Financial Markets Review

October proved to be yet another strong month for U.S. equities, underscoring both the resilience and the fragility of market sentiment as we approach year-end. The S&P 500 advanced +2.27%, the Nasdaq Composite surged +4.70% and the Russell 2000 managed a +1.76% gain. The S&P and Russell posted their sixth consecutive monthly gain, while the Nasdaq notched a seventh. That said, the equal-weight version of the S&P 500 under-performed by roughly 320 basis points amidst a decline of 0.97%. And the S&P 500 Low-Volatility Index fared even worse, falling 3.89%, which continues to highlight how the rally remains heavily skewed toward large-cap growth, high beta, and AI-oriented names.

A central driver of the upside was the combination of improved trade optics, ongoing enthusiasm around artificial intelligence, and expectations of further monetary policy easing by the Federal Reserve. Earlier in the month, President Trump set off a brief bout of volatility in financial markets when he threatened to slap an additional 100% tariff on all Chinese imports. However, all was well again after President Trump and Xi Jinping’s meeting on October 30th produced a 10% reduction in tariffs and a one-year postponement of China’s rare-earth export controls, easing a key overhang among investors.

In the same vein, the unrelenting surge in the AI growth narrative provided the kind of thematic fuel that drove markets higher. It has continued to manifest in large-scale chip and cloud infrastructure deals announced by OpenAI, Nvidia, Advanced Micro Devices, Microsoft, Qualcomm, Oracle, Broadcom, CoreWeave and Amazon, just to name a few. OpenAI alone has committed to spending nearly $1.5 trillion over the next decade against current estimates of revenue in the $12 billion range. Add in $470 billion of planned capital expenditures in 2026 amongst the big four hyperscalers (Amazon, Alphabet, Microsoft and Meta), which is on top of the $300+ billion these companies will spend in 2025, and you get a lot of excitement in the AI space.

And on the monetary policy front, the Federal Reserve delivered a widely expected 25 basis point rate cut and announced the end of quantitative tightening effective December 1st. Yet, Chair Jerome Powell’s post-meeting remarks were explicitly hawkish, cautioning that a December cut is “far from a foregone conclusion.” This comment ended up capping the excitement surrounding an easier Fed going forward.

Notably, the government shutdown weighed on the broader macro-data environment and injected an additional layer of uncertainty. With key employment reports delayed, markets increasingly turned to alternative feeds, such as the Challenger Job Cuts Report. This report showed job cuts exceeded 150,000 in October, which was twice the number in September, and three times the number of cuts in October of last year. So far this year, job cuts have exceeded 1 million, up 44% from all of 2024 and the most since the COVID pandemic. Meanwhile the University of Michigan Consumer Sentiment Index dropped to a near record low with deterioration across all groups except for those with large equity investments. The decline in consumer sentiment lines up with what several large consumer-facing companies have recently flagged regarding decelerating trends in spending behavior, specifically amongst lower income consumers.

From a valuation perspective, valuations across U.S. equities continue to be at historic extremes, with artificial‐intelligence leaders at the center of the surge. The S&P 500’s cyclically adjusted P/E, known as the CAPE ratio, has climbed to its highest point in 25 years, while the market’s price-to-sales and price-to-book multiples have reached record levels. According to the International Monetary Fund, risk-asset prices “well above fundamentals” heighten the probability of an abrupt correction. Meanwhile, senior executives at JP Morgan, Goldman Sachs and Morgan Stanley warn that the rally, heavily dependent on a narrow set of AI-driven firms, is vulnerable to a correction.



Source: Bloomberg

Tandem Strategy Update*

It’s no secret what has been driving the S&P 500 higher over the past 3 years – the Magnificent 7 plus Broadcom. 1.6% of the S&P 500 constituents now account for a 38% weighting in the S&P 500 and roughly 60% of the S&P 500’s gains since the market troughed in early April. The concentration at the index level has never been more extreme and it only appears to be growing larger as Nvidia became the first company to reach a $5 trillion market cap. This now makes Nvidia’s market capitalization larger than the GDP of all but two countries in the world – the United States and China. For any active large cap manager, who is not attempting to index their strategy to the S&P 500, the extreme concentration makes it nearly impossible to perform in line, let alone outperform the S&P 500. The risk of having 8 companies make up nearly 40% of a strategy, that are all the same play on the AI-theme, is simply too much concentration risk for most active managers.

As the concentration continues to get larger every passing day, the reliance on these companies to power the S&P 500 to new highs becomes even greater. The breadth of the market has been deteriorating for a few months now but really kicked it into another gear in late October. According to Nomura analysts and reported in the Financial Times, as the market broke out to new highs from October 23rd to October 28th, the S&P 500’s roughly 2.4% advance was almost entirely driven by just three stocks – Alphabet, Broadcom and Nvidia. In fact, on October 28th, the S&P 500 rose 0.23%, while nearly 80% of all companies in the index declined. According to Bespoke Investment Group, this was the worst breadth on record for a day where the S&P 500 finished positive. The following day exhibited very similar trading action with the S&P 500 finishing flat, while 75% of companies declined.

Within the same context of deteriorating breadth, the difference between investment factors, such as high beta and momentum versus low volatility, have significantly diverged. Since the April lows, the Invesco S&P 500 High Beta ETF (SPHB) is up a whopping 71%, while the Invesco S&P 500 Low Volatility ETF (SPLV) is higher by 3%. And since mid-August, when the divergence became even more pronounced, the S&P 500 High Beta factor gained 13%, while the S&P 500 Low-Volatility Index declined by 5%. When looking at the broader market over the past 6 months versus the S&P Low-Volatility Index, the difference in return is at extremes only seen in 1999 and early 2000.



Source: FactSet

As most followers of Tandem are aware, we specialize in low-volatility capital appreciation equity strategies. For reasons mentioned above, the low-volatility space has been a lonely place to be over the past several months. In fact, in my nearly 20 years at Tandem, I have never witnessed a time when our strategies have underperformed by so much relative to the broader market. It makes sense given the chart above, but you can rest assured that we take no comfort in it. Understandably, we have received a few inquiries into whether our strategy or process has changed. And the answer is a resounding no. We continue to seek companies that consistently grow revenues, earnings and cash flows through any economic cycle. Within our flagship Large Cap Core Strategy, which epitomizes low volatility, 93% of holdings have reported Q3 results with year-over-year sales and earnings growth coming in at 11.6% and 17.7%, respectively. Expectations for Q4 are for year-over-year sales and earnings growth of 10.8% and 15.9%, respectively. All the while, dividend growth remains a robust 10%.

Our holdings continue to do everything that we seek – consistent fundamental growth. There are times when the market seeks these types of companies and other times when it does not. Unfortunately, we are ensnared in the weakness of the low volatility space. There will come a day when the strategy is appreciated again, as it was in the decade after the bursting of the Tech Bubble or most recently in Q1 of this year. Until then, we will continue to stick to our discipline and process as we have for the past 35 years.

*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

Source: Source of all data is FactSet, unless otherwise noted.

Print
Back to Archives

Disclaimer: Tandem Investment Advisors, Inc. is an SEC registered investment advisor.

This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.​

This document was originally written/recorded in English. Tandem does not guarantee the accuracy, completeness, or reliability of any translated materials, and shall not be held responsible for any discrepancies, errors, or misinterpretations arising from the translation process.