Weekly Newsletter: September 28, 2026
“You can’t always get what you want, but if you try sometimes…you get what you need.” The markets seemed to get what they needed this week from a resurgence in the AI trade. What they did not get and certainly want was lower interest rates. Worries about higher interest rates having an impact on stock prices were pushed to the side as Meta’s new AI tool, Muse, was rolled out with much fanfare. The economic data remained strong, supporting Fed Chair Warsh’s view that the economy is on solid ground. Inflation continues to be front and center when discussing interest rates, economic growth, and the Fed’s next move. The next Fed meeting is a week before the mid-term elections, so it is expected they will stand pat to avoid “looking political”. The tenor of the Fed has changed from guiding market expectations to allowing the market to “figure things out”. Many investors look at the 2-year Treasury yield as a proxy for the Fed Funds rate. Today, Fed Funds are targeting a range of 3.75% to 4%. The yield on 2-year Treasuries is roughly 4.80%, implying that interest rates could rise another three-quarters of a percent in coming meetings. The impact of higher rates on the tech sector and AI specifically is likely modest at best, as investors are very willing to give them what they need in additional capital to continue their expansion plans.
The end of the month is usually quiet on the economic releases. This month was no different but did feature plenty of discussions by Fed governors regarding their take on the economy. Generally speaking, most saw future rate increases to deal with sticky inflation well above the Fed’s target of 2%. The bond market definitely reacted to the comments as yields rose on the week and crossed above 5% on five- and ten-year bonds. The usual beginning-of-the-month data dump comes this week, from income and spending to jobs, trade, and the Fed’s inflation gauge, the personal consumption and expenditure index. What the data is likely to show is continued economic growth, a decent jobs market, and wage growth in line with inflation. The trade balance, which has been a sore subject for the White House, is likely to show further deterioration. The US is importing a huge amount of technology over the past two years compared to history. If tech were stripped from the imports, the result would be an improving trade situation. Home price data will also be released, and the impact of higher mortgage rates is likely to be seen in somewhat slower price gains.
When inflation kicks up as it has, bond investors tend to suffer as yields rise and bond prices decline. Some refuge can be found in inflation-protected bonds, or TIPS. This time around, the prices of these securities have tracked Treasury prices lower as well. The implication is that “real yields,” or the yield above the rate of inflation, are actually growing and getting better. For much of the past 15+ years, yields were extremely low, and inflation was, in many cases, above those yields, meaning investors were losing the inflation race. Today, yields are roughly 1.5-2% above the rate of inflation, providing investors a “real” return for the first time in many years.
The return of the AI trade over the past week or two is once again masking weakness in the broader market. For the sixth consecutive week, more stocks fell than rose on both the NYSE and OTC markets, yet both are within 1% of all-time highs. More stocks are hitting yearly lows vs. those hitting yearly highs as well. For investors with a diversified portfolio, they have fared worse than the averages for September. Tech is up over 2.5%, the SP500 is up 0.5%, while small stocks are down nearly 4%. This reverses a trend that was in place for the first part of the year, where smaller stocks did well vs. the large, and the net number of stocks rising vs. falling was healthy. The sectors within the SP500 are showing similar characteristics. Outside of tech, most are below their long-term average prices. So investors continue to pin their hopes on AI and the profitability of the technology. IF something goes a bit sideways during the upcoming earnings season with tech spending, expect that other parts of the market will shine compared to the tech sector.
The economic data deluge hits this week and culminates in the jobs report on Friday. There will be plenty to watch ahead of earnings season that begins the following week.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.