September 2026 Market Recap: Rates Rise as AI Demand Remains Resilient

September presented investors with two very different market narratives. On one side, a stronger-than-expected labor market and persistent inflation pushed the Federal Reserve to raise interest rates for the first time since 2023. Treasury yields moved sharply higher, with the 10-year Treasury yield reaching 5% for the first time in approximately three years (10-year U.S. yield closed at 5% on 9/15/26). The S&P 500 declined approximately 0.45% during the month (per S&P Dow Jones), while the iShares Core U.S. Aggregate Bond ETF fell approximately 1.82% (per Yahoo Finance).

On the other side, corporate fundamentals remained remarkably resilient. Earnings from Dell, Oracle and Micron provided additional evidence that spending on artificial intelligence infrastructure continues to accelerate despite higher borrowing costs and inflationary pressures. The result is an increasingly interesting investment environment: macroeconomic conditions have become more challenging, but the strongest areas of the economy continue to demonstrate significant underlying growth.

A Stronger Labor Market Changes the Rate Equation

September began with a surprisingly strong employment report. August nonfarm payrolls, released September 4 from the U.S. Bureau of Labor Statistics (“BLS”), increased by 162,000 jobs, substantially exceeding Dow Jones estimates for approximately 56,000. The BLS also revised July's employment figures meaningfully higher, from an initially reported loss of 23,000 jobs to a gain of 21,000.

Ordinarily, evidence of a stronger labor market would be viewed positively. However, markets have increasingly been trading through the lens of monetary policy. With inflation already running above the Federal Reserve's target, stronger employment gave policymakers greater flexibility to tighten monetary policy without risking significant damage to the labor market. As such, the S&P 500 declined approximately 40 basis points on September 4 following the report.

This represented a notable reversal from August, when weaker employment data paradoxically supported equities by reducing expectations for additional rate increases. By September, that relationship had flipped: good economic news increasingly became bad news for markets because of what it could mean for interest rates.

Inflation Refuses to Go Away

Inflation data did little to alleviate concerns. The BLS released August Consumer Price Index (“CPI”) data on September 11, which showed an increase of 3.4% year-over-year, in line with Dow Jones estimates and unchanged from July. Producer prices told a similar story, with the BLS releasing August Producer Price Index (“PPI”) data showing an increase of 5.4% year-over-year on September 12. Neither report represented a meaningful upside inflation surprise. The larger issue was the lack of continued improvement.

Combined with the stronger employment report, the data painted a picture of an economy that remained resilient enough to tolerate tighter monetary policy while inflation remained sufficiently elevated to justify it. That combination ultimately set the stage for the Federal Reserve's September meeting.

The Fed Raises Rates

On September 16, the Federal Reserve unanimously increased the federal funds target range by 25 basis points to 3.75%–4.00%, marking its first rate increase since 2023. The decision itself was increasingly anticipated by markets. The more interesting question was what would come next. Since assuming leadership of the Federal Reserve, Chair Kevin Warsh has reduced the central bank's reliance on traditional forward guidance, making it more difficult for investors to anticipate the path of monetary policy. However, the updated FOMC dot plot provided some additional insight, indicating a median expectation for one additional 25-basis-point increase during 2026.

Equities weakened in anticipation of the decision, with the S&P 500 declining approximately 140 basis points between September 11 and September 16 (data per S&P Dow Jones).

We believe markets may be assigning too much weight to the probability of continued rate increases. Inflation remains elevated, but one of its largest potential swing factors (energy prices) remains heavily influenced by geopolitical developments surrounding Iran and the Strait of Hormuz. A normalization of energy flows could materially change the inflation outlook and, consequently, the path of monetary policy.

The 10-Year Treasury Reaches 5%

The bond market reflected those inflation and monetary-policy concerns even more clearly. On September 15, the 10-year Treasury yield reached 5% for the first time in approximately three years.

Several factors appear to be contributing to higher long-term rates. Persistent inflation remains an obvious concern, while expectations for additional Federal Reserve tightening have placed further upward pressure on yields. At the same time, investors continue to demand greater compensation for holding longer-duration U.S. government debt amid growing federal deficits and elevated Treasury issuance (the latter issue may prove particularly important).

Higher yields are not necessarily being driven exclusively by expectations for Federal Reserve policy. They may also reflect a higher risk premium being demanded by investors to finance increasingly large U.S. fiscal deficits. That makes the path toward lower long-term rates more complicated. An easing of inflationary pressures would certainly help, but sustainable improvement may ultimately require greater confidence in both inflation and the longer-term fiscal outlook.

Iran and the Strait of Hormuz Remain an Inflation Wild Card

Energy markets continued to complicate the inflation picture throughout September. Iran maintained that the Strait of Hormuz was closed during much of the month, while concerns surrounding regional supply disruptions helped push crude oil above $100 per barrel for the first time since May.

However, despite conventional ship-tracking data suggesting severe disruption, significantly more Gulf oil appeared to be reaching global markets than initially believed. Tankers were reportedly switching off their transponders while traversing the Strait, making portions of the traffic effectively invisible to conventional tracking systems. Industry estimates suggested Gulf exports were still running at approximately 15–16 million barrels per day, roughly two-thirds of prewar levels. Needless to say, it was an encouraging development. It suggested the effective supply disruption was less severe than headline shipping data implied and helped push oil prices back below $100 per barrel.

Late September brought another potentially positive development when Iran indicated that it was prepared to reopen the Strait within seven days if the United States eased military pressure and lifted its blockade. Iran also signaled a willingness to restart negotiations surrounding its nuclear program. Markets understandably welcomed the development, but skepticism remains warranted. Repeated attempts at negotiations have created a degree of "deal fatigue," and substantial disagreements remain between the two countries.

Nevertheless, the economic implications of a durable agreement would be significant. Normalized shipping through the Strait could place downward pressure on energy prices, ease inflationary concerns and potentially reduce the need for additional Federal Reserve rate increases.

AI Demand Continues to Defy the Macro Environment

While the macroeconomic environment became more challenging, September's corporate earnings told a strikingly different story. The strongest companies within the AI infrastructure ecosystem continue to demonstrate extraordinary demand.

Dell Technologies reported on September 1 and exceeded expectations on both revenue and earnings. More importantly, the company raised its full-year revenue and earnings outlook considerably more than anticipated. AI-server demand remained a major driver of the company's results.

Oracle reinforced that message when it reported on September 10. Revenue and earnings both exceeded expectations, while management also increased its full-year earnings outlook.

The magnitude of Oracle's beat was more modest than Dell's, but the underlying message was similar: companies continue to spend aggressively on the computing infrastructure.

Then came the report everyone was waiting for - Micron.

Micron Challenges the Traditional Memory-Cycle Narrative

Micron reported earnings on September 30 and provided perhaps the month's most interesting update on the durability of AI infrastructure demand.

Both revenue and earnings significantly exceeded expectations, while the company's forward outlook came in well ahead of consensus estimates.

More importantly, CEO Sanjay Mehrotra indicated that memory supply-and-demand conditions are expected to be even tighter in 2027 and 2028 than they were in 2026. That is particularly important because one of the primary concerns surrounding the memory industry has been that significant new capacity (particularly for high-bandwidth memory, or “HBM”) would eventually create excess supply and loosen pricing pressure over the next couple of years. Historically, this has been a defining feature of the memory cycle: periods of strong demand and elevated pricing incentivize additional capacity, eventually resulting in oversupply, weaker pricing power and a normalization of industry economics toward pre-cycle levels. Micron’s outlook challenges the expectation that this traditional cycle is poised to repeat over the next several years.

Micron's outlook suggests the opposite may occur: AI-related demand could absorb incremental supply faster than the industry can bring new capacity online. The company also disclosed that it now has 26 strategic customer agreements, with certain commitments extending as far as 2031.

The Consumer Remains Resilient—But AI Is Operating at a Different Speed

The strength was not confined entirely to technology.

General Mills reported on September 23 and modestly exceeded revenue and earnings expectations while maintaining its full-year outlook. Costco followed the next day with modest top- and bottom-line beats of its own.

Those results suggest the U.S. consumer remains relatively resilient despite higher prices and borrowing costs. However, there is a noticeable difference between what is occurring in consumer-oriented businesses and what is occurring across AI infrastructure. Consumer companies are largely demonstrating resilience. Many AI-related companies are demonstrating acceleration.

While the growth of the market is unquestionably on those invested in and part of AI infrastructure, it is important to take a pulse on the consumer through the lens of consumer corporations.

AI Could Be Both the Opportunity and the Inflation Risk

September's results further strengthened our conviction that AI-related capital spending remains one of the most powerful secular forces in the economy.

But there is another side to that equation. Building the infrastructure necessary to support AI requires enormous amounts of semiconductors, servers, data-center capacity, electricity, construction, cooling equipment and labor. As investment accelerates, demand for those resources could itself contribute to inflationary pressure.

In other words, AI could simultaneously be one of the market's largest sources of earnings growth and one of the economic forces making the Federal Reserve's inflation fight more complicated. That creates the potential for significant dispersion between corporate winners and losers. Companies capable of generating strong earnings growth despite elevated interest rates and input costs may continue to command premium valuations. We believe companies without similar growth will suffer greatly in a higher-rate environment.

Looking Ahead: Fundamentals Versus the Macro Environment

September reinforced what may become the defining tension for markets over the coming months. The macroeconomic environment has clearly become more challenging. Inflation remains persistent, the Federal Reserve has resumed raising interest rates, the 10-year Treasury yield has reached 5%, and geopolitical uncertainty continues to influence global energy markets.

Yet beneath those challenges, portions of the corporate economy remain extraordinarily strong. Dell, Oracle and Micron all provided additional evidence that AI infrastructure spending remains intact. Micron's outlook was particularly noteworthy because it extended that visibility beyond the next several quarters and into 2027, 2028 and potentially beyond.

We believe this environment increasingly favors selectivity over broad market exposure. Higher rates may continue to pressure more interest-rate-sensitive areas of the market, while companies capable of producing meaningful earnings growth may increasingly separate themselves from the broader market. At the same time, any meaningful resolution surrounding Iran and the Strait of Hormuz could become an important catalyst. Lower energy prices could alleviate inflationary pressure, reduce expectations for additional Federal Reserve tightening and provide relief to Treasury yields.

September therefore leaves investors balancing two powerful forces: increasingly restrictive financial conditions and remarkably resilient corporate fundamentals. For now, we believe disciplined portfolio construction and active risk management remain particularly important. In an environment characterized by higher rates, geopolitical uncertainty and rapid technological change, simply owning the market may become less important than identifying where underlying fundamentals continue to justify investment.

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The S&P 500 (Standard & Poor's 500) is a stock market index tracking the performance of roughly 500 leading U.S. publicly traded companies, representing about 80% of the total U.S. market capitalization.

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