September 2026
Market Recap

September marked a pivotal shift across global markets. The Federal Reserve (Fed) raised rates for the first time in more than three years, an energy-driven inflation shock intensified, long-dated Treasury yields reached multi-decade highs, and investors grew more skeptical about the scale of artificial intelligence spending. The S&P 500 Index ended the month down just 0.35 percent, but the index told only part of the story. A rally in the largest technology names offset broad declines across the rest of the market.

On September 16, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds target range by 25 basis points to 3.75 to 4.00 percent. Chair Kevin Warsh framed the move as removing a “dose of accommodation” so that the energy shock would not become embedded in inflation. The revised Summary of Economic Projections raised the 2026 Personal Consumption Expenditures (PCE) index inflation forecast to 3.7 percent and pushed the expected return to the 2 percent target back a year, to 2029.

The inflation backdrop explains the Fed’s resolve. The escalating conflict involving Iran disrupted regional refining capacity and pushed Brent crude into a range of $94 to $108 per barrel. Diesel prices hit all-time highs and spread costs across logistics, manufacturing, and agriculture.

The modest headline decline understated how difficult the month was for the typical stock. The S&P 500 Equal Weighted Index, which gives every company the same weight regardless of size, fell 4.81 percent, trailing the cap-weighted index by nearly four and a half percentage points. The Bloomberg Magnificent 7 Index advanced 4.22 percent, the Nasdaq 100 Index climbed 3.30 percent, and the Nasdaq Composite Index gained 1.93 percent. The Russell Top 50 Index rose 1.78 percent. The few gains that the market did produce were concentrated in a handful of mega-cap names.

Large versus small. Small caps sold off sharply. The Russell 2000 Index declined 5.25 percent and underperformed the S&P 500 by about five points, as higher borrowing costs weighed on more leveraged and rate-sensitive companies. Year to date, the Russell 2000 Index is still up 13.87 percent, slightly ahead of the S&P 500 at 12.73 percent.

Value versus growth. Growth outperformed decisively in September. The Russell 3000 Growth Index rose 1.83 percent while the Russell 3000 Value Index fell 3.21 percent, a spread of about five points. The month narrowed value’s lead but did not reverse it. Year to date, value has returned 19.19 percent against 6.37 percent for growth.

International. Overseas markets offered no shelter. The MSCI World ex USA Index fell 3.21 percent, MSCI Europe lost 2.38 percent, and MSCI Emerging Markets slipped 0.65 percent. Emerging markets remain the strongest major equity region for the year at 23.52 percent. A 2.23 percent rise in the Bloomberg US Dollar Spot Index added to the pressure on non-US returns.

Technology was the only sector to finish higher. It gained 5.08 percent, bringing its year-to-date return to 36.45 percent. Communication Services was nearly flat at negative 0.12 percent, and Health Care declined 0.87 percent.

Elsewhere, the declines were broad and deep. Materials and Financials fell the most, down 7.15 percent and 7.14 percent respectively. Real Estate lost 6.48 percent and Consumer Discretionary 6.44 percent. Utilities dropped 5.92 percent. The sector had been a favorite AI power trade, but its projected earnings growth slowed to 5.9 percent and several utilities trimmed their pipeline forecasts for data center projects amid local opposition and regulatory pushback. With the 10-year Treasury yielding 1.84 percentage points more than utility dividends, the income case for the sector weakened. Consumer Staples fell 4.53 percent and Industrials 4.40 percent. Energy declined 3.26 percent despite the oil spike, although it remains the top-performing sector for the year with a gain of 40.28 percent.

The “AI scare” hung over the month even as technology outperformed. Combined AI capital expenditures at the largest US hyperscalers (Amazon, Alphabet, Meta, and Microsoft) grew 80 percent in 2026 and are approaching $1 trillion next year. Bloomberg Economics warned that capex growth is peaking and will slow to roughly 30 percent in 2027. A net 33 percent of respondents to the September Bank of America Global Fund Manager Survey said companies are overinvesting. AI-linked corporate bond issuance ran at a record pace of more than $500 billion, which raised concerns about crowding out Treasuries.

Fixed income had one of its worst months in years. A relentless selloff pushed the 10-year Treasury yield to between 5.12 and 5.20 percent, its highest level since 2007, and the 30-year yield touched 5.44 percent, the highest since 2004, according to Bloomberg. The Bloomberg U.S. Aggregate fell 2.61 percent in September and is down 2.91 percent for the year. Long duration took the heaviest losses. The iShares 20+ Year Treasury Bond ETF declined 5.38 percent and is down 7.65 percent year to date. High yield fared no better, falling 2.52 percent.

The stress spread beyond Treasuries. The 30-year municipal yield rose above 5.03 percent for the first time since at least 2011, which triggered heavy fund outflows. The average 30-year fixed mortgage rate ended September at 7.23 percent, and 20.8 percent of home listings saw price cuts during the month, according to Realtor.com. In response to the rise in long-end borrowing costs, Treasury Secretary Scott Bessent expanded the Treasury’s debt buyback program.

Gold fell 3.41 percent in September as rising yields and a firmer dollar weighed on the metal. It is now up only 3.30 percent for the year and has declined 20.79 percent since the end of February. The Bloomberg Commodity Index edged up 0.28 percent as energy strength offset weakness elsewhere, and the index is up 29.24 percent year to date. Crypto was the best-performing asset of the month. The Bloomberg Galaxy Crypto Index rallied 8.20 percent, although it remains down 8.79 percent for the year and 38.82 percent over twelve months.

Corporate fundamentals remain the strongest pillar of the market. According to FactSet, the S&P 500 is expected to report third-quarter earnings growth of 29.1 percent, up from 26.7 percent on June 30. That would mark the third straight quarter of growth above 25 percent and the eighth consecutive quarter of double-digit growth. Revenue is expected to grow 12.1 percent. Analysts have raised the Q3 bottom-up EPS estimate by 1.3 percent since June 30, to $89.76, even though estimates have fallen by 2.2 percent on average during the quarter over the past five years. Corporate guidance has also been unusually constructive. Of the 116 companies that issued Q3 guidance, 72, or 62 percent, issued positive guidance, well above the five-year average of 41 percent. Most of those companies are in Information Technology.

Energy leads all sectors with expected earnings growth of 111.4 percent. Information Technology follows at 63.5 percent, driven by semiconductors, and Communication Services at 51.3 percent. Materials posted the largest downward revision, with dollar-level earnings estimates cut by 8.9 percent. The estimated net profit margin of 15.0 percent would be the second highest FactSet has recorded since 2009. Looking ahead, analysts project earnings growth of 32.0 percent for calendar 2026 and 15.4 percent for 2027, although expected growth slows to 1.7 percent by the second quarter of 2027.

Valuations have eased. Forward earnings estimates rose 8.9 percent since June 30 while the index gained only 2.7 percent, and the forward 12-month P/E ratio compressed to 19.2 from 20.4. That is below the five-year average of 19.8 but slightly above the ten-year average of 19.0. The trailing P/E stands at 25.8. Analyst sentiment remains firmly positive. The bottom-up target price of 9,275.04 implies 20.4 percent upside from the September 24 close of 7,704.13, and 59.9 percent of ratings are Buys.

Investors exit September with fundamentals and policy pulling in opposite directions. Earnings momentum and improving valuations argue for patience in equities. A Fed that has resumed tightening, 5 percent long yields, and increasingly narrow leadership argue for caution. How the market navigates the fourth quarter will depend on whether energy-driven inflation fades and whether AI spending translates into measurable returns.