“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Rising rates, higher oil prices, and weaker breadth are increasing near-term market volatility.
That said, the tactical environment can deteriorate even while the bigger-picture fundamental backdrop remains constructive.
Stay patient and use meaningful pullbacks to consider selectively adding to quality growth, industrial, and energy exposure.
The road for investors is getting a bit more difficult to navigate in the near term, but we remain optimistic about the market longer-term assuming there is no exogenous shock or sudden deterioration in fundamentals.
The recent challenges posed by rapidly rising interest rates, higher oil prices, and increasing volatility across the commodity complex were all evident last week. Many of the pressure points we highlighted heading into September continued to move in the wrong direction. Equities remained closely tied to the 30-year US Treasury yield, which in turn continued to track the move higher in oil. Breadth weakened further, energy outperformed alongside crude, small caps lagged large caps, and artificial intelligence (AI) was once again at the center of the market debate. Investors continued to wrestle with questions around the durability of current AI model advantages and DeepSeek introduced another highly efficient model.
Despite the tightening in financial conditions and the proliferation of macroeconomic concerns, the S&P 500 Index sits less than 2% below its August all-time high. That is hardly evidence of a market whose fundamental foundation is cracking.
Rather, it reinforces an important distinction we have made throughout the year: the tactical environment can deteriorate even while the bigger-picture fundamental backdrop remains constructive. Earnings growth expectations remain robust, domestic economic growth is holding up well, and we continue to receive encouraging updates across the AI value chain. Those are ultimately the variables that matter most for the sustainability of the bull market.
The question is whether those fundamentals remain strong enough to offset the increasingly difficult macro backdrop. Rising long-term yields are clearly creating a higher hurdle for equities, particularly in the more rate-sensitive parts of the market. But higher rates do not automatically mean lower stock prices. Equities can perform quite well alongside rising yields when those yields reflect a healthy economy and improving nominal growth. The more problematic outcome would be a continued surge in rates, driven primarily by inflation fears and higher energy prices that eventually begin to erode growth expectations and corporate margins. We are not there yet, but that is the risk investors need to monitor closely. Additionally, we’ve rapidly approached the psychologically important 5% level on the 10-year Treasury yield, where a move above and beyond risks nonuniform damage to equities.
The Consumer Price Index (CPI) report meaningfully increased the possibility of a rate hike and ensured that September will be a truly important meeting. Ironically, the Federal Open Market Committee (FOMC) meeting could also serve as something of a clearing event. Markets have spent the past several weeks repricing the path for monetary policy amid higher oil, stronger inflation concerns, and rising longer-dated yields. Friday’s rally suggests that some investors are beginning to look beyond the meeting. Whether the US Federal Reserve (Fed) hikes or not, greater clarity around the Fed’s reaction function could remove one meaningful source of uncertainty that has been hanging over markets.
We knew September was likely to be challenging given elevated geopolitical risk, higher long-term rates, and difficult seasonal dynamics. What has changed now is that several of these risks are reinforcing one another. Higher oil is feeding inflation concerns, inflation concerns are putting upward pressure on yields, higher yields are weighing on breadth and rate-sensitive equities, and weaker breadth is leaving the headline indices increasingly dependent on a smaller group of stocks. None of these developments individually breaks the bull case, but together they raise the probability of additional volatility over the coming weeks.
The lesson from this year has not been to avoid volatility; it has been to use volatility rather than chase through it. There have been multiple periods where rapidly shifting narratives created uncomfortable drawdowns without materially changing the earnings or economic outlook. Investors willing to stay disciplined and add selectively into those periods have been rewarded. We think the same playbook remains appropriate today.
Once we're passed the macro, tech is ripe with opportunity
Percent of Russell 3000 tech companies with a 14-day relative strength index over 70
Source: Bloomberg, as of 9/11/2026.
It’s important for investors to keep the big-picture perspective that tactical caution and strategic pessimism are not the same thing. The positioning backdrop is cleaner, sentiment is more balanced, earnings remain resilient, and AI fundamentals solid. The economy remains in good shape, earnings growth remains robust, and the secular investment themes supporting capital spending have not disappeared.
However, the potholes are getting larger. Seasonality, momentum rebalancing flows, and ongoing systematic supply will likely weigh on risk assets in the coming weeks, particularly against a more challenging rates and energy backdrop. This makes it challenging to add risk, but we continue to view meaningful downside as an opportunity to improve portfolio positioning. Right now, we like leaning into solid earnings growth at a reasonable price, selectively adding to AI adopters and companies that address compute bottlenecks and are attractive on a price-to-earnings basis — especially if there is meaningful downside after recent calls to slow the development of the most advanced AI models. Industrials also look oversold, and there is likely going to be more durability to the energy trade.
From AI hype to AI selection. The renewed AI debate is likely to remain noisy as increasingly efficient models raise questions about competitive advantages and monetization. As a result, equities are increasingly discerning on AI winners vs. laggards, while investors seem to be focused on relative value plays within semiconductors and software, rising dispersion, and amplifying moves.
Key risks to the AI trade include: 1) credit, 2) policy, and 3) China and open-source competition. Policy has been amplified over the last week with calls for regulation and slowing the pace at which AI companies improve frontier models. President Trump remains focused on charging forward, which should help mitigate the chances of any regulations moving quickly. Meanwhile, fundamentals keep improving, the pace of model improvement appears to be accelerating, and grinding higher rental costs confirm we are still compute-constrained. The rising tide will not lift every boat, making selectivity increasingly important, but we believe quality secular growth in the stronger earnings growers trading at attractive valuations can remain a core portfolio anchor.
Be patient down market cap. Small caps have been vulnerable to the combination of higher long-term yields, rising energy prices, and increased macro uncertainty. Near-term pressure does not erase the improving earnings story that has made us more constructive on the group. It does reinforce why we have consistently argued that fundamentals — not simply lower rates — must support any sustainable move down market cap. We would not chase weakness indiscriminately, but additional volatility could continue to create opportunities in higher-quality companies where earnings trajectories remain intact.
Energy can be an important source of balance, but do not chase. Higher oil prices have understandably supported the energy complex and reinforced the diversification benefits of maintaining exposure. However, after the recent strength, investors should resist extrapolating near-term momentum indefinitely. We believe the better approach is to maintain balance between areas benefiting from the current macro environment and secular winners with strong fundamentals but whose valuations may become more attractive if volatility persists. Oil servicers have underperformed the broader exploration and production complex and likely will be critical to help keep oil flowing in the US and to rebuild infrastructure globally. Additionally, large-cap integrated and mid-stream companies with durable cash generation profiles have been strong and still look interesting.
It’s a busy week for central banks. We’ll hear from the Bank of England, Bank of Japan, and the FOMC, which will dominate the calendar. Beyond the policy decision itself, the most important question will be how the Fed characterizes the recent rise in inflation and oil prices relative to the strength of the underlying economy. The market will also be sensitive to any signal that policymakers view the increase in longer-dated yields as doing some of the tightening for them. Investors are expecting a quarter-point hike by the Bank of Japan given recent messaging from Japanese policymakers and the latest yen intervention. The Bank of England is likely on hold, although the risk of a tightening move shouldn’t be discounted.
Additionally, US Treasury Secretary Scott Bessent is expected to appear before the US House Financial Services Committee for the annual testimony on the international financial system. The US and Japan also both look to sell 20-year bonds.
On the economic data front, US retail sales and industrial production as well as Canadian Consumer Price Index (CPI) top the bill in North America. United Kingdom jobs and inflation data will be the highlights in Europe while Chinese retail sales and industrial production feature in Asia.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Analyst at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of Sept. 11, 2026.
Risk Information:
M-1001745 Exp. 1/14/2027
BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA1, 2
Rising macroeconomic uncertainty could make for a challenging few weeks ahead.
Interest rates could drive near-term volatility, but earnings growth remains the foundation of our longer-term outlook.
Seek opportunities across the artificial intelligence capital expenditure trade. Outside of AI, consider larger banks, energy, health care, technology, cyclical industrials, and select global markets.
We remain tactically neutral as earnings season hands the baton back to macroeconomic data.
Friday’s payrolls report was better than expected, but continuing pressure on wage growth did little to change market pricing around next week’s Federal Open Market Committee (FOMC) meeting. That places even more importance on this week’s Consumer Price Index (CPI) report.
Geopolitical tensions are also moving back into the headlines, and the broader risk environment is unlikely to improve materially until those tensions ease and pressure for further central bank tightening recedes. Interest rates remain particularly important: We have been highlighting the risks to equities if longer-dated yields continue to rise, and since the July FOMC meeting and Treasury’s buyback announcement last month, the trajectory of the 30-year yield has closely tracked oil. With the VIX volatility index near year-to-date lows despite rising macro uncertainty, there is little reason for complacency heading into what could be a bumpy few weeks.
None of this changes our optimism into year-end. The market just closed a remarkably strong earnings season characterized by broad-based growth across sectors and industries, record profitability, and revenue growth of roughly 15%. That’s well above the nominal growth of gross domestic product (GDP). Importantly, earnings also confirmed that the artificial intelligence (AI) capital expenditure (capex) cycle remains healthy.
We continue to favor an overweight to secular growth in the US, which we see as increasingly complemented by opportunities across sectors, geographies, and broader asset classes, including fixed income and commodities. One key to our playbook this year has been using market declines opportunistically, and that remains the case today: We remain tactically patient and fundamentally constructive, while staying ready to put capital to work if macro volatility creates better entry points.
Last week’s US Federal Reserve (Fed) commentary pushed back against some of the hawkish repricing that followed Fed Chairman Kevin Warsh’s speech at the Jackson Hole Economic Policy Symposium.
Federal Reserve Bank of New York President John Williams pointed to recent progress on inflation and advocated a wait-and-see approach. Fed Governor Christopher Waller went a step further, saying he would be inclined to keep rates unchanged if the upcoming inflation data confirms that disinflation is continuing. Both, however, left room for the data to change the calculus. That leaves the September FOMC decision unusually uncertain: Friday’s stronger payroll report pushed the probability of an interest rate hike back to roughly 60%, making this week’s CPI report the key remaining input.
For equities, however, the more important near-term issue is not simply the level of yields, but the pace and scale of any move.
The yield on the 10-year US Treasury note briefly reached 4.82% last week and the 30-year traded above 5.25%. This upward pressure on the long end of the yield curve reflects more than Fed expectations alone. Higher energy prices and inflation risk remain the biggest near-term drivers. Also contributing are fiscal concerns and heavy government and AI-related corporate debt issuance.
Now at a year-to-date low, the VIX is late to its normal upswing
VIX seasonal trends since 2000 vs 2026
Source: Bloomberg, as of 9/4/2026.
Equities have proven to be relatively resilient to gradually higher yields, but abrupt repricings have been a different story, as we saw after Jackson Hole and during several episodes earlier this year. A hotter-than-expected CPI report, a September hike, or both could therefore precipitate another sharp risk-off move.
That said, we don’t think such a move would reflect a deterioration in the fundamental backdrop. Earnings growth has largely decoupled from bond yields. Despite rising rates, S&P 500 Index earnings per share (EPS) growth has topped 20% over the past two quarters, reaching 52% in the second quarter, and is expected to remain in the double digits in the third.
The Fed can influence the path of markets over the next couple of weeks, but we expect earnings to remain the ultimate arbiter of longer-term direction. That reinforces the benefits of balance: Energy, insurance, and other cyclically oriented areas that tend to benefit from higher yields can complement the overweight we favor to secular growth rather than requiring an all-or-nothing rotation away from it.
While risks are elevated ahead of Friday’s CPI report and next week’s FOMC meeting, we remain optimistic and would not be surprised to see the S&P 500 push toward 8100 or 8200 before year-end. That is why we believe investors should remain patient and keep a shopping list ready over the next two weeks as markets navigate several potential potholes before returning to what we expect to be a smoother path higher.
Technology momentum remains in its worst stretch of performance on record – now negative for the year after being up more than 125% at the end of June. At the same time, many software stocks have surged back to all-time highs as the rest of technology has moved largely sideways. In fact, the correlation between semiconductors and software has essentially fallen to 0%, while health care has become the “anti-tech” trade, with the two sectors now inversely correlated.
We believe these unusual dynamics don’t change the bigger picture for the health of the overall market. That’s because technology has already experienced considerable damage beneath the surface, while NVIDIA and much of the Magnificent Seven are still holding up.3 A meaningful pullback across the S&P 500 would likely require technology and financials to break at the same time – and financials, while sluggish lately, are still holding up reasonably well. This is why we say investors do not need to chase the market higher, but should be ready to buy dips. Two areas look particularly important:
Continue to look for opportunities across the AI capex trade. This has remained one of the market’s most durable areas of growth, and earnings have continued to support that view. Any further weakness across this cohort of companies could create an attractive setup for investors who are underweight or have not directly participated. The bottlenecks have not disappeared, and delays at data centers do not necessarily create a glut of chips, memory, or servers. Instead, that supply can shift to cloud providers, which have significant backlogs and supply-chain challenges of their own. Meanwhile, keep the bigger picture in mind: We’re witnessing the fastest monetization ramp in history, with Anthropic projected to reach $200 billion in annual revenue in just seven years, compared with 25 years for Amazon Web Services. Skepticism around the scale of AI investment is understandable, but history shows that each computing cycle has created substantially more value than the last, and AI return on investment (ROI) is already emerging across sectors. The level of spending is also a significant contributor to US economic growth, adding more than 1% to GDP growth. This perhaps highlights that some inflation challenges are supply-driven rather than demand-driven – meaning rate hikes may have a limited effect.
Beware of higher rates if you’re looking for continued broadening. Leadership has been shifting to financials, quality laggards, value, and perceived policy beneficiaries given the elections in November. Heading into the highs, breadth was strong on this rotation, but over the past week we saw a reversal as interest rates spiked. This does not mean these sectors cannot continue to perform well. Rather, it means investors need to be more selective within each area. For now, it makes sense to lean into larger companies across banks, energy, health care, technology, and cyclical industrials as investors place greater value on larger balance sheets and stable businesses. We also expect international markets to remain part of the broadening trade. European financials are reaching all-time highs; Japanese equities are recovering, accompanied by another yen intervention to support the currency; India is showing signs of improvement as the rupee appreciates; and Brazil may be nearing the end of a four-month correction. Central bank activity abroad also has been well-telegraphed, which could help alleviate some of the near-term volatility around the FOMC meeting.
In the US, the Producer Price Index (PPI) arrives Thursday and CPI on Friday, with CPI being the market’s primary focus. The August CPI report is the last major data point ahead of the FOMC, now in its communications blackout period.
On the corporate side, Apple’s iPhone event is Wednesday at 1 p.m. ET, while Oracle and Adobe report earnings Thursday after the bell.
In Europe, the focus will be on the European Central Bank meeting on Thursday, which is largely expected to deliver a rate hike while leaving the door open for further tightening.
1 Matt Orton, CFA, is Chief Market Strategist at Raymond James Investment Management. Joey Del Guercio, CFA, is Research Analyst at Raymond James Investment Management.
2 Unless otherwise indicated, all data cited is sourced from Bloomberg as of Sept. 4, 2026.
3 This is not a recommendation to purchase or sell the companies or investment products mentioned herein.
Risk Information:
M-998048 Exp. 1/8/2027
