The market is seemingly a bit skittish but also resilient; it is facing a seasonal headwind at the moment, but it is holding in there.
There is not much movement at a headline level – the S&P 500 was +0.1% and the S&P/ASX 300 flat last week – but there is lots going on below the surface.
The week started with guardrails being put around AI with implications for spending and infrastructure and there were massive spreads between AI winners and losers.
Then Beijing, Nvidia CEO Jensen Huang and US President Donald Trump said everything was going to be okay, so this had all settled down by the end of the week.
On Tuesday Trump claimed that Ukraine and Russia had agreed to stop hitting energy infrastructure. Ukraine proceeded to hit a Russian refinery within 24 hours.
Then we had the US raise rates by 25 points and the market sold off in the afternoon, but everything was forgiven by Friday.
Energy markets
A meeting between Iran and the Gulf Cooperation Council countries to discuss shipping through the Strait of Hormuz was slated for last Monday but has been postponed.
Meanwhile the Saudi East-West pipeline remains closed, though there have been reports that it may be restored to half-capacity in coming days.
Trump’s claim that Russia and Ukraine had agreed to halt strikes on oil and gas infrastructure helped bring down the oil price, but was belied by an attack on the former’s Syzran refinery on Wednesday.
The upshot was Brent crude rose slightly – up 0.7% – but remains elevated at US$106.6 a barrel.
With the ongoing stand-off between Iran and the US, constraints on both the Strait of Hormuz and the Bab el-Mandeb, and increasingly depleted oil inventories the energy market remains at an impasse.
AI
The CEO of Anthropic called for a slowdown in development of the most advanced AI models, citing safety concerns – a move backed by Sam Altman at OpenAI and Elon Musk, which saw some weakness in the semiconductor sector.
However this was rebuffed by Trump, who downplayed the need for regulation, citing the competitive threat from China.
Beijing played the same line, noting that “fearmongering, confrontation and vicious competition will only disrupt the process of global AI governance”.
Nvidia’s CEO also dismissed any need for security regulations around AI.
The semiconductors rebounded on Friday – although there was likely some distortion from the huge “triple witching” options expiry.
The CFO of OpenAI also put some nuance around the debate, noting that work on safety and alignment ultimately requires more computing power – so any “pacing” of model development does not mean a broad capex cut.
Meanwhile Forgent Power Solutions – a high-beta AI play which designs and builds custom electrical equipment for data centres – delivered a blow-out result, ending FY26 with a US$3 billion backlog in orders. It took US$1.5 billion in new orders in 4Q, which was double what consensus was expecting.
US macro and policy
Rate hike
The odds of a rate hike in response to persistent inflation had been steadily building and the US Federal Reserve duly delivered a 25-basis-point (bp) increase to 3.87% last week.
The vote was unanimous. Among those Federal Open Market Committee (FOMC) participants who submitted forecasts (Fed Chair Kevin Warsh did not), 12 are looking for one more hike in 2026, while four are looking for another 50bps of hikes.
There were only modest changes to the accompanying statement, with a new observation that the rate hike “will support a timelier return to the Committee’s 2 per cent goal”.
At his press conference, Warsh noted that the economy appears to be strengthening and corporate earnings, hiring and business investment have all improved. Against this, he noted inflation is too high and has been for too long, with too many categories running above 3%.
Hence the decision to make financial conditions less accommodative.
The equity market sold off in response, but the move was relatively muted given the high expectation of a hike.
According to work done by Goldman Sachs looking at the past seven tightening cycles, the S&P 500 falls an average of 2% over the first three months, but the pain is short-lived, with an average of 9% gains over the following 12 months – although the 2022 cycle was a clear departure from this.
Ultimately, earnings will be a critical factor. This can be seen in the fact that the S&P 500 is up 13% year-to-date off the back of 28% earnings growth, despite a sharp rise in the US 30-year bond yield to a 20-year high of ~5.4% and the market pricing in two more hikes by January 2027.
According to work by JP Morgan dating back to the 1950s, the relationship between the S&P 500 valuation multiple and bond yields is heavily influenced by the earnings backdrop.
In the current environment of 20%+ forward EPS growth, history suggests yields would need to approach 6% before the S&P 500’s valuation multiple would meaningfully de-rate – and that it has scope to re-rate from current levels if strong earnings projections are realised.
This suggests that two more hikes would be manageable – but a broader cycle of four to five hikes would present a more significant downside risk.
One factor to consider is that positioning is already quite bearish in the bond market. A reversal lower in yields could gain momentum as investors are forced to cover shorts.
Other data
US retail sales rose 1.2% month/month in August, beating consensus expectations of +0.8%. Excluding fuel, sales were still up 1.1% with strength in electronics/appliances, miscellaneous retailers, non-store retailers and food services.
In contrast, housing remains weak. There were 1.275 million housing starts in August (-2.6% month/month) versus 1.320 million expected, while housing permits were 1.394 million versus 1.408 million expected (-2.7% month/month). This comes after new starts fell 9% month/month in July. High mortgage rates remain a headwind.
The labour market remains resilient with initial jobless claims at 196,000 for the week ending 12 September, versus 207,000 expected and down from 206,000 prior. Continuing claims were also down at 1.730 million versus 1.779 million expected and 1.774 million prior.
Finally, the Evercore company survey remains in constructive territory, rising to 54.3, well up from the ~45 level at the start of the year.
Australia macro and policy
The RBA continues to take a hawkish stance, with Assistant Governor Sarah Hunter noting that inflation is its top priority and it is focused on trying to quash any second-order price effects.
Governor Michele Bullock, in comments to a Senate Committee, noted that oil prices are adding to inflation and upside risks are materialising.
Markets are pricing a 70% chance of a hike when the RBA meets on 29 September.
Elsewhere, Seek job add data came in slightly better than expected, down 4.5% year/year in August versus -5.2% the prior month.
On the property side, REA Group noted that new property listings on RealEstate.Com are down 2% nationally year/year in August.
However, there is geographic dispersion. Sydney is down 18% and Melbourne 17%, while Perth (19%), Brisbane (20%) and Adelaide (22%) are all up.
Capital cities are down 5.2% in aggregate, while regional areas are up 3.1%.
Total listings are also growing, suggesting a lack of sell-through.
Markets
Historically, September has by far the worst seasonal history for the S&P 500 going back to 1928, with negative returns usually exacerbated in Midterm Election years.
However, this year it is thus far muddling through, at +0.4% month-to-date. The S&P/ASX 300 is thus far -3.1%.
In Australia, Health Care was +3.7% for the week, with broad-based gains. Rate beneficiaries such as QBE Insurance (+3.1%) and Computershare (+3.4%) also did well, while REITs (-1.8%) weakened on the same theme.
The lithium space was also soft, with Mineral Resources (-11.0%), IGO (-9.25) and PLS Group (-7.7%) among the weakest stocks in the S&P/ASX 100.
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