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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
After the jolt of the Fed's first rate hike in three years, this week brought a welcome recovery. All three major indexes finished higher, and the Dow snapped a three-week losing streak. Two forces powered the rebound: easing oil prices and a powerful rally in technology.
The oil story was the more important one for the broader inflation picture. Tensions around the Iran war showed real signs of cooling, and crude fell sharply early in the week, with U.S. oil dropping about 4% in a single session toward the low $90s. The move came as diplomatic efforts picked up, including reports of a productive meeting between U.S. and Iranian officials, and as Saudi Arabia continued ramping up its oil exports. Falling oil matters enormously right now because energy prices have been the main engine of inflation, which is exactly what pushed the Fed into hiking. Any sustained relief there eases the pressure that has weighed on the entire market.
The other driver was a strong rally in technology, particularly chipmakers, which climbed for six straight sessions and carried the Nasdaq to fresh record highs, its first records since June. Enthusiasm around new artificial intelligence products fueled the gains and reminded investors that the AI growth story remains very much intact.
Working against all of this was the persistent climb in Treasury yields, which stayed near 19-year highs with the 10-year holding around 5%. In an unusual twist, a strong reading on business activity midweek actually triggered a bond selloff, a classic case of good economic news being bad market news, since a resilient economy gives the Fed more reason to keep hiking. That pressure pulled stocks lower midweek before the Friday recovery.
One theme worth flagging for the months ahead: with yields at 5%, the enormous cost of financing the AI infrastructure boom is drawing new scrutiny. When borrowing was cheap, funding massive data center projects was easy. At 5%, investors are starting to demand clearer proof that all that spending will pay off, and that question could shape the market well into next year.
For the smaller companies our readers focus on, this was a mixed but gradually improving picture. The winning week and the pullback in oil are genuine positives, since lower energy prices are the key to eventually bringing inflation and yields down. But the rally was narrow, led by the mega-cap tech giants rather than smaller names, and yields near 19-year highs remain a heavy headwind for rate-sensitive small caps. For smaller companies to truly join in, yields need to come down, and that hinges on oil and inflation continuing to cool. This week was a step in the right direction, but the leadership needs to broaden.
The bottom line: stocks recovered on falling oil and a tech rally, but 5% yields are still the ceiling on this market, especially for smaller companies.
What's Coming Next Week
Two major events dominate a data-heavy, quarter-end week. First, the August reading of the Fed's preferred inflation gauge is due midweek. Coming right after the Fed's hike and its signal of more to come, this number is critical. It will show whether the recent easing in oil is starting to filter through, or whether inflation is still building. A cooler reading would ease fears of further aggressive tightening and could help pull yields down, which would be a real positive for small caps.
The bigger event lands Friday, when the September jobs report arrives. It is the first major look at the labor market since the Fed hiked, and it will heavily influence whether the Fed follows through on additional increases. A strong report reinforces the case for more hikes, a headwind for rate-sensitive names, while a softer one could give the Fed room to pause. A final look at second-quarter growth and fresh manufacturing data round out the week.
Above all, keep watching yields and oil. The 10-year at 5% is the dominant pressure on smaller companies, and whether this week's oil de-escalation holds will do much to determine where both head next. Continued progress on the diplomatic front would push oil lower and offer genuine relief. Any breakdown would send it back up.
The bottom line heading into next week: inflation and jobs data will shape how much further the Fed tightens. For small caps, easing oil and softer inflation are what is needed to bring yields down from 5% and finally let smaller companies join the rally.
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SmallCapStocks Team
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