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At the time of writing, the US’s S&P 500 is up around 14% for the year, a figure that on its own describes a market in good health but offers little indication of who has delivered that return and what it truly means for investors’ returns.
If you break the S&P 500 into its 11 sectors, the picture takes on a different hue. The technology sector jumped 36%, while energy, unsurprisingly, saw gains of 44.6%. The remaining nine sectors however, ranged from a 10.6% gain in healthcare to losses in utilities, communication services and consumer discretionary, the last of which is down 5.1%. Financials are essentially flat at 0.2%.
The S&P 500 has two indices – the equal-weighted S&P 500, which gives each constituent the same weight of 0.2%, regardless of size, and the cap-weighted index which weights each company by market capitalisation. The equal weighted index had gained around 9.5% at the start of October against 12.6% for the cap-weighted index on the same date, and the Dow, with its heavier tilt toward industrials and financials, sat at 7.2%. This highlights that the headline return is being carried by a small number of stocks inside two sectors, and investors holding a genuinely diversified US portfolio will have experienced a far more modest year than the 14% jump in the index suggests.
The drivers behind the technology surge
The more instructive detail lies within technology itself, because the gains have not come from the companies most investors associate with the AI trade. The Magnificent Seven are on course for their weakest collective year since 2022, with Microsoft the poorest performer of the group. Software stocks were sold heavily in February on concern that AI would erode the very business models it was expected to enhance, a move that removed close to $1 trillion in market value. Returns have instead accrued to the physical supply chain behind AI infrastructure, where demand for memory and storage has driven extraordinary moves in Micron, up roughly 277% by early October, Sandisk, up more than 600%, and Dell, up close to 350%. Capital has moved from the companies spending on AI capacity to the companies being paid to build it, and that leadership is concentrated enough that a single soft signal on hyperscaler capex can move the whole sector, as the clusters of 10% single-session declines across storage, chip and optical networking names this month have shown.
Energy, a spanner in the works
Energy’s leadership has a more direct explanation. The US-Iran conflict that broke out at the end of February, and the threat to shipping through the Strait of Hormuz that accompanied it, pushed crude sharply higher, and West Texas Intermediate (WTI) is trading above $93/barrel at the time of writing. The energy supply shock has also reshaped the rate outlook, which is the factor most responsible for weakness elsewhere in the market. The US Federal Reserve (Fed) raised the funds rate by 25 basis points to 3.75% to 4% on 16 September, its first hike since July 2023 and the first policy move under Fed Chair Kevin Warsh, with recent data releases pointing to a further increase before year end, while the 10-year US Treasury yield is holding above 5.2%. At those levels, utilities, real estate and the more leveraged parts of consumer discretionary carry a direct valuation headwind, which is precisely where the lagging sectors are concentrated.
Europe and the uk’s equity outlook
Europe has followed a similar script from a less favourable starting point. The Stoxx 600 is up roughly 6.5% for the year, having recovered from an 8% fall in March when US-Iran hostilities began, and the European Central Bank (ECB) has raised its deposit rate twice, to 2.50% in September, as the energy shock lifted its 2026 inflation forecast to 3%. Germany’s DAX, which gained 23% in 2025 on the strength of fiscal expansion in defence and infrastructure, has struggled to hold ground this year. The UK has fared better on the surface, with the FTSE 100 up around 5% in price terms and 8% including dividends, helped by an index weighted toward energy, mining and defence. The Bank of England (BoE) held the Bank Rate at 3.75% in September, though three of nine members voted for a hike, and with Consumer Price Index (CPI) inflation expected to reach 3.75% in the fourth quarter, this means a move at the November meeting cannot be ruled out.
The real picture
The thread running through all of our examples is that this year’s returns have been earned by a narrow set of positions tied to either the energy shock or the AI build-out, while the broader market has absorbed the cost of the higher rates those same forces produced.
Market moves
Bonds
The 10-year Treasury yield fell for a third straight session to a three-week low on Thursday, near 5.09%, its lowest level since late September, having traded as low as roughly 5.04% intraday before settling around 5.08% to 5.09%, down around six-to-10 basis points. The driver was not the data – September CPI and Producer Price Index inflation both ran hot – but, rather, the Fed’s reaction. Fed Vice Chair Michelle Bowman and Fed President Mary Daly signalled the committee can wait before hiking again, and the Chicago Mercantile Exchange’s CME-implied odds of an October hike slumped toward 29%.
Germany’s 10-year Bund strengthened modestly to about 3.41%, down around three basis points, drifting lower in sympathy with Treasuries and on the calmer equity tone rather than on any domestic catalyst. The wide gap to US and UK yields underlines the divergence in policy stance: the euro area sits at the low end of the developed-market yield spectrum, which continues to cap the euro’s rate appeal even as the dollar weakens.
The UK’s 10-year Gilt yield eased about four basis points to roughly 5.38%, its largest decline among the majors on Thursday as global yields calmed. Gilts nonetheless remain among the highest-yielding core bonds, reflecting sticky UK inflation and a market now positioned for a BoE hike to 4% in November – a sharp shift from a month ago, when most economists expected no further rate hikes this year. Thursday’s firmer August gross domestic product (GDP) reading reinforced that repricing.
Equities
Wall Street closed higher in a notably two-speed session on Thursday. The Dow jumped 1.1% to 52,177.69, its best close in a month, and the Russell 2000 rose around 1.4%, as investors rotated into blue-chips and cyclicals. The S&P 500 added just 0.3% to 7,744.06, and the Nasdaq Composite eked out 0.1% to 26,713.03 after spending most of the day lower.
European blue-chips firmed, with the Euro Stoxx 50 last around the 6,170 to 6,180 area after a modest advance. The region took its cue from the calmer bond market and the softer dollar, with Germany’s DAX up about 0.3% to 25,368 and France’s CAC 40 up 0.8% to 7,935. Gains were broad but unspectacular, consistent with a market relieved that US yields retreated but wary of the same chip-sector overhang weighing on global tech.
The UK’s FTSE 100 led the region, climbing about 1.1% to 10,840, helped by calmer Gilt yields, a firmer set of UK activity data and the index’s heavy weighting toward commodity, energy and defensive earners that benefit from elevated oil and still-reasonable sterling strength. For UK-exposed clients, the combination of a stronger pound and a rising large-cap index this week reflects the market pricing a more hawkish BoE as a growth-and-currency positive rather than a drag.
Commodities
Spot gold rose about 1.5% to roughly $4,170/ounce, with December futures settling near $4,170, extending a bounce as the dollar slipped from its 18-month high and Treasury yields fell. The metal is firm but still trades below its early-2026 record. The drivers are clear: lower real-rate expectations, a softer dollar, persistent central-bank demand and lingering safe-haven interest against the inflation-and-equity-volatility backdrop.
WTI jumped about 3% to just under $98/barrel and Brent is trading around $106/barrel, with the complex underpinned by Middle East supply risk, including a reported vessel incident near the Strait of Hormuz. This is the uncomfortable cross-current for the inflation story. Energy strength is feeding directly into the hot producer-price prints that are keeping the Fed hawkish.
Currencies
The US Dollar Index eased roughly 0.5% to around 102, pulling back from the 18-month high near 102.7 it printed on Wednesday, when a higher-than-expected US CPI print was released. The move is about relative policy expectations, not dollar weakness per se as the greenback remains near multi-month highs, but the halving of October Fed-hike odds trimmed its rate advantage at the margin. The key near-term swing factor is Fed Chair Warsh’s appearance today and then the FOMC taking place on 27 and 28 October. Until then, the dollar is likely to trade off every Fed comment rather than off the data.
The euro firmed about 0.3% to around $1.1190/€ to $1.1210/€, recovering from an 18-month low as the dollar softened. The bounce is dollar-led rather than euro-driven; with Bund yields near the bottom of the developed-market range and no fresh domestic catalyst, the single currency lacks its own impetus.
Sterling was the standout, rising through $1.3250/£ to its highest level since 6 October and rebounding from Wednesday’s 11-month low near $1.3150/£. A weaker dollar and a UK growth surprise – where August GDP rose 0.1% against expectations of a contraction and with factory output notably firm – hardened expectations of a November BoE hike to 4%. The $/£ pairing still sits well below its August highs of near $1.37/£. Major UK data releases scheduled for 20 and 21 October and BoE Governor, Andrew Bailey’s remarks today are the pound’s next tests.
*Please note that all information is at the time of writing.
Key indicators:
GBP/USD: 1.3271
GBP/EUR: 1.1827
GBP/ZAR: 21.89
BRENT CRUDE: $105.38
GOLD: $4,209.26
Sources: Sources: Bloomberg, Investing.com, LSEG Workspace, Sharedata and Trading Economics.
Written by Citadel Global Managing Director, Bianca Botes.
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