Stocks advanced strongly in September. Corporate earnings were generally ahead of expectations, and the Fed cut rates while signaling openness to further easing in the fourth quarter. The U.S. total stock market posted its fifth consecutive monthly gain, up 3.4%. International stocks matched this gain, and bonds were moderately higher as well.

AI booms drives markets

September also featured a string of high-profile AI infrastructure announcements. The headline was a $240 billion commitment from OpenAI (the developer of ChatGPT) for cloud services provided by Oracle. Earlier in the month, Broadcom announced OpenAI would be buying $10 billion of custom chips. Later in the month, Nvidia announced it would invest $100 billion OpenAI, partially answering where all this funding will come from.

Energy capacity clouds outlook

Some are concerned that much of this investment is getting too far ahead of realized revenues and may prove misguided. There is also a chance much of it simply won’t happen anytime soon because of power constraints. Building new power generation or supplying enough natural gas to power massive data centers is a challenge and is becoming a political issue as basic utilities costs start to rise. Regardless, for now, investors appear enthusiastic almost all things AI related and have generally responded positively to any related investment or announcements with increases in share prices.

Government shutdown in focus

October kicked off with a new government shutdown. These have become a somewhat common occurrence, and investors have initially been unphased. There is some risk this time may prove different because of increased polarization in Washington and because the Trump administration has indicated plans to reduce certain federal positions and programs. As such, the standoff could last longer than normal and have more significant implications. Of note, unlike debt ceiling situations, Treasury bond payments are not impacted by the current type of government shutdown, so we don’t anticipate dramatic impact on the bond markets.

Fed cuts

Amid pressure from the White House and mixed data on jobs, on September 17th the Fed cut its short-term interest rate target by a quarter of a point to 4.00% - 4.25% while leaving the door open for additional cuts in future meetings. The Fed’s open market committee projections, known as the dot plot, indicated two additional cuts are likely during the fourth quarter. That said, recent comments by Fed Chair Jerome Powell were non-committal.

At this point it appears that President Trump will not pursue the removal of Chair Powell before his term ends in May, but it is likely that his successor will be sympathetic towards the President’s wishes for lower rates. As such, unless inflation reignites, interest rates may move lower by the end of 2026. Lower rates can help support elevated stock valuations but are largely expected by market participants at this point. They may also increase the risk of rekindling inflation. Small-cap stocks tend to have higher debt levels and are therefore viewed as potential beneficiaries of lower rates. This may be one reason they outperformed in Q3.