Yields Can’t Break AI…Yet

U.S. stocks experienced another volatile week as investors weighed a string of economic data against a bond market in revolt. The yield on the benchmark 10-year Treasury note, which has climbed in a largely uninterrupted line since the start of the year, broke decisively above the 5.0% threshold to touch 5.3%, its highest level since 2002. The move in rates has yet to derail the rally in equities despite looming midterm elections, higher-for-longer oil prices and central banks raising rates globally. For the week, the S&P 500 slipped -0.2%, while the Dow Jones declined -1.2%. Technology stocks were a bright spot, with the Nasdaq Composite up 0.7% during the five-day stretch.

Beneath the surface, eight of the 11 S&P 500 sectors finished the week lower, with financials, health care and consumer staples each down more than 2%. This was a recurring pattern throughout September, as technology and communication services climbed more than 5.0% for the month while nearly every other sector traded flat or declined sharply. Real estate and utilities, for instance, slumped more than 7%, while financials and materials each fell by at least 6%.

The technology sector’s strong outperformance has been driven by continued optimism surrounding artificial intelligence (AI) and agentic AI geared toward consumers. Since the start of September, the Philadelphia Semiconductor Index (SOXX) has rallied more than 17%. This helped propel shares of Nvidia to their first all-time high in 96 days, ending the stock’s third-longest streak without a fresh high since the release of ChatGPT.

At the index level, however, the S&P 500 closed out the month up 0.1%, buoyed almost entirely by strength in technology and communication services. It marked just the eighth time since 1990 that two sectors alone were strong enough to offset losses across the remaining nine, allowing the S&P 500 to finish the month in positive territory. Mega-cap technology companies continue to be a driving force in the stock market, with the technology and communication services sectors making up nearly 50% of the S&P 500 Index.

Putting this all together, the market has been pricing in elevated risks amid the oil supply shock and the U.S. Federal Reserve entering a rate-hiking cycle amid persistent inflation. The multiple, or expensiveness, of the market has declined by almost 20% year to date. Despite this, the S&P 500 is still up over 10% on the year, indicating that the stock market has been well supported by strong profit growth. Taking this a step further, the average company in the S&P 500 is now trading at 15 times NTM (next 12 months) price-to-earnings ratio. This is in line with the 20-year median multiple on the index. In simpler terms, stocks are trading at a very attractive price despite markets being near all-time highs. The average company is growing nearly 10% a year, and forecasts call for similar growth in 2027. As long as macro risks can stay contained, the bull market looks well-supported to continue.

On the data front, Wednesday’s personal consumption expenditures report offered a brief reprieve, with core inflation rising just 3.0% year over year in August, well below the 3.3% consensus estimate. Data continued to favor equity markets, with Friday’s September jobs report showing nonfarm payrolls rising by just 29,000. This largely missed consensus estimates of 90,000, while the unemployment rate ticked up to 4.2%. This puts the three-month average payroll growth rate at 51,000, the softest since 2025. The weak jobs print, combined with the better-than-expected inflation report, sent the odds of a rate hike from roughly 64% earlier in the week to less than 25% for the October meeting.

In the short term, investors are increasingly turning their attention to the upcoming midterm elections just over a month away, with control of Congress hanging in the balance. Betting markets currently favor a Democratic sweep, with Polymarket and Kalshi odds showing Democrats at roughly 92% to retake the House and 63% to flip the Senate, a sharp shift from the roughly even odds seen as recently as the spring. Historically, gridlock has been the best outcome for equities, with the S&P 500 returning 25% over the following two years versus 18% under single-party control, as legislative stalemates tend to reduce policy risk without derailing the current environment.

A Red Wall would likely be viewed as the most supportive outcome for the ongoing AI and infrastructure buildout, given the prospect of continued deregulation and fiscal expansion, while a Blue Wave would shift the policy conversation toward affordability, oversight and preserving existing programs such as Medicaid. Nonetheless, following November’s election, the market will have one less risk to worry about, and less uncertainty tends to be smoother for financial markets.

Looking ahead, investors will have a busy week of economic updates and another quiet week of earnings before third-quarter earnings reports ramp up in mid-October. Headlining the economic calendar will be September’s U.S. Services Purchasing Managers’ Index (PMI) report, which is expected to remain in expansionary territory. Other notable reports include U.S. Trade Balances on Tuesday and a preliminary consumer update from the University of Michigan on Friday. Elsewhere, the Federal Open Market Committee meeting minutes will be released Wednesday. There are no notable earnings releases this week.

Economic Calendar: Oct. 5-9, 2026

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market

5987905 – Exp. 10/31/2029