Key Observations
- Q3 is on track to deliver a fourth straight quarter of double-digit earnings growth. The Fed’s October rate cut added momentum to already strong 2025 performance.
- The 0.25% cut was expected, but the tone surprised. Hawkish dissent and Powell’s remarks shifted sentiment; leading to what was seen as a likely December rate cut now being up in the air.
- Supportive macroeconomic conditions have propelled markets to new all-time highs. To understand the implications, consider the following context:
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- Headline index price offers limited insight. If a headline touts an ‘all-time high’, move on to something more insightful.
- Valuations are more telling. While they don’t predict 2026 outcomes, elevated valuations warrant attention and may signal future volatility.
- Record concentration within the S&P 500 intensifies existing dynamics. A narrow leadership amplifies both risk and opportunity, making diversification and selectivity more critical.
Market Recap
The rally continued in October, fueled by persistent optimism about artificial intelligence, ongoing rate cuts from the Federal Reserve and robust third-quarter earnings. As of October 31, 64% of S&P 500 companies had reported earnings, with blended earnings growth at 10.7% [1]. If the quarter closes above 10%, it will mark the fourth consecutive quarter of double-digit earnings growth.
U.S. equities moved higher, with the S&P 500 gaining 2.3%. Technology stocks led the advance, propelled by robust earnings and sustained enthusiasm for Artificial Intelligence (AI). This powerful tailwind aided in growth stocks outperforming value stocks during the month. Small caps rose 1.8%, though their pace moderated after a strong third quarter.
Overseas, developed markets posted modest gains, constrained by sluggish growth in Europe and Japan. Emerging markets outperformed, buoyed by China’s targeted stimulus and a temporary easing of U.S.-China trade tensions. South Korea stood out, adding to its nearly 100% year-to-date gain. Investor excitement around Samsung Electronics, the country’s largest publicly traded company, played a key role in driving returns.
Bond markets rallied as yields declined, reflecting continued central bank easing. Although the 0.25% rate cut was widely anticipated, hawkish dissent and Chairman Powell’s remarks on the balance of risks caught investors off guard. Futures markets, which had priced in a 94% [2] probability of a December cut before the meeting has since dropped.
Lastly, Gold – a hedge against uncertainty – entered the spotlight as it briefly reached over $4,000/oz before experiencing its largest single-day decline in several years, losing some of its shine amid shifting rate expectations.
Price, Valuation, and Concentration
Financial media loves a milestone. “S&P Hits Record High!”, “Dow Tops 47,000!”. These headlines grab attention, but they rarely offer insight. Price tells us what something costs, but not what it is worth. And historically, new highs in price alone have shown little predictive power. They’re psychological markers, not reliable signals.
Valuation, on the other hand, measures what we receive for the price we pay. In equity markets, that’s earnings per share. When we buy a stock, we are purchasing a claim on future earnings, or the economic value a business generates. If those earnings grow, the price may follow, and we are rewarded through higher returns.
Low valuations often reflect modest expectations, while high valuations imply optimism. Valuation is not a perfect predictor; however, the biggest nuance is time. In the short term, valuation has little influence on how a stock trades next month, quarter or year. However, extend the horizon, and the picture changes. Over longer periods, valuation becomes far more meaningful to future outcomes.
Today, markets are expensive by nearly every measure. What does that mean for 2026? As evidenced, not much. But for long-term investors, it matters a great deal. High valuations and price call for deliberate risk management, thoughtful diversification, and a clear plan for what to do if prices fall.
Lastly, the S&P 500 is also reaching record levels of concentration. As of October 31, 2025, the top 10 stocks account for 40.2% [1] of the index, an all-time high. Unlike price or valuation, concentration does not stand alone, it amplifies what is already there. Think of it like leverage. When things go well, it boosts returns. When they go poorly, it magnifies losses.
In conclusion, since 1991, markets with above average concentration saw intra-year max drawdowns that were over 5% larger than below average concentration (-7.7% vs -12.9%)[1]. This concept is perhaps best exemplified by a sports team. A team built around a single star player might shine, but it is less resilient than a team with a deep bench. Today, AI is that star player, driving a handful of stocks to new highs. But the more concentrated the market becomes, the more fragile it may be. As concentration climbs, it intensifies the risks tied to high valuations. That’s why we believe it is more important than ever to stay diligent: manage risk, diversify wisely and prepare for what comes next.
Sources
[1] FactSet as of October, 31 2025
[2] CME Fed Watch Tool as of November 3, 2025
Disclosures
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Certain targets within the presentation are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Clarendon Private’s strategies are disclosed in the publicly available Form ADV Part 2A.
Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
MSCI EAFE is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
Bloomberg U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Bloomberg U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
FTSE NAREIT Equity REITs Index contains all Equity REITs not designed as Timber REITs or Infrastructure REITs.
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
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