U.S. equities delivered a split performance last week, with the technology sector powering ahead while the broader market struggled under the weight of rising long-term bond yields. The Nasdaq Composite advanced 0.45%, but the S&P 500 slipped 0.27% and the Dow Jones Industrial Average dropped 1.26%. This divergence underscores the narrowing leadership in the current rally, as investors grapple with the implications of a higher-for-longer rate environment.
The focal point now shifts to the bond market. The 10-year Treasury yield closed Friday at 5.28%, up 11 basis points from the prior week, even as softer payroll data fueled expectations that the Federal Reserve may pause its rate-hiking cycle. This disconnect between policy expectations and long-term yields is a critical signal for equity valuations, particularly for growth and technology stocks that are sensitive to discount rates.
Market Performance and Breadth
For the week, the cap-weighted S&P 500 ETF (SPY) lost 0.22%, while the Invesco S&P 500 Equal Weight ETF (RSP) fell 0.65%, highlighting the underperformance of the broader market. Only three of the 11 major sector funds posted gains, with technology (XLK) leading the way at +1.80%. Energy (XLE) added 1.26%, and utilities (XLU) rose 0.81%. On the downside, communication services (XLC) dropped 2.34%, financials (XLF) fell 2.46%, and health care (XLV) declined 2.65%.
Labor Market Data and Fed Expectations
Friday's employment report provided some relief but no resolution. The Bureau of Labor Statistics reported that nonfarm payrolls increased by just 29,000 in September, well below the prior 12-month average of 45,000. The unemployment rate ticked up to 4.2% from 4.1%, and average hourly earnings rose 0.1% month-over-month and 3.0% year-over-year. Revisions to July and August payrolls shaved a combined 60,000 jobs, painting a softer hiring picture.
Adam Schickling, senior economist at Vanguard, noted that the report "strengthens the case for the Federal Reserve to remain patient." Indeed, traders slashed the probability of an October rate hike to below 23%, down from 64% a week earlier, according to CME data. Yet, the 10-year yield recovered from an intraday low below 5.17% to close at 5.28%, suggesting that the bond market remains skeptical about the Fed's ability to pause.
Curve Steepening and Commodities
The yield curve steepened as long-term yields rose faster than short-term ones. The 2-year Treasury yield ended at 4.83%, up 2 basis points, while the 30-year yield climbed 14 basis points to 5.63%. This pushed the 2-to-10-year spread to 45 basis points from 36 basis points. In commodities, WTI crude oil fell 1.41% to $91.11 per barrel, while the U.S. dollar index gained 0.95%. Gold futures dropped 3.68% to $4,162.30 per ounce, offering little defensive support.
Stock Movers and Analyst Actions
Rate-sensitive growth shares led Friday's rebound. Tesla (TSLA) surged 4.7% after reporting third-quarter deliveries of 486,532 vehicles, beating its own estimate of 461,974. Nvidia (NVDA) added 1.3% and provided the biggest boost to the S&P 500. Hewlett Packard Enterprise (HPE) jumped 7.4%, while Nike (NKE) fell 3.6% after its outlook disappointed.
Analyst actions reflected the market's mixed sentiment. Morgan Stanley reiterated a Buy on Nvidia with a $300 target, while Jefferies maintained a Buy on Nike with a $60 price target. However, Williams downgraded Nike to Hold, and DZ Bank cut it to Sell, highlighting the divergent views on the sportswear giant.
Key Events Ahead
This week brings several critical catalysts. Monday at 10:00 a.m. EDT, the Institute for Supply Management releases its September services index, which came in at 55.4 in August, indicating expansion. Investors will pay close attention to the prices paid and employment components.
On Wednesday at 2:00 p.m. EDT, the Federal Reserve will publish minutes from its September 15-16 meeting, where officials voted 12-0 to raise the target range by 25 basis points to 3.75%-4.00%. The minutes may reveal how policymakers balanced resilient spending against elevated inflation, a balance that has become even more critical after the weak hiring data.
Weekly jobless claims are due Thursday, and the University of Michigan's preliminary October consumer sentiment survey is set for Friday, October 9. Inflation expectations from that report will be closely watched for their impact on long-term bond yields.
Risks and Outlook
Risks remain tilted toward higher yields. A renewed oil shock, weak demand at Treasury auctions, or hawkish minutes could push long-term rates higher, putting pressure on expensive growth stocks and deepening the market's narrow leadership. Conversely, softer services data could ease yields but might also raise concerns about corporate earnings.
Monday's ISM report provides the first data point, but Wednesday's Fed minutes will be the true test of whether the bond market accepts the pause implied by the payrolls report. The question is whether equal-weight shares can close the 0.43-percentage-point weekly gap with the cap-weighted S&P 500 before the minutes are released.
