Stocks rallied on hopes for deals with Iran and China, while the Fed and a 10-year Treasury near 5% signal inflation isn't done. This week will show which market read the room correctly.
KEY TAKEAWAYS
Stocks posted their best day since early August on Monday, led by chipmakers. The Nasdaq closed at a record after Meta's Muse AI agent revived bets on demand for AI chips, and AMD topped $1 trillion in market value.
Two diplomatic events are driving sentiment this week. Iran's president attends the UN General Assembly in New York, and China's President Xi Jinping arrives at the White House on Thursday for his first visit there in eleven years.
Oil has fallen for several straight sessions as more tankers move through the Strait of Hormuz. But much of that increase comes from Saudi barrels rerouted after its East-West Pipeline was damaged, and tankers in the strait are still coming under attack.
The Fed raised rates to 3.75%-4.00% last week in a unanimous vote. Sixteen of nineteen officials expect at least one more hike this year, and the central bank doesn't see inflation back at 2% until 2029.
The 10-year Treasury yield is holding near 4.92%, just below its recent high. The bond market is pricing a more cautious outcome than the stock market is.
MY HOT TAKES
Wall Street is celebrating the invitation, not the agreement. A willingness to meet isn't a deal, and Tehran's conditions for reopening Hormuz haven't changed.
Falling oil is the Fed's best friend right now. If diplomacy stalls, the Fed loses that friend and stocks lose their story at the same time.
The chip rally is carrying two bets, not one. AI demand may be real, but part of yesterday's premium assumes a friendly outcome in Washington on Thursday.
When stocks and bonds disagree this loudly, bonds are usually the adult in the room. A near-5% risk-free rate is a high bar for every other asset to clear.
The middle case is the one to watch: handshakes, photo ops and nothing signed. That outcome isn't priced into stocks, and it's the one summits deliver most often.
You can quote me: "The stock market is pricing the handshake. The bond market is pricing the invoice."
Raise your glass–carefully–slowly. I hate to be recycling the same topic, but well–it’s kind of a big deal for me, and given this week’s narrative, it just fits like a glove. I couldn’t just ignore the analogy, I am sure you have had a similar experience. I told you a few weeks back that my son's wedding is only a few weeks away, which means our family has entered the most dangerous phase of any wedding–the dreaded seating chart. 😰 Fourteen years of planning (yes, that’s how long they have been dating), and it all comes down to who sits next to whom. Old college friends, cousins, new in-laws meeting for the first time–every table is its own little…well, summit, for lack of a better word. Here's what I've learned: putting two people at the same table is only an invitation. It isn't an agreement.This week the whole world is working on a seating chart as well. Iran's president arrives in New York for the UN General Assembly. China's president arrives at the White House on Thursday–his first visit there in eleven years. And Wall Street is behaving as if everyone has already raised a glass together. The stock market rallied yesterday as if the toasts were done. The bond market–as one might expect–is still reading the place cards.
Let’s start with the toasts. Yesterday the S&P 500 jumped 1.49% to 7,765–its best day since early August. The Dow added 0.71% to 52,049, and the Nasdaq Composite climbed 2.26% to 27,122, a record close. The life of the party was a chipmaker. AMD rose nearly 10% and topped $1 trillion in market value–a trillion, with a T–after Meta’s new AI agent, Muse, spent three straight days at the top of Apple’s App Store. Meta itself jumped more than 11%, and Intel and Arm each rallied more than 10%. Why would an app lift chipmakers? AI agents (software that completes multi-step tasks on your behalf rather than just answering questions) lean heavily on ordinary server processors to juggle their work–not just the specialized chips everyone has been obsessing over for three years. Meanwhile, Brent crude fell 3.4% to settle near $100 a barrel, its fourth straight decline, and slipped below $98 this morning as I write. Falling oil, surging tech and not one but TWO summits on the calendar. Now that’s a party–cheers!
But let’s look at the guest list, starting with table No. 1. Iran’s President Masoud Pezeshkian is scheduled to address the General Assembly tomorrow, and President Trump has said he is open to meeting him while he is in town. Tehran has not publicly responded–and in the meantime, Iranian state media complained that the U.S. denied visas to members of Pezeshkian’s communications team. That isn’t exactly a warm RSVP. Overnight, a report from Japan’s Kyodo News said Iran could reopen the Strait of Hormuz if the U.S. lifts its blockade of Iranian ports. That is the headline that pushed oil below $100. Now read the fine print. Tehran’s conditions, passed along through mediators, include an end to the naval blockade, the release of its frozen funds and an end to the war on all fronts. Washington, for its part, has warned of severe consequences if no deal is reached. Both sides have accepted the invitation. They have not agreed on the menu.
To be fair, the oil market isn’t dreaming. Something real is happening on the water. Some analysts estimate that Saudi oil moving through Hormuz averaged 2.9 million barrels a day over the six days through September 18, up from roughly 700,000 barrels a day in August. That’s about four times as much crude getting out the door. But notice WHY. Saudi Arabia is pushing more barrels through the Gulf because Houthi drones knocked out its East-West Pipeline–the very escape route that was supposed to let crude bypass the strait in the first place. Traffic is up because the detour got bombed, not because the road got safer. Two tankers were struck by projectiles in the strait yesterday. I used the official word “projectiles” because that seems to be the new way of saying rockets/explosive drones–I am pretty sure they weren’t rocks or cannon balls. 🤣 Houthi missiles and drones targeted Riyadh over the weekend. Armed groups shut a pipeline feeding Libya’s Sharara field. And diesel is still north of $6.50 a gallon at U.S. pumps–reality. This is what I’ve been calling geo-petro-politics, and it doesn’t take the week off just because there’s a summit on the schedule.
Table No. 2 gets fewer headlines, but it may matter more to your portfolio. On Thursday, Chinese President Xi Jinping arrives for his first White House visit in eleven years, bringing a large delegation of CEOs along with him. The agenda reads like a list of everything that has kept tech investors up at night–trade, tariffs, tech restrictions, artificial intelligence and rare earths–you know, the specialized minerals that go into everything from semiconductors to fighter jets to the motor in your electric car. Ah, remember those? Here’s why that matters for yesterday’s rally. The chip stocks that led the charge are carrying TWO bets, not one. The first is that AI demand keeps exploding. The second is that Washington and Beijing find a way to keep the supply chain–and the export licenses–flowing. If the summit disappoints, the AI story doesn’t disappear. But the premium investors paid yesterday for a friendly outcome very well might.
And then there’s the guest who always reads the place cards carefully–the bond market. In case you missed it, just six days ago, the Federal Reserve raised its benchmark rate by a quarter point to a range of 3.75%-4.00%, its first hike since 2023, in a unanimous 12–0 vote. Sixteen of nineteen Fed officials now expect at least one more hike before year-end. The Fed raised its 2026 forecast for core PCE inflation to 3.4%, and it doesn’t see inflation back at its 2% target until 2029. 2029–my dear friends–2029! Chairman Warsh didn’t mince words: “Inflation is too high and has been for too long.” The S&P 500 slid about 1% to six-week lows during his press conference. The 10-year Treasury yield, which touched 5.04% last week–its highest level since 2007–is still trading near 4.92%. And futures markets have been pricing roughly a coin flip on another hike at the October 28 meeting, with high odds of one by December.
Think about what that means. The stock market is priced as if the toasts are over. The bond market is priced as if the caterer just raised the bill. A 10-year Treasury near 5% means you can get paid to sit still–and every stock, every private credit fund and every real estate deal now has to explain why it deserves your dollar more than a government bond does. Stocks and bonds rarely disagree this loudly for very long. Somebody at this table has read the room wrong.
The way I see it, there are three ways this week can go. In the best case, the invitations turn into agreements–a credible path to reopening Hormuz, a constructive meeting with Beijing, oil keeps sliding, headline inflation cools and the Fed can stop after one more hike. Stocks were right, and yesterday was simply the down payment. In the middle case, everyone shows up, everyone smiles for the cameras and nobody signs anything that matters. Oil drifts back up, the odds of an October hike climb and stocks hand back some of yesterday’s champagne. In the worst case, somebody walks out before the appetizer course is served. Energy spikes, the Fed tightens into a slowing economy and yields go back to flirting with 5%. Notice the asymmetry. The rally NEEDS the best case. The bond market is hedged for the other two.
So what does this mean for you? I’m not suggesting anyone run for the exits. Yesterday’s gains were built on some very real things, including an AI story with actual revenue behind it–AMD’s second-quarter revenue rose 50%, and its data center business doubled. But it is worth asking yourself a few questions. Is your portfolio positioned for the headline or for the outcome? How much of what you own depends on AI AND diplomacy working out at the same time? If you own high-flying growth stocks, what are those far-off future earnings really worth when the risk-free rate is near 5%? And if you are sitting in a money market fund earning a respectable yield while you wait, is waiting really the worst strategy this week?
Here is an interesting twist–this rally isn’t really a bet on AI; it’s a bet that two of the hardest negotiations on the planet go well in the very same week, and the bond market is the only guest at the table who read the menu card carefully.
The good news about seating charts is that they usually work out better than you fear. By the time dessert comes out, the college friends are trading old stories, the cousins are swapping phone numbers and the new in-laws have discovered they root for the same team. Nobody signed anything. They just stayed at the table long enough to find common ground. The invitation isn’t the agreement–but it IS where every agreement starts. I’m hopeful about both summits this week, and I will be even more hopeful at my son’s wedding. I just plan on waiting until the toasts to raise my glass. 😉🍾
YESTERDAY'S MARKETS
Stocks rallied yesterday, with the S&P 500 up 1.49% to 7,765–its best day since early August–the Dow Jones Industrial Average up 0.71% to 52,049 and the Nasdaq Composite up 2.26% to a record 27,122. AMD rose nearly 10% and topped $1 trillion in market value, while Meta jumped more than 11% after its Muse AI agent reached No. 1 on Apple's App Store. Brent crude fell 3.4% to settle near $100 a barrel, its fourth straight decline, as tanker traffic through the Strait of Hormuz increased. Bitcoin topped $87,000 for the first time since January.
NEXT UP
Richmond Fed Manufacturing Index (September) may have slipped to 2 from 4.
Diplomats are arriving in town, which means there will be headlines, and headlines, in case you missed it in today’s note, are what is moving markets right now.
Fed speakers today include Williams, Jefferson, and Barkin.