Economic & Market Monitor
For the period ending October 31, 2025
Market Review
Stocks Climb on Strong Earnings, Lower Interest Rates and Easing Trade Tensions: The S&P 500 Index climbed further into record territory in October, closing out the month with a gain of 2.3%. This lifted its year-to-date return to 17.5%. Technology stocks continued to lead the market higher last month on booming investment in artificial intelligence (AI). Internationally, the MSCI EAFE Index (developed markets) gained 1.2%, while the MSCI Emerging Markets Index rose 4.2%. Year-to-date, these indexes were up 26.6% and 32.9%, respectively. Excluding currency translation gains due to a weakening U.S. dollar earlier in the year, returns were 19.5% and 30.2%, respectively.
Surprisingly Strong Q3 Earnings: As of October 31st, 63% of S&P 500 companies had reported results, with 83% beating analysts’ expectations as tracked by I/B/E/S. Analysts currently estimate Q3 earnings per share (EPS) grew 13.8% year-over-year, up from 8.8% estimated on October 1st. Full-year 2025 EPS growth is estimated at 11.6%, up from 10.8% at the start of the month.
FOMC Rate Cut: On October 29th, as widely expected, the Federal Open Market Committee (FOMC) lowered the target range for federal funds by 0.25% to 3.75%–4.00%. The FOMC statement cited signs of labor market weakness for the cut but acknowledged inflation remains elevated compared to earlier in the year. At a post-FOMC press conference, Federal Reserve Chairman Jerome Powell remarked that a December rate cut is not guaranteed and will depend on upcoming data. Prior to Powell’s comments, fed funds futures implied a more than 90% probability of another 0.25% rate cut in December, but afterwards it slipped to just under 70%.
Inflation Slightly Below Forecast: September’s Consumer Price Index (CPI), released in late October, increased 3.0% year-over-year—up from 2.9% in August but below the 3.1% Bloomberg consensus estimate. Core CPI, which excludes food and energy, ticked down to 3.0% from 3.1% in August and was also below the consensus forecast of 3.1%. Although inflation moderated somewhat in September, it remained well above the Fed’s 2% long-term target.
Lower Interest Rates Lift Bonds: Interest rates shifted slightly lower for most fixed-income maturities in October. The yield on 10-year U.S. Treasury notes fell 0.07% to end the month at 4.08%. The Bloomberg U.S. Aggregate Bond Index gained 0.6%, while the Bloomberg U.S. Municipal Bond Index rose 1.2%, extending their year-to-date returns to 6.8% and 3.9%, respectively.
Easing Trade Tensions: After escalating earlier in the month, trade tensions between China and the U.S. eased toward the end of October following renewed diplomatic engagement between the two countries and a meeting between Presidents Donald Trump and Xi Jinping. Threats of increased tariffs were withdrawn, and China signaled a willingness to increase agricultural imports from the United States while suspending threats of additional curbs on rare earth exports.
Outlook
The uncertainties generated by the Trump Administration’s trade policies have had a far less disruptive impact on the economy and corporate earnings than forecasters anticipated earlier in the year. Both second quarter and third quarter S&P 500 earnings have exceeded expectations by wide margins. The economy in the fourth quarter also appears to be getting off to a strong start. S&P Global’s preliminary October U.S. Composite PMI, which measures business activity across the services and manufacturing sectors, climbed to 54.8 from a final reading of 53.9 in September. Readings above 50 signal expansionary conditions. If business conditions remain firm through the end of the year, it’s quite possible that analysts’ estimates for fourth-quarter and full-year 2025 S&P 500 EPS growth of 7.7% and 11.6%, respectively, will prove conservative.
Although the fundamental underpinnings for the stock market are supportive of further gains, its valuation metrics are very extended, leaving it vulnerable to profit-taking should negative surprises arise. A few areas potentially flashing early warning signs include sluggish hiring activity, persistent above-target inflation, deteriorating subprime credit, and strained low-end consumers.
Roger Khlopin, CFA
Chief Investment Officer
Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager
This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Bank of Hawaii and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, accounting or financial professional before engaging in any transaction. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Bank of Hawaii or its affiliates to buy or sell any securities, investments, or insurance products. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved. Past performance is not a guarantee of future results.
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