The S&P 500 slipped 0.5% in September, but the index average hid a split market. The Nasdaq gained 1.9% while the Dow fell 4.3% and the Russell 2000 fell 5.4%. Only five of the Dow’s 30 stocks finished the month higher, and a small group of large technology companies did nearly all the work.
Long-term Treasury yields pushed through 5%. The 10-year opened the month near 4.75% and finished close to 5.30%, its highest level since 2007, while the 30-year reached levels not seen since 2002.
The economic data and the national mood keep pulling apart. Payrolls rebounded by 162,000 in August. Jobless claims fell to 197,000, a level not seen since the late 1960s. Second-quarter GDP was revised up to 2.2%, and the Atlanta Fed’s GDPNow model puts third-quarter growth at 5.0%. Consumer sentiment, by contrast, fell to a four-month low.
The Fed raised rates for the first time in more than three years. The FOMC voted unanimously for a quarter-point increase to 3.75%–4.00%, its first hike since July 2023, and 16 of 18 officials expect at least one more increase this year.
Oil jumped again when fighting between the U.S. and Iran resumed. Brent traded close to $100 in mid-September after renewed attacks on shipping and Houthi missile strikes on Saudi Arabia, then eased on hopes for new talks. It finished the month near $97, up about 8%.
Looking ahead, October is packed. The September jobs report comes out October 2 and CPI on October 14. Third-quarter earnings season starts in mid-October, and the Fed meets again October 27–28. Markets scaled back bets on an October hike after the softer PCE report, though a move by December remains in play. One difference from last October: Congress has funded the government through December 11, which removes the risk of a shutdown before the midterms.
Equity Market Overview
Earnings Keep Rising. Fewer Stocks Are Doing the Work.
Last month we wrote that earnings strength was spreading beyond the AI-exposed mega-caps and into value stocks and small caps. September pushed back on that view. The S&P 500 ended the month down just 0.5%, but the gap underneath was wide. Deutsche Bank noted that mega-cap growth and technology stocks are up 14% since the end of July, while the rest of the S&P 500 is down 3% and has fallen 5.5% over the past five weeks. The Nasdaq 100 gained 3.2% for the month while the Russell 2000 lost 5.4%, a gap of more than eight percentage points, and only five of the Dow’s 30 stocks finished September higher.
Rates explain most of the gap. A 10-year Treasury above 5% and a Fed that has started raising rates weigh most on companies that borrow to grow, which includes small caps, housing-related names, and anything valued on distant cash flows. Large technology companies with net cash on their balance sheets feel it much less. Energy went the other direction. Energy has posted the biggest price gain of any sector since June 30, up 18.3%, as oil rose 36% over the same period through late September. Financials were the weakest sector in September as higher bond yields raised the cost of capital.
The earnings picture remains unusually strong. Analysts now expect third-quarter S&P 500 earnings growth of 29.1%, up from 26.7% at the end of June. That direction is itself unusual. Over the past five years, quarterly estimates have typically fallen about 2.2% during the quarter; this time they have risen 1.3%. Look closer, though, and the same concentration appears. Of the 72 companies issuing positive guidance for the quarter, 44 are in Information Technology. Without the semiconductor industry, the Technology sector’s expected growth rate would drop from 63.5% to 24.2%.
At today’s prices, the S&P 500’s earnings yield is about equal to what a 10-year Treasury pays.
Valuations have not run ahead of earnings. The forward P/E is 19.2, below its five-year average of 19.8 and down from 20.4 at the end of June, because forward earnings estimates have risen 8.9% while the index gained only 2.7%. The relevant comparison has changed, however. At 19.2 times earnings, the S&P 500’s forward earnings yield is about 5.2%, roughly what a 10-year Treasury pays today. Stocks have not had to compete with a risk-free rate this high since before the financial crisis.
October ISS
October ISS
Performance Review & Outlook
Highlights
Equity Market Overview
Earnings Keep Rising. Fewer Stocks Are Doing the Work.
Last month we wrote that earnings strength was spreading beyond the AI-exposed mega-caps and into value stocks and small caps. September pushed back on that view. The S&P 500 ended the month down just 0.5%, but the gap underneath was wide. Deutsche Bank noted that mega-cap growth and technology stocks are up 14% since the end of July, while the rest of the S&P 500 is down 3% and has fallen 5.5% over the past five weeks. The Nasdaq 100 gained 3.2% for the month while the Russell 2000 lost 5.4%, a gap of more than eight percentage points, and only five of the Dow’s 30 stocks finished September higher.
Rates explain most of the gap. A 10-year Treasury above 5% and a Fed that has started raising rates weigh most on companies that borrow to grow, which includes small caps, housing-related names, and anything valued on distant cash flows. Large technology companies with net cash on their balance sheets feel it much less. Energy went the other direction. Energy has posted the biggest price gain of any sector since June 30, up 18.3%, as oil rose 36% over the same period through late September. Financials were the weakest sector in September as higher bond yields raised the cost of capital.
The earnings picture remains unusually strong. Analysts now expect third-quarter S&P 500 earnings growth of 29.1%, up from 26.7% at the end of June. That direction is itself unusual. Over the past five years, quarterly estimates have typically fallen about 2.2% during the quarter; this time they have risen 1.3%. Look closer, though, and the same concentration appears. Of the 72 companies issuing positive guidance for the quarter, 44 are in Information Technology. Without the semiconductor industry, the Technology sector’s expected growth rate would drop from 63.5% to 24.2%.
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