Technology leads despite surging Treasury yields and persistent oil risk

US equities finished a volatile week higher, with technology once again providing the principal source of market strength. Small caps remained the notable exception, with the Russell 2000 falling approximately 0.9%, reflecting their greater sensitivity to higher borrowing costs.

The headline gains, however, disguise considerable volatility beneath the surface. The week began with a powerful technology rally as oil and Treasury yields eased, before rising yields and renewed Middle East concerns pressured equities through mid-week. Friday brought a recovery as oil declined and investors returned to AI-related stocks.

AI Reasserts Market Leadership

Artificial intelligence returned decisively to the centre of the market narrative.

On Monday, AMD surged 9.6% and crossed US$1 trillion in market capitalisation for the first time, joining Nvidia, Broadcom and Micron among US semiconductor companies to have reached that milestone. Intel rose around 12%, while the Philadelphia Semiconductor Index advanced strongly.

Meta was another major contributor, rising approximately 13% over the week following a strong reception for its Muse AI agent. On Friday, Microsoft gained 3.7% after unveiling additional Copilot capabilities, including coding and autonomous-agent functions. Qualcomm rose 4%, Dell gained 5%, while Akamai advanced after announcing an US$11.6 billion cloud-services agreement with Anthropic.

These developments reinforce an important shift within the AI theme. Investor attention is broadening from chips and data centres towards the commercial adoption of AI applications.

Fund flows reflected that renewed enthusiasm. US equity funds attracted US$37.6 billion during the week, their first inflow in five weeks and largest since June. Technology funds alone received US$4.89 billion.

Bond Yields Send a Different Message

The bond market was considerably less constructive.

The 10-year Treasury yield climbed to approximately 5.20%, its highest level in 19 years, while the 30-year yield reached its highest level since 2004.

Several Federal Reserve officials reinforced the possibility of additional tightening following last week’s 25-basis-point increase. By Thursday, markets were assigning approximately a 69% probability of another rate increase in October, compared with around 55% a week earlier. That probability moderated slightly to around 66% by Friday.

Economic data have given the Fed little reason to retreat. Initial jobless claims fell to 197,000, below expectations, suggesting that labour conditions remain resilient. Meanwhile, business activity data pointed towards continued economic strength accompanied by mounting price pressures.

The resulting tension is increasingly important for equities.

Strong growth supports earnings, but it also gives the Fed greater flexibility to fight inflation. The longer Treasury yields remain above 5%, the more demanding the valuation environment becomes, particularly outside the largest cash-rich technology companies.

The Market Is Becoming Increasingly Narrow

This week’s index gains should therefore be interpreted with some caution.

While the S&P 500 remains close to its record high, eight of its eleven sectors are negative for September. An equal-weighted version of the S&P 500 has fallen approximately 4% during the month, even as the conventional market-cap-weighted index has remained broadly unchanged.

Small caps have also struggled as yields have risen.

This divergence indicates that the market is increasingly rewarding companies with strong earnings visibility, substantial cash generation and direct exposure to structural growth themes such as AI.

It is not yet necessarily a bearish signal, but it does mean that the headline indices are providing an increasingly incomplete picture of underlying market conditions.

Oil Retreats, but Geopolitical Risk Remains

Oil provided some relief on Friday.

Brent crude declined 2.1% to US$104.32 per barrel, while WTI fell 2.3% to US$92.41, following reports that US and Iranian negotiators were exploring a phased path towards ending the conflict. Brent nevertheless finished the week slightly higher.

Iran has proposed reopening the Strait of Hormuz as part of a broader agreement involving an easing of the US blockade, although Tehran continues to reject concessions over its nuclear programme. Meanwhile, Houthi attacks on Saudi Arabia continue to pose risks to regional energy infrastructure.

Approximately 20% of global oil supply normally passes through Hormuz, making any credible reopening potentially significant for inflation expectations.

The geopolitical situation therefore remains asymmetric for markets: meaningful de-escalation could remove a substantial inflationary pressure relatively quickly, while renewed escalation could push oil higher again and reinforce expectations for additional Fed tightening.

Valuations Have Adjusted

One encouraging development is that equity valuations have become less stretched.

The S&P 500 traded at just under 19 times forward earnings during the week, its lowest valuation since 2023, according to LSEG. Rising earnings expectations from AI-related companies have contributed to that compression even while the index remains close to its highs.

This helps explain the market’s resilience in the face of sharply higher bond yields.

However, the combination of concentrated leadership and rising risk-free rates means earnings delivery remains critical. The market currently has considerably less tolerance for disappointing growth than the headline index level might suggest.

What to Watch Next (Beginning 28 September 2026)

The coming week brings two important tests for the Federal Reserve outlook.

The PCE inflation report is due on 30 September, followed by the September employment report on 2 October. Economists expect payroll growth of approximately 100,000.

A combination of persistent inflation and another strong employment report would reinforce expectations for an October rate increase. Softer data could provide some relief to Treasury yields and broaden equity participation beyond mega-cap technology.

Investors should also continue monitoring US-Iran negotiations and the Strait of Hormuz.

For now, the market remains resilient, but increasingly selective.

AI earnings and adoption continue to provide a powerful engine for equities. The challenge is whether that engine can continue to overcome 5% Treasury yields, restrictive monetary policy and US$100 oil.

That balance is likely to remain the defining market question heading into the fourth quarter.