Monthly Market Radar: The Benefit of the Doubt Is Gone

For the period covering September 1, 2026, through September 30, 2026.

The story hasn’t changed nearly as much as the market’s reaction to it. Economic growth is holding up, consumers are still spending, and companies continue to invest. What’s changed is investors’ willingness to give anyone the benefit of the doubt. The burden of proof is rising across the board.

Global Perspective

The Slowdown That Hasn’t Materialized Yet

At the start of the year, most market forecasts assumed interest rates would move lower and economic growth would gradually cool. Instead, the economy has remained surprisingly resilient despite a much higher cost of borrowing. In its September statement, the Federal Reserve described an economy that was still expanding at a solid pace, supported by resilient domestic spending and strong capital investment.

That isn’t the same as a boom, of course. What we’re seeing now is more nuanced, and arguably more interesting. Households and businesses have absorbed a substantially higher cost of borrowing without pulling back nearly as much as expected. That durability is good news for growth, and it’s also the main reason the Fed hasn’t been willing to say inflation is fully under control

Inflation is Cooling, But Not Cured

The August PCE report, released September 30th, showed prices up 3.4% from a year earlier, with core PCE (which excludes food and energy) up 3.0%. Both remain well above the Fed’s 2% annual inflation target. Economists had expected inflation to come in slightly higher, so the report was viewed as a welcome surprise and eased some near-term pressure on the Fed. That said, while inflation isn’t accelerating, it isn’t cooling as quickly as policymakers would like either.

Energy adds another layer of risk. Brent crude oil once again closed above $100 a barrel during the month, after the U.S. and Iran struck tankers in the largest wave of attacks on shipping since the conflict began. Higher energy costs tend to work their way through transportation, manufacturing, and consumer prices broadly, which complicates the Fed’s task. We wouldn’t expect the path back to 2% to be a smooth one.

Rates Do an About-Face

The shift in rate expectations this year has been striking. Last December, the Fed was projecting one cut in 2026, and markets were pricing in several. Instead, by unanimous decision, the Fed raised its target range by a quarter point to 3.75%–4.00% in September – the first increase since 2023.

As a result, policymakers weighed evidence of persistent inflation against signs of economic activity and have shifted their focus toward whether additional tightening is needed—with at least one additional quarter-point increase projected before year-end. Another hike isn’t guaranteed, but “higher for longer” has moved from a possibility to a working assumption.

Markets React to Every Report

In this environment, a single data release can quickly shift market sentiment, even if broader economic trends remain intact. The latest PCE report illustrated that point well. The softer-than-expected inflation figure led investors to scale back expectations for another near-term Fed hike and initially pushed stocks higher. By the close, however, the S&P 500 had given back those gains and finished down 0.3% – a reminder that investors remain divided between optimism on inflation and concern that economic strength could keep rates up.

For that reason, we’re focused less on predicting each Fed decision and more on the fundamentals that are driving it. Are prices continuing to cool? Are consumers still spending? Are businesses still investing? Are earnings holding up? The answers to those questions will ultimately determine the direction of rates and markets.

Takeaway: Why It All Matters

A resilient economy is always positive, but it comes at a cost. Borrowers should expect financing to stay expensive for some time, and investors should expect markets to react sharply to surprises in the data, because there’s considerably less room for error than there was a few years ago.

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Equities

Indexes Aren’t Telling the Whole Story

September presented plenty of headwinds for stocks: persistent inflation, oil above $100 a barrel, and long-term yields at multi-decade highs. Even so, the major indexes held up for the most part. For the month, the S&P 500 slipped only half a percentage point and the Nasdaq gained about 2%, while the Dow fell more than 4%.

But the major indexes only tell part of the story. Underneath the surface, many stocks had a much tougher month. The small-cap Russell 2000 declined 5.3% – marking its weakest month in well over a year – and nine of the 11 major S&P sectors finished meaningfully lower. A relatively small group of large technology and AI-related companies did most of the heavy lifting for the major market indexes. That isn’t a broad rally; it’s a market leaning heavily on a handful of perceived winners.

The lesson here is that investors remain willing to pay for earnings growth, even with higher borrowing costs, but they’re far more selective about which companies earn that premium. With rates and valuations both high, companies that disappoint have little margin for error.

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AI Enters the Skepticism Stage

At the start of the AI boom, its investment case was built largely on potential. Today, investors are asking a more practical question: where are the returns showing up? The evidence they want is concrete: productivity gains, lower costs, stronger margins, higher revenue, and ultimately higher profits. Spending billions on data centers may be necessary, but investors increasingly want to see what they’re getting in return.

Companies tied to the AI buildout continued to report healthy revenue growth and upbeat outlooks, reinforcing that spending on chips, computing power, and infrastructure is translating into real business activity. At the same time, some of those strong results were met with muted market reactions as investors weighed them against continued heavy spending plans.

That highlights an important point: a strong business doesn’t automatically make a strong investment, and robust demand doesn’t make every AI-related company attractively valued. The long-term winners will be those that convert today’s heavy investment into durable revenue, healthier margins, and sustainable free cash flow.

The Consumer Refuses to Fold

Much of the economy’s resilience continues to rest on the consumer. Consumer spending rose 0.9% according to the latest PCE report, and 0.6% after adjusting for inflation. Households are still opening their wallets despite higher prices and borrowing costs, which continues to support corporate revenue.

There’s a caveat, however. Personal income rose just 0.2%, well below the pace of spending growth, while the saving rate fell from 4.6% to 4.1%. In other words, households appear to be dipping into savings to keep spending at current levels. That’s not a sign of distress, but it does suggest this pace may be difficult to sustain indefinitely.

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Takeaway: Why It All Matters

Growth still matters, but valuation matters more than it did when capital was inexpensive. A high-quality company purchased at an excessive price can still produce disappointing returns. In this environment, we’d emphasize quality, sustainable free cash flow, and reasonable valuations, while recognizing that major indexes can look healthy and stable even when many individual stocks are struggling.

Fixed Income

Move Over Cash: Bond Income Is Back

For years, bonds were the quiet component of most portfolios. September changed that. By month-end, the 10-year Treasury yield stood at approximately 5.29% and the 30-year at approximately 5.64%. The 30-year reached its highest level since 2002, while the 10-year was trading near its 2007 high.

This isn’t solely a U.S. phenomenon. The third quarter saw the largest quarterly rise in Treasury yields this century, and the selloff extended globally. The yield on the U.K.’s 30-year government bond crossed 6% for the first time since 1998, and France’s 10-year yield reached its highest level since 2002.

Importantly, higher yields aren’t just making bonds more attractive. They’re giving investors another source of return that doesn’t depend entirely on stock market gains.

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5% Treasuries Change All the Math

When a 10-year U.S. government security yields more than 5%, every other investment faces a higher hurdle. A richly valued stock must offer enough expected growth to justify the additional risk. That’s particularly true for companies whose largest profits are expected well into the future, since higher rates reduce the present value of those earnings.

The effects extend well beyond financial markets, too. Mortgages, auto loans, and corporate borrowing all take their cues from Treasury yields. So, a rising 10-year translates into higher financing costs across the economy.

Chasing Yield Comes with a Price

In a rising-rate environment, the temptation is to reach for additional income – taking on more risk in an effort to earn a higher return. But we believe that’s generally a mistake. When high-quality securities already offer a healthy yield, taking on substantially more credit risk requires a compelling justification. We prefer to emphasize quality, sensible maturities, and diversification rather than stretching for incremental yield. In this market, a disciplined, conservative approach may be one of the bond investor’s greatest advantages.

The Fed Leads, But the Market Decides

One important but often-overlooked point: the Fed sets short-term policy rates, but long-term yields are determined by the market, which responds to more than just Fed policy. Stubborn inflation, heavy government borrowing, and substantial demand for capital tied to AI infrastructure are all contributing to higher long-term borrowing costs. As a result, even when the Fed eventually eases, long-term rates may not decline by the same magnitude or at the same pace.

Takeaway: Why It All Matters

For the first time in many years, high-quality fixed income offers a compelling return on its own. That’s welcome news for investors who rely on portfolio income, and it means a balanced portfolio once again has two meaningful sources of return rather than one. While bonds won’t always offset stock market declines, especially during periods of rising inflation or interest rates, today’s higher yields can provide both meaningful income and stronger long-term return potential.

Looking Ahead

Three Forces Pulling on Markets

As we move into the fourth quarter, we’re focused on three issues: inflation and energy prices, the path of interest rates, and whether AI investment delivers a measurable economic return. What makes the outlook challenging is how closely these forces are linked. A healthy economy makes it easier for companies to grow earnings, but it can also keep inflation stubbornly above target. Higher energy prices add further pressure. And if inflation remains difficult to fully contain, interest rates are likely to stay restrictive for longer than many investors once expected. No single forecast captures all of these dynamics, which is why we’re monitoring several variables rather than relying on one.

What’s On Our Radar

• Labor Market Watch: September job growth came in well below expectations, employers added just 29,000 jobs, well below the 84,000 economists expected, and unemployment rose to 4.2%. This is potentially reducing pressure on the Fed to hike rates again and raising new questions about whether hiring is starting to cool.
• AI’s Next Milestone: Investors are no longer focused on who’s spending the most on AI. The capital has been committed, the infrastructure is being built, and semiconductor suppliers are already benefiting. In the next phase, the most valuable applications are likely to be those that make consumers and businesses across industries meaningfully more productive or profitable.
• Prepare, Don’t Predict: Nothing in September suggested the onset of an economic downturn. But the forces at work are pulling in opposite directions. Persistent inflation, expensive energy prices, and higher long-term yields weigh on one side, while solid earnings and continued AI investment help support growth on the other. The economy has shown it can withstand higher rates, but this market requires considerably more discipline than it did a few years ago.

Our Positioning

We continue to favor high-quality businesses with durable earnings, reasonable valuations, and the ability to grow even in a higher-rate environment. We also see value in maintaining meaningful exposure to high-quality fixed income, where yields are once again providing attractive income and diversification benefits. While AI remains a powerful long-term theme, we believe investors should look beyond the obvious winners and avoid allowing any single narrative, company, or sector to dominate a portfolio. The goal isn’t to predict every market move. It’s to build a portfolio that can participate in continued growth while remaining resilient if inflation, interest rates, or market leadership take a different path than expected.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor’s specific circumstances. Investing involves risk, including possible loss of principal.

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