MARKET UPATE [Oct 2026]

Market Overview

October was a month of mixed economic signals and market uncertainty. Investors remained concerned about rising inflation, higher interest rates, geopolitical tensions, and the sustainability of the artificial intelligence (AI) investment boom. Although the U.S. economy continued to show signs of strength, rising oil prices and bond yields created pressure on financial markets. U.S. stocks experienced several ups and downs throughout the month as investors reacted to economic data, corporate earnings, and changing expectations for Federal Reserve policy.

Inflation remained a major concern in both the United States and Canada. U.S. inflation increased to 3.7% in September, higher than expected and well above the Federal Reserve's 2% target. Wholesale prices also increased, with the Producer Price Index rising 1.3% in September. In Canada, producer prices increased by 2%, while higher gasoline prices contributed to rising consumer inflation. These increases raised concerns that inflation could remain high for longer, making it more difficult for central banks to lower interest rates. The U.S. 10-year Treasury yield reached its highest level in 24 years during the month, putting additional pressure on stock valuations, particularly in the technology sector. The S&P 500's valuation multiple declined to 19.3 times projected earnings from 22.2 times at the beginning of the year.

Central bank decisions also influenced market activity throughout October. The Federal Reserve kept interest rates unchanged, noting that the U.S. economy continued to expand and consumer spending remained strong. However, persistent inflation left the possibility of future rate increases open. In Canada, the Bank of Canada raised its policy rate to 2.50% due to concerns about the inflation outlook. Meanwhile, the International Monetary Fund warned that the United States and other advanced economies were relying too heavily on short-term borrowing to finance government spending. The IMF also projected that U.S. government interest payments could rise significantly over the coming years. The U.S. budget deficit approached $2 trillion for the fiscal year ending September 30, adding to concerns about the country's growing debt.

Economic data in the United States remained relatively strong, although some areas showed signs of weakness. The September employment report showed an increase of 29,000 jobs, while the broader household survey indicated that the labour force expanded by 485,000 people. Weekly jobless claims generally declined throughout the month, suggesting that the labour market remained stable. U.S. retail sales also increased in September, and consumer confidence improved in October. However, consumer sentiment remained weak as households continued to deal with higher living costs. The housing market also slowed as rising mortgage rates discouraged buyers and homebuilders. Housing starts declined 5.2% in September, while pending home sales reached their lowest level since 2001. Despite these challenges, U.S. GDP grew at an annualized rate of 3.4% in the third quarter, showing that the economy remained resilient.

Canada faced a more challenging economic environment. Employers eliminated 68,300 jobs in September, pushing the unemployment rate up to 6.5%. Manufacturing shipments increased 1.5% in August, but wholesale sales declined 1.6%, mainly due to weaker vehicle and parts sales. Canada's trade surplus also widened to C$4.2 billion, its largest since May 2022. However, preliminary economic data showed that GDP declined 0.1% in September, and the Bank of Canada expected economic growth to slow further in the fourth quarter as new U.S. tariffs affected trade and business activity. Prime Minister Mark Carney announced billions of dollars in financial support for Canada's steel and automotive industries to help protect domestic businesses.

U.S. stock markets experienced volatility throughout October, particularly in the technology sector. Early in the month, stocks benefited from optimism surrounding artificial intelligence and stronger corporate earnings. However, concerns grew that major technology companies were spending too much on AI infrastructure without generating enough revenue to justify the investments. Meta shares fell after the company announced plans for additional spending, while Alphabet shares declined after reporting slower advertising growth and higher AI-related expenses. Amazon and Intel also experienced share price declines following disappointing earnings results, with Intel falling 29% after issuing a weaker-than-expected revenue forecast. Investors also became concerned about highly indebted AI infrastructure companies, such as CoreWeave, which has borrowed billions of dollars to expand its data centre operations. Despite these concerns, strong earnings from companies such as SpaceX helped support investor confidence in the AI industry.

Corporate earnings and business developments also influenced market performance. Accenture reported higher fourth-quarter profits and provided a positive outlook for the year ahead, helping ease concerns about AI-related disruption to its business. Coca-Cola raised its financial outlook as sales volumes and prices increased, while UPS shares rose after the company provided stronger earnings forecast for 2026. C.H. Robinson announced plans to acquire RXO for approximately $5.8 billion, while DoorDash entered discussions to acquire Instacart. Apple also reached a market valuation of $5 trillion, reflecting continued investor interest in major technology companies. Meanwhile, Visa received approval to begin preparations for entering China's domestic payments market.

International markets also faced uncertainty from political and economic developments. France experienced rising borrowing costs as concerns about its government debt and budget deficit increased. In the United Kingdom, consumer confidence recorded its largest decline since the pandemic. In Asia, Indonesia's stock market fell nearly 12% in one day after MSCI raised concerns about market transparency and trading practices. Technology and semiconductor stocks across Asia also declined. As investors became more cautious, they increasingly moved toward defensive sectors such as consumer staples, utilities, and healthcare. Consumer staples stocks gained 9.6% during the month, putting the sector on track for its strongest monthly performance in 26 years.

Directional Market Outlook

During its October meeting, the Federal Reserve voted 10–2 to leave its key interest rate unchanged as elevated inflation remained a concern. The Fed upgraded its assessment of the economy from “solid” to “strong,” while Warsh reaffirmed its commitment to the 2% inflation target. Despite hotter-than-expected inflation data, the Fed opted to continue assessing incoming data. Year-over-year inflation remains at 3.7%.

As noted in recent quarters, our historical studies have led us to monitor the 4.25%–4.50% range as a key benchmark for the cost of capital. In last month’s report, the

probabilities of the benchmark rate reaching this range were as follows:

The figures below show the latest probabilities of Fed rate hikes to different levels over time. As of month-end, the probability of rates reaching levels that could weigh on equity returns had fallen materially for the next FOMC decision but risen for later meetings. This shift is consistent with the Fed’s preference to await more data, as conveyed at its latest meeting.

On the valuation front, corporate earnings have strengthened while broader market prices have declined, resulting in higher implied equity risk premiums. These premiums have now returned to levels closer to their historical median over the past two decades, suggesting that the market has entered, and largely remained within, what many would consider fair value territory. For a more detailed discussion, please refer to the Market Valuation section under Management’s Discussion and Analysis in this report.

Nevertheless, headwinds remain, particularly with respect to the front end of the discount rate. Interest rates are still expected to rise as central banks continue their efforts to combat inflationary pressures, potentially creating additional downward pressure on equity valuations. However, the extent to which these movements will translate into changes in longer-term yields remains uncertain and will largely depend on evolving inflation expectations and broader market conditions. These expectations will continue to be reassessed as additional economic data becomes available and further monetary policy decisions are announced.

Key Changes to Fundamental Determinants of Market Growth and Risk.

S&P500 Market Cap (May → June): 70.081 trillion → 69.018 trillion

Analyst Consensus Earnings Forecasts (2026): 363.1→ 365.9

Model Earnings CAGR:  17.57% → 17.84%

S&P500 Aggregate Earnings (TTM) latest quarter estimates (in $ Billions):  617.34 → unchanged

S&P500 Aggregate Dividends (TTM) latest quarter estimates (in $ Billions): 165.16→ unchanged.

S&P500 Aggregate Buybacks (TTM) latest quarter estimates (in $ Billions): 249.00. → unchanged.

Model Payout Ratio: 77.85% → unchanged.

Implied Equity Risk Premium

The implied equity risk premium (IERP) represents the excess return investors demand for holding equities instead of risk-free government bond. As it is not directly observable, the IERP is estimated by discounting expected future cashflows, primarily aggregating dividends and share repurchases. At Baoro Research, we calculate the IERP each month at the market index level, utilizing it as an indicator of valuation conditions, investor sentiment, and consequently, potential market direction. As of April 2026, our estimate for the IERP stands at 5.23%, which remains notably below both the historical average of approximately 5.36% and the recessionary threshold of 6.16%.

Market Valuations

With an average equity risk premium of 5.36%, the adjusted implied fair value for the S&P 500 stands at 7393.86.  Consequently, based on long-term averages, the market appears to be overvalued by modest 2.46%

S&P500 Value (IERP 6.16%)

An IERP of 6.16% is commonly observed during periods of economic downturns, which for value investors can indicate a suitable moment to reintroduce equity risk into portfolios. Should the current market narrative lead to challenging economic conditions, S&P500 valuations suggest prices could decrease to 6404.42, an 15.51% decline from current levels. Despite the extent of this potential overvaluation, this remains the base

case model, with the intention to reintroduce equity exposure if such a scenario unfolds.

S&P500 Value (IERP 6.91%)

An IERP of 6.91% is typically observed during periods of substantial market decline, such as at the height of the global financial crisis. Should a similar scenario arise, the index could experience further depreciation, with the S&P 500 potentially reaching 5685.51, which would be a decline of approximately 24.99%. While this extent of price decrease may appear improbable, it remains within the realm of possibility based on historical precedents. For instance, equity markets dropped 89% from peak to trough during the Great Depression (1929 to 1932), while during the dotcom bust and subsequent financial crisis, the Nasdaq Composite fell roughly 78% from its March 2000 high to its October 2002 low. Similarly, the S&P 500 and Dow Jones Industrial Average both declined by approximately 50 to 57% during the 2007 to 2009 financial crisis.

Multiples Lens

Due to variability in the inputs and outputs associated with the IERP model, a multiple-based valuation is also conducted. In this approach, cash flows are represented by the sum of aggregate S&P500 firms’ dividends and buybacks on a trailing twelve-month basis.

Data from our model indicates that the S&P 500 historically has an average price to cash flow ratio of 23.4. The multiples at plus or minus one standard deviation are 28.8 and 18.0, while the values at plus or minus two standard deviations are 34.2 and 12.6. Using the most recent trailing twelve months aggregation of firm dividends and buybacks, the following valuations are derived across these key multiples.

Valuation Summary