Monthly Economic and Market Summary

• Markets Move Higher for Fifth Straight Month—The S&P 500 advanced 3.6% in September, bucking seasonal headwinds and hovering near record highs. Emerging markets led the way posting a 7% gain, surpassing international developed markets on a year-to-date basis.
• September ADP Payrolls Missed—Private sector employment data, compiled and measured by payroll data from ADP clients, fell by 32,000 month-over-month, versus consensus expectations for a 50,000 increase. August’s reading was revised to a 3,000 decline, marking two straight months of contraction in private payrolls. September’s reading marked the weakest reading since March of 2023, however; the report indicated data recalibration impacted results. Despite economic growth, U.S. employers continue to exercise caution around hiring.
• Government Shutdown—With Democrats and Republicans unable to reach a funding agreement, the federal government officially shut down as of October 1. Despite the political stalemate, historical data shows that past shutdowns have had limited impact on markets and tend to be short-lived. For example, the S&P 500 fell just 2.3% during a 16-day shutdown in 2013 and gained over 10% during a 34-day shutdown from December 2018 to January 2019. Potential impacts may be felt by the federal workforce, along with delays in the release of key economic data. Investors should remain focused on long-term fundamentals rather than short-term political noise
• Retail Sales Surprise—Retail sales rose strongly in August for the third consecutive month, signaling that household spending remains resilient despite concerns about lingering inflation and a slowing job market. Spending at U.S. retailers rose 0.6% in August, exceeding consensus expectations for a 0.2% increase.
• Federal Reserve Cuts Rates—The Federal Reserve (Fed) delivered a highly anticipated interest-rate cut in September, marking the first rate cut since late 2024. The Fed lowered its benchmark interest rate by a quarter of a percentage point to a range of 4.00% to 4.25%. Fed Chair Jerome Powell indicated additional cuts may follow, citing concerns of a weakening labor market.

The modern bull market: strong fundamentals support Tech’s dominance

The U.S. stock market is trading near record highs, driven primarily by mega-cap technology companies. Together, the information technology and communication services sectors now make up approximately 45% of the S&P 500, exceeding the concentration levels seen during the dot-com era. This concentration has fueled strong market returns in the S&P 500 over the last decade. Since the launch of ChatGPT in November 2022, artificial intelligence (AI) related stocks have become the dominant force in the market, accounting for 75 percent of the S&P 500’s returns, 80 percent of earnings growth and 90 percent of the increase in capital spending, according to Bloomberg.

While the nature of this concentration raises concerns about a potential bubble, today’s market is fundamentally different from that of the early 2000s. Unlike the speculative narratives of the past, today’s leading technology companies are characterized by strong profitability. According to McKinsey, the top tech firms report average operating margins exceeding 30 percent compared to around 10 percent for the rest of the market. Moreover, the proportion of unprofitable companies is at a multi-decade low, and earnings growth within growth sectors remains robust.

While AI investments are driving rapid growth, they have also raised concerns about stretched valuations and the risk of a speculative AI bubble. However, a key distinction lies in the fundamentals. The accompanying chart from Piper Sandler demonstrates that current growth stock valuations are supported by superior returns on equity (ROE), unlike the 2000 technology bubble when valuations surged without fundamental support. Although risks persist, the current market environment is supported by strong earnings, resilient profit margins and enduring structural trends, suggesting a more sustainable foundation than that of the previous tech bubble