October 2026
US Economy: Resilience forces the Fed’s hand
September’s economic releases reinforced the year’s central tension: growth has held up better than expected, but inflation has not retreated enough to give the Federal Reserve much comfort. Employers added 29,000 jobs in September, and unemployment ticked up to 4.2%. Headline consumer prices rose 3.4% over the year through August, with gasoline contributing to the monthly increase; core CPI was 2.4%.
US Stocks: Earnings strength meets a higher hurdle
US equities retained sizable gains for the year, but September tested valuations. The S&P 500 is up about 13% year to date even as rising yields weighed on shares late in the month: The average S&P 500 stock in fact fell 5% in September. Enthusiasm for AI infrastructure continued to support semiconductors and other beneficiaries. Yet the same investment boom that lifted earnings expectations is increasing financing needs and costs. Higher discount rates make investors less willing to pay today for profits expected far into the future.
Foreign Stocks: Currency and energy complicate the story
Foreign equities remain an important part of this year’s broader market participation, following particularly strong emerging market gains in the first half. September was less straightforward. A firmer dollar reduced the translation benefit for US investors, higher oil prices challenged energy importers, and the global bond selloff raised discount rates. Asian technology producers still benefit from spending on chips and computing capacity, but their shares remain sensitive to rates and trade expectations.
Fixed Income: The rate path is repriced
The bond market delivered September’s clearest message as the Fed raised its policy rate for the first time since July 2023 while projecting 4.1% at year end. The 10-year US Treasury yield surged breaching the psychologically important 5% level and finishing near 5.3%, while the 2-year yield also approached 5.0% after rising by more than 0.5% each forcing the Fed’s hand. The Fed’s higher projected policy path pushed short rates up, while inflation risk, heavy borrowing and competition for capital added pressure farther out the curve. Bond prices fell in this environment, especially longer-maturity issues.
Real Assets: Oil leads, but rates still matter
Energy again showed how geopolitical supply chain risks can feed the inflation and interest-rate story. Brent crude finished September near $98 a barrel as uncertainty over the Strait of Hormuz kept a premium in oil prices. Gold, which had benefited from the year’s instability, fell in September as yields and the dollar rose. Infrastructure tied to electricity, data centers and industrial capacity continues to have a long investment runway, but fell during the month owing to the impact of rising rates on such capital-intensive businesses.
Alternatives: A more selective backdrop
Hedge fund results were mixed in September. While global indices were modestly negative, equity-driven strategies were unsurprisingly the weakest. Macro strategies gained during the month which is common when markets are volatile. Meanwhile, private markets are digesting whether higher financing costs will continue to mire transactions and distributions, particularly for companies whose valuations depend on distant growth or ready access to debt. Private credit still offers income, but dispersion in borrower quality and the ability to meet investor liquidity requests deserve close attention.
Equities Total Return
| SEP | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | (0.3%) | 12.7% | 15.7% |
| U.S. Small Cap | (5.3%) | 13.9% | 16.4% |
| U.S. Growth | 1.8% | 6.4% | 7.6% |
| U.S. Value | (3.2%) | 19.2% | 23.7% |
| Int’l Developed | (3.1%) | 10.3% | 15.7% |
| Emerging Markets | (0.6%) | 23.4% | 29.2% |
Fixed Income Total Return
| SEP | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (2.6%) | (2.9%) | (1.8%) |
| TIPS | (2.6%) | (2.1%) | (2.0%) |
| U.S. High Yield | (2.5%) | 0.0% | 1.4% |
| Int’l Developed | (1.5%) | (3.4%) | (3.7%) |
| Emerging Markets | (0.1%) | 1.6% | 2.3% |
| Tax-Exempt | |||
| Intermediate Munis | (2.9%) | (2.4%) | (1.9%) |
| Munis Broad Mkt | (4.0%) | (3.7%) | (2.3%) |
Non-Traditional Assets Total Return
| SEP | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 0.6% | 32.9% | 40.6% |
| REITs | (5.7%) | 7.9% | 5.6% |
| Infrastructure | (5.4%) | 1.9% | 4.3% |
| Hedge Funds | |||
| Absolute Return | (0.1%) | 1.4% | 3.4% |
| Overall HF Market | (0.4%) | 4.4% | 7.4% |
| Managed Futures | 4.1% | 15.7% | 19.0% |
Economic Indicators
| SEP-26 | MAR-25 | SEP-25 | |
|---|---|---|---|
| Equity Volatility | 16.3 | 25.3 | 16.3 |
| Implied Inflation | 2.4% | 2.3% | 2.4% |
| Gold Spot $/OZ | $4157.4 | $4668.1 | $3859.0 |
| Oil ($/BBL) | $103.5 | $118.4 | $67.0 |
| U.S. Dollar Index | 120.3 | 119.9 | 120.0 |
Our Take
In our upcoming LNW Quarterly Commentary (due out in mid-October), we dive into the geopolitical landscape as we continue to see the global economy and markets increasingly limited by various “chokepoints”, but also as consequential mid-term elections await us this November. Meanwhile, the financial markets seemed to shift gears as the summer came to a close. Through the summer, the year’s story has been the economy’s ability to keep growing despite an uncomfortable combination of inflation, geopolitical disruption and expensive capital. However, September marked a shift in investor interest rate sentiment. Investors spent much of 2026 debating when the Fed could resume easing; after this month’s hike and the change in its projections, the more immediate question is how far rates may need to rise. That is a consequential change in the assumptions supporting both bond prices and equity valuations. The Fed’s projected path is conditional, not a promise of further hikes, but markets can reprice well before the next policy decision if inflation and growth continue to surprise on the upside.
Higher rates work through markets in more than one way. From a business perspective, they lower the present value of long-dated earnings, increase the cost of refinancing, and make new projects harder to justify. Moreover, financing terms that looked manageable at the start of a project can look materially less so before it is completed. For bondholders, the near-term price decline from rates moving up is real but so is the higher income available from new purchases and reinvestment. That said, we do not think an upward rate path makes high-quality fixed income dispensable. It does argue for being deliberate about duration and for recognizing that stocks and bonds may again fall together (as they did in 2022) when inflation drives yields higher, even if growth cools.
Whether growth surprises or disappoints, there is a second cost of that output coming into view. AI capital spending shows up immediately as a use of cash, but much of the expense enters reported earnings over the years after servers, chips and data centers are placed in service. Microsoft reported $41 billion of capital expenditure in its latest quarter, roughly two-thirds of it on shorter-lived CPUs and GPUs. They will begin depreciating those processors and other technical infrastructure when the assets are ready for use, with that expense flowing through its income statement over the next 5-6 years despite useful lives as short as 2-3 years. As successive waves of equipment enter service, that depreciation expense could build even if the pace of new spending eventually levels off. Revenue and productivity gains will have to outrun that expense for operating margins to keep expanding.
This is not a claim that AI spending cannot earn an attractive return. Cloud demand is strong, and the companies funding much of the buildout have substantial businesses and cash flows. It is just a reminder that capital intensity changes the earnings math. A company can report rapid revenue growth while free cash flow is constrained by new investment; later, rising depreciation can weigh on reported profit even after the cash was spent. The mix of long-lived buildings and shorter-lived computing equipment, utilization of that capacity, pricing power and the pace of technological replacement will determine which businesses turn today’s spending into durable earnings. Investors are likely to become more discriminating as those differences become visible.
For portfolios, the lesson is to avoid asking one narrative to do too much work. The AI buildout can continue to create opportunities across semiconductors, power, infrastructure and eventual adopters, while higher rates and depreciation make the path of returns less automatic. Maintaining diversified equity exposure, a thoughtful allocation to high-quality bonds and select diversifiers gives investors more ways to participate without depending on perpetual multiple expansion. September did not erase the year’s gains. It did raise the standard of proof for the growth and profitability that markets have already priced in.
