Market Commentary - September 2026

The bull market's resilience was on full display in August, as stocks moved higher despite a backdrop of rising interest rates around the world. Strong earnings and economic momentum continue to support risk assets, but long-term bond yields are now approaching levels not seen in decades across several major economies. The question facing investors is no longer whether higher rates matter, but when they begin to matter.

August’s Two Market Story

U.S. equity markets regained their footing in August, with the S&P 500 Index advancing 2.6% and the Nasdaq Composite Index climbing 3.9% as investors embraced another strong month of corporate earnings and renewed enthusiasm for artificial intelligence-related investments. Leadership came from sectors tied to the global AI buildout, with Technology (+6.2%) posting one of the strongest gains of the month, while Energy (+6.5%), Materials (+5.8%), and Healthcare (+4.8%) also delivered solid returns. Software companies were a particular bright spot, while several mega-cap technology firms, including Nvidia, Microsoft, and Tesla, helped power broader market performance. At the same time, market participation widened beyond the largest companies, an encouraging sign that investor confidence extended beyond a handful of AI-driven winners.

Beneath the surface, however, the bond market was telling a different story. Treasury yields moved higher throughout August as investors reassessed the path of inflation, economic growth, and monetary policy. While inflation readings generally met expectations, economic data remained resilient enough to challenge assumptions that interest rate cuts were imminent. Concerns surrounding persistent price pressures, ongoing fiscal deficits, and elevated Treasury issuance also kept upward pressure on longer-term yields. Those higher rates weighed on traditionally interest-rate-sensitive sectors, including Utilities (-5.2%) and Real Estate (-2.0%), both of which lagged the broader market despite the strong equity backdrop. Gold (+9.1%), silver (+15.9%), and Bitcoin (+25.6%) also posted notable gains as investors sought alternative stores of value amid rising yields and policy uncertainty.

By month-end, investors were weighing two competing narratives. Equity markets remained focused on resilient earnings growth, accelerating AI-related capital spending, and a still-expanding economy. Bond markets, meanwhile, appeared increasingly skeptical that inflation had been fully contained. That tension set the stage for the month's most consequential event: Federal Reserve Chair Kevin Warsh's first Jackson Hole address.

Just Don’t Call It Forward Guidance

One of the most important developments for investors this month came not from an economic report, but from Kevin Warsh's first Jackson Hole address as Federal Reserve Chairman. While Warsh once again rejected the idea of providing explicit forward guidance, his message was difficult to miss. He described an economy that remains resilient, labor markets that are consistent with full employment, corporate profits that continue to grow, and financial conditions that are far from restrictive. Most importantly, he emphasized that inflation remains well above the Fed's 2% target and that policymakers still have "work to do" if underlying price pressures fail to move convincingly lower. Barron's characterized the speech as "forward guidance by any name," noting that despite Warsh's reluctance to telegraph policy moves, investors were left with a much clearer understanding of how he views the inflation challenge.

Financial markets quickly interpreted the remarks as more hawkish than expected. Futures markets increased the probability of a September rate hike to roughly 58%, while Treasury yields and the U.S. dollar moved higher as investors recalibrated expectations for monetary policy. The reaction reflected a growing belief that the Federal Reserve may not be finished tightening if inflation remains elevated. In the bond market, the message was straightforward: stronger-than-expected economic growth, robust corporate earnings, healthy consumer spending, and accelerating AI-related capital investment make it difficult to argue for easier policy today. For much of this year, investors have debated when rate cuts would arrive. Following Jackson Hole, the more relevant question may be whether another rate increase is still ahead.

Perhaps most notable was Wall Street's reaction. Economists across the spectrum viewed the speech as an effort to restore the Fed's inflation-fighting credibility after months of uncertainty surrounding the new chairman's policy framework. Several observers pointed to Warsh's emphasis on "discipline, not a decision" as evidence that future policy will be guided by incoming data rather than market expectations. Others focused on his willingness to challenge the Fed's long-standing reliance on forward guidance, warning that investors may need to become more comfortable with uncertainty and a wider range of policy outcomes. The consensus takeaway was remarkably consistent: the Federal Reserve is no longer signaling that rate cuts are inevitable, and the possibility of higher rates for longer deserves renewed consideration.

The market arrived at Jackson Hole looking for clues about rate cuts. It left debating the possibility of another hike. Whether rates move in September or not, Warsh delivered a clear message: inflation remains the Fed's primary concern, and investors should spend less time guessing the next policy move and more time watching the data.

Earnings Back Up the Story

If Warsh's message was that the economy remains stronger than many investors appreciate, second-quarter earnings provided plenty of supporting evidence. With 97% of S&P 500 Index companies reporting results, 86% exceeded earnings expectations and 77% topped revenue forecasts. The S&P 500 is now on track to deliver earnings growth of 52%, its strongest quarterly increase since 2021. Even after adjusting for unusually large gains at Alphabet and Amazon, earnings growth remains an impressive 33.8%, suggesting strength extends well beyond a handful of mega-cap technology companies.

More importantly, corporate America continues to signal resilience rather than retrenchment. Information Technology, Financials, Consumer Discretionary, and Energy all posted robust results, while companies issued substantially more positive than negative earnings guidance for the third quarter. In other words, the same backdrop highlighted by Warsh, solid consumer demand, healthy profit growth, ongoing AI-related investment, and relatively easy financial conditions, was reinforced throughout earnings season. It is difficult to argue that monetary policy is overly restrictive when earnings are growing, margins are expanding, and executives remain constructive about the months ahead.

Strong earnings do not guarantee smooth markets ahead, but they do help explain why the Federal Reserve remains focused on inflation risk rather than economic weakness. That tension, resilient growth versus restrictive policy, is likely to remain the market's central debate as we move toward the September FOMC meeting.

Follow the Money

While investors remain focused on the September FOMC meeting, another underappreciated story is beginning to unfold across the retail sector. Following the court-ordered return of billions of dollars in tariff payments, some of America's largest retailers are suddenly faced with a simple question: what should they do with the cash? The answer may prove surprisingly important for inflation, consumer spending, and corporate profits in the months ahead.

What has emerged is a fascinating divide. Walmart, which received approximately $2.9 billion in refunds, has been explicit that much of the benefit will be invested back into lower prices and value initiatives designed to strengthen affordability and gain market share. Target, which received nearly $1 billion in refunds, also indicated that a meaningful portion of the benefit will support ongoing price reductions, noting that it has already lowered prices on more than 10,000 items over the past year and expects additional investments in value despite ongoing cost pressures. By contrast, Home Depot and Lowe's have taken a more measured approach, using tariff-related benefits to offset higher operating costs, support strategic investments, and maintain margin discipline. Lowe's management emphasized that future refund benefits will be deployed selectively to strengthen its value proposition while remaining focused on profitability and market share opportunities.

For investors, the significance extends well beyond retail earnings. These refunds have effectively become a real-time test of corporate behavior. Some executives are directing the windfall toward lower prices and market share gains, while others are using it to support margins, reinvest in their businesses, or absorb higher operating costs. The outcome matters. If more companies follow Walmart and Target's lead, consumers could see modest relief at the cash register and inflation could ease at the margin. If companies choose to retain the benefits, the primary impact may be stronger corporate profitability. Either way, tariff refunds may become one of the more unexpected drivers of both inflation and earnings as we close out 2026.

The Fed is focused on inflation. Investors are focused on the Fed. Yet one of the most important questions heading into year-end may be how corporate America chooses to deploy billions of dollars in unexpected cash. Those decisions could ultimately tell us as much about the path of prices, profits, and the economy as the next move in interest rates.

Looking Ahead

Markets continue to demonstrate remarkable resilience. Strong earnings, healthy corporate balance sheets, and ongoing investment in technology and infrastructure have helped support equity prices even as interest rates move higher around the world. Yet investors should not ignore the growing tension beneath the surface. Long-term government bond yields in the United States, United Kingdom, and Japan have climbed to levels not seen in decades, reflecting persistent inflation concerns, expanding fiscal deficits, heavy government borrowing needs, and rising competition for capital from large-scale AI and infrastructure investments. The ongoing conflict in the Middle East has only added to these pressures, contributing to higher energy prices and reinforcing concerns that inflation may prove more persistent than policymakers and investors had hoped.

For now, equity markets appear comfortable looking through higher rates. History suggests that markets can absorb rising interest rates for longer than many expect, particularly when earnings and economic growth remain strong. The question is not whether higher borrowing costs matter, but when they begin to matter. As we move into the final months of the year, investors may want to spend less time focusing on the next Fed meeting and more time watching the steady rise in global long-term interest rates. At some point, markets may demand a reassessment of valuations, fiscal sustainability, or growth expectations. Until then, the tug-of-war between economic resilience and higher capital costs is likely to remain the defining investment theme heading into year-end. 

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Index Definitions

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of the 30 blue chip stocks that are generally the leaders in their industry. It has been widely followed indicator of the stock market since October 1, 1928. 

NASDAQ Composite Index: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971. 

Russell 2000 Index: The Russell 100 Index is comprised of the smallest 2,000 companies in the Russell 1000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 19,1978. 

S&P 500 Index: The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of the available market capitalization. 

MSCI Emerging Markets Index: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in the each country. 

U.S. Aggregate: The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (Agency fixed-rate pass-through), ABS and CMBS (agency and non-agency). (Future Ticker: I00001US)

MSCI ACWI Excluding United States Index: The MSCI AC World ex USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1987.