MARKET OVERVIEW
Markets spent the second half of September balancing renewed Federal Reserve tightening against an economy that continued to show surprising resilience. The Fed’s first rate increase since 2023 reinforced the message that inflation remains the central bank’s priority, while rising long-term Treasury yields tightened financial conditions further. At the same time, uncertainty surrounding the U.S.-Iran conflict and the Strait of Hormuz kept energy markets volatile. Stocks absorbed those crosscurrents better than bonds, but leadership remained concentrated as investors favored areas with durable earnings growth over more rate-sensitive parts of the market.
Technology remained the clearest source of support. Semiconductor and other growth-oriented shares helped major indexes remain resilient even as higher borrowing costs pressured the broader market. Bond yields remained a persistent headwind: the 10-year Treasury yield ended September at 5.29%, while the 30-year yield climbed to 5.64%. Oil added another layer of uncertainty, with Brent crude briefly moving above $107 a barrel as negotiations over the Strait of Hormuz stalled before retreating below $100.
Economic data complicated the Fed’s path. On September 16, policymakers unanimously raised the federal funds target range by 0.25 percentage point to 3.75%-4.00% and projected additional tightening. Yet the Personal Consumption Expenditures (PCE) price index came in below expectations at month-end, rising 0.3% in August and 3.4% from a year earlier. Core PCE, which excludes food and energy, increased 0.2% for the month and 3.0% from a year earlier. Current-dollar consumer spending rose 0.9%, while real spending increased 0.6%. Second-quarter economic growth was revised sharply higher to a 2.2% annualized rate from the prior 1.5% estimate. Labor data were mixed: job openings were little changed at 7.1 million in August, while private employers added 90,000 jobs in September after a revised 36,000 in August. Consumer confidence fell to 81.9 from 88.65.
Bottom line: September ended with resilient growth, softer-than-expected inflation data, and financial conditions that remain restrictive. The inflation report reduced some pressure for an immediate follow-up rate increase, but inflation remains above the Fed’s 2% target and energy prices remain vulnerable to geopolitical developments. Investors will turn next to the September jobs report on October 2, followed by September inflation data and the October 27-28 Fed meeting. Whether inflation continues to ease without a sharper deterioration in hiring will help determine whether the latest rate increase becomes part of a longer tightening cycle or a more limited adjustment.
Advisor Perspective
Heading into October, our outlook remains neutral as improving economic signals are balanced by a market environment that continues to send mixed messages. Growth has remained resilient, and several forward-looking indicators have strengthened. At the same time, weakness in employment, narrowing stock market participation, and uncertainty surrounding interest rates and geopolitical developments limit our confidence in the broader outlook. These competing forces support a patient approach as we assess whether recent improvements can become more widespread and durable.
The economic data has shown some encouraging progress. Global output and other leading indicators improved during September, while orders stabilized following several months of weakness. These improvements suggest that demand may be gaining strength, helping to offset weakness elsewhere in the economy. The upward revision to second-quarter growth and continued consumer spending also reinforce that the expansion has remained intact despite higher borrowing costs and persistent uncertainty.
However, the improvement has been uneven. Employment and production remain weak within the broader economic picture, and stronger forward-looking indicators have not yet translated into a clear recovery across those areas. This distinction matters because an improving outlook can support markets, but sustained economic strength ultimately requires progress in hiring, incomes, and business activity. For now, the data provides reasons for measured encouragement while leaving important questions about the durability of growth.
The consumer remains central to that discussion. Spending has held up, but personal income trends and the low savings rate deserve attention. When households save a smaller share of their income, they have less room to absorb higher expenses or a disruption in earnings without adjusting spending. This does not mean that consumer demand is about to weaken sharply, but it makes continued income growth increasingly important. If hiring remains subdued or energy costs rise further, consumers could face more difficult spending decisions.
Stock market performance is presenting a similarly mixed picture. The S&P 500 finished September with only a modest decline, supported by technology and communication services. Beneath the headline index, however, many companies experienced considerably more pressure. Smaller companies, value stocks, and several rate-sensitive sectors declined, illustrating how different the experience of the broader market has become from that of the largest growth companies.
Market participation has also weakened since our last update. At September’s end, only about one-quarter of S&P 500 companies were trading above their 50-day moving averages, while fewer than half were above their 200-day averages. These measures help show whether strength is spreading across the market or becoming concentrated in fewer stocks. The recent deterioration suggests that the index’s resilience rests on a narrower foundation. This does not establish that a larger decline is imminent, but it leaves the market more dependent on a small group of leaders maintaining their momentum.
Interest rates remain another important influence. Higher Treasury yields have pressured bond prices and increased borrowing costs for businesses and households. At the same time, higher yields give investors more attractive opportunities to generate income from fixed income. September’s declines serve as a reminder that bonds can still experience price fluctuations, particularly those with longer maturities. Even so, the income available at today’s yields strengthens the role bonds can play within a diversified portfolio. Balancing that income opportunity with sensitivity to further rate increases remains important.
External developments remain capable of changing this balance. Uncertainty surrounding the U.S.-Iran conflict and energy supplies could influence inflation, consumer spending, and the Federal Reserve’s next steps. Softer inflation readings are encouraging, but they do not resolve those risks or establish a clear policy path. These factors help explain why improving economic data alone has not led us to adopt a more optimistic stance.
Taken together, the environment supports remaining invested while maintaining discipline. There are constructive signs in the economy, but consumer vulnerabilities, narrow market leadership, and external uncertainty warrant continued attention. We will look for broader participation and more consistent economic improvement to build confidence in the outlook. In the meantime, diversification, careful risk management, and decisions guided by the full body of evidence remain central to our approach.
DISCLOSURE
This update is not intended to be relied upon as forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Hilltop Wealth & Tax Solutions (“Hilltop Wealth”) to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, and forecasts. There is no guarantee that any forecast made will materialize. Additional information about Hilltop Wealth is available in its current disclosure documents, Form ADV, Form ADV Part 2A Brochure, and Client Relationship Summary Report, which are accessible online via the SEC’s Investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov/firm/summary/290981. Hilltop Wealth is not an attorney, and no portion of this content should be interpreted as legal advice. Hilltop Wealth may refer clients to its tax division for tax preparation and/or bookkeeping services. Services will be separately agreed upon between the client and the tax division and bill the client separately for services.
