Market Leadership Rotates as Diversification and Bonds Cushion October's Tech Selloff
A Mixed Month for Stocks
October was a reminder of why diversified portfolios matter. Headline returns looked weak: the S&P 500 slipped -0.9% after setting a new all-time high early in the month. Beneath the surface, though, most stocks rose. The equal-weighted S&P 500, which gives every company the same weight, gained +5.0%, beating the traditional index by nearly 6 percentage points, the widest one-month gap since 2009.¹
The difference came down to a handful of very large technology companies. Because the traditional index gives its biggest companies the most weight, a pullback in a few mega-cap names outweighed gains across hundreds of others.¹ For investors spread across sectors, styles, and asset classes, the month was far better than the headline number suggests.
Diversification Offset Losses in Tech and Communication Services
Nine of the eleven S&P 500 sectors rose and outperformed the index. Energy led with +14.0% as oil prices climbed. Defensive sectors followed: Consumer Staples (+11.6%), Utilities (+10.2%), and Health Care (+9.9%), some of their best months in two decades.¹˒² Large Cap Value gained +4.4%.¹
The two laggards were Technology (-6.8%) and Communication Services (-15.1%).¹ These sectors are dominated by a few giants. NVIDIA, Apple, and Microsoft make up a large share of Technology, while Alphabet and Meta carry much of the weight in Communication Services.³ Large Cap Growth fell -6.1%, the Nasdaq 100 dropped -6.6%, and semiconductor stocks fell about -15%, with a weak outlook from Intel adding pressure on the final day of the month.¹˒²
The selloff centered on artificial intelligence. Demand for AI infrastructure remains strong, but investors now judge AI spending by the cash it returns. Alphabet's shares fell sharply after its quarterly spending exceeded the cash its business generated. Microsoft held steady after strong cloud growth produced more than enough cash to cover its investment. The message: investors are rewarding companies that fund AI from their own cash flow, not from borrowing or issuing new shares.¹
International stocks offered less help. Emerging markets fell -8.0% as chip-heavy Taiwan and South Korea sold off, while developed markets were roughly flat at -0.7%. Still, perspective matters: even after October, semiconductor stocks are up more than 50% this year and the S&P 500 has gained more than 10%. The month looked less like a retreat from stocks and more like a rotation, with gains broadening beyond the largest companies.¹
Bonds Rebounded and Provided Ballast
After a difficult third quarter, bonds did exactly what they are meant to do in a balanced portfolio. The U.S. Bond Aggregate returned +2.4%, cushioning the decline in technology stocks.¹
The month didn't start that way. Treasury yields rose in early October on inflation worries and heavy government borrowing, and the 10-year yield reached 5.31%, its highest level since 2002.² Yields then reversed as investors moved toward bonds during the stock rotation, with the 10-year ending the month just below 5%. Because bond prices rise when yields fall, long-term Treasuries gained more than 5%.¹
Quality also mattered within fixed income. Investment-grade corporate bonds gained +2.0%, well ahead of high yield's +0.3%, as credit spreads widened, especially among the lowest-rated borrowers.¹ For investors holding a mix of stocks and high-quality bonds, these gains helped offset losses in the market's largest growth names.
What We're Watching
The Federal Reserve held rates on October 28, with two policymakers favoring a hike, and markets expect an increase at the December 9 meeting.² The economy grew at a +3.4% pace in the third quarter, but inflation remains above target, and oil rose about 14% after attacks on Saudi energy facilities.¹˒² The October CPI report on November 10 and NVIDIA's results on November 17 are key tests.² Over the next 12 months, we expect returns to be lower and bumpier than in recent years, driven by earnings growth rather than rising valuations.²
The Bottom Line
October's headline loss masked a healthy, broad market. Strength in energy, defensive sectors, and value stocks, combined with a rebound in high-quality bonds, helped offset sharp declines in Technology and Communication Services. Staying diversified remains the best way to navigate an uncertain path ahead.
Sources
1. MarketDesk Research, "Monthly Client Update: Market Leadership Rotates as Investors Reassess the AI Trade," November 1, 2026.
2. MarketDesk Research, "Market Talking Points: Quick Read for Client Conversations," November 2, 2026.
3. YCharts, S&P 500 Technology and Communication Services sector constituent weightings.
Forty W Advisors is a registered investment adviser. This material is for informational purposes only and should not be considered tax, legal, or investment advice. Tax laws and thresholds are subject to change, and their application depends on individual circumstances. Please consult your tax professional before taking action.