the country’s fiscal vulnerability. Persistent structural deficits pushed government bond yields higher, with the 10-year yield breaking above 5% and the spread over Germany exceeding 150 basis points, the widest since January 2012.

Moody’s maintained France’s credit rating, providing some breathing space, but passing a credible 2027 budget is the immediate test. Banks and domestically focused businesses face greater exposure to funding costs and weaker confidence, while overseas earnings cushion internationally diversified companies. For now, this remains a France-focused adjustment, not a renewed euro-area crisis. Stress in the future could prompt flows to markets with stronger public finances, such as Germany or the US.

Oil carried a third political risk. Brent crude rose to USD 118 per barrel during October, its highest in six months, on tanker attacks, Houthi strikes on Saudi Arabia, and reports that the U.S. may be planning strikes on Iran after the 3 November midterms. For Australia, higher fuel prices feed straight into headline inflation, which is already above the RBA’s target band.

Positioning matters more than headlines

October was a reminder of the benefits of diversification, both within and across asset classes. Weakness among some of the largest technology companies was offset by strength elsewhere in the markets, while high-quality government bonds demonstrated their ability to provide protection when equity risk appetite wanes. The outperformance of the equal-weighted US market also showed that technology weakness need not prevent strength elsewhere in equity markets.

Even so, selectivity is becoming increasingly important. The AI investment cycle is unfolding alongside substantial government borrowing and infrastructure spending, all competing for capital at a time when financing costs remain elevated. Bond markets are likely to become more discerning about which projects and issuers they are willing to finance. October’s stress in French sovereign bonds and parts of the neocloud debt market offered two vivid examples of how these pressures can surface.

As we look ahead, a disciplined approach to portfolio construction, focusing on quality, diversification, and robust fundamentals, will be essential to navigating the shifting landscape.

Global economy

• The Fed held interest rates at 3.75%-4.00% at the October FOMC meeting, pausing after September’s 25 bps hike, in a 10-2 vote with both dissenters favoring another increase. Fed Chair Warsh noted that inflation remained elevated, while domestic spending, productivity and capital investment remained resilient. He reiterated that future policy decisions would depend on incoming data and provided no explicit guidance on the December meeting.
• The ECB held its deposit rate at 2.5%, as expected, while signaling that a December hike is likely. The decision was unanimous, and broadly stable underlying inflation and subdued wage growth leave the Governing Council room to assess incoming data. Lagarde’s planned departure in February 2027 puts leadership succession in focus, with three executive board seats expected to become vacant next year, though policy continuity is considered likely.
• China’s growth stabilized in 3Q26, with GDP up 4.5% year over year versus 4.3% in 2Q, supported by exports and technology-linked industries while domestic demand remained weak. September exports surged 36.3% year over year, but retail sales rose only 1.1% and fixed-asset investment fell 7.2% in the first nine months, underscoring the persistent K-shaped recovery and property-sector drag. Inflation remained uneven: PPI accelerated to 5.0%, while CPI was 0.9% and core CPI held at 1.0%. Growth remains within the government’s 4.5%–5.0% target range, but a durable recovery will likely require stronger fiscal and monetary support to revive domestic demand.
• The Bank of Japan (BoJ) held its policy rate at 1.25%, as expected, with an 8–1 vote after Takata dissented in favor of a hike. The Outlook Report emphasized that underlying inflation has reached the 2% target, reinforcing the tightening stance, while projections and guidance changed little. Governor Ueda said future rate decisions would be made meeting by meeting. The BoJ will accelerate ETF sales from January 2027, but market reaction was muted given its effort to limit disruption. The baseline is for 25-basis-point hikes in December 2026 and March 2027, taking the rate to 1.75%, followed by a meeting-by-meeting approach. 

Equities

• Global and U.S. equities were mixed in October, with the S&P 500 declining for a second month and the Nasdaq lagging, while the equal-weight S&P 500 rallied as breadth improved. AI-related technology and communication services weakened on financing and capital-spending concerns, while energy, staples, utilities and health care led; resilient earnings and a Federal Reserve hold provided a counterweight.
• Asian equities fell sharply in October, with the MSCI Asia Pacific ex Japan index down 6.8% amid pronounced regional dispersion. Indonesia, South Korea and Taiwan lagged, while Australia and India gained as defensive shares and software services, respectively, provided support. Technology valuation and financing concerns, elevated oil prices and hawkish central-bank signals weighed on sentiment.
• Australian equities rose in October, with the ASX 200 gaining 1.4% despite choppy trading. Utilities and financials led as banks rebounded and investors rotated out of resources, while materials fell sharply amid weaker metals prices and technology lagged on data-centre delays and AI infrastructure valuation concerns. Softer employment data, firmer inflation and a hawkish Reserve Bank of Australia kept the interest-rate outlook in focus.
• Greater China equities declined in October, with Hong Kong outperforming mainland markets as property shares and REITs cushioned losses in technology stocks. The CSI 300 fell 8.5% amid valuation, competition and capital-spending concerns. Strong industrial output and exports contrasted with weak retail sales and continued contraction in fixed-asset investment.
• Japanese equities fell in October, with the Nikkei down 5.2% versus a 3.5% decline in the broader Topix, reflecting heavier pressure on technology-linked shares. The Bank of Japan held rates steady, while above-target inflation and a weaker yen kept the policy outlook in focus. 

Fixed income

• The U.S. Treasury (UST) yield curve bull-flattened  in October, with 2-year yields falling to around 4.57%, while 30-year yields declined to around 5.29%. Yields eased amid softer labor market data, although elevated inflation and expectations for further monetary tightening continued to influence market expectations. Following the October FOMC meeting, markets continued to price the possibility of another hike in December, with the 10-year yield remaining close to 5% as investors awaited further inflation and employment data.
• Credit spreads widened in October amid growing investor concerns over heavy debt-funded AI investment and rising corporate leverage. U.S. investment grade spreads widened by around 10bps to 90bps, while U.S. high yield spreads widened more significantly by around 29bps to 340bps. Debt issued by AI infrastructure providers and neocloud firms also came under pressure amid concerns over aggressive borrowing and the sustainability of AI-related capital spending. 

Alternatives

• According to PitchBook data, the number of global private equity deals in 3Q26 is estimated to have increased to 5,718, up from 5,613 in the last quarter. Deal value also rose to USD 499billion in 3Q26, from USD 463billion in the last quarter. Exit activity in global private equity also picked up, with USD 482billion across 1,089 exits estimated in 3Q26, up from USD 292billion across 996 exits in the previous quarter.
• As for the U.S. middle market, the J.P. Morgan Private Assets Index-Middle Market returned a total of -7.7% on a trailing 12-month basis as of September with revenue growth, net debt change and multiple expansion attributing to 9.8%, -2.4% and -13.9%, respectively.
• Based on the KBRA DLD Direct Lending index on a par-weighted basis, the trailing 12-month default rate excluding non-accruals fell 10bps over the month to 2.2%, while the non-accrual rate remained unchanged at 1.8%. Consequently, the trailing 12-month default rate including non-accruals declined to 4.0%. Yield to maturity rose by 4 bps to 9.34% as of October.

Other financial assets

• Oil prices rose in October amid persistent tensions in the Middle East and renewed concerns over supply disruptions. Brent crude gained 13.6% over the month, with the expiring December contract settling at around USD 118 per barrel, as escalating geopolitical tensions and threats to key energy infrastructure and shipping routes heightened supply risks. Despite ongoing geopolitical uncertainty, elevated U.S. yields and expectations for further Fed tightening continued to pressure gold, with prices declining to around USD 4,000 per troy ounce by end-October.
• The USD strengthened modestly in October, with the USD index (DXY) rising around 0.4% over the month as resilient U.S. economic activity and expectations for further Fed tightening supported the currency. Among other developed market currencies, the AUD and GBP strengthened against the USD, while the EUR weakened amid political and fiscal uncertainty in Europe. The Japanese yen weakened modestly to around 157.5 against the USD as investors assessed the timing of further Bank of Japan tightening, while the CNY strengthened to around 6.66 per USD, supported in part by continued exporter dollar conversions. 

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