Third Quarter Review & Outlook

October 1, 2026

AI Drives Stock & GDP Growth, But Weighs On Bonds

In a month and quarter like the ones we’ve just experienced, it’s worth remembering the old saw that the economy is not the market, and the market is not the economy. All things considered right now, both could be better — or much worse.

Let’s start by noting that the S&P 500 and Nasdaq Composite are up for the third quarter and year-to-date. Though widely watched, the price-weighted Dow Jones 30 Industrial Average is faring less well in all periods, but its relevance to the broad stock market — though not the economy — is less than it has ever been throughout its 130-year history.

When it was officially started in 1896 with a handful of stocks, it mostly consisted of railroads. And railroads were central to the economy’s growth in much the same way as tech is today. Still, as a percentage of the country’s population, not many Americans worked for railroads, though their economic well being were very much tied to them even if they never heard or saw a locomotive.

The same cannot be said of tech generally (it’s everywhere in our lives), though AI is another matter: that technology is still inconspicuous unless you live near a data center, or one is coming to your town.

However, technology dominates major stock indexes nearly the same way railroads once did. The expanding sector includes chip- and hardware makers, hyper-scalers, cloud providers and communication companies. Excluding power companies, water utilities and construction firms, the sector directly accounts for roughly half of the S&P 500 and two-thirds of the Nasdaq Composite.

On the plus side, AI may be responsible for a third or more of the economy’s growth. But that raises another uncomfortable point: For all those AI investment dollars, the economy is only expanding at a rate of around 1.5% to 2.0%; AI may be responsible for 0.5% to 1.0%.

And, as Jack points out in his column, the hundreds of billions of dollars that are being borrowed and spent on AI infrastructure are partly contributing to higher borrowing costs, though there’s only scant evidence so far that rising prices for semiconductors, building materials, etc., are doing much to fan inflation.

The bottom line for consumers is that they are yet to see AI’s benefits in their daily lives; they fear job loss, higher electric and water bills, and now dire warnings of Armageddon. At the same time, they are less focused on what the promise of AI has already done for them personally: greatly increase the value of their retirement accounts.

Of course, the big question for AI/tech at this possible inflection point is whether or not the sector and its investors are facing another railroad bust, a tech bubble, or worse. If the Nasdaq’s performance last month, last quarter and this year are any worthwhile measure, optimists continue to prevail over the pessimists: the Nasdaq rose last month while the more economically sensitive Dow stumbled.

Let’s attach monthly figures to the market’s various barometers.

For its part last month, the Nasdaq Composite rose 1.9% versus a decline of 4.1% for the Dow. The S&P 500 was occasionally spooked by the Iran War, rebounding oil prices, inflation jitters, a Fed rate hike, and calls for a slowdown in AI development. Still, it managed to finish September down a modest 0.3%.

The Russell 2000 (down 5.3%) was another matter, as was the Russell Midcap Index (down 4.2%). Typically more rate-sensitive than better capitalized large-cap companies, rising borrowing costs triggered selling. All that said, double-digit year-to-date gains remain the norm for all major indexes with the notable exception of the Dow, which has risen a tamer 7.2%.

Thanks largely to tech-related stocks (including a nice bounce from Meta, whose new personal AI agent/assistant — called Muse — super-charged its share price 27% last month!), Fidelity’s large-cap growth funds outpaced all other investment styles. Their 14 offerings in that space gained an average of 1.5%. OTC fared best (up 4.8%), although three funds did finish the month in the red.

Widely held Blue Chip Growth rose 3.0%, Growth Discovery fared a bit better (up 3.5%), while the less aggressive Contrafund (up 2.6%) performed exactly as one would expect in such a market.

Apart from the aforementioned group, few other funds had much to crow about. Value-oriented stock funds bore the weight of falling share prices in a variety of sectors including financials, energy, utilities and even precious metals like gold.

The large-cap value fund Equity-Dividend Income was among the month’s biggest laggards (down 5.3%), though like other such funds, Small Cap Value (down 6.1%) also faced the headwind of rising interest rates.

Only eight of Fidelity’s 34 Selects gained ground in September, and arguably, all but one occupies some space in the tech sector. That includes Medical Tech & Devices (up 7.6%), which benefited from its 17% stake in Thermo Fisher Scientific’s 10% pop last month. Matching that fund’s performance was Semiconductors (up 7.6%), while the more diversified Technology (up 5.8%) fared quite well.

Elsewhere, rising bond yields made non-income-producing gold less attractive. The precious metal fell nearly 6% last month to $4,189.10 a troy ounce. In turn, Gold fund fell 10.0%.

And, despite a 5% rise in global oil prices, Energy trimmed this year’s gargantuan gains some -4.4% as investors took profits and bet that peak prices may be at hand.

Almost all foreign funds bled red last month as technology is not a significant sector in developed Europe and elsewhere. (Europe fund fell 4.0% while Euro-rich International Index fell 3.2%.) That also includes Canada (down 6.2%) which bore the additional weight of falling commodity prices, a large banking sector, and an ever-expanding trade war with the U.S.

As noted elsewhere, the Fed rate hike, combined with inflation concerns, a poorly received Treasury auction for five year notes, and other factors, each contributed to a difficult September for all bond funds.

With but two exceptions (Conservative Income Bond, up 0.1%, and Sustainable Low Duration, up 0.2%, whose durations are measured in months rather than years), most varieties of bond offerings ended in the red for the month, quarter and year-to-date. That includes nationally-diversified and state-specific municipal bond funds.

In a majority of cases, funds that are most sensitive to rising interest rates fared worse. (The Scorecard shows that measure as duration: a 1.0% rise in interest rates may eventually translate into a decline of 5 percentage points for a fund with a duration of five years.)

At the extreme, Long-Term Treasury Index is Fidelity’s most interest-rate-sensitive fund with a duration of 14 years. Since the start of the year, the yield on the 30-year Treasury Bond has risen 80 basis points (0.8 percentage points) while the benchmark 10-year Note is up 111 basis points (1.10 percentage points). The latter fell 5.0% in September and is down 7.3% for the year-to-date.

With mortgage rates typically tied to the 10-year, Freddie Mac’s conforming 30-year mortgage rates topped 7% for the first time since January 2025. For their part, GNMA and Mortgage Securities fell 3.3% and 3.4%, respectively last month. For the year, they’re down 2.6% and 3.0%, respectively.

Among nationally diversified tax-free bond funds, September’s declines ranged from -0.5% for Conservative Income Muni to -4.2% for Municipal Income.

Finally, with the Fed rate hike, money market yields should continue to drift higher as existing holdings are replaced with higher-yielding securities.

For its part, the yield on Fidelity’s only retail-available prime fund, Money Market [SPRXX], was 3.55% at month end, up from 3.36% a month earlier. With the August inflation (CPI) read at 3.4% year-over-year, the fund’s real yield is basically zero. That’s much the same for all money funds at this time.

— John Bonnanzio