Equity markets October 2026: AI fuels US gains, Europe faces yield pressure

1. US equities, led by AI-driven growth, saw strong gains despite high valuations.
2. European markets faced pressure from rising bond yields and monetary tightening.
3. Credit markets remained stable, but rising yields and shadow credit risks warrant caution.

US equity markets: AI's enduring influence

US equity markets demonstrated resilience in October, largely propelled by the ongoing AI-driven capital expenditure boom and robust earnings growth. The S&P 500 climbed 1.3% month-over-month to 7,819, marking a 16.4% year-over-year increase. Its trailing 12-month EPS surged by 30.1%. However, valuations remain a concern, with the S&P 500's CAPE ratio at  40.6x and its forward implied equity risk premium at a low 1.28%. The Nasdaq led the charge, gaining 5.7% MoM to 31,224, boasting a 25.7% YoY rise. In contrast, the Dow Jones saw a 3.5% MoM decline, settling at 51,521, though still up 10.6% YoY. Hyperscaler P/E multiples are under pressure due to rising Weighted Average Cost of Capital (WACC) and falling Return on Invested Capital (ROIC), with a projected slowdown in earnings growth for 2027-28.

European bourses and broader market dynamics

European equity markets are experiencing a challenging October, primarily due to the impact of rising bond yields. The FTSE100 fell 2.7% month-over-month to 10,542, despite a 21% YoY increase in EPS and a 12x forward P/E, which is below its post-millennium average. Similarly, the DAX40 declined 2.3% MoM to 25,449, even with a 7.7% YoY EPS growth, though its 14.4x forward P/E stands above its historical average.

In the broader market, US bond yields continued their ascent, with the 10-year Treasury reaching 5.32% (+0.54 MoM, +1.19 YoY) and the 3-month T-bill at 4.14%. The USD index strengthened by 2.9% MoM to 128.10. WTI crude oil prices rose to $96.20/bbl (+3.8% MoM), while gold saw a 6.0% MoM drop to $4,163/oz. The credit market remained stable with the BofA BBB Corporate Index Effective Yield at 6.23%, but rising bond yields and potential shadow credit concerns pose ongoing risks. The UK 20-year Gilt also increased by 20 basis points to 5.90%.

Key decisions and events shaping the coming months

The US Federal Reserve's recent 25 basis point rate hike to 4.0% signals a continued hawkish stance, with futures implying three more 25 bps hikes by summer 2027. Investors will closely monitor upcoming inflation reports and economic indicators for further clues on central bank policy trajectories in the US and Europe. The sustainability of AI-driven capital expenditure and its impact on corporate earnings, particularly for hyperscalers, will be a critical determinant of market direction. Geopolitical developments and their potential influence on energy prices, as evidenced by the rise in WTI crude, will also remain a significant factor.

Summary for investors

October 2026 highlights a bifurcated global equity market. While US tech-led growth persists, valuations are stretched, demanding careful scrutiny. European markets face yield-driven headwinds. Investors should prioritize robust earnings quality and monitor central bank actions, bond yields, and the evolving AI investment landscape, preparing for potential volatility as monetary policy continues to tighten globally.

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The content here is for educational and informational purposes only. This material is not investment advice or a recommendation or suggestion of any investment strategy, and it does not provide investment advisory services. OANDA is not responsible for any investment decisions made based on this content. Investing involves the risk of a loss of capital. Past performance does not guarantee future results.