October was a more difficult month for global financial markets. Global equities declined as investors reassessed the valuations and financing requirements of artificial intelligence-related investment, while renewed tensions in the Middle East pushed energy prices higher. The headline weakness masked a marked shift beneath the surface: technology-heavy markets and emerging-market equities came under pressure, while more defensive and value orientated sectors were relatively resilient. Government bonds generally performed well as investors sought diversification and yields fell back from September’s highs.
In the US, economic activity remained resilient, supported by consumer spending, business investment and continued expenditure on data centres and AI infrastructure. However, investors became more selective about the scale of this investment and whether the considerable capital being committed would generate adequate returns. The S&P 500 declined modestly, but technology and communication-services companies experienced sharper falls as concerns grew around valuations, leverage and future profitability. Energy, healthcare and consumer staples companies held up better, while demand for US Treasuries helped longer-dated government bonds recover despite firm economic data and higher oil prices.
UK equities were comparatively resilient, helped by the market’s exposure to energy, financial and other value orientated companies. Higher oil prices benefited energy producers, while the rotation away from highly valued technology shares was less damaging for the UK market than for the US and parts of Asia. Domestically focused businesses still faced pressure from elevated borrowing costs and the effect of higher energy prices on household spending. Gilts benefited from the broader move into high-quality government bonds, although the outlook remained sensitive to inflation, fiscal policy and the path of Bank of England interest rates.
European equities were mixed. Improving economic activity and planned infrastructure and defence spending remained supportive, but higher energy costs and political uncertainty weighed on sentiment. France was a particular source of concern, with fiscal and political uncertainty putting pressure on both equities and government bonds. The region’s lower exposure to AI-related technology reduced the direct impact of the sell-off in semiconductor shares, although weaker global risk appetite still limited returns.
Emerging-market equities were the weakest major area during October. Technology-heavy Asian markets, including Korea, were particularly affected by the reassessment of AI investment, semiconductor demand and competition from China. Higher oil prices also created a divide between energy exporters and countries reliant on imported fuel. Political developments added to volatility in some markets, while the stronger demand for developed-market government bonds reduced investors’ appetite for higher-risk assets.
Government bonds provided a valuable counterweight to equity weakness. Yields fell from their September highs as investors sought safe-haven assets, supporting returns from high-quality sovereign debt. Investment-grade credit was also relatively resilient, although more leveraged parts of the corporate market came under greater scrutiny as concerns about AI financing increased. High-yield bonds continued to benefit from their higher starting income and shorter interest-rate sensitivity, but they remain more exposed if economic growth slows or corporate funding conditions deteriorate.
Commodities produced mixed returns. Oil prices rose sharply as tensions in the Middle East intensified and concerns increased about potential disruption to energy supplies. This supported energy producers but also renewed inflation concerns for consumers and businesses. Precious metals were weaker, with gold and other metals affected by changing interest-rate expectations, a firmer US dollar and profit-taking after earlier strength. The divergence reinforced the importance of viewing commodities individually rather than as a single asset class.
Overall, October highlighted the benefits of diversification. Global equities fell, but the weakness was concentrated in AI-linked technology companies and emerging markets, while many defensive and value-orientated sectors proved more resilient. Government bonds recovered and helped offset equity-market volatility, demonstrating their potential role as a stabilising component within diversified portfolios. Looking ahead, investors are likely to remain focused on whether AI investment can deliver sufficient returns, the effect of higher energy prices on inflation and the response of central banks. Economic activity remains supportive, but elevated valuations and geopolitical risks argue for continued selectivity across regions, sectors and asset classes.