Equity Markets Looking To Be A Treat In October

Executive Takeaway: September is historically the worst performing month for stocks, with an average S&P 500 decline of 2.6% over the past five years. This year, the S&P 500 fell only 0.45% while the tech-heavy Nasdaq 100 rallied 3.2%. October is traditionally a strong buying month, with seasonal year-end rallies typically beginning in late October. With S&P Technology breaking out to new record highs, signals suggest the year-end rally may already be underway.

September Outperforms Historical Norms as Tech Breaks Out

Despite seasonal headwinds, equity markets held up remarkably well through September.

• Historical Outperformance: While September averages a 2.6% decline for the S&P 500 over the past five years, the index lost just 0.45% this September.
• Tech Leadership: The Nasdaq 100 gained 3.2% in September, propelled by major technology constituents.
• Record High Breakout: The State Street Technology Select Sector SPDR ETF (XLK) broke out to a new record high of 201.39 before closing near 199.81, serving as a powerful confirmation of the ongoing secular bull market.

Employment Report Showed Weakness In September

Following the FOMC’s 25-basis-point rate hike on September 16, Friday’s Nonfarm Payrolls report called into question the central bank’s assumption that economic expansion is unthreatened.

• Payroll & Unemployment Softness: September nonfarm payroll growth came in weaker than expected, and the unemployment rate ticked up 0.1% to 4.2%.
• Household Survey Divergence: Civilian employment from the Household Survey—which captures farmers, self-employed individuals, and sole proprietors (~4 million more workers than nonfarm payrolls)—showed even greater deceleration. Because the Household Survey is more sensitive to turning points in the economic cycle, it signals broader labor cooling.
• Structural Labor Shifts: Immigration trends and baby boomer retirements are reshaping the worker pool, requiring strategists and policymakers to re-evaluate traditional labor market models.

The Bear Is Visiting The Bond Market, But Inflation Is Easing

Fixed income markets continue to experience upward yield pressure across the curve.

• 10-Year Yield Peak: The 10-year Treasury yield touched 5.23%, its highest level since June 2007. Over the past year, as 10-year yields surged from 4.08% to 5.23% (+115 bps), a 10-year duration bond lost 10%–12% in price.
• Rate Normalization: Yields between 0% and 3% were historically abnormal; a range of 5%–6% reflects the longer-term historical average for long-term Treasury rates. Unless 10-year yields break decisively above 2007 highs toward 6.0%, rates should hold near current levels following softer labor data.
• Softer PCE Inflation: Personal Consumption Expenditures (PCE) and Core PCE (3.0% YoY) came in softer than expected after data revisions.
• 2-Year Yield Level: The 2-year Treasury yield (4.7955%) is holding below key resistance at 5.0%, pricing in one final Fed rate hike in December.

3Q26 Earnings Season Forecast: EPS Up 29.5%

As third-quarter earnings season begins, analyst estimates have been revised upward at an above-average pace.

• Strong Growth Momentum: S&P 500 year-over-year earnings growth for 3Q26 is forecast at 29.5% (up from 26.7% estimated on June 30), marking the third consecutive quarter above 25% EPS growth.
• Sector Leaders: All 11 GICS sectors are expected to report positive growth, led by Energy (+114.0%), Information Technology (+65.0%), Communication Services (+51.5%), and Materials (+29.4%).
• Calendar Year Expectations: CY 2026 S&P 500 earnings growth is projected at 32.4%, supporting Sanctuary’s S&P 500 year-end target of 8,225 and long-term target of 10,000–13,000.
• All-Time High Profit Margins: Corporate profits as a percentage of GDP have reached an all-time high in data extending back to 1945, providing fundamental support for equity valuations.

Key Market Levels & Indicators Summary

Consumer Spending Resilient as G7 Coordinates Emergency Oil Release

While consumer sentiment showed softness, actual household spending behavior remains surprisingly strong.

• Confidence vs. Action: Conference Board Consumer Confidence dropped from 88.6 to 81.9 in September due to elevated fuel prices. However, real consumer spending rose YoY in August.
• Income Tier Strength: Bank of America credit card data confirms solid spending growth across all income brackets, with lower-income cardholders showing stronger growth than middle- and upper-income cohorts.
• Holiday Forecast: The Mastercard Economics Institute predicts total U.S. holiday retail sales (excl. gas/autos) will grow +5.5% YoY, led by an +11% surge in e-commerce.
• Freight & G7 Action: Freight costs remain up >16% YoY due to diesel costs. In response, the G7 and IEA announced a coordinated emergency release of 100 million barrels of oil and diesel over four months, initially prioritizing diesel supply to cap shipping inflation.

AI Infrastructure Buildout, Space-Based Data Centers, & Anthropic Mega-IPO

Secular technology investment continues to accelerate across new frontiers.

• Semiconductor Supply Deficits: ISM manufacturing data underscores persistent shortages in semiconductors, memory (DRAM), and electrical equipment. Backlogs are rising, and the VanEck Semiconductor ETF (SMH) reversed its downtrend to reach 617.81 as it tests record highs.
• Data Centers in Orbit: To bypass power grid capacity limits and water cooling constraints, SpaceX (SPCX) launched Alphabet’s (GOOGL) AI TPU chip into Earth orbit. Space data centers leverage continuous solar energy and natural space cooling.
• Anthropic Mega-IPO: Reports indicate AI pioneer Anthropic is preparing for an initial public offering as early as mid-November, with formal marketing starting the week of November 9 and trading expected before Thanksgiving.

Sector Model Readings & Overbought / Oversold Oscillator Status

Information Technology retained the top spot in Sanctuary’s sector model, followed by Energy and Healthcare. Utilities remains the main laggard for the ninth consecutive week.

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