The 10/10 Mini-Crash: A Gift in Disguise

Thoughts on the Market

Following the recent sharp pullback in volatility, the VIX Index continued to ease last week as investors managed to fully repair the damage from the October 10 selloff.

The craziest part was that every major US index hit a fresh weekly all-time closing high last Friday... all while the CNN Fear & Greed Index is still stuck in fear mode.

But like any repair job, it’s not just about how things look on the surface — we also need to check under the hood to make sure the job was done properly.

So let’s do that by checking out high-yield spreads and a couple of risk gauges: Discretionary vs Staples, and High Beta vs Low Volatility.

Looking at the chart below, the past 10-day rebound looks genuinely strong. All three lines are comfortably above their October 9 marks (right before the 10/10 mini-crash), and High Beta vs Low Volatility is already back to making new highs.

That’s definitely a bullish signal for the broader market. After all, when we look at how High Beta vs Low Volatility lines up with small-caps, it’s usually small-caps that do the catching up, or down — not the other way around.

So, with the Russell 2000 hitting its highest weekly close ever last Friday — just as we roll into the historically strongest three months for stocks — it’s clear this trade is still one to stick with.

Broadly speaking, the 10/10 mini crash didn’t just shake up sentiment — it also forced a big reset in positioning.

According to Goldman Sachs, October’s selloff led to the largest drop in positioning since Liberation Day, pushing its broad measure of equity positioning decisively into underweight territory. And despite last week’s gains, investor positioning remains underweight.

Deutsche Bank’s positioning chart tells a similar story: equities are underweight, and discretionary investors’ exposure is now so low that they’re effectively positioned for negative Q3 earnings growth.

But anyone paying attention knows that’s not what’s happening.

About 30% of S&P 500 companies have reported so far, and the results are beating expectations — again. Just like in Q1 and Q2, analysts got a bit too bearish and are now playing catch-up.

So far, 86% of companies have beaten bottom-line expectations, with an average earnings surprise of 7.7%. That puts Q3 earnings growth on track for 15.1% year-over-year, or roughly $73 in EPS if the trend holds.

Circling back to those cautious discretionary investors, this just means they’ve got plenty of room to step up exposure — potentially supporting further upside in the market.

Sticking with earnings for a moment, momentum looks set to stay strong well into next year. Our next chart shows analysts are still expecting double-digit growth for 2026 bottom-up EPS.

Now, if you’re tempted to fade those big projections, don’t be too quick to ignore the tailwinds in play. Rather than worrying about what could derail this, it’s worth remembering that the Fed is easing into a recovery. That should finally ease the interest rate drag on the ISM and provide further support for earnings growth momentum going forward.

Speaking of financial conditions, another Fed rate cut can be expected this Wednesday, after last week’s soft CPI pretty much seals the deal for more easing into next year.

We should also pay close attention to Wednesday’s Fed press conference for potential confirmation that quantitative tightening (QT) may be ending — possibly even immediately.

As our next chart shows, the Fed is expected to cut rates in just two days, then again in 44 days, and again in 93 days. And that’s before we even consider the arrival of a new Fed Chair in May, who’s widely expected to back Trump’s dovish agenda.

Looking ahead to 2026, the market is already pricing in nearly three rate cuts. But with Trump publicly pushing for aggressive cuts, we could end up with a lot more.

He has already signaled interest in candidates who align with his view of slashing rates to as low as 1% to fuel growth.

But this raises a key question: does it make sense to push rates below 2% while Core CPI is still above target?

Well, here’s the main point going forward: what we think they should do is irrelevant. What matters right now is that the doves are flying high. It is what it is — they’re going to cut, and that’s dovish… which is a huge tailwind for equities.

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So, where does that leave us?

The small pullback from two weeks ago caused one hell of a shakeout. Investors are playing it safe and keeping their risk exposure low, even though the latest earnings reports are showing that growth momentum is running hot.

Add in the chaos the Trump administration keeps throwing at the markets, and you’ve got the perfect recipe for some serious upside potential right now.

All signs point to a setup for some of the most anxiety-fueled all-time highs in S&P 500 history — just as we roll into the historically strongest three months for stocks.

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