Update on the Economy and Markets: September 2026

By Noah Vercampt, CFA
Hightower Signature Wealth NC Investment Team

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Overview

Stocks benefited from strong corporate earnings growth in August while continuing to balance competing macroeconomic forces and ongoing geopolitical uncertainty. AI-related stocks rebounded as investors moved past the hedge fund-driven volatility that weighed on the sector earlier in the year, helping generate positive momentum heading into the month.

Equity markets also saw a boost from weaker economic data in early August, as decreasing inflation and a weaker jobs report eased expectations for the Federal Reserve to raise interest rates. According to the CME Fed Watch Tool, expectations for a rate hike at the Federal Reserve’s September meeting fluctuated significantly during the month. The probability of a September rate increase fell from 71% to 34%, before rebounding to 66% after Federal Reserve Chairman Kevin Warsh struck a more hawkish tone at the Jackson Hole Economic Symposium at the end of the month, reaffirming the Federal Reserve’s 2% inflation target. The September Fed meeting will be heavily watched since the prior meeting had three dissenting votes against keeping rates flat, the most since 2016. The start of the Fed raising interest rates once again could lead to volatility in the months ahead.

Beyond monetary policy, developments in the Treasury market have also attracted investors’ attention. Treasury Secretary Scott Bessent has generated headlines with his new Treasury bond buyback strategy, along with fresh threats against Iran, precipitating volatility in the bond markets that will require focused attention heading into September. [See this month’s FAQ for more details and opinions.]

Corporate Earnings Momentum

According to FactSet, as of August 28, “For Q2 2026 (with 97% of S&P 500 companies reporting actual results), 86% of S&P 500 companies have reported a positive EPS surprise and 77% of S&P 500 companies have reported a positive revenue surprise… For Q2 2026, the blended (year-over-year) earnings growth rate for the S&P 500 is 52%. If 52% is the actual growth rate for the quarter, it will mark the highest earnings growth rate reported by the index since Q2 2021 (91.6%). It will also mark the 2nd consecutive quarter of year-over-year earnings growth above 25% and the 7th consecutive quarter of double-digit growth for the index.”¹ One important note is that the 52% growth rate is being boosted by one-time earnings contributions from private investments at Amazon and Alphabet. Excluding Amazon and Alphabet, the S&P 500’s blended earnings growth rate still comes in at a very strong 34%.

As the chart shows below, margin expansion is driving most of the earnings growth for 2026, a sign that productivity in the economy is picking up as companies become more efficient. Nine of 11 sectors and 59% of the S&P 500 companies are seeing margin growth. Revenue growth has continued its upward trend since 2023, adding to the elevated earnings per share growth seen this year.

While earnings growth is being driven higher by some of the largest companies benefiting from AI, the median S&P company is still growing earnings 14% year over year, a testament to the widespread participation the broader market is experiencing. Outside the S&P 500, the chart below shows small-cap stock earnings growing at an above-average pace, confirming the narrative that high earnings growth is a broader phenomenon.

Even as stocks continue to raise the bar on earnings growth, analysts continue to raise their expectations for earnings in the future. DataTrek co-founder Nick Colas spoke to the irregularity of the current earnings environment, saying, “Analysts never raise numbers during the year. It just never happens. They start high and trim. That has not been this year. It has been an amazing year for earnings growth because of tech and because of energy, and that’s why the S&P has rallied the way it has. It has been 100% earnings, which is super unusual.”²

As we move into 2027, the key question is not whether earnings growth will continue, but whether corporate America can sustain its current pace of expansion. Given the magnitude of recent gains, a moderation in growth would be natural. However, the combination of improving productivity, broadening participation across sectors and market capitalizations, and the continued economic impact of AI-related investment provides a constructive backdrop. The current earnings environment speaks to the resilience of corporations as they have continued to grow in the face of oil spikes, rising interest rates, continued tariff pressures, sticky inflation, and geopolitical risks. Even though consumer sentiment continues to decline, the mix of companies making up the S&P 500 continues to be focused on goods-producing and technology-driven businesses, whereas the U.S. economy is mostly made up of services that make up a smaller portion of the S&P 500, like rent, insurance, and dining. This difference explains how the S&P 500 can continue to outperform even when consumers are not feeling so positive.

While the pace of future earnings growth will depend in part on continued capital spending and the realization of returns from AI initiatives, the current environment demonstrates that earnings strength is no longer confined to a handful of companies. Instead, it reflects a broader corporate profitability story that has become one of the most important areas of focus in the market.

Treasury Market Moves

During the month, Treasury Secretary Scott Bessent announced the Treasury Department would make some off-schedule purchases of longer-dated bonds to lower rates. This move followed news that the U.S. hit $40 trillion in debt, resulting in the 30-year Treasury yield rising to a 19-year high of 5.31%. Bessent suggested the Treasury would issue shorter-term treasuries to buy $4 billion in longer-term treasury bonds (10-30 year bonds), doubling the amount of the original scheduled buybacks.  By artificially increasing demand, Bessent hopes the interest rate in longer-dated bonds will fall.

Bessent also noted that the Treasury is not limited to only $4 billion in repurchases but could extend the buybacks if needed, signaling to the market that the government is willing to use buybacks more aggressively to address rising yields. The market’s immediate response resulted in lower yields for a day but quickly reversed the trend, calling into question the policy move. After all, issuing debt to buy back debt does not lower the debt; it only changes the mix of debt the U.S. Treasury holds.

Speaking on CNBC, Bessent said, “Part of it is signaling here and to show that we believe that yields don’t reflect the underlying fundamentals…we believe that the liquidity, especially at the 30-year point, is very poor.” Legendary investor Stan Druckenmiller, once a mentor to Secretary Bessent, wrote a very critical op-ed in the Wall Street Journal on this intervention, which did not paint a rosy outlook for the Treasury’s planned actions or the overall government debt situation. In the letter, Druckenmiller’s message was clear, “Return buybacks to their stated purpose: small, scheduled, off-the-run liquidity operations announced at quarterly refundings, never off-cycle responses to yield levels. Term out the debt honestly and pay the price the market sets. If the 30-year must trade at 5.5% to clear, that isn’t a crisis. It is an invoice. Then do the only thing that durably lowers long-term yields: address the primary deficit.” ³  Druckenmiller is calling for treatment of the disease and not just the symptom. As PJ Williams wrote in last month’s newsletter, “This country, sadly, has a debt problem that neither political party has the will nor the votes to rectify, especially during a mid-term election year.”⁴

Outside of the increasing level of debt, another factor causing the rise in bond rates is increased competition from the investment-grade bond market, specifically from the largest tech companies issuing debt to fund the AI buildout. Fixed income investors, looking to hold bonds to maturity, are generally worried about receiving their coupon and their principal back when the bond matures. If they can get a slightly higher yield from a company they believe will not default on its debt, then that becomes competitive with a risk-free Treasury bond that pays less. Taking away the demand from the long end of the Treasury curve while keeping the supply of those bonds steady will naturally raise rates. As seen below, the issuance from large tech companies as a percent of the investment-grade bond market has risen sharply since the beginning of 2025 and is expected to continue as AI-related projects continue to expand.

The actions of the Treasury may appear somewhat at odds with recent comments from Federal Reserve Chairman Kevin Warsh, who emphasized the role of market forces in determining longer-term interest rates. Another potential contradiction will become evident if the Federal Reserve needs to raise short-term interest rates in response to inflation or the tightening labor market. This would make the Treasury’s move to issue more short-term debt more expensive for the government over time. It will be interesting to see how this evolves from here, as the Fed and the Treasury may be pursuing conflicting objectives.

Iran

The month ended with a resumption of attacks between the U.S. and Iran.  The U.S. first attacked the rocket launchers Iran utilized to activate sea mines in the Strait of Hormuz. Iran then responded by attacking two U.S. bases in Jordan. President Trump told the press that U.S. air defense systems intercepted all meaningful missiles launched at the U.S. bases and added, “We’re going to hit them very hard,”⁶ while posting an AI generated video of Iran’s economically important Kharg Island being blown up by U.S. forces.

An attack on Kharg Island, Iran’s primary oil export terminal, would signal a significant escalation in the war, and precipitate a major hike in oil prices.  The renewed physical actions of the U.S. Iran war come as Secretary Bessent is actively launching what he calls ‘Operation Economic Outcast,’ a campaign aimed at increasing economic pressure on Iran and the foreign entities that continue facilitating its trade. While the administration is actively discouraging other countries from trading with Iran, any true sanctions enforcement would most certainly risk an escalation in tensions with China, the purchaser of 80-90% of Iran’s oil.  Given economic sanctions are the U.S. administration’s most likely path to a negotiated settlement, the upcoming visit by Xi Jinping to Washington will be highly scrutinized.

Meanwhile, Iran and Oman appear to be making progress on a shared transit agreement through the Strait of Hormuz, potentially establishing one of the prerequisites for a future reopening of commercial shipping. In the eyes of Tehran, reopening the Strait of Hormuz largely relies on the U.S. complying with Iran’s terms.  From the U.S. perspective, a negotiated settlement appears to have shifted from regime change to a reopening of the Strait. 

As shipping through the Strait remains severely constrained, any steps towards a peace deal will likely lead to relief in oil prices and future inflation data. However, the latest military exchange creates a step back in progress towards any resolution of the conflict.

Ukraine

Meanwhile, the war between Russia and Ukraine rages on. Ukraine increasingly looks to hit economically sensitive areas that disrupt Russia’s supply chain. Russia has reportedly shot down a record 1,478 Ukrainian drones over a 24-hour period on August 16, as Ukraine targeted Russia’s economically important infrastructure, including its Amazon-like Wildberries warehouse facilities. Wildberries is a major economic driver in Russia, processing goods equivalent to roughly 3% of Russia’s gross domestic product. Reports show that Ukraine is looking to continue ramping up the economic pressures by targeting Russia’s second-largest online retailer next, Ozon. Shares of Ozon reportedly dropped 30% on the news, creating an additional economic loss for Russia.

Markets

• U.S. stocks were up in August as the market digested earnings and as AI-related stocks rebounded from a slump in July. The S&P 500 rose 2.7% during the month, bringing its year-to-date (YTD) return to 13.1%. International stocks were up 2.0% during the month and 14.2% YTD through August.
• The yield on a 10-year Treasury bond was largely flat over the entire month as the market digested a drop in headline and core inflation rates while reacting to Treasury intervention.  The 10-year yield closed July at 4.76%, while the 30-year hit 5.31%, coming to the doorstep of its 5.35% 20-year high. The Bloomberg U.S. Aggregate Bond Index finished the month up 0.4%.

Economic Data

• July headline inflation declined from the previous month to 3.4%. The 3.4% headline inflation rate came in from 3.5% the previous month and below the 3.8% consensus estimate. While inflation showed continued downward momentum, the 3.4% level is still significantly higher than the Federal Reserve’s stated 2% target. Core inflation (excluding food and energy price movements) dropped to 2.5% year over year, slightly lower than last month’s 2.6% number. In Jackson Hole, Fed Chair Warsh said “While this summer’s readings were better than expected, they do not tell me that underlying trends have meaningfully improved.”⁷
• July Nonfarm payrolls declined by 23,000, and May and June numbers were revised lower by 103,000 jobs, largely due to a drop in government and leisure and hospitality jobs. The unemployment rate decreased in the month to 4.1% but was driven by the labor force participation rate shrinking to 61.4%, the lowest rate since the 1970s, excluding the 2020 pandemic. Part of the shrinking in the labor force participation rate was due to a statistical population revision, with the majority of the shrinking coming from an aging population and a sharp drop in participation among prime-age workers (25-54), though this was a reversal back to levels seen in 2023-2025.

Our Team’s Take

The Federal Reserve will receive August inflation and employment data before its September meeting, which should provide greater clarity on the timing and direction of its next policy move. During the second half of 2026, investors will closely monitor any Fed decisions, as well as the resulting movements in Treasury yields, developments in the Iran conflict, and the potential impact of oil prices on inflation and economic growth.

We continue to focus on diversification across asset classes, including private alternatives such as infrastructure, real estate, private equity, and private credit. Public stock valuations are elevated relative to history, but strong earnings growth, positive investor sentiment, and a decent economy continue to provide support for stock markets. Eventually, AI productivity growth should help maintain strong profit margins; however, markets continue to punish stocks that fall short of lofty expectations. Continued turbulence is likely.

As we have discussed repeatedly, it is imperative that investors be in the correct risk tolerance for their own personal situations. If you have concerns, please do not hesitate to reach out to your wealth advisor.

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¹https://insight.factset.com/mag-7-companies-reported-earnings-growth-above-100-boosted-by-investment-gains August 28, 2026

²https://www.youtube.com/watch?v=WaKDHRCC3NE&t=1837s August 25, 2026

³https://www.cnbc.com/2026/08/20/bessent-says-treasury-buyback-operation-could-be-more-than-4-billion.html August 20, 2026

⁴https://www.wsj.com/opinion/let-the-bond-market-speak-81529d74 August 24, 2026

⁵https://hightowersignature.com/blogs/insights/update-on-the-economy-and-markets-august-2026 August 5, 2026

⁶https://www.cnbc.com/2026/08/30/us-iran-strikes-strait-hormuz.html August 30, 2026

⁷https://www.cnbc.com/2026/08/28/kevin-warsh-jackson-hole-federal-reserve-inflation.html August 28, 2026