RBA raised the cash rate by 0.25% to 4.85%, money left Big Tech in October

October gave investors one of the clearest tests yet of a question we have been exploring on The Rate of Change: when market leadership becomes this concentrated, where does the money go next?

The first half of the answer arrived. Capital left the largest technology companies. The second half didn't, or at least not yet. In Australia, money moved into the market's largest and most defensive companies, while smaller companies fell.

That gap is worth understanding. It's also a good example of how we use the podcast. We interview fund managers to understand how they think, not to adopt their views. Our job is to probe, ask questions and test what we hear against the data.

What they say

On our latest episode, Chris Cuesta, Chief Investment Officer of THB, a US small and micro-cap specialist, compared today's US market with the Nifty Fifty of the early 1970s. Back then, a group of large US companies was considered so dependable that the price paid for them hardly seemed to matter.

Chris believes the US market is about as concentrated today as it was then, and that capital could rotate from the mega-caps towards smaller companies over time. Importantly, he was clear that he can't time it.

The numbers behind the concentration argument are striking. Analysis by The Kobeissi Letter shows that 42 AI-linked stocks generated around two-thirds of the S&P 500's price return since the start of 2024.

What the data says

In the US, the first part of the rotation looked real. The Nasdaq-100 fell 6.7%, its worst month since March 2025, as Big Tech results raised questions over whether the scale of AI spending will deliver adequate returns. The Dow rose 1.7%. Beneath the surface, the average US stock held up better than the giants, with the equal-weighted S&P 500 outperforming the standard index.

In Australia, the picture was different.

Sources: S&P Dow Jones Indices (via Stockhead); Nasdaq-100 via Bloomberg. Index returns for October 2026.

Money left the leaders. But it went to safety, not to smaller companies.

Why the two may differ

Leaving the leaders isn't the same as taking more risk. When investors sell the market's winners because of concerns about funding costs, rates or valuations, the first move is often towards safety. In Australia in October, that meant utilities, financials and health care. Smaller companies usually need confidence to return before they benefit.

Rates are still rising at home. On Melbourne Cup Day, the Reserve Bank lifted the cash rate again, to 4.85% (more below). Smaller companies are typically more sensitive to borrowing costs and slowing demand.

The make-up of the market matters. Australia's small-cap indices carry a meaningful weighting to resources companies, including miners and explorers. With materials down 8% and the S&P GSCI Gold index down 3% over the month, part of the small-cap decline may simply reflect what the index owns.

Chris's thesis is about the US. His view concerns American mega-caps and American smaller companies. Australia has its own concentration, its own rate cycle and its own sector mix. A rotation in one market doesn't automatically travel to another.

A change in the rate

On Tuesday 3 November, the Reserve Bank lifted the cash rate by 0.25% to 4.85%, its highest level since 2008 and the fifth increase this year. The decision was not unanimous. Six members voted to increase it and three voted to hold at 4.60%.

The important points from the statement:

• Inflation is taking longer to come down. The RBA now expects inflation to stay above 3% over the coming year and not to reach the top of its 2–3% target range until late 2027, around three quarters later than previously forecast.
• The causes are both global and local. Higher fuel and commodity prices linked to the Middle East conflict, slightly tighter capacity at home, and AI-related investment pushing up prices for technology-related goods.
• The economy is slowing. Housing prices have fallen significantly, unemployment has risen, and the Bank expects the unemployment rate to rise by more than it forecast in August.
• Business investment is the exception. The RBA expects it to be stronger in the near term, including investment in data centres.

What it could mean:

• Smaller companies. Higher borrowing costs and softer household spending are typically a headwind for smaller, domestically focused businesses. On this measure, the conditions that usually support an Australian small-cap recovery may have moved further away, not closer.
• Larger defensives. Utilities, financials and health care led in October as investors looked for safety. For banks, higher rates can support margins, while a weaker housing market and rising unemployment can work the other way.
• Cash and term deposits. Rates on cash and term deposits tend to follow the cash rate, which raises the return that riskier assets need to offer.
• The split vote. Three members preferred to hold. That may suggest the Board is closer to the end of this cycle than the headline implies, although the Bank has kept its options open.

Interestingly, the RBA now names AI-related investment as a source of inflation. The same spending that concentrated returns in a handful of US companies is now showing up in Australian prices.

As the name of our podcast suggests, markets tend to respond to the rate of change, not the level. The direction for Australian rates is still up. The vote suggests the pace may be slowing.

The questions we'd ask next

Testing a thesis means asking what would have to be true for it to play out. On rotation, the questions we're watching are:

• If capital is leaving the leaders, why didn't Australian small caps benefit? Is it rates, earnings, or simply what the index owns?
• What would need to change? Typically, easing rates and stronger earnings revisions. In Australia, rates are still rising.
• Is the US move durable, or positioning? Some of the late-October strength in US small caps may reflect short covering, which can fade as quickly as it arrives.
• Was October a rotation, or a flight to safety? The two can look similar in a single month, and lead to very different outcomes.

Our thoughts

October may have separated two questions that are often treated as one.

The first is whether investors are becoming less willing to pay any price for the largest AI companies. October suggests they might be.

The second is where that capital goes next. So far, the data doesn't confirm it is heading to smaller companies. In Australia it went the other way.

One month is not a trend. Rotations rarely move in a straight line, and the conditions that would typically support smaller companies, such as easing rates and improving earnings, aren't yet in place here.

We see this not as a call on where markets go next, but as a reminder of why we test every thesis we hear, however compelling, and why portfolio construction matters:

• Concentration can build quietly, across index funds, managed funds and super, without anyone choosing it.
• Leaving a crowded trade and finding the next one are different decisions.
• Defensive sectors, bonds and smaller companies each play a different role, and each responds differently to rates.
• Time horizons matter more than any single month.

Performance appears increasingly determined not by what markets do, but by where capital is positioned.

If you would like to understand how much of your family’s wealth depends on the same handful of companies, we offer a complimentary second opinion. You can reach us through yorkwealth.com.au.

Murdoch Gatti
York Wealth Management

Views of podcast guests and third-party research providers are their own.