Capital Market Outlook

Summary

• Scott Bessent serves as U.S. Treasury Secretary while acting as a financial field marshal managing three strategic fronts: the Japanese yen, the 10-year U.S. Treasury yield, and financial pressure on Iran.
• Bessent successfully engineered a stronger yen by coordinating with the Bank of Japan to raise rates to 1.25% and intervening in foreign exchange markets, resulting in a nearly 5% appreciation against the dollar.
• The 10-year U.S. Treasury yield has breached 5% due to high inflation, elevated oil prices, and government borrowing, prompting Treasury buybacks and a shift to short-term debt issuance to manage liquidity.
• The Treasury Department intensified sanctions under "Operation Economic Outcast" to economically isolate Iran, aiming to asphyxiate the regime while risking higher global oil prices and inflation.
• A contradiction exists where the U.S. weaponizes the dollar system abroad while simultaneously requiring foreign capital inflows to finance domestic fiscal deficits.
• AI adoption requires vast physical infrastructure including data centers, power plants, and supply chains, with U.S. data centers projected to account for 20% of national electricity consumption by 2035.
• AI's environmental handprint includes potential benefits such as grid optimization, precision agriculture, and climate risk management that could offset its resource footprint.
• Brent crude re-eclipsed $100 per barrel and diesel prices surpassed $6 per gallon for the first time in history during the first 13 trading days of September 2026.
• The Federal Reserve joined the ECB and BoJ in hiking rates for the first time since July 2023, while the 10-year U.S. Treasury yield breached 5%.
• The S&P 500 declined 1.4% in the first 13 trading days of September, with the equal-weighted counterpart down 3.3%.
• Historical data shows the S&P 500 average September return is -1.1% since 1928, but the index has never been negative in the six or 12 months following midterm elections since 1950.
• Average S&P 500 returns are 13.8% over six months and 15.8% over 12 months post-midterm election, with volatility expected to rise into October before moderating.
• Portfolio recommendations favor diversified equity exposure including value, small- and mid-caps, non-U.S. equities, and dividend-focused strategies.
• Strategic durations are favored in fixed income due to elevated nominal and real yields, with specific value identified in long-dated municipal bonds.
• Investment opportunities are identified in industrial metals, energy, real assets, hedge funds, and private markets to capture themes from AI, reindustrialization, and infrastructure growth.
• Economic forecasts project 2026 real U.S. GDP growth of 2.1% and CPI inflation of 3.4%, with the Fed funds rate ending the year at 4.38%.
• Current market data shows the S&P 500 at 7,650.50 with a year-to-date return of 12.7%, while the 10-year yield stands at 5.00%.