Shares continue their winning streak - the week ahead

October closed out on the front foot, pushing shares to their longest winning streak in four years. Bonds did well too and year to date it’s less a story of winners and losers - more a question of what has done best in a market that has seen across the board gains.

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Onwards and upwards

US stocks added 2.4% in October, a sixth consecutive month of higher prices. It is now the longest run in four years.

The tech-heavy Nasdaq index did even better, up 4.8% in October for a seventh rise on the trot. It hasn’t done better than this since 2018.

Looking around the rest of the world, the performance so far in 2025 has been even stronger. The US market is up by around 17.5%, but Japan is 25% to the good, Europe 29% higher and emerging markets have risen by a third.

Shares are enjoying a healthy combination of tailwinds. There’s a big fiscal impulse from the Big Beautiful Bill. The Fed is back on an easing bias. Bonds are behaving. And to cap it all there’s a positive AI narrative with usefully unquantifiable benefits.

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Bubble trouble?

Unsurprisingly, this is all leading to a great deal of bubble speculation. The similarities between today’s AI-driven bull market and the internet boom in 1999 are hard to ignore. The speed with which markets recovered from a 20% correction in both periods is another echo. So, too, is the role of the Fed - cutting rates in the face of a relatively strong economy and market.

The concentration of the US market, with just a handful of big tech stocks driving all the gains, is another concern. But it might also be what saves investors’ bacon this time around. Look beyond the Magnificent Seven and it is harder to justify the bubble thesis. Valuations are not excessive for the equal weighted version of the S&P 500. Even less so for less frothy markets in the rest of the world.

If the tech stocks fall, it will undoubtedly drag the US benchmark lower. Other markets will not be immune either. But a well-diversified portfolio will provide some protection.

Earnings now the main driver

After 2023, when earnings fell but valuations rose sharply, and 2024, when both earnings and valuations amplified each other, this year has seen earnings pick up the baton.

Earnings season is well underway now and, with around two thirds of big US companies having reported, it’s looking good. Initial estimates of a 7% growth in EPS in the third quarter look too pessimistic. In fact, we will probably get something like 13% growth, and that will contribute to a low double-digit gain for the year as a whole.

That’s important if the market is to stay bullish but not bubbly. Valuations will remain in check as long as earnings keep rising in this way. Without rising profits, investors might start to question whether a price-to-earnings ratio close to dot.com levels is really justifiable.

Central banks still in focus

This week, attention shifts from the Fed and ECB to the Bank of England. The Bank is expected to leave rates unchanged this week, but the odds are shifting from a 5% chance of a cut a month ago to about 30% today.

At the last meeting, the talk was all about sticky inflation. But the latest inflation print was a lower-than-expected 3.8%. That’s still above the Bank’s target, but below the 4% forecast. Money markets are now pricing in 60 basis points (0.6 percentage points) of rate cuts over the next year. A month ago, it was just 40 basis points.

Bonds back in favour

Bond investors have said for some time that it was only a matter of when not if inflation started to come back to target in the UK. And they have been buying government bonds (gilts) in anticipation. The yield on the 10-year gilt has fallen from about 4.8% over the summer to just 4.4% today. Falling yields equate to rising bond prices.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.