Weekly Investment Perspective

U.S. equities posted a mixed week as investors continued to grapple with the backup in long-term interest rates while the employment picture remained tepid. The Nasdaq Composite gained 0.5%, while the S&P 500 slipped 0.3%, the Dow Jones Industrial Average fell 1.3%, and the Russell 2000 edged down 0.2%. The rise in long-term borrowing costs remained a key headwind, with the 10-year Treasury yield rising to its highest level since 2002 at 5.30%. At the same time, weaker labor-market data pulled shorter-term yields lower as markets reduced expectations for near-term rate hikes from the Federal Reserve. This leaves investors confronting a somewhat unusual backdrop with less pressure from the Fed at the short end, but still-elevated long-term borrowing costs tied to persistent inflation, solid nominal growth, heavy Treasury issuance, and rising private-sector borrowing needs.

That backdrop has contributed to an increasingly narrow equity market. Fewer than 25% of S&P 500 companies are now trading above their 50-day moving averages, while the equal-weighted S&P 500 has declined for seven consecutive weeks. Technology and AI-linked stocks again provided much of the market’s support, with semiconductor shares especially strong, as investors continue to view the strongest AI beneficiaries as relatively insulated by unusually robust growth and spending visibility. The key question is how long that leadership can carry the broader market if long-term rates remain elevated, particularly as the AI investment cycle becomes more dependent on debt financing. A stabilization or easing in long-term yields could allow participation to broaden, while a continued rise would likely put increasing pressure on even the market’s strongest leaders.

That dynamic also framed the end of the third quarter. The S&P 500 and Nasdaq still posted modest quarterly gains of 2.0% and 2.5%, respectively, but the equal-weighted S&P 500 fell 2.2% and the Russell 2000 small-cap index declined 7.5%. Only about one-quarter of S&P 500 constituents finished the quarter above their 50-day moving averages, down from roughly two-thirds at the end of June. In other words, the headline indexes held up considerably better than the experience of the average stock.

Friday’s September employment report helped explain why short-term rates moved in the opposite direction from the long end. Nonfarm payrolls increased by just 29,000, well below expectations near 90,000, while the prior two months were revised down by a combined 60,000 jobs. The unemployment rate ticked up to 4.2% from 4.1%, reinforcing signs that labor demand is cooling. Wage growth was also subdued, with average hourly earnings rising just 0.1% for the month and 3.0% from a year ago. While softer wage growth is another indication of a less robust labor market, it does temper the inflation outlook a bit and ease pressure on the Fed to hike rates more aggressively. There were some encouraging details beneath the headline report as well, including improved labor-force participation and weekly unemployment claims that remained near cycle lows.

Geopolitical developments also remain relevant for the inflation outlook. Recent diplomatic efforts surrounding Iran appear to have lost momentum, raising the risk of renewed tensions just as improving flows through the Strait of Hormuz have helped crude oil prices decline for three consecutive weeks. Energy markets have provided some relief lately, but that progress remains fragile.

The week ahead should be relatively quiet, with consumer sentiment, weekly jobless claims, and the September Federal Reserve meeting minutes among the main watch points before third-quarter earnings season begins to ramp the following week. Expectations heading into earnings season remain unusually strong. According to FactSet, consensus analyst forecasts currently call for roughly 29.5% year-over-year S&P 500 earnings growth in the third quarter, which would mark a third consecutive quarter above 25%. The AI investment cycle remains the largest contributor to that strength, with Goldman Sachs estimating that AI infrastructure investment accounts for roughly half of S&P 500 earnings growth in 2026. That fundamental support has helped offset the pressure from higher interest rates, but it also raises the importance of upcoming results in determining whether earnings growth can remain strong enough to sustain current market leadership while broader participation remains weak.