September Market Commentary | AI Strength Meets Higher Rates

AI-driven earnings strength is supporting a narrow equity market even as stronger growth, heavy capital demand and higher real rates make both stocks and bonds more vulnerable.

• The capitalization-weighted S&P 500 fell only 0.4% in September, while its equal-weighted version dropped 4.8%; Nvidia, Micron, Apple and Advanced Micro Devices accounted for almost half of the index’s 12.7% year-to-date total return.
• The U.S. 10-year Treasury yield rose nearly 1 percentage point in the third quarter to 5.28%, its largest quarterly increase since 1994, while the Bloomberg U.S. Aggregate Bond Index lost 3.5%.
• The increase in yields was driven mainly by real rates: from late February to late August, the 10-year real yield rose 0.60 percentage points, compared with a 0.16-point increase in inflation expectations.
• Economic momentum remained strong, with the September S&P Global flash composite PMI at 58.4, Atlanta Fed third-quarter growth tracking at 5.1% annualized, and August real consumer spending up 0.6%.
• The Fed raised its policy rate by 25 basis points on September 16 to 3.75%-4%; markets price three further quarter-point increases by the end of 2027, while the authors expect only one or two more moves as fine-tuning rather than a prolonged tightening cycle.

Takeaway: Investors should not overreact to a narrow market or higher yields, but should reduce reliance on a few AI beneficiaries and recognize that bonds may offer less protection if 10-year yields rise materially above 5.25% and stocks and bonds continue moving together.