October 3, 2026 | Unsubscribe
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
This was a week of two halves. Rising bond yields pressured stocks early on, and then a run of softer economic data eased fears of more Fed rate hikes and pulled yields back down. The Nasdaq finished the week higher on technology strength, while the Dow and S&P 500 posted small weekly losses.
The week started badly. On Monday Treasury yields climbed back toward multi-decade highs and oil rose, sending stocks lower. Breadth under the surface was weak: far more stocks hit new lows than new highs, even though the major indexes held up better. That is a reminder of how heavily higher borrowing costs have weighed on the average stock, especially smaller companies.
The turn came Wednesday with the Fed's preferred inflation gauge. August inflation came in cooler than expected, with the headline rate at 3.4% against forecasts of 3.7% and core inflation at 3.0%, also below estimates. Inflation is still well above the Fed's 2% target, but the report lowered the odds of another rate hike in October and pushed expectations for the next move out to December. Yields stopped climbing. The report also showed consumer spending rising at its fastest pace in over a year, so the economy is still moving forward.
Friday's September jobs report was the most important release of the week. The economy added just 29,000 jobs, far below the roughly 84,000 expected. Prior months were revised lower and unemployment rose to 4.2%. A weak jobs report would normally worry investors, but right now it was welcome because it makes another Fed rate hike much less likely. Treasury yields fell sharply, stocks rallied, and the Nasdaq hit an intraday high.
For the smaller companies our readers follow, this was the most encouraging shift in weeks. Cooler inflation and a softer job market both suggest the Fed's hiking cycle may be close to over, and yields have started to come down from multi-decade highs. Lower yields reduce borrowing costs, which matters more for smaller companies than for anyone else. Rate-sensitive areas like housing perked up on Friday. One trend has not changed yet: technology is still leading, and small caps need lower yields to hold before they can fully join the rally.
What's Coming Next Week
Next week is relatively quiet before earnings season begins. The main event is Wednesday's release of the minutes from the Fed's September meeting, when it raised rates for the first time in three years. Investors will look for how many officials want to keep hiking. After this week's soft data, any sign the committee is open to pausing would add to the relief in bond yields.
On the data front, the services sector report early in the week will give a fresh read on the largest part of the economy. The bigger test comes the following week with the September inflation report on October 14 and the start of third-quarter earnings season.
The most important thing to watch is still Treasury yields. If this week's decline continues, it would be the strongest tailwind for small caps in months. If yields climb back toward their highs, the pressure returns. Oil also matters, since energy prices feed directly into inflation expectations.
The bottom line: cooler inflation and a softer jobs market have shifted the rate outlook in a better direction, and that is good news for smaller companies.
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SmallCapStocks Team
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