Economic Cycle

The U.S. economy continued to demonstrate resilience, supported by healthy consumer spending and robust business investment, particularly in AI-related infrastructure. Corporate earnings also remained healthy, while the growing financing needs of the AI buildout drew increased scrutiny and contributed to wider credit spreads among some borrowers.

Labor market conditions were mixed, with unemployment claims falling to their lowest level of the year despite slower hiring and a modest increase in the unemployment rate. Inflation continued to run above the Federal Reserve’s target, with elevated oil prices amid the ongoing conflict with Iran adding to price pressures. With growth firm and inflation elevated, the Federal Reserve held interest rates steady in October following September’s increase, although two policymakers favored further tightening.

Equity Markets

U.S. large cap stocks finished October modestly lower, but the decline in the S&P 500 masked a significant rotation beneath the surface. The equal weighted index substantially outperformed its market cap weighted counterpart as investors moved away from megacap technology leaders. Value stocks were positive and significantly outperformed growth, while smaller companies also posted gains.

Energy stocks continued to benefit from elevated oil prices, while more defensive sectors, including Consumer Staples, Health Care, and Utilities, posted strong gains as well. Information Technology and Communication Services struggled amid renewed concerns over the scale and sustainability of AI-related investment. Semiconductor stocks and companies heavily reliant on external financing for AI infrastructure were particularly hard hit. Developed international equities declined modestly, while emerging markets suffered sharper losses amid weakness in technology-heavy Asian markets.

Fixed Income Markets

Bonds rallied in October, recovering much of their September losses as Treasury yields declined meaningfully across most maturities. Signs of softer hiring and increased demand for safer assets amid the selloff in Tech stocks outweighed concerns about persistent inflation. Meanwhile, short-term yields were relatively stable as the Federal Reserve held rates steady.

Municipal bonds led the rebound following a difficult September, while Treasuries and investment grade corporate bonds also posted solid gains. High yield bonds lagged, as their generally shorter duration kept a lid on the benefit of falling rates while credit spreads widened amid growing concerns about financing conditions for certain borrowers. Despite the decline in rates, bond yields remain attractive relative to much of the past decade, offering investors a meaningful source of income.

Our Perspective

The AI investment cycle continues to support and drive economic growth, but October’s rotation showed how quickly sentiment can shift as questions emerge about the returns on all that spending. While AI’s long-term potential impact and value remain significant, growing scrutiny over the scale, financing sources, and profitability of these investments has contributed to recent volatility. Meanwhile, stronger performance elsewhere suggests stock market opportunities may be broadening beyond companies tied to AI.

We believe diversification and ensuring investors are adequately compensated for the risks they assume are particularly important today. Concentrated leadership can leave portfolios dependent on a narrow set of return drivers and more vulnerable when conditions change. In the equity markets, we remain focused on high-quality businesses with durable earnings and attractive valuations across sectors and market capitalizations, while fixed income continues to offer meaningful income and potential stability during stock market volatility.

Monthly Recommendation

In David and Goliath, Malcolm Gladwell challenges how we think about obstacles, advantages, and what it takes to succeed. Through stories spanning history, psychology, and everyday life, he explores how perceived weaknesses can become unexpected strengths. Gladwell encourages readers to question conventional wisdom and consider how a different perspective can reveal opportunities we might otherwise overlook. For anyone navigating challenges or looking for a fresh approach to familiar problems, this book offers a thought-provoking look at the power of adaptability, perseverance, and perspective.

Indicator Sources: Bureau of Economic Analysis (BEA) — Real GDP estimate & Core PCE (bea.gov / fred.stlouisfed.org) | Department of Labor (DOL) Jobless Claims (fred.stlouisfed.org) | Census Bureau Retail Sales (census. gov) | University of Michigan Surveys of Consumers (sca.isr.umich.edu) | ICE BofA High Yield Option-Adjusted Spread (OAS) (fred.stlouisfed.org).

Index Disclosures: Unless otherwise noted, index returns do not reflect any fees or expenses and are provided by Morningstar, Inc. Index data referenced herein is the property of each index sponsor (S&P Dow Jones Indices LLC, a division of S&P Global Inc. (“S&P”), Bloomberg Finance L.P. (“Bloomberg”), ICE Data Indices, LLC (“ICE Data”), and MSCI), their affiliates (“Index Sponsors”) and/or their third-party suppliers and has been licensed for use by Manning & Napier. The Index Sponsors and their third-party suppliers accept no liability in connection with its use. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. For additional disclosure information, please see: https://go.manning-napier.com/benchmark-provisions. See next page for index definitions.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but not guaranteed.

The S&P 500 Total Return Index is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The index accounts for the reinvestment of regular cash dividends, but not for the withholding of taxes. The MSCI USA Value Index is designed to measure large and mid-cap US securities exhibiting overall value style characteristics. The MSCI USA Growth Index is designed to measure large and mid-cap US securities exhibiting overall growth style characteristics. The MSCI USA Small Cap Index is designed to measure the performance of the small cap segment of the US equity market. The index represents approximately 14% of the free float-adjusted market capitalization in the US. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure large and mid-cap representation across 21 Developed Markets countries (excluding the U.S. and Canada). The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets and consists of 24 emerging market country indices outside the U.S. The MSCI ACWI ex USA Small Cap Index is designed to measure a small cap representation across 22 of 23 Developed Markets countries (excluding the U.S.) and 24 Emerging Markets countries. MSCI indices are denominated in U.S. dollars, returns are net of withholding taxes, and they assume daily reinvestment of net dividends thus accounting for any applicable dividend taxation. The Bloomberg U.S. Aggregate Bond Index is an unmanaged, market-value weighted index of U.S. domestic investment- grade debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of one year or more. Index returns provided by Intercontinental Exchange (ICE). The ICE Bank of America (BofA) U.S. Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states, territories, and their political subdivisions. Qualifying securities must have at least one year remaining term to final maturity, at least 18 months to final maturity at the time of issuance, a fixed coupon schedule and an investment grade rating. The ICE BofA U.S. Treasury Total Return Index is an unmanaged index that measures the performance of U.S. dollar-denominated, fixed-rate securities issued by the U.S. Treasury across all maturities. The ICE BofA U.S. Corporate Total Return Index is an unmanaged index that measures the performance of U.S. dollar-denominated, investment-grade, fixed-rate corporate debt publicly issued in the U.S. domestic market. The ICE BofA U.S. Cash Pay High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt, currently in a coupon paying period, issued in the U.S. domestic market. Qualifying securities must have at least one year remaining term to final maturity as of the rebalancing date, at least 18 months to final maturity at the time of issuance, a fixed coupon schedule, and a minimum amount outstanding of $250 million.

Morningstar, Inc. is a global investment research firm providing data, information, and analysis of stocks and mutual funds. © Morningstar, Inc. 2026. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.