October ended with the Australian inflation problem becoming ever less theoretical. Third-quarter trimmed mean CPI printed at 1.0% for the quarter and 4.3% over the year, well above the 0.83% the RBA had pencilled into its August Statement on Monetary Policy. The breadth was the worry rather than the level: 59% of the trimmed-mean basket is now rising at more than 3.5% in three-month annualised terms. With hawkish testimony from Bullock, Hauser and Hunter the same day, markets now treat a move to 4.85% on Tuesday as close to done. Central banks have been diverging in sometimes  unexpected ways: the RBNZ held 4–3 when a hike was 96% priced, the Bank of Canada hiked when few thought it needed to, and the Fed delivered a dovish hold against US third-quarter GDP of 3.4% annualised.

The local market held up well though. The ASX finished the month up around 1%, the ASX 20 up about 2% on a 6% rally in the banks, offset by resources down roughly 6% by month-end after being as much as 10% lower at one point. Ex-20 strategies carrying resources lagged; ex-20 ex-resources looked more resilient. 

US earnings were the month's real story. Earnings growth of 30.2% beat the 29.1% expected and revenue grew 13.4%, a third consecutive double-digit quarter, but the average beat was just 1.9% against a five-year average of 7.5% — and for the hyperscalers, beating was no longer enough. Alphabet fell almost 13% on falling search revenue, rising capex and free cash flow of US$9.1b Amazon is running at US$42bn of free cash flow over twelve months on roughly US$220bn of capex; Meta posted its first negative free cash flow since 2012. Microsoft, which trimmed capex and stayed cash-flow positive, was flat: spending alone is no longer rewarded. Elsewhere all eleven sectors grew earnings, with Exxon and Chevron at record highs on refining margins, and the S&P now trades on 18.7x forward earnings against a five-year average of 19.8x.

Andrew Hunt frames the risk well. Trade volumes are slowing but prices are rising, with US import prices from Asia climbing and chips up around 40% on a year ago. "Clearly, we have stagflation in world trade," he writes — which keeps the Fed boxed in. His second concern is the financing: the AI build-out is cash-flow negative and borrowing heavily, US  debt is growing faster than GDP, and as private credit stalls, firms are turning to banks,the pattern seen in Japan in 1990 and the US in 2007. Nothing has broken; his trigger for turning risk-averse is his weekly data showing banks pulling back from lending.

So October looks like a rotation month as much as a risk-off month. The Nasdaq fell 5.2%, its worst month since March 2025, while the S&P 500 lost only 1.2% and the Dow rose 1.5%. The FTSE 100 was roughly level and Japan fell about 5%. Emerging markets were down about 8%, but that was overwhelmingly Korea; the rest of the complex stayed resilient until the last fortnight, when some cyclicality seeped in. Global small caps did well, particularly ex-US, as did several quality growth managers whose holdings had been sold off earlier in the year on fears of AI disruption. Those names have become the "ex-AI trade", a reminder that you cannot read this market at an asset-class level.

Part of that is fundamental and part of it is plumbing: when institutions sell big tech, the money goes somewhere, and in October it went into exactly what had been discarded. On our look-through work on one manager in particular, holdings the market had flagged as "AI-disruptable” enjoyed double digit gains off the back of earnings that were decent but unspectacular, while semi stocks that delivered 30% growth sold off. This indicates that the bar for AI related stocks is much, much higher than it is for the rest of the market. 

The diversifiers also did their job, which was not the consensus four weeks ago when "is 60/40 dead?" was doing the rounds (including in this column). Short-term rate expectations rose but long-term yields fell, and global, US and Australian government bonds were up around 1%-2%; credit spreads widened a little, mostly in high yield. Global infrastructure was the standout, up about 9%, though much of that index is itself tied to the AI build-out. Gold fell about 5% and has increasingly tracked the AI trade rather than hedging it,  hence our growing suspicion of the asset class in this environment.

In summary, prices are rising in global trade, so rate pressure is not an Australian problem alone. AI is real, but so is the borrowing behind it is the risk, the warning lights are amber rather than red, and this is not an environment in which to reach for yield in credit. Lastly, diversification is earning its keep: October's best outcomes came from infrastructure, bonds and the parts of the equity market nobody wanted in June. The week ahead brings Apple on Monday, the RBA and the US midterms on Tuesday, the Bank of England on Thursday and US payrolls on Friday.