Market Update | September 2026

This week marked a sea change with the Federal Reserve, as the U.S. central bank voted to raise the target federal funds rate by 0.25% to a range of 3.75%-4%. The decision marked the first time the Fed has raised rates since 2023, and the likely beginning of a new hiking cycle. While economists and hedgers oscillated for a month on the likelihood of a hike, markets had mostly priced one in by the time the decision was made. Fed funds futures gave it a 94% chance in the day leading up. Furthermore, the decision to raise rates was unanimous among the 12 voters on the FOMC. While lower in the aftermath of chairman Warsh’s press conference, equity markets positioned themselves for a rally the following day.

Investors have a tendency to prefer certainty to the unknown; in that sense, the reality of a hike has answered a key lingering question hanging over the market in recent months. However, new questions are sure to arise around rate hikes, including how high they will go and how long the change in trajectory will last. Fed funds futures markets are nearly pricing in a total of 3 hikes, with 1 more priced in for 2026 and 2 others arriving in 2027. This would bring the upper bound of the target fed funds rate to 4.75% in 2027 (an implied effective rate of ~4.63% as seen below).

Implied Overnight Rate & Number of Hikes/Cuts- Bloomberg

Given the 2022-2023 rate hiking cycle is still very present in investors’ memories, it is understandable that the beginning of a new hiking cycle would cause concerns. There are a few important features of the economy and markets that differentiate the present from that previous backdrop. For one, year-over-year inflation (through CPI) at the time of the first rate hike in 2022 was nearly 8%. As of the last report, current inflation is running at 3.4% year-over-year; far lower, and largely driven by a supply side oil shock, not unprecedented monetary and fiscal stimulus (such as in the aftermath of COVID).

Secondarily, and perhaps most importantly for bond investors, current yields on bonds are not just positive, but the highest they’ve been in nearly 20 years. In the lead-up to the 2022 rate hiking cycle, bonds were coming off a much more richly valued position, with the 10-Year Treasury Yield falling to as low as ~0.5% in 2020 and still sitting at just ~2.2% at the time of the first hike in 2022. Bond prices and yields are inversely related, and yields are directly related to the coupons paid to investors to compensate for the risks over the investment’s time to maturity.

We believe this rate hiking cycle and the current inflationary backdrop still warrant caution and careful monitoring. However, the combination of the starting point for yields in bond markets and a strong corporate earnings environment put this market in a unique and resilient position at the start of this new cycle. The continued additional risks of upside energy inflation from the Iran war, rising concerns around the A.I. theme, and the growing spotlight on the midterm election cycle are multiple sources of headwinds that could produce volatility in markets.

Market Summary

While having experienced a moderate pullback this month, the S&P 500 remains higher on a quarter-to-date basis and has gained over ~11% on the year. Both the technology heavy NASDAQ (~12.3% YTD) and small cap equities (~16.2% YTD) have outperformed the S&P 500 on a year-to-date basis. However, these markets have seen some dispersion in recent weeks. With the conflict escalating from a failed ceasefire in the Middle East pushing both oil and bond yields higher, small cap stocks have borne the brunt of the volatility as of late, having fallen -5.2% on the quarter compared to the S&P 500 remaining positive.

The best performing market this quarter has been international developed markets. The MSCI EAFE has risen ~1.9% on the quarter, and while having pulled back some on the month (~-2%), it remains closely in line with its U.S. counterpart year-to-date (~11.5% YTD). While emerging market equities remain the strongest performer on the year (~21.9% YTD), they have given back modestly this quarter (-1.6% QTD).

The renewed surge in oil prices has separated the energy sector from the rest of the S&P 500 constituents on a year-to-date basis (~45.1%). Technology (21.3%) and materials (11.3%) remain the only other outperforming sectors compared to the broader benchmark. Consumer discretionary stocks (~-5.4%) and utilities (~-1.8%) are negative on the year, with recent pullbacks eliminating gains.

Iran War

Placing significant pressure on the Fed’s position has been the ongoing oil market disruption resulting from the continuing war in Iran. The conflict is approaching its seventh month since the U.S. began strikes in February. The 60-day ceasefire formalized in June expired in August (with numerous breakdowns and renewed hostilities in the lead-up) without a permanent peace treaty. Hopes for a resolution to the war by the midterms in November, or even by the end of the year, have diminished significantly, while the global economy reckons with a worsening oil supply disruption that raises stagflationary pressures.

While these prices have moderated some in recent days, this week saw WTI crude oil break $105 while BRENT nearly hit $110, the highest prices since May and well off the lows of the ~$60-$70 range seen in July. A resurgence of hostilities in the Strait of Hormuz, rocket and drone attacks on U.S. forces across the Middle East, and the recent (allegedly temporary) shutdown of Saudi Arabia’s East-West pipeline due to a Houthi drone strike have all pulled prices upward.

From the lens of oil markets, the Saudi pipeline perhaps holds both the most uncertainty and consequence. Reports from regional officials have suggested that the attack is likely to put the East-West pipeline out of service for weeks while it is under repair. Satellite imagery shows significant damage to the facilities. In contrast to this statement, the U.S. Energy Secretary, Chris Wright, told CNBC in an interview that the interruption to the pipeline will be “brief” and “measured in days”. The market could lose 120 million barrels of oil if the pipeline is closed for a month (Matt Smith, Kpler). Further escalation in energy market volatility has come from the Ukraine-Russia front. Russian ballistic missiles and drones have targeted the Ukrainian power grid while Ukraine recently launched long-range strikes targeting Russia’s oil and gas industry. The attacks on this front have pushed US diesel prices past $6.

The term structure of oil, seen through the relative prices of WTI crude and the WTI crude futures strips over 12 and 24 months shows that while the highest prices ($100+) continue to remain contained near-term, longer-term contracts are rising with the 12-month strip at its highest price since May (~$85).

WTI Oil Futures (Current, 12 Month Strips, 24 Month Strips) Over 1 Year- Bloomberg

WTI contracts for November and December of this year suggest expectations for oil prices remaining over $90 through 2026.

WTI Oil Futures (Current, November, December) Over 1 Year- Bloomberg

More on the Economy

Causing some to question the Fed’s rate hike decision is that the current trend for core inflation has been moving lower across most metrics. Year-over-year core CPI over the past 3 months has been 2.6%, 2.5%, and most recently 2.4% for the August period. On a month-over-month basis, the latest core CPI figure arrived slightly above expectations at 0.3% (0.2% exp).

While the overall core CPI trend has been lower, the inflation rate (both core and headline) has been above the Fed’s 2% target for a significant amount of time. With the exception of COVID, core inflation has not seen consecutive core CPI prints below 2.5% since the beginning of 2020.

Year-Over-Year % Change in Core CPI (2015-2026)- Bloomberg

One may see the decision to hike rates as a means of combatting the potential of entrenching higher inflation expectations that could result from the surge in energy prices. Even if the Fed has no control over the supply of oil, they do have an impact on long-term inflation expectations and demand.

Despite persistent inflation and poor reported consumer sentiment, spending remains surprisingly strong. Retail sales showed a significant bounce back in August, reporting a month-over-month gain of 1.2% (0.8% exp) after a negative July reading (-0.6%). Sentiment displayed from other sources, such as PMI surveys, brings additional positivity to the economic picture. Purchasing Managers’ Index (PMI) surveys are monthly questionnaires sent to supply chain executives and business managers that provide a lens into the leadership’s own view of the health of their industry or sector. For PMIs, numbers above 50 indicate economic “expansion” while those below 50 suggest “contraction”. The ISM PMIs for both Services and Manufacturing have both shown increases since the end of last year, with the ISM Manufacturing PMI now in the mid 50s after being below 50 for much of 2025. The first estimate of Q3 GDP will not be released until the end of October. However, the Atlanta Fed’s GDPNow model is tracking the third quarter’s GDP to grow 5.1%, much higher than the current consensus economists’ estimate (~2-3%). GDPNow is highly volatile and quickly changes with the input of new data (of which much is yet to be released), however the combination of higher-than-expected retail spending and strong PMIs are a likely influence on potentially higher than anticipated GDP growth.

Like with spending, the labor market has seen some encouraging data points as of late. The latest labor market reports showed unemployment maintaining a rate of 4.1% and change in nonfarm payrolls growing dramatically above expectations with 162K jobs added versus the 55K expected. In addition to the monthly beat, July’s negative payrolls report was revised up to 21K jobs added. The positive revision was a welcome break from the year’s trend of surprising large swings in revisions (often negative).

A.I. and the Midterms

Looking ahead, the combination of emerging concerns surrounding artificial intelligence and the approaching midterm elections adds another layer of uncertainty to an already complex investment environment. The rapid expansion of A.I. related investment has been an important contributor to corporate spending, earnings expectations, and equity market performance, particularly within the technology sector. As the theme matures, investors are increasingly focused on whether the extraordinary pace of infrastructure spending and technological development can translate into sustainable returns.

At the same time, public opinion around A.I. appears to have taken a turn for the negative. Recent polling suggests Americans are becoming increasingly cautious about the rapid expansion of artificial intelligence. A July Bentley University- Gallup survey found that 39% of respondents believe that A.I. does more harm than good, up from 31% in 2025, while only 9% believe it does more good than harm. Further takeaways form the polls included a decline in trusting businesses to use A.I. responsibly and a dramatic increase (79% of respondents) expecting A.I. to reduce the number of U.S. jobs over the next decade. Another poll from UMass shows that just 1 in 9 Americans support A.I. data center construction in their local communities. Recent discussions emerging about the broader existential risks that could potentially come from uncontrollable A.I. “superintelligence” have grown so loud that major frontier lab CEOs have discussed a coordinated slowdown in the development of their most advanced models.

At the same time, the November 3rd midterm elections are likely to bring greater attention to potential changes in the policy environment. A change in the balance of power in the House or Senate could influence the direction or pace of A.I. regulation and an array of technology targeted policy. Some hypothesize (as suggested by the lab CEOs statements) that greater regulatory scrutiny itself could contribute to a temporary slowdown in development, deployment, or capital spending. None of these outcomes are set in stone, but alongside higher interest rates, elevated energy prices, and geopolitical uncertainty, they represent additional sources of risk that could contribute to a rise in market volatility.

Conclusion

Despite these uncertainties, the broader economic and market backdrop continues to demonstrate the resilience needed to foster earnings growth and robust equity performance. Strong consumer spending, improving business activity, a relatively healthy labor market, and substantially higher starting yields across fixed income provide important sources of support even as investors navigate inflation, monetary tightening, geopolitical risks, and evolving technology-related concerns. We remain committed to closely monitoring these developments and adjusting our outlook as the underlying data and investment environment evolve. Periods of uncertainty reinforce the value of maintaining a long-term perspective rather than allowing short-term headlines or market volatility to dictate investment decisions. We continue to believe that thoughtful strategic asset allocation, appropriate diversification across asset classes and market segments, and disciplined alignment with each investor’s risk cognizant objectives remain among the most effective tools for navigating changing market environments and pursuing long-term financial goals.