October 5, 2026: Earned leadership

BY MATT ORTON, CFA, AND JOEY DEL GUERCIO, CFA^{1, 2}

Key takeaways

• Rising longer-dated US Treasury yields – and the forces driving them – are the most important risks to monitor going forward.

• Broad market breadth remains weak, but participation within semiconductors and across technology has improved dramatically.

• We increasingly favor positioning for a year-end equity rally, with mega-cap technology likely to be the primary driver. Our playbook also is focused on select opportunities in small- and mid-cap industrials, health care and international markets.

 

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The macroeconomic backdrop turned friendlier last week, but the bond market didn’t get the memo. October interest rate hike expectations fell sharply, yet longer-dated US Treasury yields reached fresh highs for this cycle.

Meanwhile, the S&P 500 Index fell just 0.3%, the Nasdaq-100 Index gained 0.7% (hitting another all-time high), and the PHLX Semiconductor Sector Index™ (SOX) added 3.7%. Equity resilience, especially in technology, is becoming harder to dismiss. We are increasingly comfortable with adding beta through mega-cap technology and semiconductors broadly. That’s not because the interest rate problem has disappeared, but because earnings, valuations, and participation within those groups have provided more reasons to trust the rally.

Last week brought a substantial repricing of expectations for a US Federal Reserve (Fed) interest rate increase. October hike odds fell from 65% to 23% as:

• dovish comments from Fed Vice Chair Philip Jefferson and Federal Reserve Bank of New York President John Williams signaled patience,

• core Personal Consumption Expenditures (PCE) Price Index inflation came in cooler than expected,

• payrolls rose by just 29,000 against expectations of 90,000, and

• unemployment ticked up marginally to 4.2%.

Nearly every data point we saw bolstered the case for the Fed staying on hold at its next meeting. We believe this reinforces our view that expectations for a prolonged hiking cycle look overdone. Less urgency to hike is helpful, but we will continue to monitor how the evolution of these expectations affects the long end of the yield curve over time.

 

The risk to watch

The long end itself presents a different problem. West Texas Intermediate (WTI) crude oil fell for a second consecutive week and short-end yields eased marginally, yet 10- and 30-year Treasury yields reached their highest levels since 2002. A Fed pause in October does not settle the longer-term policy path or the compensation investors require to hold duration. Inflation breakevens have remained comparatively contained. Elevated real yields and a higher term premium offer more insight into the pressure on borrowing costs than short-term policy probabilities alone. Fiscal concerns, Treasury supply, and position unwinds are all plausible contributors. Importantly, interest rate volatility and credit spreads also have moved higher. These rising longer-dated yields, and the forces driving them, are the most important risks to monitor going forward.

The strength to watch

Against this backdrop, technology’s earnings stand out. Since the end of the second quarter, earnings per share (EPS) revisions for tech have outpaced the rest of the market handily. The third quarter was tough, kicking off with a sharp momentum unwind that drove meaningful drawdowns across the entire artificial intelligence (AI) complex. Against that backdrop, resilient EPS estimates have helped valuations come in meaningfully.

The overall market and technology specifically both are trading at forward price-to-earnings (P/E) multiples about one turn lower than they were at the beginning of last quarter. Tech’s EPS estimates have also been broad: 82% of the sector has seen third-quarter estimates move higher over the course of the quarter.

This is a very different setup as we head into the third-quarter earnings season: positioning has reset meaningfully and is nowhere close to being overextended, valuations have reset across the board, and many managers who underperformed last quarter may be inclined to chase momentum into year-end. Assuming earnings deliver, we believe the path of least resistance for the equity complex is likely higher. And don’t forget: the S&P 500 has beaten its preseason consensus EPS estimate in each of the last 14 quarters.

Micron Technology’s results and Hewlett Packard Enterprise’s higher networking outlook last week both helped reinforce that conviction.³ This does not settle every debate around AI spending or eventual returns, but it gives us concrete operating evidence to weigh against the increasingly noisy narratives. We want to follow where investment is producing demand, cash generation, and improving earnings; we do not expect all companies attached to AI to win equally.

 

The price action has reinforced that story. The SOX semiconductor index gained 3.7% last week, its fifth consecutive weekly advance. Within the index, 97% of constituents are above their 50-day moving averages, and 90% are above their 200-day moving averages. Contrast that with just 25% of S&P 500 constituents above their 50-day moving averages and the S&P 500^® Equal Weight Index falling for seven straight weeks. Broad market breadth remains weak, but participation inside the semiconductor complex (and tech broadly) has improved dramatically.

Importantly, we don’t need every stock to work before adding exposure where fundamentals and participation are strengthening. Nor should we view equal-weight outperformance for a healthy rally if it simply reflects leaders falling faster than the rest of the market. Narrow leadership still raises the bar for companies carrying the indices, but it is not automatically a reason to sell companies that have earned their position at the top of the index for good reasons and are at the center of investor attention.

Investment playbook

The long-term hurdle rate has not gotten any lower. What has changed is our confidence that the today’s market leaders can clear it. That is why we are leaning into earned leadership rather than waiting for a perfect macro backdrop. We increasingly favor positioning for a year-end equity rally despite the busy calendar ahead, and we think mega-cap technology would be likely to be the primary driver of that rally. As such, we see leaning into beta and selectively positioning within and around secular growth as offering an attractive risk/reward:

• Lean into leaders. Think of quality as the filter. We are more comfortable adding mega-cap technology and semiconductor exposure where earnings, valuations, and improving participation support the move. Quality and beta are not opposites. Strong balance sheets and internally funded growth still matter with long-term borrowing costs elevated. The objective is to gain more exposure to businesses delivering results, not more exposure to every speculative corner of the market.

• Consider adding selectively down the market-cap spectrum. Small caps do not need to replace mega-caps as market leaders for individual opportunities to emerge. We believe small- and mid-cap industrials are worth revisiting after being caught in the rate-driven selloff: despite weak performance and softer positioning, earnings and sales revision ratios remain above 1, meaning upgrades still outnumber downgrades. That is a more useful starting point than buying a stock simply because it has fallen. Attractive pricing within the group is not uniform, and refinancing pressure remains. We favor self-funding businesses with improving estimates rather than a blanket small-cap rebound trade.

• Build balance around secular growth. Health care has remained a useful source of differentiated earnings, despite a difficult week, while selective international exposure can prevent a constructive US technology view from becoming a US-only portfolio. We would continue evaluating industrials and financials on a company-by-company basis. Increasing exposure to these sectors does not require selling the leaders, and a steeper curve alone does not repair credit quality or weaker demand.

What to watch

The Treasury auctions deserve particular attention: the 3-year on Tuesday, 10-year on Wednesday, and 30-year on Thursday will test demand after the selloff.

Monday – ISM^® Services PMI^® Report.

Tuesday – September Federal Open Market Committee minutes. While the minutes will provide context, they predate the latest employment and inflation reports.

Wednesday – The New York Fed Survey of Consumer Expectations.

Thursday – Initial jobless claims.

Friday – Preliminary University of Michigan Index of Consumer Sentiment and inflation expectations.

Earnings reports from PepsiCo, Delta Air Lines, and Constellation Brands offer early checks on consumer demand and margins before banks kick off the broader reporting season next week. We also will watch whether calmer oil and policy expectations finally translate into steadier long yields. Rising bond volatility, wider spreads, and weaker earnings revisions together would challenge our more constructive stance.

 

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 Oct. 2, 2026.

³ This is not a recommendation to purchase or sell the companies or investment products mentioned herein.

Risk Information:
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Disclosures:
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Definitions
ISM^® Services PMI^® Report — A report compiled by the Institute for Supply Management based on data compiled from purchasing and supply executives nationwide. Survey responses reflect the change, if any, in the current month compared to the previous month for business activity, new orders, backlog of orders, new export orders, inventory change, inventory sentiment, imports, prices, employment and supplier deliveries. An index reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining.

Personal Consumption Expenditures (PCE) Price Index — A monthly measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index, released monthly by the US Department of Commerce Bureau of Economic Analysis, is known for capturing inflation or deflation across a wide range of consumer expenses and reflecting changes in consumer behavior.

University of Michigan Index of Consumer Sentiment — Based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.

Indices
Nasdaq-100 Index — Includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies.

PHLX Semiconductor Sector Index^™ — A modified market capitalization-weighted index that was created by the Philadelphia Stock Exchange and is composed of 30 companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.

S&P 500 Index — Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.

S&P 500^® Equal Weight Index — An index that includes the same constituents as the capitalization-weighted S&P 500 Index, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight.

S&P 500^®; Information Technology Index — Comprises those companies included in the S&P 500 that are classified as members of the GICS^®; information technology sector.

 

M-1013155 Exp. 2/5/2027

 

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