Executive Summary
Equity indexes were mixed last week, with small-cap and value stocks adding to their year-to-date leads over large-cap and growth-oriented shares. The Russell 2000 and S&P MidCap 400 Indexes advanced, reaching all-time highs during the week, while large-cap indexes pulled back from the prior week’s record levels. Value stocks outpaced their growth counterparts for the third straight week.
The yen depreciated sharply on the news of the snap election before recovering to around JPY 158 against the U.S. dollar level, holding relatively steady from the prior week. Some support for the yen came from a verbal intervention by Japan’s Finance Minister Satsuki Katayama, who reasserted that the government could take decisive action against sharp currency moves that do not reflect fundamentals. Within fixed income, the yield on the 10-year Japanese government bond rose to 2.18% from 2.09% at the end of the previous week, reflecting concerns about the potential for even greater fiscal stimulus and the impact this would have on the health of Japan’s finances.
Equities
The S&P 500 returned -0.4% for the week. The week was marked by negative headlines around both the Fed and geopolitics. The DOJ launched an investigation of Chairman Powell while President Trump seemed to back off picking Kevin Hassett as the next Fed Chair, who was seen by markets as “dovish.” Tensions flared between the U.S. and Europe and threatened to spill into further tariff turmoil as President Trump upped the ante to take control of Greenland. Large banks all fell during the week on weak outlooks despite posting solid earnings. Mid cap (+0.8%) and small cap (+2.1%) stocks outperformed large caps. Real estate (+4.1%) and consumer staples (+3.7%) were the best performing sectors in the S&P 500; financials (-2.3%) and consumer discretionary (-2.0%) were the laggards. EAFE markets returned +1.4% with gains in Japan (+4.2%) and the U.K. (+1.2%), while EM markets returned +2.3% led by Korea (+4.3%) and China (+1.3%).
From a valuation perspective, the S&P 500, NASDAQ, EAFE and EM trade at or above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.9, NASDAQ at +1.1, EAFE at +1.5 and EM at +1.5. For the next 12 months, EPS growth for S&P 500 is expected to be 11.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 22.6% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had mixed returns as rates rose slightly across the curve. Municipals returned +0.2%, US AGG returned -0.1% and US IG returned 0.0%. HY bonds returned +0.2% as spreads compressed 6bps while bank loans returned +0.1%. EM debt returned +0.2% as the U.S. dollar rose 0.3%.
Rates
Rates rose slightly across the curve. The recession-watch 3M-10Y spread widened 2bps to +58. The 2Y-10Y spread was unchanged at +63. Rates were lower in Europe but rose in the U.K. and Japan. The BTP-Bund spread is at 0.62%. 5-year breakeven inflation expectations rose 6bps to 2.40% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 4bps to 2.32% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 2bps to 1.88%. For 2026, the market expects between 1 and 2 cuts vs. the Fed’s guidance of 1 cut. At year-end 2025, the market expects the Fed Funds rate to be 3.18% vs. the Fed’s guidance of 3.25%-3.5%.
Currencies/Commodities
The dollar index rose 0.3%. The commodities complex rose 0.9% as energy prices rose 1.4% for the week. Brent prices rose 1.2% to $64/bbl; US natural gas prices fell 2.1% while European gas saw its biggest weekly rise since 2023, jumping 29.4% due to a sudden shift in sentiment around the adequacy around inventories. Gold rose 1.9% to $4,596/oz, while Silver gained 12.9% to $90/oz and copper fell 1.2% to $583/lb.
Market monitors
Volatility rose for equities and fell for bonds (VIX = 16, MOVE = 58); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) became more bullish rising from +13 to +21.
Weekly Commentary
Markets Hold Steady as Value and Small Caps Lead
Stuart Katz
Executive Summary
Equity indexes were mixed last week, with small-cap and value stocks adding to their year-to-date leads over large-cap and growth-oriented shares. The Russell 2000 and S&P MidCap 400 Indexes advanced, reaching all-time highs during the week, while large-cap indexes pulled back from the prior week’s record levels. Value stocks outpaced their growth counterparts for the third straight week.
The yen depreciated sharply on the news of the snap election before recovering to around JPY 158 against the U.S. dollar level, holding relatively steady from the prior week. Some support for the yen came from a verbal intervention by Japan’s Finance Minister Satsuki Katayama, who reasserted that the government could take decisive action against sharp currency moves that do not reflect fundamentals. Within fixed income, the yield on the 10-year Japanese government bond rose to 2.18% from 2.09% at the end of the previous week, reflecting concerns about the potential for even greater fiscal stimulus and the impact this would have on the health of Japan’s finances.
Equities
The S&P 500 returned -0.4% for the week. The week was marked by negative headlines around both the Fed and geopolitics. The DOJ launched an investigation of Chairman Powell while President Trump seemed to back off picking Kevin Hassett as the next Fed Chair, who was seen by markets as “dovish.” Tensions flared between the U.S. and Europe and threatened to spill into further tariff turmoil as President Trump upped the ante to take control of Greenland. Large banks all fell during the week on weak outlooks despite posting solid earnings. Mid cap (+0.8%) and small cap (+2.1%) stocks outperformed large caps. Real estate (+4.1%) and consumer staples (+3.7%) were the best performing sectors in the S&P 500; financials (-2.3%) and consumer discretionary (-2.0%) were the laggards. EAFE markets returned +1.4% with gains in Japan (+4.2%) and the U.K. (+1.2%), while EM markets returned +2.3% led by Korea (+4.3%) and China (+1.3%).
From a valuation perspective, the S&P 500, NASDAQ, EAFE and EM trade at or above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.9, NASDAQ at +1.1, EAFE at +1.5 and EM at +1.5. For the next 12 months, EPS growth for S&P 500 is expected to be 11.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 22.6% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had mixed returns as rates rose slightly across the curve. Municipals returned +0.2%, US AGG returned -0.1% and US IG returned 0.0%. HY bonds returned +0.2% as spreads compressed 6bps while bank loans returned +0.1%. EM debt returned +0.2% as the U.S. dollar rose 0.3%.
Rates
Rates rose slightly across the curve. The recession-watch 3M-10Y spread widened 2bps to +58. The 2Y-10Y spread was unchanged at +63. Rates were lower in Europe but rose in the U.K. and Japan. The BTP-Bund spread is at 0.62%. 5-year breakeven inflation expectations rose 6bps to 2.40% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 4bps to 2.32% (vs. recent low of 2.03% on Sept 10, 2024); the 10Y real yield rose 2bps to 1.88%. For 2026, the market expects between 1 and 2 cuts vs. the Fed’s guidance of 1 cut. At year-end 2025, the market expects the Fed Funds rate to be 3.18% vs. the Fed’s guidance of 3.25%-3.5%.
Currencies/Commodities
The dollar index rose 0.3%. The commodities complex rose 0.9% as energy prices rose 1.4% for the week. Brent prices rose 1.2% to $64/bbl; US natural gas prices fell 2.1% while European gas saw its biggest weekly rise since 2023, jumping 29.4% due to a sudden shift in sentiment around the adequacy around inventories. Gold rose 1.9% to $4,596/oz, while Silver gained 12.9% to $90/oz and copper fell 1.2% to $583/lb.
Market monitors
Volatility rose for equities and fell for bonds (VIX = 16, MOVE = 58); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) became more bullish rising from +13 to +21.
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