S&P 500 Holds Near Records as AI Boom Offsets Bond Rout and Oil Spike

Key points

• The S&P 500 closed at 7,741.83, up 1.2% for the week, remaining only 0.7% below its all-time high.
• The Nasdaq Composite reached 27,068.72, gaining 2.1% for the week and hitting new peaks for the first time since early June.
• The Dow Jones Industrial Average finished at 51,828.59, rising 0.9% on Friday and 0.3% for the week.
• The U.S. 10-year Treasury yield climbed above 5%, reaching its highest level since June 2007, while the 30-year yield hit its highest since June 2004.
• Meta Platforms’ launch of the AI agent 'Muse' drove a 30% monthly gain for the company and boosted the broader 'Magnificent Seven' index.
• The probability of a 25-basis-point Federal Reserve rate hike in October rose to 64% from 58% the previous week.

Background

This week’s volatility follows a period of mixed signals in late September. On September 22, an AI-fueled rally pushed the S&P 500 up 1.5% and the Nasdaq up 2.3%, with oil sliding to around $95.80. However, by September 23, rising oil and bond yields caused equities to open lower, pausing the tech-led rally. Earlier in the month, on September 3, stocks edged higher as yields retreated, but Brent crude remained near $91 due to U.S.-Iran tensions. The current bond rout, with yields at multi-decade highs, contrasts with the equity market’s resilience, highlighting a divergence between fixed-income and equity sentiment driven by AI optimism and inflation concerns.

Why it matters

The divergence between soaring bond yields and resilient equity prices signals a complex market environment where AI-driven corporate earnings are offsetting macroeconomic headwinds. The surge in 10-year and 30-year yields to multi-decade highs increases borrowing costs for consumers and businesses, potentially slowing economic growth. However, the strength of mega-cap tech stocks, particularly Meta Platforms, suggests that investor confidence in AI profitability remains high. This dynamic could lead to continued volatility, as the Federal Reserve’s hawkish stance and geopolitical risks in the Middle East pose threats to the current bull market. Investors must navigate a landscape where traditional rate-sensitive sectors are under pressure, but AI-related companies continue to drive market performance.

What to watch

Investors will closely monitor the Federal Reserve’s next move, with a 64% probability of a rate hike in October. The outcome of U.S.-Iran diplomatic talks regarding the Strait of Hormuz will be crucial for oil prices and inflation expectations. Additionally, the performance of AI-related stocks, particularly Meta Platforms and other 'Magnificent Seven' members, will determine if the equity market can sustain its resilience against rising bond yields. Traders should watch for signs of a broader market reset, as the percentage of stocks trading above their 50-day moving average has fallen to 26%, indicating potential weakness in non-tech sectors.