October 31, 2026 | Unsubscribe
Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
October ended with a clear split in the market. Big technology stocks had a rough month, with the Nasdaq down about 5%, its worst month since March 2025. The rest of the market did much better: 9 of the 11 S&P 500 sectors gained in October, the Dow rose about 2%, and small caps rose about 1.3% this week even as the large indexes fell.
The main driver was disappointing earnings from several of the largest technology companies. The results themselves were mostly solid, but investors focused on how much these companies are spending on AI infrastructure and how little cash some of that spending is producing so far. Friday brought the S&P 500’s worst day since June, and the S&P 500 and Nasdaq have now fallen three weeks in a row, their longest losing streak since March. The message is the same one we have been watching all month: the market is no longer rewarding AI spending on faith.
The Fed held rates steady on Wednesday at 3.75% to 4%, as expected. The vote was split: two members wanted to raise rates again. The Fed said the economy is “expanding at a strong pace” and that inflation “remains elevated,” and Chair Warsh said the Fed stands ready to act if needed. Markets now see roughly an 80% chance of a rate hike at the December meeting. The pause gives some breathing room, but the direction is still toward higher rates.
Thursday’s data explained why the Fed is torn. The economy grew at a strong 3.4% annual rate in the third quarter, faster than expected, with consumer spending holding up well. But the Fed’s preferred inflation gauge rose to 3.6% in September, up from 3.4% in August, and core inflation rose to 3.1%. Both matched forecasts, which helped small caps rally that day, but inflation is still moving in the wrong direction.
Oil remained the biggest pressure on inflation. U.S. crude held above $100 a barrel, with the international benchmark above $110. Energy stocks were the big winners in October, up about 13% for the month, while higher fuel costs continue to squeeze consumers and businesses.
For small caps, the takeaway is encouraging. Money is rotating out of crowded mega-cap tech into the broader market, and the Russell 2000 is now up about 13% for the year, ahead of the S&P 500 and Nasdaq. That rotation is the trend to watch.
What’s Coming Next Week
The October jobs report on Friday is the main economic event. The labor market has been cooling, and with the Fed weighing a December hike, this report matters. A weak number would ease pressure for another hike. A strong one would make December more likely and could push yields up, which tends to weigh on smaller companies.
Monday’s manufacturing report and Wednesday’s services report will give an early read on how businesses are handling high energy costs. Earnings season continues, including more large technology names early in the week, so the AI spending debate will stay in focus.
Tuesday is also Election Day. Markets are open as usual, but election outcomes can add short-term volatility, especially for sectors sensitive to government policy.
Oil remains the wildcard. As long as it stays above $100, inflation and the Fed’s path will stay difficult.
The bottom line: big tech had a bad October, but the broader market and small caps held up well. The Fed is on pause but leaning toward another hike. Next week’s jobs report will help determine whether that hike happens in December.
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SmallCapStocks Team
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