Markets: Stocks Continue to Rally and US Economic Growth Strengthens

U.S. equities fell slightly in September, but the mild pullback for the month left the market’s solid year-to-date gain intact. The U.S. bond market, by contrast, fell, widening the performance gap with stocks, which are still outperforming fixed-income securities by a hefty margin in 2026.  Although the decline in equities was modest in September, the path was choppy, reflecting investor concern about inflation, interest rates, and geopolitics. The relatively moderate rise in volatility mid-month was temporary, suggesting that traders largely expected the stock market to weather those risks without a sustained downturn.

What looks constructive: U.S. economic activity strengthened recently, providing support for stocks. Retail sales rose well above economists’ forecasts in August, climbing 1.2%, rebounding sharply from July’s 0.5% decline and posting the strongest monthly gain since March. Hiring also increased in August: payrolls jumped by 162,000, the best monthly gain in five months.

What gives us pause: Rising diesel prices, which reached a record high in September, are concerning because they raise transportation and production costs across the economy. If sustained, higher diesel costs can squeeze business profits, boost consumer prices, and weigh on growth.

What we’re watching: Inflation remains well above the Federal Reserve’s 2% target, which was a factor in the central bank’s decision to hike interest rates in September for the first time in three years. Inflation erodes purchasing power and can slow economic growth if higher costs persist. If inflation prompts additional Fed rate hikes, borrowing costs could rise further, pressuring both the economy and financial markets.

Why it matters: The outlook for the economy and financial markets remains mixed because inflation uncertainty is clouding the path for Fed policy. If inflation stays elevated, interest rates could remain higher for longer and weigh on growth; if inflation eases, lower rates could support both the economy and financial markets.

Note: Past performance does not guarantee future results, and investing involves risk, including possible loss of principal.