Weekly Newsletter: October 27, 2025
“Faster than slapping tariffs on a country! More powerful than the lack of government data! Able to leap inflation in a single bound!” It’s a super stock market!! Undaunted by any bit of news that might derail the now six-month rally, stocks keep rising. The latest reason for the euphoria is better-than-expected earnings. An unofficial gauge of the consumer, banking, credit card, and airline earnings was solid, and companies declared they are seeing positive trends in their businesses. Even the “required” bit of government data, consumer inflation, came in a bit better than expected. It was required as part of the calculation for the annual cost-of-living adjustment for Social Security. This week will see more earnings, with a focus on technology and AI spending. The Fed meeting will also be interesting, not because they will cut rates, but for their assessment of the economy without data for the past three weeks. Will tech keep up their super run? What could derail the markets? Don’t change that channel for the next in the series of the Super Stock Market!
The consumer price index (CPI) came in a bit better than expected as housing and energy helped keep an overall lid on prices. The big concern coming into the release was that inflation might be re-accelerating with the tariffs still a feature of the economy and showing no signs of letting up. Better still, the “stable” inflation data gives the Fed a green light to cut rates at their meeting this week. Excluding a very hot inflation report, there was a better than 95% chance the Fed would be cutting rates this week. If the consumer remains “healthy” as judged by company earnings reports, and the economy is expected to grow at 3+% (ish) based on the Atlanta Fed’s GDPNow calculation, the question should be asked as to why cut rates? The last cut was seen as an insurance policy against weakness in the labor market (that has yet to show up). This is on top of rate cuts last year that have seen little economic impact, judging by economic growth before and after the cuts. “Animal spirits” in the financial market are high as investors use leveraged ETFs to speculate on market moves. Valuations of stocks in general are near all-time highs, and bond investors have pushed junk bond yields down to levels closer to treasuries than nearly any time in history. The market party is in full swing, and it seems as though the Fed is spiking the punch bowl.
In anticipation of rate cuts all year, which are only now showing up, interest rates have steadily declined all year. The 10-year bond yield has fallen by 50 basis points (1/2 percent), and the 1-year by 60bp. Bond investors are enjoying back-to-back gains for the first time since before Covid. Even as oil prices decline, commodity prices in general have firmed up over the last few weeks and are once again showing yearover-year increases, which may feed into inflation down the road. The trend following bond model remains positive, indicating still lower rates in the future.
Earnings season has been very good so far, with companies reporting better-than-expected earnings, but more importantly, better-than-expected revenue. This week, five of the seven top tech companies report earnings. Given their dominance in the various indices, their results (good or bad) will be market-moving. Flying under the radar of late have been small-cap stocks. Many have questioned why buy small stocks, as many are unprofitable, and the entirety of the index is roughly equal to any one of the largest tech companies. But they remain one of the cheapest parts of the market, even taking out the dregs of the index. Their comparatively small size means that even a small shift from large stocks toward small stocks can have a huge impact on performance. Small stock indices tend to be dominated by financials and industrial stocks, with less than half of the tech weight as the SP500. If the economy continues to chug along and the Fed remains accommodative, this could be a good spot for investors to go fishing.
The coming week will be dominated by earnings and the Fed meeting. More interesting than the expected cut in rates will be the press conference by Chair Powell that follows. The discussion on the state of the economy without much data will be interesting. Tech earnings will also be market-moving as the focus will be on spending on AI.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.