Markets hit record highs as trade deal and strong earnings fuel optimism

Stocks reached new heights in October, boosted by a breakthrough US-China trade agreement and exceptional corporate earnings. President Trump and President Xi Jinping reached a comprehensive agreement in Busan, South Korea, that reduced tariffs and suspended export controls. The agreement halved American tariffs on Chinese goods related to fentanyl supplies. It prompted Beijing to suspend retaliatory duties on US agricultural products while pausing its rare earth export restrictions for one year. The deal also commits China to purchasing at least 12 million metric tons of American soybeans before year's end, providing relief to farmers who had lost access to their largest foreign market.

Corporate America delivered one of its strongest earnings performances in years, providing fundamental support for the rally beyond trade optimism alone. An impressive 83% of large-cap companies beat profit expectations during the third quarter reporting season, the highest proportion since mid-2021. Earnings grew 10.7% from a year earlier, marking the fourth consecutive quarter of double-digit growth. Technology giants led the charge, with Microsoft, Apple, Amazon and Alphabet all exceeding analyst estimates. The information technology sector posted earnings growth of 25%, driven by demand for AI-related products.

The Federal Reserve delivered an expected 25 basis point cut in October, but Chair Jerome Powell suggested it might be the last cut of the year. The rally in global equities is underpinned by the strength in corporate earnings and a limited impact from tariff-related uncertainty. Analysts expect earnings to grow 11% in 2025 and 14% in 2026. The Federal Reserve appears to be committed to cutting interest rates gradually, which further supports risk sentiment. We remain vigilant against building valuation concerns and will continue to seek appropriate sources of diversification to enhance risk-adjusted returns.

The continuing US government shutdown is making the macro picture harder to determine. This is something we are monitoring as the lack of information is introducing some risk, and we stand ready to adjust portfolios if US economic fundamentals are deteriorating.

Digesting the data

US large caps climbed 4.87% during the month, notching multiple record closes as investors celebrated an end to escalating trade tensions between the world's two largest economies. The breakthrough lifted stocks across the board. World equities jumped 4.54% for the month, with Asian markets surging 7.10% on hopes the truce would stick.

Japanese equities rose 4.35% on policy optimism after Sanae Takaichi was sworn in as Japan’s first female prime minister.

European markets posted more modest gains of 2.75% and UK equities rose 4.09% on better economic data and waning budgetary concerns.

Fixed income assets were roughly flat over the month after stronger returns in the prior month. In the UK, Chancellor Rachel Reeves signalled a willingness to consider spending cuts alongside tax increases, which helped UK government bonds rally 2.7%.