Markets 19 days ago ·
AI vs the 5%
Nasdaq and S&P 500 advance despite the 10-year Treasury yield hitting 5.17%, driven by AI leadership. Yet market breadth remains incomplete: the Russell 2000 is in the red and the dollar strengthens.
Week 38 delivered a combination less intuitive than the headline index gains might suggest: the US economy continues to surprise on the upside, yields are rising again and the dollar is strengthening, yet AI leadership is allowing the Nasdaq and S&P 500 to advance. Equity resilience, however, is far from uniform — small caps continue to lag, and dispersion remains the true risk indicator.
The market week runs from 21 to 25 September, within DOMINA's Week 38 of 20–26 September. The starting point is not a new Federal Reserve or Bank of Japan decision: those belong to the prior week. In W38 the market instead digested that monetary tightening against a backdrop of surprisingly robust macroeconomic data, Treasury yields once again above 5%, and crude oil highly sensitive to geopolitical developments.
Dominant regimeSelective resilience
Large-cap growth and AI are absorbing the rise in yields better than small caps.
Decisive factorUS growth still strong
PMI, claims and core capital goods keep upward pressure on the yield curve elevated.
Macro constraintCost of capital
The 10-year Treasury closes at 5.17%, limiting any broadening of market participation.
Central thesis. Technology is beating the 5% level, but it is not neutralising it. Rising yields are not preventing mega-cap AI names from advancing, while they continue to penalise areas most sensitive to the cost of capital. As long as this divergence persists, index strength does not equate to a fully broad-based risk-on environment.
1. Wall Street: gains yes, participation incomplete
Performance from the close of 18 September to the close of 25 September 2026. US indices in local currency.
The S&P 500 closed at 7,743.41, up 1.21% on the week; the Nasdaq at 27,068.72, up 2.06%; the Dow at 51,828.62, up 0.28%. The Russell 2000, by contrast, lost approximately 0.80%. The divergence is clear: the market rewards equity duration only where earnings growth and the AI theme are perceived as strong enough to offset the rates repricing.
Monday set the tone: the Nasdaq posted a new closing record on a rally led by semiconductors and mega-cap AI names, even as oil and yields declined. From Wednesday, however, the re-acceleration of the Treasury curve brought the cost of capital back into focus. The index held its ground, but small caps did not — which makes it impossible to read the week as a straightforward return of risk-on sentiment.
| Market | Key data point | Regime reading |
|---|---|---|
| S&P 500 | +1,21% | Large-cap resilience despite the rates repricing. |
| Nasdaq | +2,06% | AI and semiconductor leadership remains dominant. |
| Russell 2000 | -0,80% | The cost of capital continues to weigh on the most rate-sensitive companies. |
| UST 10Y | 5,17% | Approximately +19 bp versus 18 September: tighter financial conditions. |
| DXY | approx. +0.8% | Yield differential supportive of the dollar. |
2. US macro: growth is fuelling the rates problem
The week's most significant data point arrived on 23 September. The S&P Global US Composite Flash PMI rose to 58.4 from 56.0, its highest level in over five years. The signal is twofold: activity and employment are accelerating, but cost pressures are also building. This combination is favourable for near-term earnings but uncomfortable for the bond market, as it reduces the scope for a swift monetary normalisation.
On 24 September, initial jobless claims fell to 197,000 in the week ended 19 September, down from a revised 198,000 — another signal of labour market resilience. On the same day, August new home sales rose to an annualised pace of 684,000 units, up 6.4% from July, albeit with wide confidence intervals.
On 25 September, durable goods orders were essentially unchanged at $338.6 billion, but the non-defence capital goods ex-aircraft component — a proxy for business investment — rose 1.6%. The final University of Michigan Consumer Sentiment for September came in at 48.1, below August's 51.7, with one-year inflation expectations at 4.6%. The picture is therefore asymmetric: businesses and the labour market remain robust, while the consumer is signalling greater pressure from prices and the outlook.
3. Treasuries: the bond market reasserts its pricing power
The benchmark 10-year Treasury yield closed on 25 September at 5.17%, versus 4.98% on 18 September — approximately +19 basis points over the week. The 30-year reached 5.54%. The move higher was concentrated in the latter part of the week, consistent with an upward revision to expectations for nominal growth and the persistence of rates.
Robust macroPMI readings, jobless claims and capex data signal no meaningful slowdown.
Fed expected to remain restrictiveThe market scales back the scope for rapid easing.
Yields rising10Y at 5.17%, 30Y at 5.54%.
Selective equityAI holds up; small caps and rate-sensitive assets remain under pressure.
The week contained no new Fed decision: the 16 September rate rise is a prior event, not a W38 development. The monetary policy decision actually taken during the week was that of the Swiss National Bank on 24 September, which left its policy rate at 0%, noting an increase in inflation driven primarily by energy.
4. Europe and Asia: European recovery, a divided Asia
The STOXX Europe 600 snapped three weeks of losses and closed the week with a gain of approximately 0.5%. The decline in oil prices for much of the week eased perceived inflationary pressure, while technology and banks underpinned the recovery. The ECB Economic Bulletin published on 24 September kept the focus on financial conditions and global spillovers.
In Japan, the Nikkei 225 gained approximately 2.07% relative to 18 September, closing at 66,364.20. The Tokyo trading week was shortened by public holidays and the advance remained largely driven by technology and semiconductors, with subsequent broadening into banks and dividend-yielding stocks.
The KOSPI closed its week as early as Wednesday 23 September at 7,080.92 points, approximately +2.71% versus 18 September. The South Korean exchange was closed on 24 and 25 September for the Chuseok holiday: the figure must therefore be compared against a three-session week rather than a normal Friday close. Leadership remained concentrated in AI and semiconductors.
Mainland China and Hong Kong, by contrast, underperformed. The Shanghai Composite ended the last available session of the week at 3,888.37, approximately -0.6% relative to 18 September; the Chinese market was closed on 25 September for the Mid-Autumn Festival. The Hang Seng closed at 24,510.09, approximately -1.0% on the week.
5. FX, gold and oil: the dollar follows yields
The Dollar Index gained approximately 0.8% over the week, supported by the rise in yields and expectations of a higher-for-longer Fed stance. The euro and sterling lost ground, while the yen remained vulnerable despite the Bank of Japan's rate rise the previous week.
Gold fell approximately 2.4% over the week, weighed down by the combination of a stronger dollar and elevated real yields. The signal is consistent with the repricing of opportunity cost: in W38, the metal did not replicate the resilience it had demonstrated the previous week.
Oil remained the primary geopolitical driver. WTI closed around $92.44, approximately -3.8% on the week, after sharp swings driven by the outlook for US-Iran negotiations and the partial normalisation of Middle Eastern supply flows. The decline in crude supported risk sentiment at the start of the week, but was not sufficient to prevent Treasury yields from rising as US macro data came in above expectations.
6. Regime and Scenarios
Scenario
Validation
Invalidation
BASE
Tech leadership still strong, S&P above support levels, Treasuries elevated but orderly; gradual improvement in market breadth.
A simultaneous renewed acceleration in yields, the dollar and oil, accompanied by deteriorating breadth.
RISK
10Y yield sustainably above the week's highs, small-caps and cyclicals underperforming further, credit weakening.
A pullback in yields accompanied by non-recessionary macro data and improving breadth.
UPSIDE
Yields stabilise, oil remains contained and leadership broadens beyond AI/mega-caps.
A fresh inflationary or geopolitical shock pushing energy and the term premium higher again.
7. What to Watch Next Week
| Factor | Event / Data | Why It Matters | Signal |
|---|---|---|---|
| US Labour Market | JOLTS and employment data | Confirms whether the robustness of claims data holds. | Further tightening would support yields. |
| US Curve | 10Y and 30Y | The primary constraint on breadth. | Stabilisation favours broadening; acceleration increases dispersion. |
| Energy | WTI/Brent and the Middle East | Direct transmission to inflation expectations and rates. | A renewed oil rally would reopen inflationary risk. |
| Breadth | Russell / equal-weight vs S&P | Measures the quality of the rally. | Relative recovery confirms a healthier risk-on environment. |
| Asia | South Korea and China re-open | Holidays shortened the weekly comparisons. | The post-holiday reaction tests Asian leadership. |
Resilience Has a Price
Week 38 is not a central bank week: it is the week in which the market began to price in the consequences of central bank action. US data pointed to an economy more resilient than expected, and the 10-year Treasury yield rose to 5.17%, yet technology continued to support the broader indices.
The key differentiator remains participation. As long as the Nasdaq and mega-caps advance while the Russell 2000 and other rate-sensitive segments lag, the backdrop is one of selective resilience, not uniform risk expansion. A transition to a more constructive regime requires strength to broaden without depending on a macro deterioration to bring yields down.
