Key Wealth Investment Brief

Key Takeaways:

Last week’s employment report underwhelms, but a changing labor market may be the cause. 

The unemployment rate rose slightly to 4.2%, and the U.S. economy gained 29,000 jobs in September, well below the consensus forecast of 90,000, according to Bloomberg. Additionally, the July and August non-farm payrolls were revised lower by a combined 60,000 jobs. While these numbers may appear “soft” on the surface, most economists believe this data is above the labor market’s breakeven rate, which has fallen recently due to changes in immigration policy and other factors. 

One area of the report that is cause for concern relates to wage growth. Average hourly earnings for workers have grown at a slower pace than inflation in every month since March. This slower wage growth is a positive for corporate profitability, but it reduces workers’ purchasing power, which reinforces the K-shaped economy.

Interest rates are rising around the world. 

The rise in government bond yields this year is not just a U.S. phenomenon; almost every developed market has experienced an increase in rates. Most major economies are seeing long-term yields near their highest levels since 2007, just prior to the Great Financial Crisis. While credit markets are showing some signs of strain among a small number of the riskiest borrowers, we have not seen signs of widening concern. Additionally, the economy has changed quite significantly since 2007, becoming much less interest rate sensitive. 

Rising rates have been a significant drag for fixed income returns, highlighted by the Bloomberg U.S. Aggregate Bond Index generating one of its lowest 5-year returns (for the period ending 8/31/26) since 1980 according to Ritholtz Wealth Management. However, with yields now firmly above 5.00%, future returns will likely be better as approximately 90% of bonds’ 5-year annualized returns can be explained by the yield-to-maturity at the time of purchase.

Third quarter earnings look poised to continue their strong growth. 

When the third quarter began, analysts were expecting earnings for the S&P 500 to rise 26.7% year-over-year. As of the end of the quarter, analysts have revised that number higher to 29.5%. Historically, analysts revise their forecasts lower prior to quarter end; however, that trend has been bucked this quarter, primarily driven by positive revisions to the Energy and Technology sectors. An additional positive sign for equities is the increase in the number of companies providing positive pre-announcement guidance. All said, analysts are expecting another strong earnings season, and corporations are expecting good things, too.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification. To gain the desired diversification in a portfolio, we continue to emphasize the use of New Tools where appropriate. We also note that international markets may also provide additional diversifying qualities and believe opportunities exist beyond traditional asset classes.

Equity Takeaways:

Stocks were largely unchanged in early Monday trading. The S&P 500 rose approximately 0.1%, while the tech-heavy Nasdaq was unchanged. Small caps were also unchanged, and non-U.S. stocks were mixed.

The S&P 500 rose approximately 0.5% last week. Through the first three quarters of 2026, the Index is up 12.7%, and the small-cap index is up 14.1%. Emerging Market equities have been the top performer, up 22.7%. The Nasdaq broke out to its first all-time high since June, thanks in part to the mega-cap technology companies regaining their leadership position. Outside of the mega-cap tech companies, the broader market has been experiencing a difficult environment, highlighted by market breadth continuing its steady decline since its peak in mid-August.

Fixed-Income Takeaways:

The yield curve experienced a “bear steepener” last week as long-term yields rose and short-term yields fell. Specifically, at the short end, 2-year yields moved 2 basis points (bps) lower, closing the week at 4.83%; longer out on the yield curve, 10-year yields moved 11 bps higher to close the week at 5.27%, and 30-year yields moved 13 bps higher to close the week at 5.62%.

The drop in short-term yields was likely due to the softer-than-expected employment report reducing the odds of an interest rate hike at the October Federal Open Market Committee (FOMC) meeting. After the report’s release, the odds of a rate hike fell from more than 60% to approximately 20%. Yields at the long end of the curve were likely driven higher by continued strong consumer spending, as well as robust corporate issuance crowding out Treasuries. Foreign holdings of Treasuries have experienced a notable dip in the past year after seeing a sharp rise in 2023 and 2024.

In early Monday trading, yields were mixed: 2-year Treasury yields were trading at 4.82%, 5-year Treasury yields at 5.06%, 10-year Treasury yields at 5.30%, and 30-year Treasury yields at 5.66%.

Key Takeaways:

Rising interest rates are causing volatility in the bond market to jump. 

Yields across the curve climbed higher last week. Continued high gas prices and signs of sticky inflation pushed short-term yields higher, while massive hyper-scaler debt issuance has attracted investors, diverting demand from Treasuries and putting upward pressure on intermediate-term yields.

Growing concerns about the U.S. fiscal situation have continued to drive long-term rates higher. These increases in yields caused volatility in the bond market to jump, with the ICE BofA MOVE Index experiencing its largest weekly increase since April 2025. Bond performance has struggled thus far in 2026, highlighted by the Bloomberg U.S. Aggregate Bond Index falling more than 2.0% year-to-date and longer-dated bonds faring even worse. 

Despite the turmoil in the bond market, the U.S. economy continues to show strength. 

Recent economic data releases have pushed the Atlanta Fed’s GDPNow forecast for Q3:2026 GDP to 5.0%. While 5.0% growth may be overly optimistic, the economy is still growing at a very healthy clip. In addition, the labor market has shown no signs of stress as the initial weekly unemployment claims have held steady near historic lows.

The S&P 500 is expected to continue its strong earnings growth into the third quarter, with forecasted year-over-year growth of 29.1%. In short, while the volatility in the bond market is making headlines, the underlying economy continues to press ahead.

The artificial intelligence (AI) build-out has become the economy.

In a recent article, The Wall Street Journal noted that the AI build-out has become the biggest economic bet in U.S. history, echoing a theme we have been signaling for the past 12 months. The average annual infrastructure spending as a percentage of GDP for the AI build-out is expected to be approximately 3.6% through 2032, far surpassing the spending on the railroad, highway, and internet build-outs.

The rise in AI valuations has been the primary driver in the rise of U.S. household wealth, which recently surpassed $60 trillion, and has enabled consumers to continue spending despite rising prices. Due to this dependence on AI, if the AI trade reverses, we will likely see a significant pullback in consumer spending and a slowdown in economic growth. We continue to favor AI adopters over AI enablers. 

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification. To gain the desired diversification in a portfolio, we continue to emphasize the use of New Tools where appropriate. We also note that international markets may also provide additional diversifying qualities and believe opportunities exist beyond traditional asset classes.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Equity Takeaways:

Stocks moved lower in early Monday trading. The S&P 500 fell approximately 0.3%, while the tech-heavy Nasdaq fell 0.6%. Small caps were down 0.3% and non-U.S. stocks were mostly higher.

The S&P 500 rose approximately 1.4% last week. Year-to-date, the Index is up 14.1% while the small-cap index is up 16.0%. Despite testing new highs last week, the S&P 500 Index has remained in a tight price range for the past two months, suggesting market participants are waiting for clarity before deciding on a future direction.

The Magnificent 7 stocks have surged back into the headlines as the group broke through to a new all-time high, supported by positive reactions to Meta’s new AI agent, Muse. Semiconductors are also showing signs of a resurgence, breaking out from the downtrend that started in June.

Fixed-Income Takeaways:

The yield curve experienced a “bear steepener” last week as long-term yields rose by more than short-term yields. Specifically, at the short end, 2-year yields moved 11 basis points (bps) higher, closing the week at 4.85%; longer out on the yield curve, 10-year yields moved 16 bps higher to close the week at 5.16%, and 30-year yields moved 16 bps higher to close the week at 5.49%, its highest level since 2004. 

The rise in yields was likely caused by multiple factors including hawkish comments from multiple Federal Reserve officials, a strong PMI data release, and falling demand for U.S. debt. The probability of an October interest rate hike rose to approximately 70%, and market participants are pricing in nearly four rate hikes by September 2027.

In early Monday trading, yields were higher: 2-year Treasury yields were trading at 4.92%, 5-year Treasury yields at 5.07%, 10-year Treasury yields at 5.23%, and 30-year Treasury yields at 5.55%.

Both Investment Grade (IG) and High Yield (HY) spreads widened modestly last week. While IG and HY spreads have remained contained, the CCC & Lower rated debt has experienced a steady rise over recent months, bringing its spread to its highest level since April 2025.

Key Takeaways:

The Federal Open Market Committee (FOMC) raised interest rates and made a firm commitment to deliver price stability.

For the first time in three years, the FOMC raised interest rates by 25 basis points (bps) or 0.25%, bringing the target range for the fed funds rate to 3.75% – 4.00%. The vote was unanimous, signaling the Fed's commitment to delivering price stability and underscoring its acknowledgement that “inflation is too high and has been too high for too long.”

The Committee also released the updated Summary of Economic Projections (SEP) that showed, relative to the June SEP, Committee members believe the economy will grow faster, unemployment will be lower, and inflation will be higher. Additionally, any premonitions of a “one and done rate hike” were decisively dismissed as members projected at least one additional 25 bps hike this year and Fed Chair Warsh declared “a dose of accommodation” needs to be removed; translation: more rate hikes are coming.

The Federal Reserve (the Fed) believes they are tightening into a strong economy that can tolerate higher rates.

Recent economic and corporate data releases signal a resilient consumer, robust capital spending, and a stable labor market that combined underpin an economy set up to handle rising interest rates. The August Retail Sales report released last week showed consumers are still spending freely, rising 1.2% month-over-month. Third quarter gross domestic product (GDP) forecasts estimate the economy to expand by nearly 3.0% in the quarter.

Historically, the first rate hike has not ended equity bull markets, especially when the economic backdrop is this strong. Since 1970, in all but two instances, the S&P 500 had a positive one-year return in the period immediately following the first rate hike. The most important question going forward is how far the Fed ultimately tightens and whether earnings can remain strong enough to absorb the higher rates.

Artificial intelligence (AI) backlash is growing and could materially slow the buildout.

Recent surveys have found growing opposition to the AI buildout, highlighted by 71% of respondents opposing a local data center, up nearly 20 percentage points from earlier this year, according to data compiled by the Pew Research Center. This growing backlash has led to a sharp increase in the number of data center projects facing new hurdles. In the first quarter of this year, 26 data center projects have been blocked, more than the number blocked in the entirety of 2025.

With the market relying heavily on AI, a dramatic slowdown in the buildout could lead to a return in volatility. Despite this uncertainty, we continue to emphasize the importance of staying invested and diversified, as well as our preference for AI adopters over AI enablers.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification. To gain the desired diversification in a portfolio, we continue to emphasize the use of New Tools where appropriate. We also note that international markets may also provide additional diversifying qualities and believe opportunities exist beyond traditional asset classes.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks moved higher in early Monday trading. The S&P 500 rose approximately 0.6%, while the tech-heavy Nasdaq rose 1.0%. Small caps were up 0.5%, and non-U.S. stocks were higher.

The S&P 500 recovered from its post-FOMC lows last week, to end the week essentially flat. Year-to-date, the Index is up 12.7%, while the small-cap index is up 16.6%. Since the end of May, the S&P 500 has generally moved sideways, up approximately 1.0% during that time.

The rising backlash against AI has led to a slowdown in growth across the companies exposed to the AI buildout. The performance over the past few months for the future-year beneficiaries (Industrials and Utilities) suggests investors have already been pricing in this kind of event. The recent AI pullback has dragged down the momentum factor; but it remains the top performing factor year-to-date, up more than +20.0%.

Fixed Income Takeaways:

Last week, the front-end of the yield curve led the sell-off, as the curve experienced a bear flattening. Specifically, at the short end, 2-year yields moved 11 basis points (bps) higher, closing the week at 4.74%; longer out on the yield curve, 10-year yields moved 3 bps higher to close the week at 5.00%, and 30-year yields moved 2 bps lower to close the week at 5.33%.

The rise in short-term yields was likely caused by market participants pricing in additional rate hikes, following the FOMC decision on Wednesday. Market participants are now fully pricing in one additional 25 bps hike this year, and a second hike is fully priced in for early next year.

In early Monday trading, yields were lower: 2-year Treasury yields were trading at 4.73%, 5-year Treasury yields at 4.82%, 10-year Treasury yields at 4.96%, and 30-year Treasury yields at 5.30%.

Both Investment Grade (IG) and High Yield spreads tightened by 4 bps last week. Within IG, every sector experienced tightening spreads, with Technology seeing the largest tightening, moving lower by more than 5 bps.

One Hike, Now What?

Key Takeaways:

• Rates move higher: the Fed raised rates 0.25%, bringing the fed funds target range to 3.75% – 4.00%. The decision was unanimous.
• One more to go: the Fed’s projections point to one additional rate hike in 2026.
• Inflation still matters: price pressures remain above the Fed’s 2% target.
• Data will drive the decision: the Fed is not committing to a preset rate path.
• Higher for longer: the projected policy path has shifted higher.
• Investor lens: favor liquidity and flexibility as policy uncertainty remains elevated.

What Did the Fed Do?

The Federal Open Market Committee (FOMC) raised the federal funds target range by 25 basis points (0.25%) to 3.75% – 4.00%, its first increase under Chairman Kevin Warsh and the first increase since nearly three years ago. The vote was unanimous, 12-0. The move shifts policy back toward restraint as the Committee responds to persistent inflation while economic activity and the labor market remain resilient.

Warsh defended the move early in the press conference, saying “the decision today was the right decision.” That framing matters because the hike was presented as a deliberate step toward restoring price stability, not as a reluctant response to a single data point.

What Did the Fed Say?

The statement was short and notably direct. The Fed described economic activity as expanding at a solid pace, with resilient domestic spending, strong productivity growth, and robust capital investment. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

On inflation, the message was even more clear: inflation remains elevated, and the Committee said today’s policy action will support a timelier return to its 2% goal. The closing line — “The Committee will deliver price stability” — left little ambiguity about the Fed’s priority.

Warsh also framed independence as reciprocal: “Independence is a two-way street. We must stay in our lane.” In other words, the Fed should focus on monetary policy while leaving fiscal and trade policy to those responsible for them — a clear definition of the institutional boundaries Warsh believes support Fed independence.

What Changed in the Projections?

The September Summary of Economic Projections (SEP) reinforces the hawkish message. The median federal funds rate projection is 4.1% at year-end 2026 (4.125% on the dot plot), up from 3.8% in June. With the new federal funds target range at 3.75% – 4.00% as a result of today’s decision, that median projection implies one additional 0.25% rate hike before the end of 2026.

The median projection remains 4.1% in 2027, then declines only gradually to 3.9% in 2028 and 3.6% in 2029. The longer-run median moved to 3.2%. The message is not simply one more rate hike; it is a higher-for-longer policy path with little near-term relief embedded in the median forecast, clearly a hawkish shift.

Inflation projections also moved modestly higher. Median headline PCE inflation is now forecasted to rise 3.7% for 2026 versus 3.6% in June’s SEP, while core PCE is projected to increase by 3.4% versus 3.3%. At the same time, the unemployment rate projection improved to 4.1% from 4.3% in June’s forecast. That combination — firmer inflation and a more resilient labor market — gives the Fed more latitude to keep policy restrictive.

The distribution of forecasts is important. Twelve FOMC participants placed their 2026 forecast at 4.125%, four at 4.375%, and two at 3.875%. Chair Warsh did not submit a forecast. The clustering around 4.125% makes one additional rate hike the center of gravity, but the dispersion shows that the Committee is not unanimous in how much more tightening may ultimately be needed.

What Happens From Here?

The SEP now places another 0.25% fed funds increase squarely on the table for the remainder of 2026, but the forecasts are projections, not commitments. Inflation, labor market conditions, and growth will determine whether the Committee follows through. Warsh reinforced that flexibility, noting that “trends matter, data points are noisy.” The message: the Fed will focus on the broader trajectory of the economy rather than overreact to any single economic data release.

Although not a surprise, Warsh’s decision not to submit a forecast is particularly relevant. It allows him to defend the September rate hike while avoiding a personal commitment to the median year-end path. In other words, the Committee has signaled one more hike; the Chair has retained flexibility.

What Does It Mean for Investors and Consumers?

For investors, the Fed’s message reinforces a higher-for-longer rate environment. Attractive yields on cash and short-term securities raise the hurdle for taking risk, while another potential rate increase could keep pressure on interest-rate-sensitive assets. Equity investors may face a higher discount rate on future earnings, particularly for longer-duration growth stocks, while companies with strong balance sheets, durable cash flows, and less reliance on financing may be better positioned to absorb elevated borrowing costs. Credit markets should also remain sensitive to any signs that restrictive policy is beginning to weigh on corporate fundamentals.

At the same time, higher short-term rates do not necessarily mean higher long-term yields indefinitely. If investors become more confident that the Fed is willing to contain inflation, longer-term inflation expectations and yields could eventually moderate. The broader message across asset classes is to remain flexible rather than assume this rate hike defines the entire path ahead.

For consumers, the trade-off is less comfortable. Higher short-term rates will keep borrowing costs elevated for credit cards, mortgages, floating-rate loans, and other rate-sensitive financing. The Fed is effectively taking the course that a firmer stance now can restore price stability more quickly, even if near-term financing conditions remain restrictive.

Bottom Line

One hike, now what? The September meeting delivered a clear answer: the Fed is not declaring victory on inflation. The 0.25% increase was unanimous, the SEP points to one more hike in 2026, and the projected path stays higher for longer. But with Warsh stressing that “trends matter, data points are noisy,” the next move is not preordained. The Committee has signaled the direction; the Chair has preserved the flexibility to let the data determine the timing.

Key Takeaways:

The conflict in the Middle East is escalating and widening.

Over the past week, the fighting in the Middle East has continued to spread beyond the U.S. and Iran. The Houthis captured key areas that will allow them to tighten their grip on the Bab al-Mandeb Strait, a key alternative to the Strait of Hormuz. Additionally, a crucial oil pipeline in Saudi Arabia was shut down after being struck by a drone.

The continued attacks and difficulty of exporting have caused Saudi Arabia to lower its oil production to its slowest rate in more than three decades. As a result of the escalations, diesel rose to its highest price ever, and oil is reapproaching its cycle high, putting upward pressure on inflation.

Inflation is persisting, and bond yields are rising.

Last week, both the Consumer Price Index (CPI) and Producer Price Index (PPI) revealed inflation is persisting. Additionally, the Federal Reserve’s (Fed) preferred gauge, Core Personal Consumption Expenditures (PCE) inflation, has been above the 2.0% target for 65 consecutive months. All three reports are likely to suggest a 25-basis point (0.25%) interest rate increase at the Federal Open Market Committee (FOMC) meeting on September 16. However, inflation is increasingly being caused by supply shocks, which central banks across the world have less ability to influence, meaning there is increased uncertainty around the path forward for both inflation and interest rate policy.

As a result of the persistent inflation and uncertain path forward, bond yields have steadily risen around the globe. The 10-year U.S. Treasury yield is on the verge of breaking above 5.00% for the first time since 2007, and the 2-year U.S. Treasury yield experienced is largest weekly increase since Liberation Day in April 2025.

The range of outcomes for artificial intelligence (AI) has expanded.

A former AI researcher, who briefly worked at both Anthropic and OpenAI, posted a controversial statement suggesting that that there may be a 10% chance that AI becomes so powerful that humans could be at peril. At the same time, Nvidia’s CEO, Jensen Huang, declared the arrival of artificial general intelligence, which can match or surpass the cognitive abilities of humans and unleash tremendous innovation and unlock immense productivity.

The more negative announcements fueled concerns about the technology, leading to AI corporate executives agreeing to slow down the progress in AI models to ensure safety. Technology stocks pulled back following the announcement. Despite these concerns and the negative market reaction, we believe it is important to remember resiliency in the stock market has almost always been rewarded.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification. To gain the desired diversification in a portfolio, we continue to emphasize the use of New Tools where appropriate. We also note that international markets also provide additional diversifying qualities and believe opportunities exist beyond large cap growth equities.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Equity Takeaways:

Stocks moved sharply lower in early Monday trading. The S&P 500 fell approximately 0.8%, while the tech-heavy Nasdaq fell 1.7%. Small caps were down 0.6%, and non-U.S. stocks were mostly lower.

The S&P 500 fell 0.9% last week, due to rising AI fears. The Index’s decline brought it below its 50-day moving average for the first time since July. Year-to-date the large-cap index is up 12.7%, while small-cap stocks are up 18.9%.

Earnings continue to power the S&P 500, as the Index’s earnings per share approaches $400. However, waning investor confidence has led the price-to-earnings multiple to fall to approximately 19x, approaching the level seen at the start of the Iran War. In an additional sign of recent stock market challenges, market breadth has turned negative and has remained below its 21-day moving average for the past nine trading days. However, in a potential sign of good news, stocks are approaching oversold territory, which suggests we are nearing an area where we should see significant buying interest.

Fixed Income Takeaways:

The yield curve experienced a bear flattening last week, as short-term yields rose by more than long-term yields. Specifically, at the short end, 2-year yields moved 26 basis points (bps) higher, closing the week at 4.63%; longer out on the yield curve, 10-year yields moved 19 bps higher to close the week at 4.97%, and 30-year yields moved 11 bps higher to close the week at 5.35%.

The rise in yields was likely caused by higher inflation readings in both the CPI and the PPI. Market participants are now pricing in more than a 90% chance of a 25-bps interest rate hike at the September 16 FOMC meeting.

In early Monday trading, yields were higher: 2-year Treasury yields were trading at 4.65%, 5-year Treasury yields at 4.81%, 10-year Treasury yields at 4.98%, and 30-year Treasury yields at 5.36%.

Investment Grade issuance has continued its record-setting pace. Markets are anticipating $215 billion of new issuance in September.