Economic Cycle
The U.S. economy continued to demonstrate resilience in September, with signs of strength across both businesses and consumers. Second-quarter real GDP growth was revised higher to 2.2%, while more recent measures of business activity strengthened across both manufacturing and services. Business investment also remained an important source of growth, supported in part by continued spending on AI
Consumer spending has remained healthy despite more modest income growth, as households have reduced savings to support spending. Labor market conditions also remain relatively stable, with unemployment claims remaining low. At the same time, inflation remains elevated and above the Federal Reserve’s 2% target, while higher energy prices have added to near-term inflation pressures. Against this backdrop of resilient economic growth and persistent inflation, the Federal Reserve raised interest rates by 0.25 percentage points in September, its first rate increase in more than three years.
Equity Markets
U.S. equities weakened modestly in September, although the relatively small decline in the S&P 500 masked considerably greater weakness beneath the surface. Market leadership remained concentrated, with several mega-cap technology companies benefiting from continued enthusiasm surrounding AI investment and helping support the broader index.
Most sectors finished the month lower, with Information Technology and Communication Services the only two sectors to post positive returns. Higher interest rates also weighed on more rate-sensitive areas of the market, including Real Estate and Utilities, while smaller companies experienced more pronounced declines. Within technology, semiconductors and other companies tied closely to the AI infrastructure buildout were particularly strong. International equities also declined during the month, with a stronger U.S. dollar creating an additional headwind for U.S. investors.
Fixed Income Markets
Fixed income markets came under significant pressure in September as Treasury yields rose sharply across the yield curve. Resilient economic growth and persistent inflation contributed to a significant repricing of interest-rate expectations, while the Federal Reserve raised its policy rate for the first time in more than three years. The largest increases occurred in the intermediate portion of the curve, although yields moved meaningfully higher across maturities.
The broad rise in rates weighed on nearly all areas of the bond market. Municipal bonds were particularly weak as the increase in Treasury yields was compounded by unfavorable supply and demand dynamics and tax-related selling. Credit spreads also widened during the month, adding another source of pressure for corporate bonds, while short-term securities were comparatively resilient.
Our Perspective
Equity markets remain near record highs, supported by resilient economic growth, healthy corporate earnings, and continued investment in AI. At the same time, the continued rise in interest rates is becoming an increasingly important consideration for investors. Higher bond yields have improved the relative attractiveness of fixed income while also raising the hurdle for equities, particularly in more interest-rate-sensitive areas of the market.
We continue to believe this environment favors a balanced approach. AI remains a significant long-term investment opportunity, but the concentration of market returns tied to the theme also creates risks. Historically, periods of narrow market leadership have reinforced the importance of diversification. As the opportunity set evolves, we believe investors should remain focused on whether they are being adequately compensated for the risks they assume while avoiding excessive reliance on any single source of return.
Monthly Recommendation
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Indicator Sources: Bureau of Economic Analysis (BEA) — Real GDP estimate & Core PCE (bea.gov / fred.stlouisfed.org) | Department of Labor (DOL) Jobless Claims (fred.stlouisfed.org) | Census Bureau Retail Sales (census.gov) | University of Michigan Surveys of Consumers (sca.isr.umich.edu) | ICE BofA High Yield Option-Adjusted Spread (OAS) (fred.stlouisfed.org).
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