Market Update October 2026

Summary

Chad Larson compares September's market to clear air turbulence: a sudden drop in perfectly calm skies that rattles the cabin without changing the flight plan. After a strong, low-volatility August, the Fed raised rates for the first time since 2023, bond yields jumped and rate-sensitive sectors fell sharply, yet the S&P 500 finished the month down less than 1%. He explains why the hike confirms rather than changes MLD's positioning, why volatility is the price of admission for equity returns, and why a multi-decade reindustrialization and defence spending cycle is reshaping where long-term opportunity lies.

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Highlights

• August was smooth air: The S&P 500 gained about 2.7% and closed above 7,800 for the first time, with the Dow, Russell 2000 and equal-weight S&P also reaching record highs. The VIX fell to about 14, its lowest level of the year.
• September brought the bump: The Fed raised its policy rate by a quarter point to 3.75% to 4%, its first increase since 2023. Financials, real estate and utilities each fell roughly 8%, small caps were hit hard and gold gave back much of its August gain.
• The altimeter barely moved: Despite sharp moves beneath the surface, the S&P 500 finished September down less than 1%, while the Nasdaq was positive.
• Mega caps grew into their valuations: Strong upward earnings revisions mean the largest US tech names now trade at lower multiples than eight months ago despite higher prices, a sign this is not a hollow market.
• Three drivers, no broken thesis: Higher borrowing costs, narrowing leadership and overly comfortable positioning explain the turbulence. None of them changes the underlying outlook.
• The Fed is prioritizing credibility: With inflation above target for more than five years, the Fed chair framed the hike as removing accommodation, and another hike before year-end remains possible.
• The regime rewards real assets: A central bank willing to fight inflation despite political pressure, and a bond market worried about debt supply, favour scarce, physical assets over long-duration paper.
• Volatility is the fare, not a fault: The market typically sees a double-digit drop within the year and still finishes most years positive. Price action does not break a thesis. Facts do.
• The checklist still holds: Liquidity remains high, earnings growth is strong, the economy is slowing rather than stalling and credit stress remains contained.
• Staying buckled in: MLD continues to carry dry powder, adds risk only from surplus gains, rebalances deliberately and uses alternatives and international equities to reduce concentration and dampen volatility.
• A reindustrial super cycle is underway: G7 defence spending is projected to climb from about 2% of GDP toward 3.8% by 2030, implying roughly $8 trillion of additional spending over the decade. NATO members have committed to 5% of GDP by 2035, including 1.5% for infrastructure, supply chains and the industrial base.
• Canada is building a defence industrial base: Canada's first defence industrial strategy targets more than half a trillion dollars of investment over the next decade, with 70% of acquisitions going to Canadian firms and a path to 5% of GDP by 2035.
• Own the skeleton, not the muscle: Drones and defence tech are the visible story, but they depend on the grid, copper, critical metals, munitions, shipyards, machining and power generation, which are scarce, slow to build and harder to disrupt.

Key Insights

1. Turbulence is not engine failure.

A quarter-point hike, a bond auction and a rising volatility index made September feel far worse than the headline index suggested. The right question in a drawdown is not whether the market went down, but whether the reason for owning something has changed. With liquidity, earnings and credit all intact, the response is to stay buckled in rather than pull the ripcord.

2. The shape of defence spending matters as much as the size.

Modern conflicts have shown that inexpensive drones can destroy platforms worth many times their cost, pushing militaries toward smaller, faster and more technology-driven procurement. Rather than chasing richly valued private defence technology, Chad focuses on the physical bottlenecks every one of those systems depends on, from transformers and copper to energetics and naval capacity.

3. Durable demand is written into budgets and treaties.

Unlike a rate decision, reindustrialization is anchored in multi-year government commitments that do not bend with the business cycle. Chad acknowledges the real risks, including stretched valuations in parts of the sector, budget fights, ceasefire headlines and execution friction, but sees them as reasons to be selective on entry rather than reasons to abandon the theme.

Conclusion

The episode argues that September's volatility was a normal, survivable bump in an otherwise intact outlook, and that the Fed's hike confirmed MLD's preference for real, scarce assets. Chad remains positioned with dry powder, disciplined rebalancing and diversifying alternatives, while leaning into the long-term reindustrialization and defence cycle through the physical infrastructure it requires.

The TakeawayKeep your seat belt on, rebalance on purpose and keep some powder dry. Short-term turbulence does not change the destination, and a world rebuilding its physical economy is a destination worth owning.

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