September 9, 2026
Executive Summary
Through the end of August, the equity performance landscape generated: MSCI Emerging Markets Index +24.3%; Russell 2000 Value Index +23.7%; Russell 1000 Value Index +23.1%; MSCI Japan Index +21.1%; Russell 2000 Index +20.2%; S&P 400 MidCap Growth Index +17%; Russell 2000 Growth Index +16.9%; S&P 500 Equal Weight Index +15.6%. The laggards were MSCI India -8.3%, Russell 1000 Growth +4.1%, the Magnificent Seven +4.8%, and the MSCI Europe Index +11.8%. The S&P 500 Index appreciated +13.1%.
Last week, geopolitical developments were a meaningful driver of sentiment early in the week after the U.S. and Iran exchanged strikes near the Strait of Hormuz for the first time in several weeks. Oil prices rose sharply on Monday and Tuesday as concerns about potential supply disruptions resurfaced, contributing to renewed worries about inflation and the path of Federal Reserve policy.
Treasury yields moved higher alongside oil prices. Potential supply disruptions contribute to renewed worries about inflation and the path of Federal Reserve policy. At the end of last week, the US two-year Treasury note yielded 4.32%, about 50 basis points (bps) over the federal funds rate. Investors believe the bond market leads the Fed, not the other way around. Two-year yields continue to call for a Fed rate hike. The US 10-year bond yield is 4.74%, just off recent intraday highs of 4.81%. Fed Governor Christopher Waller said he would be inclined to keep rates unchanged if incoming data confirm that disinflation is continuing. However, yields across most maturities resumed their upward climb after Friday’s better-than-expected jobs report appeared to increase expectations for a near-term Fed rate hike.
August and Beyond in 2026
The market stabilized in August after July’s sharp reversal in AI and semiconductors. Major equity indices returned to record highs, AI stocks rebounded, breadth remained healthy, the VIX declined, and credit spreads remained tight. The recovery suggests July’s selloff hasn’t developed into a broader market breakdown, but several questions remain. AI demand remains strong, but it’s too early to know whether the AI trade can regain the momentum that carried markets through 2024, 2025, and early 2026, particularly as financing needs grow. Earnings remain supportive, but growth is expected to slow after an exceptionally strong period. At the same time, long-term Treasury yields are tightening financial conditions and making bonds more competitive with stocks. In addition, midterm elections are approaching, a period that has historically been volatile. Our base case is that the market can continue to grind higher, but with more volatility and a wider range of outcomes. Overall, the bar has risen as markets increasingly need strong earnings, durable AI leadership, and continued economic growth to offset rising interest rates and a less forgiving macro backdrop.
What to Consider During the Next 12 Months
Markets have navigated significant volatility this year, with investor sentiment shifting rapidly in response to changing expectations around economic growth, inflation, Federal Reserve policy, and geopolitical developments. Despite those swings, major equity indices remain near record highs. The consensus view still calls for a soft landing, a reflection of the economy’s resilience despite a global oil supply disruption. The bull case is increasingly driven by corporate earnings rather than expectations for lower interest rates, with AI-related investment continuing to be the dominant structural driver of earnings expectations. However, the market is widely viewed as pricing in these themes, and there’s recognition that elevated valuations, unresolved tensions in the Middle East, and rising Treasury yields introduce downside risks. The next 12 months likely depend on whether earnings growth can meet expectations and whether inflation, energy prices, and yields remain contained.
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