The S&P 500 returned 2.3% (12.7% year-to-date) and finished near record highs, led by large technology and AI companies, while small caps fell nearly 8% and international stocks were roughly flat.
Stocks Near Record Highs on Exceptional Earnings
The S&P 500 returned 2.3% (12.7% year-to-date) and finished near record highs, led by large technology and AI companies, while small caps fell nearly 8% and international stocks were roughly flat. Earnings did the heavy lifting. S&P 500 profits grew more than 30% in the second quarter, third-quarter earnings are expected to grow about 29%, and analysts unusually raised their estimates during the quarter.
AI Sparks Bouts of Volatility
AI remained the market’s main growth engine, but it also drove sharp swings. Chip stocks sold off in July on valuation concerns, and again in mid-September after the CEOs of Anthropic and OpenAI warned about AI safety risks and urged the industry to slow development. Markets largely recovered, but these episodes highlight the risk of a market concentrated in a single theme.
Oil Rebounds Above $100
Renewed Middle East tensions and uncertainty around the Strait of Hormuz reversed much of the second quarter’s relief. Oil climbed from around $70 per barrel in early July to more than $100 by mid-September, briefly reaching $108, with Brent crude ending the quarter at $103.
Solid Growth, Slower Hiring
GDP grew at a 2.2% annual rate in the second quarter after 2.5% in the first, and personal spending rose 0.9% in August. Hiring has cooled, however, with just 29,000 jobs added in September and unemployment ticking up to 4.2%.
The Fed Hikes from a Position of Strength
On September 16, the Fed unanimously raised rates 0.25% to 3.75%–4.00%, its first hike since 2023. September inflation, released October 14, came in hotter than expected: CPI rose 3.7% from a year ago, driven by a 9.1% monthly jump in gasoline, while core CPI rose 2.6%. The 10-year Treasury yield climbed to 5.29%, pushing the Bloomberg U.S. Aggregate Bond Index down 3.5% for the quarter, though today’s yields offer meaningful income above inflation.
Looking Ahead
The fourth quarter brings the midterm elections, the October 27–28 Fed meeting, oil price volatility, and third-quarter earnings season. Slower hiring argues for a pause, but hotter inflation keeps another hike in play, with markets now eyeing December. History shows the S&P 500 has averaged 8.6% annual returns in midterm election years since 1933. Our focus remains on maintaining well-diversified portfolios, managing risk thoughtfully, and keeping clients focused on their long-term goals.