Weekly Investment Perspective

U.S. equities moved higher last week, but the gains masked growing pressure as Treasury yields jumped. The S&P 500 advanced 1.2%, the Nasdaq Composite gained 2.1%, and the Dow Jones Industrial Average added 0.3%, while the more rate-sensitive Russell 2000 fell 0.8%. Strength in AI-linked technology helped the large-cap indexes overcome higher borrowing costs, while utilities, real estate, financials, and energy declined. The week’s central market development was the sharp backup in rates. The 10-year U.S. Treasury yield pushed above 5.20%, its highest level since June 2006. At these levels, long-term rates raise the valuation hurdle for stocks and tighten financing conditions.

The move in rates was ignited Wednesday by S&P Global’s preliminary September purchasing managers’ survey, which showed business activity and inflation pressures well above expectations. The composite index rose from 56.0 in August to 58.4, its strongest reading since July 2021, alongside faster new orders, higher input costs, and renewed supply constraints. The AI buildout appears to be an important source of strength as spending on data centers, power equipment, semiconductors, and cloud capacity ripples through the economy. We would not read too much into the magnitude of a single survey, but its direction fits with other evidence that growth remains firm and inflation is proving difficult to fully contain. Rate pressure was then compounded by Federal Reserve Governor Michael Barr’s view that further hikes will likely be needed and by soft demand at Treasury auctions. The five-year auction was particularly weak, with foreign investor participation below recent norms. The rise in yields was therefore multifaceted with stronger growth, persistent inflation, a more hawkish Fed, and less enthusiastic demand for heavy government debt issuance.

Developments in the AI investment narrative last week were more mixed. Demand received another boost from the rapid early adoption of Meta’s Muse personal AI agent, which has surpassed 2.5 million downloads and climbed to the top of U.S. app-store rankings. Unlike a traditional chatbot that mainly answers questions, Muse can connect with other applications and take actions for the user, including sending emails, booking travel, shopping, or canceling subscriptions. That shift from generating answers to completing tasks could substantially increase the computing needed to run AI models, helping explain another strong week for semiconductor stocks.

Demand, however, does not guarantee that new capacity can be built smoothly or profitably. Oracle issued a force majeure notice related to Project Jupiter, a large New Mexico data center campus intended to support OpenAI, seeking to protect itself from potential costs tied to construction delays and overruns. The project has faced possible delays in securing power, highlighting the growing challenges surrounding grid access, permitting, and local political opposition. Research cited by Reuters found that at least 45 data center projects worth $68 billion faced community opposition during the second quarter alone. This does not suggest that AI demand is weakening, but it shows that converting demand into operating capacity is becoming more complicated and expensive.

Geopolitical developments offered a modest counterweight to rising inflation concerns. U.S.-Iran negotiations remain active, although President Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz and cease hostilities, leaving the path toward an agreement uncertain. Further talks are expected this week, and other U.S. officials have described the mediated discussions as positive and constructive. More importantly for markets, oil flows through the Strait have continued to recover despite the diplomatic uncertainty, easing some of the immediate pressure on energy supply even as the possibility of renewed hostilities remains a meaningful risk.

The week ahead is headlined by Friday’s September employment report. Economists expect payroll growth to slow to roughly 100,000 from 162,000 in August, with the unemployment rate holding at 4.1%. The report will help determine whether last week’s strong growth signals are being confirmed by the labor market or need to be caveated. PCE inflation data and the ISM manufacturing survey will provide additional evidence earlier in the week. A stronger jobs reading could reinforce expectations for additional Fed tightening and keep upward pressure on yields, while a softer report could temper some of last week’s move. With both economic growth and financing costs rising, investors need to distinguish companies whose demand can translate into durable cash flow from those dependent on uninterrupted capital access and construction. That makes valuation discipline, balance-sheet quality, and diversification especially important as the AI investment cycle broadens.