Quarterly Market Update: Solid Fundamentals Meet Higher Oil and Rates
The third quarter put two forces against each other. On one side, the economy and corporate earnings stayed solid. On the other, oil and interest rates pushed back. Oil climbed back above $100 per barrel, inflation stayed elevated, Treasury yields surged, and the Federal Reserve raised rates in September.
The S&P 500 still finished higher and set a new all-time high, carried by strong earnings and steady economic activity. But the headline gain didn't tell the whole story. Beneath it, market leadership narrowed as smaller companies and rate-sensitive areas lagged.
Artificial intelligence, meanwhile, kept playing a large role in both the economy and the markets. In this letter, we'll look at the forces pushing interest rates higher, the economic and earnings strength helping offset that pressure, and how AI's influence now reaches everyday borrowing costs, business investment, and the stock market.
Oil Stays Volatile, and the Fed Hikes
Oil was once again one of the quarter's main drivers. Its sharp swings carried implications well beyond energy, touching inflation, interest rates, and economic growth.
The top chart in Figure 1 graphs the monthly change in oil prices this year, and what stands out is how often prices have changed direction.
Oil surged early in the year, fell sharply in May and June, then reversed higher again in Q3, jumping 22% in July alone. The point isn't any single monthly move. It's how frequently the direction has flipped.
Most of that volatility traces back to shifting expectations for Middle East oil supplies and the uncertainty around the Strait of Hormuz. And those swings matter well beyond the energy market.
That's because oil feeds into gasoline and transportation costs, those costs feed into inflation, and inflation ultimately shapes the outlook for interest rates and growth. When oil fell in Q2, some of that pressure eased. When prices climbed again in Q3, concerns about inflation and the path of rates came right back.
That shift had a real impact on the rate outlook. Earlier in the year, investors were focused on how much the Fed could lower rates. But as oil rebounded and inflation stayed above the Fed's target, the conversation gradually turned to whether policymakers would need to raise rates instead.
The bottom chart in Figure 1 shows how that played out. The Fed cut rates by a cumulative 1.75% beginning in September 2024, then held steady for most of this year. After a nine-month pause, it raised rates 0.25% in September, its first increase since 2023.
Markets now expect additional hikes in the coming quarters, although those expectations have shifted often this year. The broader point is that the path for rates remains closely tied to how inflation, oil, and economic growth develop into year-end and early 2027.
Earnings and Growth Hold the Line
So far, that sounds like a difficult backdrop. And in some ways, it was. Yet the underlying data told a steadier story. Corporate earnings stayed strong, and households and businesses kept spending, giving the stock market real fundamental support through the quarter's uncertainty.
The top chart in Figure 2 graphs the year-over-year growth rate of S&P 500 earnings going back to 2001. Over the past year, 12-month earnings for the S&P 500 grew nearly 30%.
Outside of the rebounds that followed the financial crisis and COVID, that's one of the strongest stretches of earnings growth on the chart, and a significant step up from the single-digit pace of 2023 and 2024. So while the macro backdrop was volatile, corporate profits kept growing at a strong pace.
The bottom chart looks beneath headline GDP to show what households and businesses were actually doing. Headline GDP includes volatile categories such as trade, inventories, and government spending. Final sales to private purchasers, on the other hand, focuses on consumer spending and private investment.
Comparing the two helps separate changes in the underlying economy from temporary swings. In the second quarter, headline GDP grew at a 2.2% annualized rate, down from 2.5% in Q1. Underlying private demand, however, grew 4.6%. That gap suggests households and businesses were still spending and investing at a healthy pace, even as the broader backdrop grew more volatile.
Taken together, the two charts help explain how markets absorbed the quarter's volatility. Consumers are still spending, businesses are still investing, and earnings are still strong. That combination has served as a counterweight to higher oil prices, persistent inflation, and rising interest rates.
AI's Reach Keeps Widening
Which brings us to the theme running through much of the year. Artificial intelligence has been a major market story for several years. What's changed is the scale of the buildout, which is making AI more important to the broader economy and financial markets. Figure 3 shows three ways its influence is expanding: business investment, the stock market, and financing.
Start with business investment. The top chart graphs spending on data-center construction and computer equipment, which together serve as a proxy for the physical infrastructure being built to support AI.
Combined investment has grown from roughly $180 billion at the end of 2023 to nearly $490 billion today. That makes AI-related infrastructure an important source of business investment in its own right.
Next is the stock market. The middle chart shows that Technology now makes up nearly 40% of the S&P 500, up from about 34% at the end of 2025.
As that share has grown, the index has become more sensitive to the performance of its largest sector. What this means is that strong AI-related earnings and stock gains can have an outsized influence on the broader index.
And then there's financing. Major U.S. tech companies remain highly profitable, but the scale of their AI investment programs has grown quickly. The bottom chart shows that several of these companies are increasingly turning to the bond market to help fund the buildout. Historically, the group was fairly balanced between issuing new debt and paying it down. The right side of the chart, though, shows a significant jump in new issuance.
The question isn't just how much is being spent on AI anymore. It's how far that spending now reaches. The buildout is supporting business investment, drawing on the bond market for financing, and carrying more weight in the stock market, all at the same time.
AI has moved well beyond a narrow technology theme, and its growing scale means it's now influencing several parts of the economy and financial markets at once.
Equity Market Recap: Leadership Narrows as Rates Rise
The S&P 500 finished Q3 higher and set a new all-time high, but the path there was uneven, and the divergence beneath the index grew as the quarter went on.
Stocks faced some early pressure before rebounding in August, when the Russell 2000, the Dow Jones, and the equal-weight S&P 500 each set new highs. From there, leadership narrowed as larger companies outpaced smaller ones into quarter-end.
The S&P 500 gained 2.3% for the quarter, compared with 0.6% for the Nasdaq 100, -1.5% for the Dow Jones, and -6.9% for the Russell 2000. Most of that gap opened up in the second half of the quarter, which overlapped with a sharp rise in Treasury yields.
The timing suggests rising rates contributed to the divergence. That's because smaller companies tend to be more sensitive to borrowing costs.
Sector performance reflected many of the quarter's main themes. Only four of the eleven S&P 500 sectors outperformed the broad index, a sign of narrow breadth. Energy led with a 17.2% gain as oil climbed from roughly $70 per barrel in early July to more than $100 by mid-September.
That's a sharp reversal from Q2, when Energy was the worst-performing sector as oil prices fell. Technology came in second with a 7.2% gain, followed by Health Care at 6.5% and Communication Services at 3.6%. On the other end, Utilities fell -12.4% as rates rose, while Industrials dropped -9.7% and Real Estate declined -5.6%.
International markets were relatively quiet after their gains in the first half of the year. Developed and emerging market stocks each finished the quarter within 1% of where they started, with developed modestly ahead of emerging.
Even so, both regions are up year-to-date and are still outperforming the S&P 500 over the past 12 months.
All told, the quarter left a mixed picture beneath the major indexes. The S&P 500 reached a new high, while smaller companies and several rate-sensitive areas moved lower as yields rose late in the quarter.
Leadership is narrower now than it was in August, though the major U.S. equity indexes remain higher year-to-date.
Credit Market Recap: Rising Rates Weigh on Bonds
The same rise in yields that pressured smaller stocks made Q3 a challenging quarter for bonds. Figure 4 graphs the change in Treasury yields across maturities during the quarter, and yields rose at every one. The 5-year, 7-year, and 10-year yields each climbed more than 0.80%, and the 30-year rose nearly 0.70%.
Longer-maturity bonds underperformed because they're more sensitive to changes in interest rates. Shorter-maturity Treasuries held up better on a relative basis, though they still traded lower.
Corporate bonds came under pressure too, although they outperformed government bonds. High-yield posted a total return of -1.8%, ahead of investment-grade's -3.7%. Investment-grade took the bigger hit because its longer maturities made it more sensitive to rising rates.
For most of the quarter, though, the main headwind was rising interest rates, not weakening credit conditions. Investment-grade and broad high-yield spreads stayed relatively stable and tight by historical standards, suggesting investors remained comfortable with corporate fundamentals even as borrowing costs climbed.
The clearest sign of caution showed up at the lowest-quality end of the high-yield market. Spreads on CCC-rated bonds, the lowest-rated tier of high-yield, widened even as spreads on higher-quality high-yield bonds held steady. In other words, investors started demanding more compensation to hold the debt of financially weaker borrowers. Broader high-yield spreads, which had been comparatively calm for most of the quarter, also began to widen in late September.
The market grew more selective as the quarter went on, and the impact of higher financing costs showed up first among the most sensitive borrowers.
Put simply, Q3's weakness in bonds came mainly from rising Treasury yields, not a broad deterioration in corporate credit.
The late-quarter widening was concentrated among the lowest-quality borrowers, while investment-grade and broader high-yield spreads stayed relatively contained. Higher financing costs were creating pressure in pockets of the market, not across all of it.
2026 Outlook: What to Watch in Q4
Economic growth and corporate earnings remain strong heading into the fourth quarter, even as higher oil prices and interest rates have made the backdrop more mixed and volatile.
One of the main questions now is whether that underlying strength holds up as households and businesses adjust to higher borrowing costs, persistent inflation pressure, and continued uncertainty around energy prices.
So far, the economy has handled those pressures relatively well. Consumers have kept spending, businesses have kept investing, and unemployment has stayed low.
Those trends have supported growth even as rates and borrowing costs moved higher.
The coming months will show whether that momentum continues, particularly in the data tracking consumer spending, hiring, and business investment.
Corporate earnings will be another important source of information. Profit growth has been strong over the past year and has given the market fundamental support through a volatile macro backdrop.
Third-quarter earnings season, which begins in October, will offer an updated look at how companies are managing higher interest rates, changing input costs, and continued investment while still growing revenue and profits.
The AI investment cycle will remain part of the discussion as well. Spending on data centers, computing equipment, and related infrastructure continues to support business investment, and large technology companies are increasingly using the bond market to help pay for it.
As the cycle matures, the focus is likely to broaden from how much is being spent to what that investment is producing in revenue, profits, and productivity.
Markets have absorbed several changes this year without losing the support of economic growth and corporate earnings. We'll continue watching how these trends develop, while keeping the focus on portfolio diversification, discipline, and meeting your long-term financial goals across a range of possible outcomes.
Weekly Market Update: Long-Term Yields Climb as Tech Leads
Markets were mixed this week as gains in large-cap technology stocks offset broader market weakness, while long-term Treasury yields rose sharply.
The S&P 500 gained 0.9% and the Nasdaq rose 3.5%, while the Russell 2000 small-cap index fell -1.3%. Growth 2.5% outperformed Value -0.7%, and the Equal-Weight S&P 500 declined -1.0%, signaling narrow leadership.
Technology led all sectors with a 3.6% return, while Utilities -4.4%, Energy -2.3%, Financials -2.1%, and Real Estate -1.8% lagged the market.
Bonds declined as Treasury yields rose across the yield curve, with long-maturity Treasuries falling -2.8% and investment-grade bonds declining -1.9%. The U.S. dollar strengthened 1.0% as rates rose, oil declined -2.0% despite intra-week volatility, and Bitcoin gained 10%.
Key Takeaways
Consumer Sentiment Nears Its Record Low
The preliminary University of Michigan Consumer Sentiment Index fell to 47.8 from 51.7, moving back toward the record low set in May. Consumers grew notably less optimistic about their personal finances and future business conditions, and one-year inflation expectations rose to 4.6% as higher fuel prices and trade-related concerns added to worries about household costs.
The weaker sentiment contrasts with recent data showing that consumers continue to spend despite a more cautious mood.
Why it matters: Consumers remain active, but they're increasingly concerned about inflation, borrowing costs, and the outlook for their finances and the broader economy.
Long-Term Yields Keep Climbing
The 10-year Treasury yield approached 5.15%, its highest level since 2007, while the 30-year climbed above 5.40%, its highest since 2004. Several factors contributed to the continued rise, including stronger economic data, persistent inflation pressure, higher oil prices, and heavy Treasury issuance.
Why it matters: The move is notable not just because yields are high, but because of how fast they've risen. The faster rates move, the more quickly markets have to adjust expectations for economic growth, inflation, and borrowing costs, which can increase volatility.
Business Activity Picks Up, Price Pressures Persist
The preliminary S&P Global U.S. Composite Purchasing Managers Index rose to 58.4 in September from 56.0 in August, well above expectations and its strongest reading since 2021. Businesses reported the fastest hiring in more than four years, while input costs rose at their quickest pace in four years. The index is based on a survey of businesses rather than hard economic data, but it provides an early read on how activity is changing.
Why it matters: The survey suggests economic activity remains solid. The combination of firm activity and persistent price pressures is contributing to higher Treasury yields and reinforcing expectations that the Fed may need to keep rates elevated or tighten further.
Meta's Muse Lifts AI, Weighs on Consumer Businesses
Muse, Meta's new personal AI agent, surpassed ChatGPT to become the top free app in the U.S. Meta shares rose sharply, the Nasdaq set a new all-time high, and semiconductor stocks rallied as investors considered how AI agents could increase demand for computing power.
The launch also pressured travel, financial, insurance, and other consumer-facing stocks, as investors questioned whether AI agents could make it easier for customers to compare prices, negotiate bills, and switch providers.
Why it matters: Strong early adoption reinforces the case for continued demand for AI infrastructure, but the reaction across travel, financials, and other industries shows that investors are still determining who ultimately benefits and who faces disruption.
Weekly Market Update: Oil and Yields Pressure Markets Ahead of the Fed
Markets traded lower this week as rising oil prices and long-term interest rates weighed on risk assets.
The S&P 500 fell 2.0%, the Nasdaq declined 1.2%, and the Russell 2000 small-cap index returned -2.6%. Growth (-1.7%) outperformed Value (-2.4%), while the Equal-Weight S&P 500 fell 3.1%, signaling broad weakness beneath the major indexes.
Energy (+0.7%) was the only sector to finish higher, while Technology was nearly flat. Health Care (-4.3%), Consumer Discretionary (-3.9%), and Materials (-3.6%) led to the downside.
Bonds declined as Treasury yields rose, with long-maturity Treasuries falling 1.7% and the 10-year yield approaching 5%. Corporate bonds also declined but outperformed Treasuries. Oil surged 12.5%, volatility increased, the U.S. dollar was little changed, and Bitcoin fell nearly 6% after a 20% rally.
Key Takeaways
Labor Conditions Improved in August After Several Weak Months of Hiring
Employers added 162,000 jobs, while the unemployment rate held at 4.1%. Prior months also looked better after revisions: June payroll growth was raised to +31,000 from +20,000, and July was revised from an initially reported -23,000 jobs to +21,000. Combined, the revisions added 55,000 jobs to the previous two months. The report does not suggest the labor market has returned to the strength of earlier years, but it paints a less concerning picture than investors saw after July's initial release.
Why it matters: The labor market still appears to be cooling, but August suggests that deterioration is occurring more gradually than previously feared.
Middle East Conflict is Becoming Harder for Markets to Treat as a Temporary Disruption
Oil prices moved sharply higher as fighting intensified and disruptions to energy shipments through the Strait of Hormuz continued. U.S. crude moved back above $100 per barrel after falling substantially earlier in the summer. More importantly, repeated escalations are making it harder to assume that each increase in energy prices will quickly unwind.
Why it matters: The longer the disruption persists, the more relevant energy becomes as an ongoing source of inflation uncertainty rather than a series of isolated weekly price swings.
Long-Term Borrowing Costs Continue to Rise Across Global Bond Markets
The 10-year Treasury yield climbed above 4.90% this week, its highest level since October 2023, while the 30-year moved above 5.3%. Government-bond yields also rose across several major developed markets as investors weighed inflation, higher energy costs, government borrowing needs, and tighter monetary policy. The breadth of the move suggests that higher long-term rates are not simply a reaction to one U.S. economic report or a shift in Fed expectations.
Why it matters: A wider set of global forces is putting upward pressure on long-term borrowing costs, making it harder to attribute elevated yields to any single economic report or shift in central-bank policy.
Expectations for a Rate Hike at Next Week's Fed Meeting Continue to Build
The Fed held rates at 3.50% to 3.75% in July, although three policymakers preferred a 0.25% hike. At Jackson Hole, Chair Warsh described the labor market as stable and said inflation should remain the Fed's predominant focus. Since then, stronger August job growth, higher oil prices, and renewed producer-price pressure have strengthened the case for an increase. Futures markets now place roughly a 70% probability on a +0.25% move at the September 15 to 16 meeting.
Why it matters: Next week's decision will show whether firmer labor data and persistent inflation pressure have been enough to move the Fed from considering a rate hike to delivering one.
AI Infrastructure Spending Remains Resilient Despite Volatile Macro Backdrop
Oil prices and long-term yields have risen, inflation pressure has increased, and the market expects a Fed hike. Those shifts would normally make large capital projects more expensive and could lead companies to reconsider spending plans. So far, however, the largest tech companies have continued committing substantial capital to data centers, computing capacity, and other AI infrastructure.
Why it matters: AI investment has become a significant contributor to both economic growth and corporate earnings, and so far, the largest tech companies appear willing to continue that spending despite volatility in rates, energy prices, and inflation.
Monthly Market Update: Stocks Set Broad Records as Rates Climb
The S&P 500 Index returned +2.7% in August and set a new high. Five of the eleven S&P 500 sectors traded higher, with four outperforming the broad index. Energy (+7.0%) led all sectors, followed by Technology (+6.2%) as the sector rebounded from a July selloff and Materials (+6.0%) as gold gained nearly 10%. Utilities (-4.8%) led to the downside, followed by Industrials (-2.6%) and Real Estate (-1.9%).
Bonds traded higher despite Treasury yields rising throughout the month, with the U.S. Bond Aggregate returning +0.4%. Investment-grade corporate bonds modestly outperformed with a +0.5% total return, while high-yield gained 1.0%.
International stocks traded higher in August. Developed markets gained 2.0% and underperformed the S&P 500, while emerging markets returned +3.4% and outperformed as international tech stocks rebounded alongside U.S. tech stocks.
Stocks Set New Highs as Rates Climb
Equity markets traded higher in August, with strength extending across most broad stock market indexes. The S&P 500, Dow Jones, Russell 2000, and equal-weight S&P 500 all set new all-time highs during the month, and the Nasdaq 100 approached its June high.
The breadth of records was notable because the indexes capture very different parts of the market, from mega-cap tech to small-caps and the average S&P 500 company.
Market leadership has shifted multiple times this year, alternating between broad participation and concentration. August looked different, with strength spread across a wide range of companies and equity market segments.
The bond market offered a counterpoint to the strength in stocks. Treasury yields faced broad upward pressure during August, with the 10-year yield climbing above 4.75%, the highest since January 2025, and the 30-year approaching 5.30%, its highest level since 2007.
The rise in longer-term yields reflected several concerns, including persistent inflation, elevated government borrowing, and renewed uncertainty around energy prices.
Near the end of the month, Fed Chair Kevin Warsh's Jackson Hole speech signaled that the Fed's next move could be a rate hike rather than a rate cut, which added further upward pressure on Treasury yields. Despite the rate volatility, corporate credit spreads remained relatively calm and sit near record lows, suggesting investors are more concerned about the path of interest rates than companies' ability to repay their debt.
Markets Learn to Live with Headline Volatility
Geopolitics have dominated headlines this year, but their impact has changed as the year progresses. Oil prices continue to move when Middle East developments alter the outlook for global energy supply.
The difference is that investors appear less willing to treat each new headline as an economic shock. Earlier this year, the start of the conflict and disruption in the Strait of Hormuz caused oil prices to surge and contributed to a broad stock market selloff. Since then, investors have experienced several rounds of escalation and de-escalation.
Oil still jumps on new developments, but markets are increasingly waiting for evidence that a headline will affect energy supply, inflation, and economic growth before reacting as dramatically as they did in March.
Artificial intelligence is the second dominant market theme. Investors continue to debate whether the large sums being spent on data centers, computer chips, power generation, and networking equipment will ultimately generate adequate returns, but the companies making those investments keep moving ahead.
Nvidia's earnings report provided another indication that demand for AI infrastructure remains strong, with quarterly revenue more than doubling from a year ago. Spending plans across the industry keep rising as companies race to add computing capacity and build the infrastructure needed to support AI.
There are still questions about the eventual return on the hundreds of billions being spent, but the debate in financial markets has done little to slow the companies making the investments.
The Return You're Chasing Already Happened
There's a particular kind of investment decision that rarely feels reckless in the moment.
A part of the market has had an exceptional run. The companies are strong. The narrative makes sense. Every time you open your account, those positions seem to be doing exactly what you hoped they would.
So you add more.
That doesn't necessarily feel like chasing returns. It can feel prudent. Why put new money into investments that have lagged when the winners seem to be proving themselves month after month?
The problem is that your brain may be answering a different question than the one your portfolio needs you to answer.
Instead of asking, What mix of investments gives me the appropriate amount of risk for where I'm trying to go? you begin asking, What's been working lately?
That's where recency bias can quietly take control of a portfolio.
And for successful investors, particularly technology executives whose careers, compensation, and accumulated wealth may already be connected to the same companies or sector, the bigger risk isn't simply choosing the wrong investment next.
It's allowing yesterday's returns to determine how much risk you take tomorrow.
What Just Happened Feels Like What Happens Next
One of the central problems in investing is that our expectations aren't formed in a vacuum.
What we've recently experienced matters.
Robin Greenwood and Andrei Shleifer examined six different measures of investor expectations covering nearly five decades. They found that expectations for future stock returns were strongly tied to past market returns and to how high the market had already climbed.
In plain English, after stocks performed well, investors tended to expect more of the same.
But there was another important finding: those expectations were strongly negatively related to the returns the models actually projected going forward. The periods that left investors feeling more and more optimistic weren't necessarily the periods when future returns looked attractive.
A strong return is evidence of what's happened.
It's not evidence of what must happen next.
Research by Ulrike Malmendier and Stefan Nagel adds another piece of the puzzle. Studying household investing with Survey of Consumer Finances data from 1960 through 2007, they found that people's own experiences with stock and bond returns shaped how much risk they were willing to take and how they allocated their portfolios. More recent experiences carried greater weight.
Our memories, in other words, can become inputs into our portfolios.
And the freshest memories can become some of the most influential.
The Return That Convinced You Is the Return You Already Missed
This tendency shows up in what investors actually do with their money.
Erik Sirri and Peter Tufano studied money flowing into and out of equity mutual funds and found that investors based their buying decisions heavily on past performance. The relationship was particularly strong among the best-performing funds: exceptional prior performance pulled in a disproportionate share of new money.
That makes intuitive sense.
The investment with the best story is often the investment whose performance has already supplied the evidence for that story.
None of this means that last year's winner must become next year's loser.
A technology company can have an extraordinary year and keep performing well. An expensive asset can become more expensive. Market leadership can last much longer than investors expect.
That's why the lesson isn't to bet against whatever has recently performed well.
The lesson is simpler:
The return that convinced you to buy is a return that's already occurred.
Your decision today needs to be justified by what the investment contributes to your portfolio from this point forward.
How Concentration Actually Shows Up
This issue is usually more subtle in practice than an investor deliberately deciding to make a giant bet on last year's winner.
In one recent planning engagement, we worked with an executive whose compensation included salary, bonus, and recurring restricted stock units.
Those RSUs were an important part of the family's wealth-building engine. At the same time, the taxable portfolio was being built to serve an entirely different purpose: helping create enough financial flexibility for the executive to eventually step away from a high-paying career and move toward work optionality.
That distinction mattered.
Each time another block of RSUs vested, there were effectively two choices.
The first was passive: simply allow the employer shares to accumulate.
The second was deliberate: treat the vest as a new capital-allocation decision and ask where those dollars belonged given the family's overall portfolio, future spending needs, and risk capacity.
We chose the second approach.
The planning process called for vested equity to help fund a diversified taxable portfolio rather than allowing employer stock exposure to compound indefinitely by default. That taxable portfolio was spread across multiple asset classes and placed on a quarterly rebalancing schedule.
The important part wasn't predicting whether the employer's stock would outperform.
We didn't need to.
The issue was that the client's salary, future compensation, and a growing portion of financial wealth could otherwise become increasingly dependent on the same company.
And a position can become concentrated without the investor ever consciously deciding, I want more concentration.
Imagine that a $500,000 employer-stock position rises to $750,000.
Nothing was purchased.
No investment decision was made.
But the risk exposure changed materially.
Then another RSU grant vests.
Keeping those shares may feel innocuous because the stock has performed well, and because familiarity with the company can make the investment feel easier to understand than something outside the investor's immediate experience.
Another vest arrives six months later.
Then another.
Over time, what began as compensation can quietly become an investment thesis.
That's the practical danger of recency bias for investors with equity compensation. The bias doesn't always tell you to go out and buy the hottest stock.
Sometimes it simply tells you there's no reason to disturb what's already been working.
Success Can Change the Portfolio Without Your Permission
Now extend that problem across the rest of a high-income household's balance sheet.
The executive owns employer shares.
The 401(k) contains a large-cap U.S. index.
The taxable account owns another broad-market strategy.
Perhaps there are additional technology holdings accumulated over the years.
Viewed separately, none of those investments may appear particularly alarming.
Viewed together, however, they may represent substantially more exposure to the same companies, sector, and economic forces than the investor realizes.
This is particularly important for technology professionals.
Your human capital may already depend on the technology industry.
Your bonus may depend on company performance.
Your future RSU value depends on the employer's stock.
Your existing shares may represent a substantial portion of your financial capital.
And broad-market indexes can add further exposure to some of the same companies that have already driven your wealth higher.
The question, then, isn't simply, Is this a good company?
It may be an exceptional company.
The better portfolio question is:
How much of my financial future should depend on it?
Lisa Meulbroek's research into company stock held by employees illustrates the economic problem created by combining employment exposure with concentrated ownership of employer shares. Even when an employee believes strongly in the company, concentrated employer stock exposes the household to risks that could otherwise be diversified.
That distinction matters because diversification isn't a judgment about whether your company will succeed.
It's a judgment about how much of your family's future should depend on being right about any single outcome.
Why Portfolio Discipline Sometimes Feels Wrong
This is where a disciplined investment process earns its keep.
You establish what role each asset is supposed to play.
You decide how much concentration you're willing to accept.
You determine an appropriate allocation based on the return you need, the risk you can afford to take, your liquidity requirements, taxes, time horizon, and the goals the portfolio ultimately needs to fund.
Then you periodically compare the portfolio you actually own with the portfolio you intended to own.
That last step matters because successful investments don't remain politely inside their original allocations.
They grow.
For an investor receiving equity compensation, there's another layer: new shares may keep arriving even after an existing position has already become large.
That means maintaining the portfolio may require an active process for deciding what happens when shares vest.
Hold?
Sell?
Diversify?
Fund another goal?
The answer will vary by investor. Taxes, trading restrictions, holding periods, liquidity needs, charitable objectives, and the rest of the financial plan all matter.
What shouldn't determine the answer by itself is the fact that the stock has recently gone up.
Sometimes the most important portfolio decision isn't identifying the next winner.
It's recognizing how much your previous winners have already changed your risk exposure.
Don't Ask Your Memory to Vote
The solution to recency bias isn't becoming better at predicting which sector will lead next.
It isn't selling everything that's performed well.
And it certainly isn't reflexively buying whatever performed poorly.
Those approaches simply replace one forecast with another.
The better defense is an investment process that doesn't require you to reconstruct your portfolio strategy every time the market hands you a new reason to feel optimistic or pessimistic.
Build the portfolio around your objectives and risk profile.
Understand your exposure across all of your accounts.
Include employer stock and future equity compensation when evaluating concentration.
Establish parameters for how much risk you're willing to allow any one company, sector, or economic driver to contribute.
And when equity compensation vests, treat those shares as a fresh allocation decision rather than automatically assuming yesterday's allocation should become tomorrow's.
Then periodically compare the portfolio you actually own with the one you deliberately set out to build.
That leads to one useful question to ask this quarter:
Have my recent winners quietly made me more concentrated than I ever consciously chose to be?
If the answer is yes, that doesn't automatically mean those investments should be sold.
Taxes matter. Equity-compensation restrictions matter. Liquidity needs matter. Your broader financial plan matters.
But it does mean the portfolio deserves another look.
Because the job of an investment strategy isn't to own whatever just worked.
It's to maintain the amount and type of risk necessary to get you where you're trying to go, even when the rearview mirror is telling you to do something else.
Sources
Greenwood, Robin, and Andrei Shleifer. "Expectations of Returns and Expected Returns." The Review of Financial Studies, 2014.
https://academic.oup.com/rfs/article-abstract/27/3/714/1580705
Malmendier, Ulrike, and Stefan Nagel. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?" The Quarterly Journal of Economics, 2011.
https://academic.oup.com/qje/article-abstract/126/1/373/1901343
Sirri, Erik R., and Peter Tufano. "Costly Search and Mutual Fund Flows." The Journal of Finance, 1998.
https://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00066
Meulbroek, Lisa. "Company Stock in Pension Plans: How Costly Is It?" The Journal of Law and Economics, 2005.
https://www.journals.uchicago.edu/doi/abs/10.1086/430807
Weekly Market Update: Softer Data Cools Rate-Hike Bets
Markets traded higher for a third straight week as participation broadened.
The S&P 500 gained 1.2%, the Nasdaq 100 rose 2.4%, and the Russell 2000 small-cap index rose 1.8%. Both the S&P 500 and Russell 2000 reached new all-time highs.
Growth and high-beta stocks led the market higher, though strength wasn't limited to the largest companies.
The equal-weight S&P 500 gained 1.9%, which suggests participation stayed relatively broad.
Technology rose 2.9%, and Energy was the week's strongest sector as oil prices climbed nearly 5%. International stocks generally kept pace with U.S. equities, while the U.S. dollar was little changed.
Bonds traded higher as investors reduced expectations for another Federal Reserve rate hike, with shorter-maturity bonds outperforming longer-maturity bonds. Gold continued to drift higher, while the VIX fell below 15 and remains near its lowest level of the year.
Key Takeaways
The Labor Market Softened in July
The labor market showed more signs of cooling in July. Employers cut 23,000 jobs, and previously reported gains for May and June were revised lower by a combined 103,000, suggesting hiring had already been weaker than first reported.
Even so, the broader picture hasn't fallen apart. The unemployment rate held relatively low at 4.1%, and private-sector employment rose by 30,000.
The report points to a labor market losing momentum, but not yet the kind of deterioration typically tied to a recession.
Why it matters: A softer labor market weakens one of the arguments for keeping interest rates higher. If employment continues to cool without a meaningful rise in unemployment, the Fed may have less reason to tighten policy further.
Inflation Stayed Contained
The latest inflation reports were relatively encouraging. Consumer prices rose just 0.1% in July, and producer prices were unchanged. Both came in below expectations and helped ease concerns that rising oil prices were pushing inflation broadly higher again.
Energy remains a pressure point. The energy component of CPI is still 14.5% higher than a year ago, but that increase hasn't translated into a similar acceleration across broader inflation measures.
Higher energy prices can squeeze households and businesses without necessarily setting off another broad inflation cycle.
Why it matters: Inflation remains above the Fed's target, but July's reports suggest the recent energy shock hasn't spread meaningfully into the rest of the economy. That reduces some of the immediate pressure on the Fed to respond with higher rates.
September Rate-Hike Odds Fell
The outlook for Fed policy shifted meaningfully over the week. Heading into the employment report, markets were assigning better than a 50% probability to a September hike, with persistent inflation concerns and three dissents at the Fed's July meeting keeping another increase firmly on the table.
Then the data changed the conversation. Expectations for a September hike fell after the weaker payroll report, declined again following Wednesday's CPI release, and moved lower still after Thursday's flat producer-price report. In other words, investors are looking at a different backdrop than they were several weeks ago: a softening labor market alongside relatively contained inflation.
Why it matters: With the Fed offering less forward guidance, each incoming report carries more weight. This week's data shifted the balance away from another near-term increase, though that outlook can change quickly if inflation or employment data surprise again.
AI Demand Stayed Strong
The investment boom around artificial intelligence continues to show up in the companies building its infrastructure. CoreWeave, which buys advanced chips, installs them in data centers, and leases that computing capacity to customers, reported quarterly revenue of $2.58 billion and a backlog that climbed to $104 billion.
Other AI-infrastructure companies also reported strong growth during the week, suggesting demand isn't isolated to a single name.
The story increasingly extends beyond software firms and chipmakers to the data centers, power, networking equipment, and computing capacity needed to train and run more sophisticated AI models.
Why it matters: Questions remain about how much companies will ultimately spend on AI and what returns those investments will generate. Even so, rapid growth in demand for computing capacity suggests the underlying buildout remains strong.
Small-Business Confidence Climbed
Small-business owners grew more optimistic in July. The NFIB Small Business Optimism Index rose to 99.8, its highest reading since August 2025 and above its long-term average.
That's notable given the past several years of higher inflation, elevated borrowing costs, and persistent difficulty finding qualified workers.
Those pressures haven't disappeared, but July's survey showed improvement across several categories, including a meaningful increase in hiring plans.
Since small businesses account for nearly half of private-sector employment, improving sentiment offers a useful read on conditions beneath the surface of the broader economy.
Why it matters: Rising confidence suggests some of the pressures weighing on small businesses may be starting to ease. If that continues, it could support hiring, investment, and activity even as growth elsewhere moderates.
Weekly Market Update: Stocks Set Records as Tensions Ease and Oil Retreats
Markets rebounded this week as geopolitical tensions eased and oil prices declined. The S&P 500 gained nearly 4% and set a new all-time high, with the Dow Jones, S&P 500 Equal Weight, and Russell 2000 also setting records.
Technology, Consumer Discretionary, and Communication Services led all sectors, as the mega cap tech stocks known as the Magnificent 7 gained nearly 6.5%.
Energy was the worst-performing sector as oil prices fell nearly 7%, with defensive sectors also lagging the rally.
Bonds gained as oil and Treasury yields fell. Shorter-maturity bonds outperformed as easing inflation fears trimmed the odds of a rate hike, while high-yield corporates outperformed as credit spreads re-tightened, a sign of risk appetite.
The U.S. dollar strengthened slightly, the VIX declined, and gold rose to its highest level since mid-June.
Key Takeaways
Fed Holds Rates Steady for a Fifth Meeting
The Fed held its benchmark rate at 3.50% to 3.75% for a fifth consecutive meeting, the second under Chair Kevin Warsh. Three officials dissented in favor of a quarter-point increase, the most in that direction since 2016, and Warsh offered little guidance on the path ahead.
Stocks declined and Treasury yields rose to multi-year highs after the decision, with the 30-year yield trading near a 19-year high, on concern the Fed was not moving fast enough on inflation and might have to raise rates more later. Markets place around a 60% probability on a hike at the September meeting.
Why it matters: The Fed is providing less guidance about its intentions, which makes its policy path harder to forecast and, in turn, has made interest rates more volatile.
Oil Whipsaws on Middle East Tensions
Oil spiked more than 30% in July as the U.S.-Iran conflict escalated again, with West Texas Intermediate crude above $90 a barrel. It has since reversed by nearly 20% as a planned U.S. strike was paused and talks turned to reopening the Strait of Hormuz, a critical route for global oil trade.
Crude now trades near $75, roughly where it stood before the latest flare-up in early July. The headlines and move in oil prices are the latest in a pattern that has repeated multiple times this year, with each escalation followed by a round of de-escalation and one set of headlines countered by the next.
Why it matters: The conflict and swings in oil prices have added to interest-rate volatility and uncertainty about Fed policy.
Big Tech Earnings Split on AI Payoff
Several of the Magnificent 7 reported quarterly results this week, and investor reactions diverged sharply. The difference came down to how much growth each could show in return for its AI spending.
Microsoft rose 16% after its Azure cloud business grew 43%, the biggest one-day market-value gain for a stock on record, and Amazon gained 10% after its cloud division drove the first ever $200 billion quarter. In contrast, Meta declined as its heavy AI spending and a profit miss weighed on its ad business.
Why it matters: Investors are differentiating among the big tech companies, rewarding clear returns on AI spending and turning more cautious on the rest.
Q2 Growth Slowed but Core Demand Held Firm
The U.S. economy grew at a 1.5% annualized rate from April through June, down from 2.1% in Q1. The slowdown traced mainly to an increase in imports, which count against GDP, and a decline in government spending.
A measure of private demand that combines consumer spending and business investment rose 3.9%, more than double the 1.7% pace of the first quarter, as consumers continued to spend.
Why it matters: The economy's core held up despite the slowdown, with consumer and business demand still growing even as the headline number cooled.
Manufacturing Hit a Four-Year High in July
A widely followed gauge of factory activity, the ISM's manufacturing index, rose to 55.6 in July from 53.3 in June, its strongest reading since 2022. A level above 50 signals expansion.
The improvement was broad: production led the gain, new orders held firm, factory hiring expanded for the first time in nearly three years, and cost pressures eased.
Why it matters: Manufacturing continues to strengthen after several sluggish years, when elevated interest rates and reduced capital spending weighed on activity.
The Market Does Not Need a Recession to Correct
When markets fall, investors often assume something must be wrong with the economy.
They start looking for evidence of a recession, weakening employment, falling consumer spending, or deteriorating corporate profits.
However, markets don't need an economic contraction to experience a meaningful decline.
Sometimes prices simply get ahead of fundamentals.
Indeed, according to Ned Davis Research, moderate corrections of 10% or more happen, on average, once per year. Market declines greater than 15-20% happen once every 2-3 years according to their research.
That’s because valuations can become stretched, interest-rate expectations can change, or investors can crowd into the same companies or sectors.
Additionally, sentiment can shift after a modest earnings disappointment.
And when markets are priced for an unusually favorable outcome, it doesn't take a crisis to force a reset.
That distinction matters because markets and the economy aren't the same thing.
The economy measures activity across businesses, consumers, employment, and production. Markets, on the other hand, reflect what investors are willing to pay today for the cash flows they expect to receive in the future.
As a result, the economy can remain relatively stable while stock prices decline. Corporate earnings may still be growing. Consumers may still be spending. Businesses may still be investing. Yet markets can fall if those outcomes are weaker than investors expected or if the price attached to those outcomes becomes harder to justify.
To be sure, we're seeing some of the forces that can create that vulnerability today.
For example, investors have become more selective about whether artificial-intelligence spending will translate into revenue, cash flow, and profits.
At the same time, higher oil prices and Treasury yields have brought inflation and interest-rate risk back into focus. None of this means a broad correction is underway.
However, it does illustrate how expectations can become more fragile even when the economy isn't falling apart.
In other words, a correction doesn't require a recession. It only requires the market's expectations to change.
Markets Trade on Expectations, Not Just Economic Conditions
One of the most important distinctions we make when evaluating markets is the difference between what's happening in the economy and what investors had already assumed would happen.
The economy tells us what's happening today. Markets are forward-looking, meaning they attempt to price what may happen next.
That means a company can continue growing revenue and profits while its stock declines. If investors expected faster growth, stronger margins, or a clearer return on investment, otherwise respectable results may still disappoint.
Suppose a company reports that earnings increased 10 percent from the prior year. On its own, that sounds like a good result, right?
Well, if the market had expected earnings to grow 15 percent, the stock may still decline. The company hasn't stopped growing, and the business may not be fundamentally impaired. Its results simply weren't strong enough to support the assumptions already reflected in its share price.
The same principle applies to the broader market.
Prices don't fall only when economic conditions become bad. They can also fall when conditions remain good but no longer appear good enough to support current valuations.
That's why a correction can occur before a recession becomes visible in the economic data. It's also why a correction can happen without a recession ever arriving.
Valuation Determines the Margin for Error
Now, a key factor we look at when it comes to market corrections valuations.
That’s because valuation affects how forgiving the market will be when expectations aren't met.
When investors are paying relatively modest prices for future earnings, some uncertainty may already be reflected in stock prices. A company may be able to report a mixed quarter or lower its outlook without producing an extreme reaction.
However, that dynamic changes when valuations become elevated.
A higher valuation often reflects confidence that revenue will keep growing, profit margins will remain strong, interest rates will cooperate, and management will execute with few setbacks. The more favorable assumptions already included in the price, the less room there is for disappointment.
The Federal Reserve describes elevated valuation pressure as a condition in which asset prices are high relative to economic fundamentals or historical norms, often alongside a greater willingness by investors to accept risk.
To be sure, elevated valuations don't tell us exactly when prices will decline, but they can increase the potential for larger losses when expectations change.
That's why a market priced for perfection doesn't need a recession to decline. It may only require the future to look slightly less perfect.
A company might still report higher revenue, but investors may become concerned that expenses are rising faster. A new product may continue attracting customers, but the path to profitability may take longer than anticipated.
An industry may still have a compelling long-term future, but investors may decide they've already paid too much for that potential.
None of those developments requires an economic collapse. They simply require investors to reconsider what they're willing to pay.
Interest Rates Can Reset Prices Without Breaking the Economy
Interest rates can create another source of market pressure.
The value of an investment partly depends on the cash flows investors expect to receive in the future. When the return available elsewhere in the market rises, investors may apply a higher required return to those future cash flows. That can reduce what they're willing to pay today.
At the same time, higher bond yields give investors a more competitive alternative to stocks. Investors may become less willing to accept equity risk when high-quality fixed-income investments offer more attractive yields.
Consequently, the market may demand a lower stock price, a higher expected return, or both.
This effect can be particularly significant for growth companies whose valuations depend heavily on profits expected many years from now. Even when the underlying business outlook remains positive, a change in rates can reduce what investors are willing to pay for those distant earnings.
Bonds can also decline as interest rates rise. Therefore, a period of higher yields can place pressure on both stocks and fixed income without signaling that a recession has begun.
The market may simply be adapting to a different cost of capital.
That's also why inflation matters to investors even when economic growth remains intact. If inflation causes interest rates to stay higher than investors expected, asset prices may need to adjust around that new reality.
Again, the economy doesn't have to contract for that adjustment to take place.
Positioning Can Magnify an Otherwise Ordinary Disappointment
Market corrections aren't driven by fundamentals alone. They're also influenced by how investors are positioned.
When enthusiasm builds around a company, sector, or investment theme, more investors begin owning the same assets for many of the same reasons. Rising prices attract additional capital, recent performance reinforces confidence, and the trade can become increasingly crowded. That process can continue longer than many investors expect.
However, crowded positioning can work in reverse.
A modest disappointment may lead some investors to reduce exposure. Those initial sales push prices lower, which can encourage additional selling from investors who were comfortable with the risk only while prices were rising. Before long, the decline can appear disproportionate to the news that caused it.
The headline may be the catalyst, but valuation, positioning, and sentiment often determine the size of the reaction.
That's another reason markets don't need a recession to correct. A crowded trade can unwind because the expectations supporting it have changed, even when the broader economy remains relatively stable.
Today's Environment Shows the Ingredients, Not the Outcome
The current market environment helps illustrate these forces, but it's important not to overstate what the recent data tells us.
The market hasn't experienced a broad correction simply because some growth and technology investments have come under pressure. Instead, investors have started applying greater scrutiny to companies making large artificial-intelligence investments. The question is shifting from how much those companies can spend to whether that spending can generate sufficient growth, cash flow, and profitability.
Meanwhile, renewed inflation concerns and higher interest rates have complicated the valuation backdrop. These developments don't prove that a correction is coming, and they certainly don't tell us when one might occur. They do, however, show how the assumptions supporting market prices can change.
A company can remain profitable while investors become less willing to pay a premium for its future growth. The economy can remain intact while interest rates force investors to reconsider valuations. A popular investment theme can continue having long-term potential while the stocks associated with it experience a short-term reset.
The current environment makes the subject timely. It doesn't serve as evidence that a broad correction has already occurred.
For evidence of the thesis itself, history provides a cleaner example.
The Fourth Quarter of 2018 Offers a Useful Example
During much of 2018, the Federal Reserve described asset valuations and investor appetite for risk as elevated. The economy, meanwhile, remained in an expansion.
Then, during the fourth quarter, market volatility rose sharply and equity prices declined. That drop reduced valuation pressure in stocks and corporate bonds, even though the underlying economic expansion continued.
The Federal Reserve later reported that economic growth remained solid during the second half of the year, with real gross domestic product growing a little less than 3 percent for 2018 as a whole.
The economy didn't enter a recession in 2018. According to the National Bureau of Economic Research, the expansion that began in June 2009 continued until economic activity peaked in February 2020.
That doesn't mean the 2018 decline was unimportant or that investors knew the economy would continue expanding. It means a meaningful market reset occurred without a concurrent recession.
Investors reassessed valuations, interest rates, global growth expectations, and their appetite for risk. Stock prices adjusted even though the economic expansion still had more than a year to run.
That's the distinction investors often miss.
A market decline may reflect concern about what could happen next. It may reflect a lower price investors are willing to pay for the same earnings. Or it may simply reverse some of the optimism that had already been built into prices. It doesn't automatically mean the economy has entered a recession.
How We Read a Market Decline
In our investment process, we don't treat every pullback as evidence that the long-term plan is broken. Over the years, we've learned to ask the same question first, before anything else. Is the market repricing expectations, or is the economy actually deteriorating?
That single question does most of the work. The market can reprice for all the reasons we've described, stretched valuations, higher rates, crowded positioning, a modest earnings disappointment, without the economy changing at all. So the first thing we look for isn't a headline. It's evidence of genuine financial stress.
Credit conditions tend to tell us the most. When investors grow truly concerned about borrowers' ability to repay, that worry shows up in credit markets before it appears almost anywhere else. When credit spreads stay calm while stocks fall, the decline usually looks more like repositioning than a fundamental break.
When spreads widen meaningfully, we pay closer attention. That's the same signal we've relied on through past pullbacks, and it rarely misleads us.
From there, the rest of the read fills in around that question. We look at whether weakness is broad or concentrated, because a decline led by a handful of highly valued companies tells us something different from weakness spreading across most sectors and company sizes.
We look at whether corporate fundamentals are deteriorating across the market or whether a smaller group of companies is simply failing to meet elevated expectations, because there's a real difference between profits falling throughout the economy and a profitable company disappointing investors who wanted more.
And we consider whether interest rates are changing the return investors demand, because a higher discount rate can lower prices even when the expected cash flows haven't weakened at all.
None of those readings, though, answers the only question that ultimately matters to you. Does this decline change your plan?
That's where we finish, every time. We return to the purpose of the money.
Has your time horizon changed?
Have your near-term spending needs increased?
Is there enough liquidity in place?
Has your willingness or ability to accept risk changed?
We also look at whether prior performance has quietly left the portfolio more concentrated than intended, because an investment that did well can grow into a larger position and leave you more dependent on one company, one sector, or one outcome than you meant to be.
A correction that doesn't change your goals, time horizon, or cash-flow needs may not require any change to the long-term strategy.
However, a portfolio that was too concentrated, too aggressive, or too dependent on near-term withdrawals may reveal a weakness that deserves attention.
This approach doesn't let us predict the market's exact bottom.
Nothing does.
But it does help us tell the difference between normal repricing, broader financial stress, and a portfolio problem that actually requires action. That distinction is the one that protects the plan.
Diversification Matters When Leadership Changes
The purpose of portfolio construction isn't to eliminate every decline. That isn't realistic.
Instead, the goal is to build a portfolio that doesn't require every part of the market to perform well at the same time.
Market leadership changes. Growth can outperform value for an extended period before the relationship reverses. Domestic stocks can lead international markets until valuation differences begin to matter. Longer-term bonds can provide diversification in one environment and struggle when inflation and interest rates rise. No allocation works best under every condition.
That's why diversification isn't simply about owning more investments. It's about reducing the portfolio's dependence on one company, one investment style, or one economic outcome.
The SEC describes asset allocation as dividing investments among categories such as stocks, bonds, and cash. It also emphasizes that investors should look beneath fund labels and examine underlying holdings, because owning several funds doesn't necessarily create meaningful diversification.
Diversification can't prevent losses or guarantee better returns. However, it can reduce the risk that weakness in one narrow part of the market disrupts the entire plan.
Rebalancing provides another layer of discipline. When one area has risen far beyond its intended allocation, rebalancing can reduce unintended concentration.
When another area has fallen below its target, the process can create a systematic way to restore exposure without relying entirely on emotion or short-term predictions.
The SEC identifies asset allocation, diversification, and rebalancing as related tools for managing portfolio risk over time.
Adequate liquidity matters as well. Investors who have their near-term spending needs covered are generally in a better position to tolerate volatility. They're less likely to become forced sellers during a decline and less dependent on correctly predicting when the correction will end.
In our experience, these decisions are best made before markets become unsettled. It's far easier to build discipline into a portfolio when nothing is going wrong than to manufacture it in the middle of a selloff.
Build for the Reset Before It Arrives
Corrections are uncomfortable because they create uncertainty without providing a clear endpoint.
Nevertheless, they're a normal part of investing.
A durable investment plan shouldn't depend on the economy avoiding every slowdown, interest rates moving exactly as expected, or investors remaining permanently enthusiastic about the same companies.
It should assume that valuations will occasionally reset, market leadership will change, and prices will sometimes decline even when the economic backdrop remains relatively stable.
Therefore, the important question isn't whether the market will experience another correction. It will.
The more important question is whether your portfolio was built to withstand one.
A pullback isn't automatically evidence that the plan has failed. Sometimes it's simply the market adjusting expectations, demanding greater discipline, and returning prices to a level that better reflects the risks ahead.
The market doesn't need a recession to correct. Likewise, a disciplined investor doesn't need to predict every correction to be prepared for one.
So the real question isn't whether you can see the next correction coming. It's whether your plan is ready when it does.
Sources
Federal Reserve Board, Financial Stability Report: Asset Valuation Pressures, November 2018; https://www.federalreserve.gov/publications/2018-november-financial-stability-report-asset-valuation-pressures.htm
Federal Reserve Board, 2018 Annual Report: Monetary Policy and Economic Developments; https://www.federalreserve.gov/publications/2018-ar-monetary-policy.htm
National Bureau of Economic Research, Determination of the February 2020 Peak in US Economic Activity, June 8, 2020; https://www.nber.org/news/business-cycle-dating-committee-announcement-june-8-2020
U.S. Securities and Exchange Commission, Investor.gov, Asset Allocation and Diversification; https://www.investor.gov/introduction-investing/getting-started/asset-allocation
Stock Market Corrections Are Normal — Ned Davis Research (PDF); https://www.ndr.com/hubfs/NDR/Business%20Developer/pdfs/EDU_8_WM_public.pdf?hsLang=en
July Market Update: A Loud Month, a Quiet Market
July gave investors plenty to think about.
Geopolitical tensions flared again in the Middle East. AI stocks pulled back after a strong start to the year. And the Federal Reserve had another rate decision to make.
Yet when the month was over, the market had barely moved.
The S&P 500 returned -0.1%.
Beneath that flat headline, though, there was quite a bit going on. Energy led every sector with a +12.6% return as geopolitical tensions pushed oil prices higher. Financials followed at +6.2%. The more defensive corners of the market held up well too, with Real Estate (+2.5%), Health Care (+2.4%), and Consumer Staples (+2.1%) all gaining ground.
Technology was the outlier. The sector fell -3.4% as AI stocks gave back some of the gains they'd built up earlier in the year.
Bonds had a tougher month.
The U.S. Aggregate Bond Index returned -1.3% as Treasury yields moved higher. The culprit was familiar: rising oil prices, tied to the renewed U.S.-Iran conflict, brought inflation concerns back to the surface. Investment-grade corporate bonds lagged with a -1.5% return, while high-yield corporates held up a bit better at -0.3%.
Overseas, the picture was mixed. Developed international markets gained +2.0% and outperformed the S&P 500. Emerging markets went the other way, returning -3.0%, as the same U.S. tech selloff weighed on South Korean stocks.
Markets Turn Back to the Middle East as Tensions Resurface
The ceasefire from earlier this spring didn't hold.
Renewed conflict between the U.S. and Iran brought back the same headlines and the same concerns we saw earlier in the year. Once again, uncertainty around the Strait of Hormuz raised the risk of reduced oil supply. Late in the month, there were signs of another round of de-escalation, but the situation remains fluid.
This matters for the same reason it did the first time around.
After all, energy prices feed directly into inflation. And inflation, in turn, shapes what the Federal Reserve decides to do next.
In July, the Fed held interest rates steady for the fifth consecutive meeting. But it wasn't a unanimous call. A handful of officials pushed for a +0.25% rate hike, pointing to the renewed inflation risk.
If this feels familiar, that's because it is.
We've now moved through this same cycle several times this year. Conflict escalates. Oil prices rise. Tensions ease. And then the pattern repeats. The specific headlines shift from week to week, but the market has absorbed this same shock more than once.
The Fed's split decision reflects that uncertainty. Officials are debating their next move, but for now they're choosing to gather more information rather than react to the latest headline.
And here's the part worth remembering: despite all the noise, the net impact on markets has been limited. Stocks rebounded from the March selloff, and the S&P 500 has returned nearly +10% this year.
AI Stocks Trade Lower as Investors Shift Focus from Growth to Discipline
Second-quarter earnings season kicked off in July, and the biggest names in AI all reported: Alphabet, Microsoft, Meta, Apple, and Amazon.
These are the companies pouring money into data centers and the other infrastructure needed to power artificial intelligence. This quarter, they laid out their forecasts and their spending plans.
Something had changed in how investors received them.
For the past two years, the AI conversation was all about scale. How much are these companies spending? How fast are they building? How big could the opportunity get? This quarter, the focus shifted to a different question: profitability and return on investment.
In plain English, investors started pushing back on the spending.
Companies whose investments are clearly translating into growth, like Microsoft's cloud business, were rewarded. Companies whose spending has outpaced their cash flow, or started to weigh on profit margins, saw their stocks move lower.
The market is no longer content to reward growth and big spending numbers on their own. It's asking a harder question: is the spending actually profitable, or are expenses climbing faster than revenue?
This is a healthy development.
Every major technological buildout eventually reaches a point where investors stop rewarding growth for its own sake and start looking for results to match. July was the month that question arrived for AI.
As that scrutiny set in, semiconductor stocks and other parts of the AI trade gave back some of their earlier gains, with investors questioning whether the current pace of spending could last.
But it's worth keeping the pullback in perspective.
The volatility stayed relatively contained. For instance, the equal-weight S&P 500, a proxy for the average S&P 500 stock, set a new all-time high late in the month, and seven of the eleven sectors finished higher. Credit spreads, which measure how worried the market is about credit risk, widened only modestly and remain very tight by historical standards. And even after the pullback, semiconductor stocks are still up nearly +60% for the year.
As for the companies doing the spending? They're forecasting even higher spending levels in the quarters ahead.
What This Means for Investors
July was a busy month that, on the surface, went almost nowhere.
Geopolitical tension returned. AI leadership wobbled. The Fed stood pat, but not without disagreement. And through all of it, the S&P 500 finished essentially flat.
That's a useful reminder.
A lot can happen in a month without much of it showing up in your account balance. The headlines were loud, but the market's response was measured, and in some ways more disciplined than it's been in a while.
That discipline is the theme worth holding onto. Whether it's a geopolitical shock the market has already learned to absorb, or a shift toward asking harder questions about AI spending, the through-line is the same. Markets are starting to separate noise from results.
For long-term investors, that's not something to fear. It's something to build around.
Weekly Market Update: Investors Rotate Away From Tech as Inflation Heats Up
Markets were mixed this week as technology and growth stocks declined while value and defensive sectors traded higher. The S&P 500 fell -0.3%, the Nasdaq declined -2.6%, and the Russell 2000 small-cap index slipped -1.0%.
However, the Equal-Weight S&P 500 gained 1.3%, and Value 1.6% outperformed Growth -2.3%, signaling broader participation and a rotation beneath the major indexes. Health Care 5.6% and Consumer Staples 3.9% led, with nine of the eleven S&P 500 sectors finishing higher. Technology -4.4% significantly underperformed.
Bonds rallied as Treasury yields declined, with longer-maturity Treasuries gaining 2.7%. Investment-grade corporate bonds gained 1.0% and outperformed high-yield bonds, which were flat as credit spreads widened. Oil rose 6.8%, while the U.S. dollar and Bitcoin were little changed.
Key Takeaways
Energy Pushes Inflation Higher
The Consumer Price Index (CPI) rose 0.6% in September, lifting year-over-year inflation from 3.4% in August to 3.7%. Gasoline prices jumped 9.1% month-over-month, accounting for more than half the monthly increase. Underlying inflation also firmed.
Core CPI, which excludes food and energy, rose 0.3%, slightly above expectations. Producer prices climbed 1.3% for the month, their largest gain since March 2022, reflecting both rising energy costs and broader price pressures.
Why it matters: The combination of persistent inflation and slower hiring complicates the Federal Reserve's efforts to balance price stability with economic growth.
Spending Beats Expectations, Helped by Gas Prices
Retail sales rose 0.8% month-over-month in September, beating expectations for a 0.3% gain, and August's increase was revised higher to 1.3%. Part of that strength reflected gasoline prices. Retail sales aren't adjusted for inflation, so higher fuel prices can lift reported spending, and sales at gas stations rose 6.4% in September.
Excluding gas stations, retail sales increased 0.2%. Spending at restaurants and other retailers stayed positive, suggesting consumers kept buying despite higher costs.
Why it matters: The report points to continued consumer spending, although growth outside gas stations wasn't as strong as the headline suggested.
AI Borrowing Comes Under Scrutiny
AI-related stocks declined sharply this week as investors grew more concerned about the heavy borrowing behind AI infrastructure. CoreWeave, a major provider of AI computing capacity, fell roughly -15% on Wednesday. Yields on some of its bonds approached 15%. That's a sign investors are demanding much higher compensation to lend to the company.
Building AI infrastructure takes enormous upfront spending on data centers, specialized chips, and electricity, and some companies are borrowing heavily to fund it. The sell-off came even though semiconductor manufacturers reported strong earnings.
Why it matters: Demand for AI computing and infrastructure remains strong, but higher borrowing costs have increased scrutiny of how companies are paying for that buildout.
Bank Earnings Point to a Resilient Economy
Third-quarter bank results showed continued growth in credit and debit card spending, adding to evidence that consumers remained active. Credit quality was also solid. Borrowers generally kept up with their payments, and loan losses stayed contained despite rising interest rates.
Bank leaders said consumers and businesses were holding up well, though they acknowledged challenges from inflation and higher borrowing costs.
Why it matters: Taken together, the results suggest consumers and businesses remain relatively resilient despite higher interest rates, elevated oil prices, and persistent inflation.