The Big Picture

Briefing.com Summary:

*The S&P 500 has gained in September, but weakness across equal-weighted, small-cap, mid-cap, and most sector indexes revealed narrow leadership.

*Surging Treasury yields and expectations for additional Fed rate hikes weighed heavily on rate-sensitive stocks and the broader market.

*Mega-cap and semiconductor strength masked widespread weakness, reinforcing that headline S&P 500 performance did not reflect the average stock.

The month of September is winding down, and it has been a better-than-feared month—or has it?

When September was approaching, the business media was awash with references to how September has historically been the worst month of the year for the S&P 500. Morningstar, citing Dow Jones Market Data, reported that the average decline for the S&P 500 since 1928 has been 1.1%.

Well, we're pleased to report that the S&P 500 is up 0.8% for the month, led by its mega-cap and semiconductor components. The Vanguard Mega-Cap Growth ETF (MGK) is up 3.9%, with Meta Platforms (META), up 31%, serving as its muse; meanwhile, the State Street SPDR S&P Semiconductor ETF (XSD) is up 11.5%.

That's pretty much where the good performance news stops. What has happened in the market cap-weighted S&P 500 has stayed in the market cap-weighted S&P 500.

The equal-weighted S&P 500, down 3.8% for the month, has lived up to September's advance billing and then some.

A Bear Flattener

What has gone wrong for the rest of the market? Simply put, little has gone right on the interest rate front.

The Treasury market has been upended by a recalibration of the monetary policy outlook, which itself has been upended by stubbornly high inflation and the persistence of high energy prices. Other sources of upset have been the increased debt issuance (both government and corporate), the shadow of the growing national debt, and a batch of economic data that have conveyed real strength in the U.S. economy (the Atlanta Fed GDPNow real GDP estimate for Q3 currently sits at 5.0%).

In other words, the basis for the jump in Treasury yields hasn't been all bad.

Still, higher rates are generally less friendly to stocks. They reduce the present value of future cash flows, increase financing costs, and provide investors with a more attractive risk-free alternative.

More unsettling has been the speed of the move. The 2-yr note yield has soared 53 basis points in September to 4.88%, while the 10-yr note yield has surged 44 basis points to 5.18%, its highest level since 2007.

That "bear flattener" reflects a market increasingly concerned that stubborn inflation and economic strength will force the Fed to raise rates further.

The current target range for the fed funds rate is 3.75-4.00%, yet the 2-yr yield sits at 4.88%. The fed funds futures market is currently pricing in three more rate hikes before the April 2027 FOMC meeting. A lot can happen before then, but several Fed officials have already teased the possibility of at least one more rate hike before year end.

Empirical Proof

Rising rates have been the broad market's biggest problem, but they haven't been its only problem. A new AI-driven threat to established business models has added another layer of uncertainty.

The Muse AI agent from Meta is an agent that can handle personal tasks behind the scenes, 24/7, at the direction of its owner. That carries obvious benefits for consumers in terms of saving time, money, and aggravation. What may be good for the consumer, however, may not be as good for the businesses built around direct consumer interaction.

The term "disintermediation" has quickly become a part of the market narrative, used to explain how the agent takes over as a middleman to disrupt the traditional approach of a person interacting directly with the business and its consumer platform. That can reduce impulse purchases, diminish cross-selling opportunities, and steer business elsewhere.

In brief, it could hurt the earnings prospects for some businesses. Online travel agencies and financial companies got caught in those presumptive crosshairs this past week.

One wouldn't know it from the market cap-weighted S&P 500, but the empirical data speaks for itself. This has been a September to remember, or forget, depending on one's positioning:

• The Dow Jones Transportation Average is down 8.0%.
• The Dow Jones Utility Average is down 4.9%.
• The Russell 2000 is down 4.0%.
• The equal-weighted S&P 500 is down 3.8%.
• The S&P MidCap 400 is down 2.8%.
• The Dow Jones Industrial Average is down 2.5%.
• Eight of the 11 S&P 500 sectors are down, with losses ranging from 1.8% to 5.9%. Communication Services (+5.7%), Information Tech (+4.8%), and Health Care (+0.4%) are the three winners.
  • Consumer Staples (-1.8%)
  • Energy (-2.1%)
  • Industrials (-2.5%)
  • Consumer Discretionary (-4.6%)
  • Financials (-4.7%)
  • Materials (-4.9%)
  • Real Estate (-5.1%)
  • Utilities (-5.9%)

Briefing.com Analyst Insight

When September began, the equal-weighted S&P 500 was leading the market cap-weighted S&P 500, up 14.5% versus 12.3% year-to-date. Those positions have now been flipped.

As of today, the market cap-weighted S&P 500 is up 13.1%, while the equal-weighted S&P 500 is up 10.2%. There is nothing wrong with either gain, but the reversal is a reminder that the headline index doesn't always tell the market's full story.

September has been a winning month for the S&P 500, but it hasn't been a winning month for the stock market.

That distinction matters. Rising interest rates have exposed a market riding on the shoulders of a relatively small group of mega-cap and semiconductor stocks. Beneath them, the weight of higher rates has been much harder to bear.

Maybe September's reputation wasn't wrong after all. It just needed to be viewed through an equal-weighted lens.

The good news is that September is almost over. The more important question is whether the forces that made it difficult for most stocks—higher rates, tighter financial conditions, and narrowing leadership—are almost over, too.

--Patrick J. O'Hare, Briefing.com