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Market Commentary

Monthly Financial Markets Commentary — October 1, 2026

Stocks were mixed in the month of September and bonds fell. Concentration in the speculative Ai trade increased while more prosaic issues in the Dow and S&P 500 fell slightly.

All measures of market valuation, such as price-earnings, price-to-sales, market-cap-to-GDP and the Schiller CAPE Ratio indicate that stocks are at historic levels. Retail investors have bought every dip in the market since 2010 and have been rewarded. Speculation in the market remains significant, with margin balances and stock ownership percentages being in record territory. Notwithstanding recent geopolitical concerns, rising interest rates, the Iran War and inflation, investors remain "all in", and have noticably stepped up their buying.

For 2026 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 12.84%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 16.01%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 7.30%. For the month of August, the S&P 500 fell 0.17%, the Nasdaq gained 2.16%, and the Dow fell 4.14%. The AI trade completely dominates the markets as well as the real economy, as reflected in such measures as capital investment and GDP. This makes any potential rout in the AI trade more consequential than the bust in internet stocks in 2000, since the AI economic impact will be much more widespread. Free cash flow of the hyperscalers (Microsoft, Amazon, Google, Meta) has collapsed as cap-ex spending has exploded; they are also starting to tap the debt markets to a significant extent. This is beginning to have major implications for the bond market, both in terms of concentration in high-tech and upward pressure on U.S. government bonds.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned -2.91% for the year. This is a precipitious drop from the prior month, reflecting concerns about the creditworthiness of the U.S. Treasury as well as a host of other factors. Interest rates on sovereign bonds in general have exploded upward, particularly in Japan and France. The rise in Japanese bonds is particularly concerning, as they are the largest holders of U.S. debt. To shore up the value of the yen, they have been forced to sell dollars, putting pressure on U.S. sovereign bond rates.

The sectors in the equity market that have performed the best so far in 2026 are Energy, Health Care and Information Technology at 36.90%, 9.50% and 28.60%, respectively. Utilities, Financials, and Consumer Discretionary have fared the worst at -7.20%, -2.30% and -6.20%, respectively. The rise in energy stocks is not surprising given the run-up in oil, but supply constraints of refined products are the more consequential factor. Breadth in the market is increasingly narrow with AI or AI-related stocks representing more than 50% of market value.

The comparison of current price/earnings ratios and dividend yields as of October 1, 2026 to those of the prior year is as follows.

* based on 12-month trailing data

The dividend yield, which is at historic lows, is a reliable metric of valuation, since it cannot be manipulated as earnings frequently are. Dividend yields continue to fall in 2026. While price/earnings ratios appear reasonable they are somewhat misleading, since in a significant cap-ex boom sales are inflated relative to depreciation (which reverses in later years). As stated above, the free cash flow of the hyperscalers has collapsed.

Gold and crude oil futures most recently traded at $4,215.50 and $86.25, respectively, compared to $3,875.50 and $61.25 one year earlier. Gold has fallen significantly after a spectacular rise at the beginning of the year. . Notwithstanding the developing view that gold is moving into the role of an alternate currency, it has reccently shown characteristics of a classic risk asset. The long-term fundamentals of gold remain very positive, however, given the appetite for gold by central banks and the lack of fiscal discipline by nearly all developed nations.

While the price of a barrel of oil has not moved as significantly as some would have expected, given disruptions in supply, crack spreads have widened to historic levels. Barrels of oil are not consumed but rather refined products such as gasoline, diesel and jet fuel. The supply of these final products has been constrained due to the destruction of refining capacity and transportation issues. This has resulted in rising prices at this level and falling prices of inputs; hence the historic rise in crack spreads.