The S&P 500 returned 1.2%, unperturbed by rising global interest rates. A renewed rally in semiconductor stocks drove the NASDAQ to an all-time high mid-week; markets remained optimistic around renewed talks in the Middle East and the U.S.-China summit for potential breakthroughs on either front. Mid-cap stocks (0.0%) and small-cap stocks (-0.8%) continue to fare worse than large caps. Within the S&P 500, technology (+3.1%) and communication services (+2.2%) were the best-performing sectors; rate-sensitive utilities (-3.1%) and energy (-3.0%) were the worst-performing. EAFE markets returned +0.2% with small gains across major geographies, while EM markets returned +1.3%, driven by technology-related gains in Korea offset by losses in Brazil (-1.7%), India (-1.0%) and China (-0.6%).
Rates rose sharply across the curve as traders began to price in further rate increases and investors demanded higher compensation for persistent inflation, government deficits and surging corporate borrowings to fund the AI buildout. 2-year rates rose 10bps to 4.85%; 10-year rates rose 16bps to 5.16%. Rates rose sharply in other developed markets as well. The Italian BTP-German Bund spread is 0.91% while the French OATs-Bund spread is wider at 1.11%, reflecting concerns about budget deficitis. 5-year breakeven inflation expectations rose 2bps to 2.36% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations rose 2bps to 2.34% (vs. recent high of 2.52% on May 4, 2026); the 10Y real yield rose 15bps to 2.82%. For 2026, markets now expect between one and two additional rate hikes. At year-end 2026, the market expects the Fed Funds rate to be 4.26%.
Key Takeaways
1. Long-term Treasury yields continued to rise this week and reached their highest levels in roughly two decades. The 10-year Treasury yield increased to 5.16%, its highest level since 2007, while the 30-year climbed above 5.40%, its highest level since 2004. Multiple factors contributed to the continued rise in yields, including stronger economic data, persistent inflation pressure, higher oil prices, and heavy new Treasury issuance. Implication – The move is notable not just because yields are high, but because they have risen rapidly. The faster rates move, the more quickly markets have to adjust expectations for economic growth, inflation, and borrowing costs, which can increase volatility.
2. A September business survey pointed to stronger economic activity and continued price pressures. The preliminary S&P Global U.S. Composite Purchasing Managers’ Index rose to 58.4 from 56.0 in August, well above expectations and its strongest reading since 2021. Businesses also reported the fastest hiring in more than four years, while input costs increased at their fastest pace in four years. The index is based on a survey of businesses rather than hard economic data, but it provides an early indication of how activity is changing. Implication – The survey suggests economic activity remains solid. The combination of firm activity and persistent price pressures is contributing to higher Treasury yields and reinforcing expectations that the Fed may need to keep rates elevated or tighten further.
3. Meta’s Muse created a sharp divide between AI winners and other consumer-facing businesses. Muse, Meta’s new personal AI agent, surpassed ChatGPT to become the top free app in the U.S. Meta shares rose sharply, the Nasdaq set a new all-time high, and semiconductor stocks rallied as investors considered how the use of AI agents could increase demand for computing power. However, the launch also weighed on travel, financial, insurance, and other consumer-facing stocks as investors considered whether AI agents could make it easier for customers to compare prices, negotiate bills, and switch providers. Implication – Strong early adoption reinforces the case for continued demand for AI infrastructure, but the reaction across travel, financials, and other industries shows that investors are still determining who ultimately benefits and who faces disruption.
4. Consumer sentiment fell back toward its record low set in May 2026. The preliminary University of Michigan Consumer Sentiment Index declined to 47.8 from 51.7, with consumers becoming notably less optimistic about their personal finances and future business conditions. One-year inflation expectations also rose to 4.6% as higher fuel prices and trade-related concerns added to worries about household costs. The weakness in sentiment contrasts with recent data showing that consumers continue to spend despite a more cautious outlook. Implication – Consumers remain active, but they are increasingly concerned about inflation, borrowing costs, and the outlook for their finances and the broader economy.
Weekly Commentary
Markets Climb as AI Optimism Meets Higher Rates
Stuart Katz
Executive Summary
The S&P 500 returned 1.2%, unperturbed by rising global interest rates. A renewed rally in semiconductor stocks drove the NASDAQ to an all-time high mid-week; markets remained optimistic around renewed talks in the Middle East and the U.S.-China summit for potential breakthroughs on either front. Mid-cap stocks (0.0%) and small-cap stocks (-0.8%) continue to fare worse than large caps. Within the S&P 500, technology (+3.1%) and communication services (+2.2%) were the best-performing sectors; rate-sensitive utilities (-3.1%) and energy (-3.0%) were the worst-performing. EAFE markets returned +0.2% with small gains across major geographies, while EM markets returned +1.3%, driven by technology-related gains in Korea offset by losses in Brazil (-1.7%), India (-1.0%) and China (-0.6%).
Rates rose sharply across the curve as traders began to price in further rate increases and investors demanded higher compensation for persistent inflation, government deficits and surging corporate borrowings to fund the AI buildout. 2-year rates rose 10bps to 4.85%; 10-year rates rose 16bps to 5.16%. Rates rose sharply in other developed markets as well. The Italian BTP-German Bund spread is 0.91% while the French OATs-Bund spread is wider at 1.11%, reflecting concerns about budget deficitis. 5-year breakeven inflation expectations rose 2bps to 2.36% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations rose 2bps to 2.34% (vs. recent high of 2.52% on May 4, 2026); the 10Y real yield rose 15bps to 2.82%. For 2026, markets now expect between one and two additional rate hikes. At year-end 2026, the market expects the Fed Funds rate to be 4.26%.
Key Takeaways
1. Long-term Treasury yields continued to rise this week and reached their highest levels in roughly two decades. The 10-year Treasury yield increased to 5.16%, its highest level since 2007, while the 30-year climbed above 5.40%, its highest level since 2004. Multiple factors contributed to the continued rise in yields, including stronger economic data, persistent inflation pressure, higher oil prices, and heavy new Treasury issuance. Implication – The move is notable not just because yields are high, but because they have risen rapidly. The faster rates move, the more quickly markets have to adjust expectations for economic growth, inflation, and borrowing costs, which can increase volatility.
2. A September business survey pointed to stronger economic activity and continued price pressures. The preliminary S&P Global U.S. Composite Purchasing Managers’ Index rose to 58.4 from 56.0 in August, well above expectations and its strongest reading since 2021. Businesses also reported the fastest hiring in more than four years, while input costs increased at their fastest pace in four years. The index is based on a survey of businesses rather than hard economic data, but it provides an early indication of how activity is changing. Implication – The survey suggests economic activity remains solid. The combination of firm activity and persistent price pressures is contributing to higher Treasury yields and reinforcing expectations that the Fed may need to keep rates elevated or tighten further.
3. Meta’s Muse created a sharp divide between AI winners and other consumer-facing businesses. Muse, Meta’s new personal AI agent, surpassed ChatGPT to become the top free app in the U.S. Meta shares rose sharply, the Nasdaq set a new all-time high, and semiconductor stocks rallied as investors considered how the use of AI agents could increase demand for computing power. However, the launch also weighed on travel, financial, insurance, and other consumer-facing stocks as investors considered whether AI agents could make it easier for customers to compare prices, negotiate bills, and switch providers. Implication – Strong early adoption reinforces the case for continued demand for AI infrastructure, but the reaction across travel, financials, and other industries shows that investors are still determining who ultimately benefits and who faces disruption.
4. Consumer sentiment fell back toward its record low set in May 2026. The preliminary University of Michigan Consumer Sentiment Index declined to 47.8 from 51.7, with consumers becoming notably less optimistic about their personal finances and future business conditions. One-year inflation expectations also rose to 4.6% as higher fuel prices and trade-related concerns added to worries about household costs. The weakness in sentiment contrasts with recent data showing that consumers continue to spend despite a more cautious outlook. Implication – Consumers remain active, but they are increasingly concerned about inflation, borrowing costs, and the outlook for their finances and the broader economy.
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