Week in Review: October 9, 2026

October 13, 2026

Summary

• S&P 500 sets new record high.
• Third quarter S&P 500 earnings growth expected to be 29%.
• 10-Year Treasury yield briefly reaches highest level since 2002.

Overview 

Markets ended the week mixed with large caps (S&P 500) posting a modest gain while small caps and international markets posted small losses. On Tuesday, the S&P 500 set a new record high, benefiting from the seemingly inexorable climb of AI-related stocks. Despite the gains, the week had a subdued feel, as investors seemed content to bid their time prior to the start of third quarter earnings season.  

Higher interest rates remained a central focus as the 10-Year Treasury yield briefly reached 5.37% on Wednesday, its highest level since 2002. Despite the recent surge in rates, equities have proven to be surprisingly resilient. As is often the case, however, markets have a tendency to ignore obvious challenges until they suddenly decide to respond. Thus, the concern is markets will reverse course at some point and become worried about the impact of higher rates on either the overall economy, and/or the valuations of many of the large AI-related stocks that have driven recent market returns. 

On Wednesday, the Federal Reserve released the minutes of its September Federal Open Market Committee (FOMC) meeting. The release did not generate any meaningful market reaction or change in market expectations for an October rate hike. Immediately following the Fed’s September rate hike decision, market expectations for an October hike peaked at 70%. However, since then, weaker-than-expected employment and inflation data, along with comments by influential FOMC member Christopher Waller, who said there is “flexibility” regarding the timing of future hikes, have reduced those expectations to 18%.  Despite the decline in October expectations, markets continue to price in an 86% chance of one additional hike by December.  

In response to record high diesel prices, the White House announced plans to relax sanctions on Russia in exchange for Russia supplying the US and global markets with additional diesel. Many analysts do not expect the move to have a meaningful impact on prices given the relatively modest amounts of supply involved. 

The Details 

Equities 

Equity market tone remained choppy. The S&P 500 closed at a new all-time high on Tuesday and finished the week up 1.2%. The Mag 7 was also up 1.2%, hitting a new record high. The S&P 500 Equal Weight index finally posted a gain, rising 1.6%. After seven straight down weeks, this represented a welcome change of fortune for the average stock. The Nasdaq lagged the two broader indices, rising only 0.6%. While the average large cap stock seemed to stabilize during the week, small cap shares declined, with the Russell 2000 index down 0.9%, leaving it 9% below its all-time high reached on August 14.  

The weaker performance of the Nasdaq compared to the average stock may have been influenced by further evolution in the narrative around AI investment. Semiconductor shares were down 4% after firming over previous weeks. The change in direction was driven by confusion over the level of OpenAI’s revenue run rate, which had been widely reported to be ~$70 billion. On Thursday, the Financial Times reported investors were told the figure for the maker of Chat GPT is closer to $50 billion, with the gap attributable to the accounting for certain revenue through partners. 

OpenAI and Anthropic are viewed as critical to the health of the AI infrastructure boom. Should the revenue of these companies fail to grow as anticipated, there is fear the massive investment planned for coming years, underpinning the robust forward earnings expectations of semiconductor, industrial, and power companies, could collapse with associated knock-on effects for the market and economy as a whole. The truth is potentially more nuanced. Of course, it is important that OpenAI and Anthropic continue to grow and drive investment. However, AI use is broadening beyond the most advanced models, as customers figure out which use cases require the most advanced models and which can be completed with cheaper solutions off the frontier. The wider assortment of AI models at varying capability and price points expands the addressable market to lower value tasks. This could support the need for more computing resources, enabled by semiconductor and industrial products, even if not obviously great for OpenAI and Anthropic revenue growth.  Expectations for AI investment are high. Any additional complexity to the narrative often drives indigestion. While slowing growth at OpenAI and Anthropic may ultimately be bad for the whole value chain, it is also worth considering a more nuanced point of view. 

Third-quarter earnings season kicked off, with Delta Airlines lowering its full-year earnings forecast by 24% due to the impact of higher fuel costs. Though the company has raised prices 20% this year with little resistance, a 60% increase in fuel costs from a year ago is offsetting the higher revenue, thus far. The company reports its premium- and corporate-heavy customer base is not changing its travel plans in light of higher costs. This behavior has been common for large swaths of consumers this year, particularly for the experiential spending consumers are prioritizing these days. 

Earnings reports will pick up this week, with the large banks leading the charge. Though stocks have been choppy this quarter, expectations for third quarter earnings are high, having increased over the past few months, a rare event compared to the typical negative revisions over the course of the quarter.  

Earnings growth for the S&P 500 is estimated at 29% for the quarter, according to industry group FactSet, which would be the third straight quarter above 25%. This is a rare event, particularly in year four of an earnings expansion cycle. The strong earnings are being driven by revenue growth of 12%, a high level for the index. This outcome would lead to profit margins at 15%, which would be well above the five-year average of 12.6%. While it is important that third quarter earnings results meet high expectations to support current market levels, analysts will be most focused on the outlook for 2027. Analysts currently expect 9% revenue growth for the S&P 500 and 15% earnings growth, excluding the impact of extraordinary items in 2026, such as large one-time gains. Will higher energy costs and interest rates impact expectations for demand or costs heading into 2027? Will the AI investment juggernaut continue, undaunted by swirling news reports? These and many other topics will keep us riveted over the coming weeks. 

Fixed Income 

The Treasury market remained volatile, with the 10-Year Treasury yield briefly reaching 5.37% on Wednesday, its highest level since 2002. However, strong demand at the government’s long-term debt auctions helped keep the selloff from gaining further momentum. The 30-Year Treasury also traded near a 24-year high before finding support at Thursday’s auction. The curve steepened modestly over the week, with the 2-Year closing Friday at 4.80%, the 5-Year at 5.07%, the 10-Year at 5.21%, and the 30-Year at 5.66%. Yields remain near multidecade highs, but the week showed that significant demand for Treasuries exists at current levels. 

This week’s Treasury auctions were an important test of that demand. The Treasury sold $58 billion of 3-Year notes, $39 billion of 10-Year notes, and $22 billion of 30-Year bonds. The 10-Year auction was particularly strong, clearing at 5.30% with a bid-to-cover ratio of 2.77. Indirect bidders, a category that includes foreign central banks and other institutional investors, took 80.3% of the offering, while dealers were left with just 2.5%. The 30-Year auction also produced a solid result, with indirect bidders purchasing 72.3% of the offering, above the recent average. The market has spent months worrying about who will absorb the government’s growing debt issuance. The auction results showed that at least for now, buyers see value at current yields, prompting strong demand. 

That demand did not settle the larger debate over how high rates can move or how long they will remain elevated. Federal Reserve Governor Christopher Waller said additional rate hikes are likely necessary to return inflation to the Fed’s 2% target, although they do not need to occur at consecutive meetings. The distinction matters. Last week’s employment report lowered the urgency for an October hike, but Federal Reserve officials have not indicated that the hiking cycle is finished. The front end of the curve remains tied to the timing of possible Fed policy actions, while the long end is being asked to absorb persistent inflation, heavy Treasury supply, and uncertainty over the appropriate long run level of interest rates. 

The strong auctions also showed how higher yields can eventually become their own source of support. The 10-year auction cleared at 5.30%, providing considerably more income and protection against further rate increases than investors received for most of the past two decades. That does not mean 5.30% represents a ceiling. It does mean the market is reaching levels where foreign institutions, pensions, and other long duration investors have a meaningful incentive to buy. The same higher yields that produced losses for existing bondholders are now creating opportunities for new buyers. 

Corporate yields remained elevated against the same difficult backdrop. U.S. corporate bond issuance totaled ~$2.2 trillion through September, an increase of 24.5% from a year prior. Spreads have remained relatively contained, meaning higher Treasury rates, rather than broad concern about corporate credit, are responsible for much of the increase in borrowing costs. Issuers must increasingly decide whether their financing needs to justify borrowing at levels that would have appeared unusually expensive only a few years ago. 

Municipal bonds remained under pressure following a historically difficult third quarter. 10-Year AAA municipal yields ended the week between 4.02% and 4.25%, depending on the benchmark, while 30-Year AAA yields finished between 5.15% and 5.20%. The municipal market is still contending with heavy issuance, mutual fund outflows, and continued tax loss selling. The third quarter included a record 5.2 million municipal trades and $164 billion of new issuance, while tax exempt mutual funds experienced $11 billion of net outflows over three consecutive weeks in September. The weakness has not been driven by deteriorating credit issues. Instead, municipal bonds are being forced to reprice alongside Treasuries while the market works through an unusually difficult environment. 

The adjustment has been painful, but long dated investment grade tax exempt yields above 5% are rare and can attract buyers who do not normally participate in the municipal market. This week’s Treasury auctions showed that demand can materialize quickly when yields become sufficiently attractive. The municipal market is still waiting for the same dynamic to provide more durable support. 

---

Trust, estate planning, insurance, and investment products are not a deposit, not FDIC insured, not insured by any federal government agency, not guaranteed, subject to investment risks, including possible loss of the principal amount invested and may go down in value. Any information and research contained herein do not represent a recommendation of investment advice to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment, and it does not constitute an offer or solicitation to buy or sell any securities or investment services. This content is for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor for specific guidance tailored to your situation. First Western Trust Bank cannot provide tax advice.