Wealth Insights

Stocks Commentary

Stocks: Potential Headwinds Converging, But U.S. Indices Remain On Firm Footing

September 2026

After marking time in June and July, U.S. equity indices did better in August with the S&P 500 rising 2.6% and the small-cap Russell 2000 eking out a 0.8% gain. The equal-weight S&P 500 rose 2%, but rotation remained the story within the S&P 500 as some of July’s worst performing sectors returned to favor in August. Meaningful upside was concentrated in three sectors with energy, health care, and information technology each rallying at least 4.7% on the month, while the industrial sector dropped 2.5%. Information technology sector continued to dominate headlines as earnings results rolled in, and the sector notched a 6.2% gain after falling 7.9% the month prior. But for the second consecutive month software, not hardware, garnered inflows; the S&P 500 Software industry group rose 13.6% in August as earnings releases out of the group put to rest for the “SaaS-pocalypse” narrative that made the rounds earlier this year.

In stark contrast to software, semiconductor stocks, which experienced a 20% drawdown in July, saw a more muted recovery as the Philadelphia Semiconductor index, or SOX, gained just 2% last month. The semiconductor industry mustered only a half-hearted recovery in August after July’s selloff despite surprisingly strong sales guidance out of semiconductor stalwart Nvidia (NVDA) late in the month. After a positioning shake-out and deleveraging in semiconductor and memory stocks in July and with more reasonable valuations to be found, we would have expected robust guidance to offset negativity surrounding recent returns on AI-related investments and broadening pushback related to the data center buildout. There have been signs of improvement in perceived AI beneficiaries at the start of September, but if semiconductor stocks continue to run in place, tougher sledding will lie ahead for the S&P 500.

As the information technology sector has floundered in recent months, the energy and health care sectors have provided market leadership. The energy sector posted back-to-back monthly gains totaling over 20% while health care just closed out its fourth straight month in positive territory. The S&P 500 energy sector gained another 6.5% in August, and what may be most notable is that the sector’s return easily surpassed 1.2% and 2.9% monthly gains in the price per barrel of West Texas Intermediate (WTI) and Brent crude oil, respectively. This is potentially a sign that investors view the situation in the Middle East as unlikely to be resolved in the near term, limiting downside for commodity prices and boosting the profit outlook for companies positively correlated to higher crude oil prices. While the energy sector could remain dependent upon the path taken by crude oil, it remains an appealing diversifier and a valuable, albeit imperfect, hedge against geopolitical risk. Within the health care sector, both pharmaceutical and biotechnology stocks started strong out of the gate in August before giving ground into month-end as rising rates weighed on valuations and clouded the outlook for mergers and acquisitions (M&A). Health care offers a blend of offensive and defensive characteristics, and the sector has historically performed well in midterm election years, but if Treasury yields fail to stabilize, investors could look to play defense elsewhere.

The fundamental outlook for U.S. stocks remains constructive, but rising Treasury yields, seasonality, and midterm elections could pose near-term headwinds for equities. Rising yields could negatively impact investor sentiment and risk appetite, particularly if the 10-year yield makes a run at 5% and could also impact how investors position portfolios into midterm elections in early November. Historically, slower growing and relatively higher yielding sectors have performed well on a relative basis in September and October of midterm election years. But if Treasury yields continue to rise, market participants could turn to shorter-dated bills/notes to generate income and get more defensive. Higher yields could also act as a drag on valuations of longer duration information technology stocks and heavily levered small cap stocks as well, so the path forward for yields could dictate the direction of travel for U.S. stocks.

Lastly, while we don’t want to overstate its potential importance, seasonality has not historically favored bulls in September. The S&P 500 has, on average, fallen 1% during the month since 1928, with outsized moves not uncommon in midterm election years. More recently, the S&P 500 fell 9.3% in September of ’22 and rose 8.7% in September of 2010, highlighting just how volatile the month can be. It is notable that in years in which the S&P 500 is higher by 10% or more through August, stocks haven’t fared as poorly, which gives bulls hope and a reason to stay invested. Rising rates could pose a more durable headwind for stocks, but the other two hurdles facing stocks (midterms, seasonals) will be fleeting, and any material weakness could be an opportunity to tactically adjust portfolios.

Emerging Markets Share In Semiconductor Success And Carry More Attractive Valuations. The ‘reversion trade’ went global in August as beleaguered semiconductor stocks listed in South Korea and Taiwan rebounded from a steep selloff in July. The broader MSCI EM index notched a modest 3.2% advance during the month as capital rotated out of Latin America and China and back into Korea and Taiwan, leading to a 6.8% rally in the former and 6.5% bounce in the latter. The broad MSCI EM benchmark entered September with an 11.6 forward price-to-earnings (P/E) multiple, its cheapest valuation since September of 2022. The bears might chalk this cheaper valuation up to semiconductor exposure by suggesting these companies are near their earnings peak, but the MSCI EM index carries a 25% allocation to the semiconductor subindustry, while the NASDAQ 100 is over 30% semiconductors and trades at more than double the multiple with a 25.3x forward-PE ratio. The comparison between U.S. large cap technology companies and those found in the MSCI EM is imperfect to say the least, but to us cheaper valuations and faster growth tells us the sub-asset class has room to rally and remains under-owned in global portfolios. The technical setup leaves us more cautious as the asset class built up momentum in August while breadth narrowed, showing a lack of confirmation as just 51.8% of the index traded above its 200-day moving average. In summation, the fundamentals have us optimistic on emerging market stocks, but we have yet to see the sort of broad-based strength that could potentially warrant an overweight allocation.

As of September 11, 2026