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Current stock market timer: BULLISH
Stocks started the week on a cautious note after Trump rebuffed a proposed peace deal with Iran, raising geopolitical tensions.
But the real news came on Friday when the September jobs report came in softer than expected, which is viewed positively for stocks because it reduces Fed rate hikes. Stocks lifted and the Nasdaq reached a new all-time high.
Semiconductor and AI-related stocks continued to lead the rally, while non-AI stocks struggled under high rates and weak breadth. But there are burgeoning signs that other sectors are starting to reboundâŠ
Why are yields rising?
Interest rates ended the month significantly higher. The primary driver is a repricing of Fed policy. Not long ago, the market was expecting two rate cuts for 2026; now it is expecting three hikes.
The Fed has clear reasons to hike: a solid economy risks overheating, while a tight labor market threatens to spark wage-price spirals. Therefore, the Fed is hiking to cool activity before this self-reinforcing cycle becomes entrenched.
The Fed is also scarred by 2022 when they reacted too late and allowed inflation to reach 9%. Policymakers are determined not to repeat the mistake (a.k.a. âfighting the last warâ). This time, they are moving aggressively to stamp out inflation before it takes root.
Exacerbating the issue, global interest rates move in tandem as nations compete for capital (investors choosing higher-yielding US bonds over German bonds, for example). Unfortunately, an oil price shock is reverberating around the world at the moment. Unlike the US, most economies struggle to absorb higher energy prices, forcing foreign central banks to raise rates in a vicious loop:
Where do rates go from here? How will it affect stocks? We discuss belowâŠ
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Market overreaction to interest rates
Inflation is not accelerating
Risk assets are tied to interest rates
Small cap squeeze
Stocks leading the rebound
Our portfolio
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