October was a month when investors began questioning some of the assumptions that had sustained the equity rally. Political uncertainty was hardly new, the Middle East remained dangerously unstable and oil prices surged once again. Yet it was the growing unease over the extraordinary sums being committed to artificial intelligence that proved particularly uncomfortable for markets. Investors were becoming less willing to overlook valuations in pursuit of AI exposure, while the economic and political backdrop offered little reassurance.
Donald Trump remained an ever-present influence, alternating between threats, negotiations and displays of American economic and military muscle. His approach to trade continued to unsettle relations with allies and adversaries alike, while the unresolved confrontation with Iran ensured that geopolitics remained firmly embedded in investment decisions.
There was also the small matter of November’s US midterm elections. With polling suggesting that the Democrats could regain control of at least one chamber of Congress, Trump faced the prospect of a considerably less accommodating political environment. The possibility of a divided Congress raised questions about his ability to advance his domestic agenda, although his considerable executive powers over trade and foreign policy would remain. Political uncertainty was hardly likely to disappear after polling day.
Iran remained the more immediate geopolitical concern for markets. The conflict continued to threaten energy supplies and regional security, with little confidence that a durable settlement was close. Hopes of negotiations periodically offered relief, but the underlying tensions persisted.
Oil prices reflected that uncertainty, with Brent surging 21.9% to $113.43 a barrel and WTI climbing 19.2% to $104.12. These were substantial moves, particularly for an economy already contending with elevated borrowing costs and uneven growth. Higher oil prices benefit producers, but for much of the global economy they represent another unwelcome increase in costs. The Bloomberg Commodity Index rose 4.8%, although the strength of energy contrasted sharply with developments elsewhere in the commodity complex.
The economic picture was less alarming than the political backdrop might suggest. The US economy continued to demonstrate resilience, with consumer spending and business investment supporting activity. Investment in artificial intelligence itself remained an important contributor. That created something of a paradox. The same expenditure helping sustain economic growth was becoming a source of growing anxiety for equity investors.
Central banks were increasingly uncomfortable. The Federal Reserve held interest rates at 3.75%–4.00% in October, with two policymakers favouring another quarter-point increase. The Fed also upgraded its assessment of US economic activity, describing growth as strong rather than merely solid. The prospect of further tightening had certainly not disappeared.
Europe faced a less appealing combination of weak growth and rising energy costs. The European Central Bank left rates unchanged, with its deposit rate at 2.5%, but warned that the prolonged energy shock threatened both higher inflation and weaker economic activity. Japan also maintained its gradual approach to monetary normalisation. The direction of travel was becoming less straightforward. Central banks were no longer debating how quickly they could ease monetary conditions, but whether inflation would allow them to ease at all.
For equity markets, the more significant development was the increasingly uncomfortable debate surrounding artificial intelligence. For several years, investors had rewarded technology companies for spending ever greater sums on computing infrastructure, data centres and the equipment required to support AI. The assumption was that commercial returns would eventually justify the expenditure. October suggested that investors were becoming considerably less patient.
The Nasdaq fell 5.3%, while the S&P 500 declined a comparatively modest 0.9%. The difference was telling. This was not a wholesale retreat from equities, but a reassessment of valuations attached to some of the market’s most influential companies.
Alphabet suffered particularly badly, falling 18.7%, as concerns over search advertising and the cost of AI investment unsettled shareholders. Amazon declined 3.5%, although Tesla bucked the trend with a 12.7% advance. Investors were increasingly distinguishing between companies demonstrating commercial returns from AI and those whose valuations depended heavily on expectations of future growth.
The underlying issue was not whether artificial intelligence would transform industries. The question was whether the enormous capital commitments being made today could generate sufficiently attractive returns, and how long shareholders would have to wait. Some of the largest technology companies were committing unprecedented sums to infrastructure at a time when financing costs were becoming less forgiving.
There was also growing scrutiny of the increasingly interconnected relationships between technology companies, AI developers, infrastructure providers and their financiers. Investment, financing commitments and commercial contracts are becoming closely intertwined. That does not invalidate the commercial opportunity, but it makes the economics harder to assess. The AI revolution may be genuine, but that does not mean every investment made in its name will prove profitable.
Europe offered a rather different experience. The FTSE 100 gained 1.2%, while Germany’s Dax advanced 2.5%. The UK’s greater exposure to energy and established dividend-paying businesses provided some insulation from the technology correction. European equities also benefited from a less concentrated market structure, although the continent remained vulnerable to higher energy costs and weak underlying growth.
Asian markets were considerably less fortunate. Japan’s Nikkei 225 fell 5.2%, reflecting pressure on technology-related businesses and concerns about the implications of monetary policy normalisation. China suffered an even sharper reversal, with the Shanghai Composite declining 11.6%. Persistent questions over the strength of the domestic economy, the property sector and the effectiveness of policy support continued to weigh on confidence.
Perhaps the month’s most surprising development came from precious metals. Despite geopolitical instability and surging oil prices, gold fell 14.4% to $3,893 an ounce, while silver dropped 18% to $49.28. Both had enjoyed extraordinary gains earlier in the year, leaving them vulnerable to profit-taking and changes in interest-rate expectations. Their declines illustrated how quickly crowded positions can reverse, even when the longer-term arguments supporting an investment remain intact.
Bond markets faced their own conflicting pressures. Higher energy prices threatened to keep inflation elevated, limiting the scope for monetary easing, while concerns about technology valuations encouraged some investors to seek more defensive assets. Stronger economic activity was not necessarily good news if it also meant borrowing costs would remain elevated. Currency markets reflected similar tensions, with the dollar, euro and sterling responding to changing interest-rate expectations and the relative strength of their economies.
Crypto markets had an altogether more uncomfortable month. Bitcoin fell 6% to $78,038, with confidence further tested by reports of a substantial security breach at Binance in the final days of October. The incident raised renewed questions about operational security, counterparty exposure and the concentration of activity within a handful of major exchanges.
That was particularly damaging to confidence in a market that has spent years seeking greater institutional legitimacy. Whatever progress has been made in attracting mainstream investors, a major security failure at one of the industry’s largest exchanges is hardly reassuring.