The DJIA, S&P 500, and Nasdaq Composite index made record highs on October 28, 2025, and the Russell 2000 index hit a record high one day earlier, on October 27, 2025. Year to date, the gains in the broad indices are DJIA 12.2%, S&P 500 17.2%, Nasdaq Composite Index 23.4%, and Russell 2000 12.4%. And though the technology-heavy Nasdaq Composite is leading the stock market with a gain of 23.4%, the advance in the equity market has been broad based.

The confirming breadth of the market is also seen by the new all-time high recorded by the NYSE cumulative advance/decline line on October 27. So, as we shift into the three most favorable months of the year for equities, the technical picture of the equity market remains bullish. The only minor technical issue we have with the stock market is that NYSE daily volume has been below its 10-day average for six of the last trading sessions. One likes to see volume increase on rallies to new highs. Plus, our 25-day up/volume oscillator continues to languish in neutral territory. To confirm these new highs, it is necessary for the oscillator to move into overbought range for a minimum of five consecutive trading days. The last time this occurred was in July. See pages 10-11. The neutral reading in this indicator suggests that volume in declining stocks is equal to that in advancing stocks, a sign of churning.

The backdrop for the market is good. We believe the Fed will continue to lower interest rates this year and are expecting another 25-basis point cut this week. The Wall Street mantra of “don’t fight the Fed” has been a useful guide in the past since a dovish Fed has typically been bullish for stocks.

The fiscal backdrop for the economy, consumer, and equities is also good. The One Big Beautiful Bill, which allows for immediate depreciation of capital expenditures is stimulative to Corporate America and is particularly helpful to small businesses. Moreover, we expect the first half of 2026 will be positive for many households who will experience lower taxes due to an increase in the standard deduction, an increase in the child tax credit to $2,200 per child, no tax on tips and overtime, and a deduction of up to $10,000 for interest on an auto loan for a US-made vehicle. 

Equally important is the fact that each earnings season of the year has brought a multitude of positive surprises. According to LSEG IBES, as of October 28^th, with 180 of the S&P 500 companies reporting third quarter earnings, 86.7% exceeded analysts’ expectations. This is compared to the long-term average of 67%, and the prior 4-quarter average of 77%. Earnings are rising but so are equity prices, consequently valuation has been a hurdle. If we use the S&P Dow Jones consensus earnings forecasts for 2026 of $302.58 with the recent SPX close of 6890.89, we get a PE ratio of 22.8. This is high, but PE ratios and inflation tend to have an inverse relationship that has been a valuable tool. So, if we add 3% inflation to this PE, the result is 25.8, the highest since August 2022 and above the standard deviation range (see page 10).

However, this index is still below the 30 level seen at the peak of the market in early 2022. More importantly, bubble markets, like those seen in 1997 to 2000, drove this “PE plus inflation” index to 42 in March 2000. In other words, if one thinks the market is forming a bubble, it is too early to get too bearish.

Another way to value equities is to compare the S&P 500’s earnings yield to the 10-year Treasury yield. The 10-year Treasury yield is currently 3.99%. The S&P’s earnings yield is 4.4% based on 2026 earnings and 3.7% on 2025 earnings. Adding the 1.2% dividend yield creates a total earnings yield for equities of 4.9% (2025) or 5.6% (2026), relative to the Treasury bond. Either way, equities look undervalued to bonds, particularly if interest rates continue to fall. In short, the liquidity backdrop for equities remains bullish.

Headline CPI rose 0.3% in the month of September, according to the BLS, and this lifted the year-over-year increase in the index from 2.9% to 3.0%. Core CPI, which excludes food and energy, rose 0.2% in the month and increased 3% YOY, which was a decline from the 3.1% YOY seen in August. The broad energy index was a major factor in September’s headline increase since it jumped from 0.2% YOY in August to 2.8% YOY in September.

Food prices rose 3.1% YOY in September versus 3.2% YOY in August, but the meats, poultry, fish, and eggs index was significant with a 5.2% YOY rise. Note, however, that while both CPI and core CPI are well above the Fed’s target of 2% YOY, both remain below the long-term inflation average of 3.7%. See page 3.

The good news in the September report was the steady deceleration in service sector inflation. Note that the service sector is important since it represents nearly 64% of the CPI and the good news was that prices rose 3.6%, down from 3.8% in August. The index for owners’ equivalent rent, representing 26.2% of the CPI index, rose 3.8%, down from 4.0%. The problem areas were motor vehicle maintenance and repair up 7.7% YOY, tenants’ and household insurance up 7.5% YOY, used cars and trucks up 5.1% YOY, fuels and utilities up 5.8% YOY, and other goods and services up 4.1% YOY. See page 4.

The source of energy inflation is not coming from rising commodity prices, as is typical. The energy commodity index was minus 0.4% YOY in September, up from minus 6.2% YOY in August, but still declining. However, the CPI’s energy index was still up 2.8% YOY, up from 0.2% YOY a month earlier. One of the problems is utility (piped) gas service which rose 11.7% YOY, down from 13.8% YOY in August, but still high. Growing international demand is boosting natural gas prices, and 40% of US electricity generation comes from natural gas, according to the Institute for Energy Economics and Financial Analysis. But gas service prices are also affected by costs for pipeline maintenance and replacement, and regional demand and supply factors. Regional energy demand is also being distorted by AI infrastructure energy usage. This is a major issue. See page 5.

Households, particularly low income households, are negatively impacted by the rising cost of energy services. The household energy price index rose 6.2% in September, down from 7.4% YOY in August but still extremely high. Along with utility (piped) gas service, this index is heavily weighted by electricity, up 5.1% YOY and fuel oil, up 4.1% YOY, in September. The other burden on households is the 7.5% increase in tenants’ insurance and 4.1% increase in household furnishings and operations. See page 6.

Conference Board consumer confidence fell one point in October to 94.6, from an upwardly revised 95.6 in September. The present index was 129.3, up 1.7 from an upwardly revised 127.5, and the expectations index fell 2.9 to 71.5, from an upwardly revised 74.4. The second estimates for October’s University of Michigan sentiment indices were all lower. The headline index is now 53.6, down 1.5 from September. The present conditions index is 58.6, down 1.8 and the expectations index declined 1.4 to 50.3. The University of Michigan sentiment indices have been in recession territory for most of the last five years, which makes them irrelevant as a tool, in our opinion. See page 7.

Gail Dudack

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According to a Reuters/Ipsos poll, President Donald Trump’s approval rating is down 5% from when he took over the White House in January. Yet even though Americans blame Republican lawmakers (50%) more than Democrats (43%) for the government shutdown, Trump’s approval rating is up 2% to 42% from prior to the shutdown. For perspective, the President’s rating has vacillated between 40% and 44% since early April.

It should not be a surprise that Trump’s approval rating has gone up, not down, during the shutdown. Except for the roughly 3 million people paid by the federal government (2.9 million civilian employees and 1.3 million active-duty military personnel) most people have been unaffected by the shutdown. And while most investors may not be aware of this, the President only has control over foreign affairs and American defense and has little to no power over budgets or shutdowns.

President Trump does have some influence, but most of it comes from the slim Republican majority in Congress. However, a slim majority is insufficient to pass a real budget or to prevent a federal government shutdown. Most legislation, including regular appropriations bills, requires a simple majority in the House, but 60 votes in the Senate to overcome a filibuster and pass. The Republican party currently holds 53 seats in the Senate and therefore cannot prevent a shutdown.

Where President Trump is using his influence is in global affairs and trying to find peace in the Middle East and in Europe. Yet while a Middle East peace accord was signed in Egypt on October 13, 2025, it is becoming increasingly clear that Hamas has no real desire for reconciliation, and Middle East peace seems tenuous. In Europe, Russian President Putin appears unwilling to find a solution to end the war with Ukraine and the planned Putin-Trump summit is now on hold.

Nevertheless, there are several reasons to be bullish on equities. The WTI crude oil future (CLc1 – $57.56) is below the psychological $60 level for the first time since May of this year. The oil future has not remained below $60 consistently since February 2021, i.e., during the pandemic. We believe the price of oil is significant for the inflation trend and while it may not show up in the CPI data expected later this week, it will be a positive factor in coming months. In line with lower oil and gasoline prices, it is also significant that the 10-year Treasury bond yield is below 4% for the first time in over twelve months. Lower inflation and lower interest rates give a positive boost to economic activity, and this is apt to show up in coming months and quarters.

In addition, third quarter earnings season is in full force, and the results continue to surprise to the upside. Most notable was the report from General Motors (GM – $66.62), where quarterly adjusted earnings per share dropped to $2.80, but easily beat analysts’ expectations of $2.31. More importantly, the company reduced its tariff expectations and raised its annual profit forecast. According to LSEG research, of the 58 companies in the S&P 500 that have reported earnings to date, 86.2% have reported earnings above analyst estimates. This compares to a long-term average of 67.2% and prior four quarter average of 76.5%. In short, this could be another quarter of positive earnings surprises. As we have often noted, analysts have been too pessimistic about the economy, tariffs, and earnings. And although PE multiples are rich, the forward earnings yield of 4.5% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 3.98%. Plus, the 12-month sum of operating earnings shows a gain of 10.5% YOY, better than the 75-year average of 8.1% YOY. See page 7.

Despite a lack of normal economic releases there were good reports this week. In October, homebuilder confidence increased 5 points to 37, according to the National Association of Home Builders’ Housing Market Index. All components of the index were higher, with current sales rising four points to 38; next six month sales rose nine points to 54; and current traffic increased four points to 21. The fed funds rate cut in October, coupled with the dovish statements by Fed Chairman Jerome Powell, appears to have lifted the spirits of homebuilders. As we have already noted, interest rates have been declining, and this is having an immediate impact on the housing market. September Inflation data will be reported by the BLS at the end of the week and good news could also help sentiment and move stock prices higher. See page 3.

The federal government’s fiscal year 2025 concluded on September 30, and Treasury data indicates that the month of September closed with a $198 billion surplus. Nevertheless, the fiscal year ended with a deficit of $1.775 trillion, down 2.4% from the $1.817 trillion in fiscal year 2024; but still high. Even so, it is worth noting that the Trump administration began four months into the 2025 fiscal year with the deficit already at $840 billion. This means the 2025 deficit was running at $210 billion per month compared to the last eight months of the fiscal year when deficits averaged $117 billion per month. In short, 47% of the fiscal 2025 deficit materialized in the first four months of the fiscal year. This suggests that progress is being made, albeit slowly. However, most economists are only looking at CBO estimates for future deficits which imply that gross federal deficits will grow at a steady rate in the future. We doubt this will prove to be accurate, which means most economists remain too bearish. See page 4.

Bending the curve on deficits is critical since the trend in post-pandemic federal debt is not sustainable over the long term. Debt issuance was $1.96 trillion in fiscal 2024 and $1.973 trillion in fiscal 2025. These levels of debt issuance require major increases in demand for US Treasuries to offset supply. Gross federal debt was $37.2 trillion at the end of September, according to the CBO, and 69% was held by the public. Only 12% was held by the Federal Reserve, down from 19% in 2021 and the remaining 19% was held by federal government accounts. Pressure on the US Treasury market has declined since the Fed indicated it may have reached the end of its quantitative tightening cycle. This helps the supply/demand balance. See page 5.

During the Covid pandemic, and with the mandated shutdown of businesses, gross federal debt surged $4.2 trillion as the federal government gave financial assistance to workers and shuttered businesses. However, gross debt continued to increase over $2 trillion per year in 2022, 2023 and 2024, more than the annual increases seen during the recession years of 2008-2010. This spending precedent, even during an expansion, will be difficult to reverse since many Americans are now accustomed to government support. Since discretionary spending has already been reduced to 6.3% of GDP from 9.1% in 2010, this administration has the difficult job of trying to reduce mandatory spending to balance the budget. Hopefully, a program to reduce fraud and waste in programmatic spending can succeed. See page 6. The NYSE cumulative advance/decline line made a new high on October 21, 2025, which is a bullish confirmation of the recent highs. See page 10. Notably, last week’s AAII survey showed bullishness dropped 12.2% to 33.7% and bearishness jumped 10.5% to 46.1%. Bullishness is below average, and bearishness is above average this week indicating no exuberance on the part of the public. This is positive. See page 11. We expect volatility will continue but would be a buyer of any weakness.

Gail Dudack

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Equities tumbled on October 10, with the Dow Jones Industrial Average losing 879 points, shortly after President Trump threatened 100% tariffs on Chinese goods. Trump’s action was in response to Beijing imposing controls on the export of rare earth minerals and the tit-for-tat between these two world powers made investors fear the start of a real trade war. Gold and silver also soared to new heights, igniting debates on whether these were bearish safe haven trades. But while most investors were talking about equities, gold, and silver, it may be chaos in the cryptocurrency markets that proves to be the important event of the weekend.

Bitcoin plummeted from $123,000 to $107,000 between midday Friday and early Saturday morning and the reverberations were felt throughout the cryptocurrency world. According to Yahoo Finance, as falling prices forced leveraged positions to unwind on a variety of exchanges, the crypto market saw its largest liquidation wave on record. Roughly $19 billion of crypto positions were liquidated in 24 hours. Some say this is good news since it unwound the leverage in the crypto market; however, the craziness may not be over. Crypto Economy (*www.crypto-economy.com) writes that a famous trader opened a massive $163 million Bitcoin short position on the Hyperliquid platform on Sunday, October 12. This trader, known as the “insider whale”, became famous for making $192 million by shorting Bitcoin before the 2022 crypto market collapse. This “insider whale” position, which has 10x leverage (a fairly commonplace leverage ratio in the crypto world), also has a liquidation level set at $125,500. Bitcoin (BTC=) is currently trading at $113,242.09.

We are not experts in cryptocurrency, but money is fungible, and leverage in one area of the financial arena can affect other markets. And while leverage in crypto currency is wreaking havoc in that market, the leverage in the equity market is growing as well. Margin debt is only one form of leverage, however, in September, margin debt rose to $1.126 trillion, a 6.3% increase for the month and this compares to a 3.4% increase in the Wilshire 5000 index. We compare monthly increases in margin debt to the Wilshire 5000 or market capitalization since large increases in margin versus small increases in equity prices is a pattern that has preceded some market peaks. (It suggests more leverage is moving equity prices less.) Margin debt is now 1.69% of total market capitalization, not a huge percentage, but the highest since May 2022. See page 3.

Another form of leverage is the growth and widespread use of ETFs. In the US, ETF industry assets reached a record $12.70 trillion at the end of September, surpassing the previous high of $12.19 trillion set in August 2025. This level may seem small compared to total equity market capitalization of $66.5 trillion as of September, but the ETF universe has grown from modest beginnings to 18% of market capitalization and it is worth monitoring. ETFs are a growth segment of the market and represent significant leverage.

Leverage and late-stage bubbles tend to go hand in hand. However, we do not believe equities are in a late-stage bubble. History shows that bubbles are often a ten-year process, and we are only several years into the AI revolution. Equally important, we expect corporate earnings will continue to surprise to the upside – and that is the opposite of a late-stage bubble characteristic. Nevertheless, it is important to monitor all risk factors.

Given the current debate about the equity market being in a bubble, it is worth looking at historical annual performance. Major peaks such as those seen in 1972 or 2000 were followed by several years of negative equity performance, i.e., multi-year bear markets. Note that there were 27 years between these major peaks, which in stock market terms suggests a new generation of investors drove the advance. This is another characteristic of a bubble. If one counts 27 years from the 2000 peak, it suggests a major equity peak may appear in 2027. In addition, annual equity performance shows that there tends to be a pattern of less significant lows roughly every four years. The last negative year was in 2022, suggesting a low (but not necessarily a bear market low) could appear in 2026. All in all, history tends to repeat but is not precise. In our view, it would not be a surprise to see a correction of 10% or more in 2026, but if equities are indeed forming a bubble, we think it is still in the early stage of one. See page 4.

Seasonality has not been a good guide for equity performance this year, but yearend seasonality tends to be the strongest and most reliable. September tends to be a weak month for equities and October tends to be volatile, but a significant low often appears in October. A low in October is followed by November, December, and January, which have been among the three best performing months of the year historically. And since we believe analysts are still too pessimistic about earnings, and third quarter earnings season is starting off well with positive surprises from financial stocks, we believe there is reason to be a buyer of weakness.

The NFIB Small Business Optimism Index declined 2 points to 98.8 in September. Five of the 13 components that we monitor fell, four were unchanged, and four increased. Actual sales changes have been in negative territory since June 2022, but in September the index rose from minus 9 to minus 7. It was minus 20 in October 2024. It is currently at its best level since March 2023, or in 30 months. See page 5. On the positive side, hiring plans increased 1 point to 16, and job openings were unchanged at 32. A bad omen was that plans to raise prices rose from 26 to 32. This may be linked to the fact that sales expectations fell from 12 to 8. However, the most disturbing index in the survey was the outlook for general business conditions, which fell from 34 to 23. In line with this, the outlook for expansion fell from 14 to 11. See page 6.

The preliminary data for the October Michigan Consumer Sentiment index shows the headline index edging down from 55.10 to 55.0, while the present conditions index rose from 60.4 to 61.0 and the expectations index fell from 51.7 to 51.2. Once again, expectations are bringing sentiment down, but present conditions remain stable to higher. This pattern has persisted since April. October data will be revised and perhaps the Egyptian Peace Summit will improve sentiment. See page 7.  

From a technical perspective, the 25-day up/down volume oscillator is at 0.66 and relatively unchanged this week. Even after the October 10 selloff, this indicator remains neutral. However, the last positive readings in this indicator were the one-day overbought readings of 3.15 on July 3 and 3.05 on July 25. This means that this volume breadth indicator is yet to confirm the string of recent new highs made by the popular indices from August to date. To do so, the oscillator should record an overbought reading of 3.0 or higher for a minimum of five consecutive trading days. At present, this indicator suggests advancing volume has been weak and the longer this disparity continues, the greater the risk is that equities experience a near-term pullback. See page 10. *https://crypto-economy.com/famous-trader-opens-massive-163m-bitcoin-short-on-hyperliquid/

Gail Dudack

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It is interesting, and perhaps important, to watch how the stock market deals with the absence of government surveys, and in particular, information regarding both employment and inflation. These releases, plus FOMC meetings, have been the main sources of either angst or exuberance for investors over the last year. And since third quarter earnings season has not yet started in earnest, investors are relatively void of action points. However, to date, investors have not been worried about the shutdown, or a lack of data, and for reasons we explained last week. (Calm not Chaos, October 1, 2025)

Meanwhile, outside US borders, there have been changes. Sanae Takaichi, a hardline conservative and proponent of low interest rates and fiscal spending, was recently elected leader of the ruling party in Japan. Takaichi, an admirer of Margaret Thatcher, has called for a stronger military, promotion of nuclear fusion, cybersecurity and tougher policies on immigration. The election prompted a selloff in the yen and domestic bonds and sent Japanese stocks to record peaks.

Conversely, France’s President Emmanuel Macron is facing immense pressure to resign or hold a snap parliamentary election to put a stop to the never-ending political turmoil that has forced the resignation of five prime ministers in less than two years. French Prime Minister Lecornu recently held last-ditch talks to form a new government, but this failed, and he resigned. France, the second largest economy in the eurozone, is crippled by a combination of unsustainable debt and unions and factions that rebel at the thought of budget cuts. In our opinion, this scenario is important and has the earmarks of the Greek sovereign debt crisis. The Greek crisis became evident to all in 2009 and led to a joint European Union, International Monetary Fund, and European Central Bank bailout in 2010. The collapse of Greek sovereign debt threatened the stability of the European Union and many banks around the world, and the aftermath left Greece impoverished for over a decade due to externally imposed austerity measures from its creditors. We should keep an eye on France.

Meanwhile, in the absence of the Bureau of Labor’s release of September job data, there are a few different data points we can monitor. ADP releases monthly data on the private sector job market and this report indicates the private sector lost 32,000 jobs in September. The greatest job losses were in the service sector and in establishments with 20 to 49 employees. Conversely, large companies increased the number of employees. Note that ADP’s September report incorporated a preliminary re-benchmarking of the National Employment Report based on the 2024 results from the Quarterly Census of Employment and Wages release. ADP also noted that its August 2025 employment number was revised from 54,000 to negative 3,000 due to this re-benchmarking. (The BLS will do its re-benchmarking with the January employment report released in early February 2026.)

Both ISM manufacturing and nonmanufacturing surveys were reported in recent days and both surveys include employment indices. The ISM employment indices were 45.3 in manufacturing and 47.2 in nonmanufacturing. The total of these two employment indices equaled 92.5, which is up from the 90.3 level seen in August. The importance of the combination of these two employment indices is that whenever the sum has dropped below the standard deviation range, the economy has been in a recession. This index did fall below the standard deviation range in the months of September 2024, March 2025, July 2025, and August 2025. In short, the ISM employment surveys have implied the US economy has been waffling near recession employment levels for the last 12 months. The good news is that there was improvement in September. See page 4.

The ISM surveys also showed that the main manufacturing index increased 0.4 points to 49.1 and the nonmanufacturing index fell 2 points to 50. In terms of business activity, manufacturing rose 3.2 points to 51.0 and nonmanufacturing fell 5.4 points to 49.9. This was an unusual shift from the pattern seen for most of the last two years in which nonmanufacturing, or service, outperformed manufacturing. In the manufacturing survey, six of the 11 components fell in the month and eight were below the 50 breakeven level. In the nonmanufacturing survey, seven of 11 components fell in the month and six were below the 50 breakeven level. New orders declined significantly in both ISM surveys with this index falling to 48.9 in manufacturing and to an above benchmark 50.4 in nonmanufacturing. Conversely, backlog of orders rose considerably, to 46.2 in manufacturing and 47.3 in nonmanufacturing. All in all, both reports reflected sluggishness in business activity. The most worrisome fact was the weakening trend in the nonmanufacturing sector since the service sector is currently the most important segment of the US economy.  

There were two releases on consumer credit this week. The Quarterly Report on Household Debt and Credit, released by the Federal Reserve Bank of NY, indicated that total household debt increased by $185 billion to reach $18.4 trillion in the second quarter. Mortgage balances grew by $131 billion, to $12.94 trillion at the end of June. Auto loan balances also increased by $13 billion to $1.66 trillion. Transition into early delinquency held steady for nearly all debt types; but the exception to this was for student loans. Missed federal student loan payments were not reported to credit bureaus between the second quarter of 2020 to the fourth quarter of 2024 but they are now appearing in credit reports; as a result, delinquency rates are on the rise. In the second quarter of 2025, 10.2% of aggregate student debt was reported as 90+ days delinquent. This was a significant jump from the 7.7% reported in the first quarter. Credit card 90+ days delinquent remain the highest at 12.27% of total loans, but this was down slightly from the 12.31% reported in the first quarter of the year. See page 5.

Separately, Federal Reserve monthly data of total consumer credit showed credit was declining year-over-year from December 2024 to February. This is another sign of a recession. But total consumer credit has been growing modestly since February. The exception is revolving credit, which continues to contract and was down 2.5% YOY in August. This is a sign that consumers may have tapped out credit card lines which is another sign of financial stress.

From a technical perspective, the stock market remains in a bull market. The NYSE cumulative advance/decline line made a new high on October 6, 2025, and the 10-day averages of new highs and lows remain consistently bullish. The only indicator that has failed, to date, to confirm the string of new highs in the popular indices is the 25-day up/down volume oscillator. It has remained neutral since July, and this implies that volume in advancing stocks has been equal to that of declining stocks. In a bull market, volume typically increases in advancing stocks and is a sign of strong and increasing demand. This strong buying results in a long overbought reading. The absence of a strong overbought reading suggests that, lacking strong buying, the August-September rally is vulnerable to a pullback. Nevertheless, we would be a buyer of any weakness since the long-term bull market trend remains intact. As we noted earlier, it is important to see how the equity market performs in the absence of any significant catalyst or new information. In our opinion, the market’s action has been solid, and we believe this is due to the deregulation and fiscal stimulus that will help companies grow and low tax rates to help middle income families. In turn, this will drive corporate earnings and generate positive earnings surprises.

Gail Dudack

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