After a strong August for markets, September paled in comparison. If you were following the major market headlines, much of it would have sounded familiar inflation, geopolitical uncertainty and artificial intelligence. So why did markets behave differently? The answer lies in the details. With that in mind, it's time to read between the lines. First, global stock markets have been resilient in 2026, but September saw most major markets trade lower.
So what changed? Second, Japan's Nikkei stood out among major developed markets in September and remains a leader year to date. What exactly is driving that strength? And lastly, last month, we discussed Kevin Hersh's hawkish speech at the Jackson Hole conference in September. The Federal Reserve followed through, raising its target interest rate to 4%. How much do rates still matter and where do they go from here?
With that, let's start with September's pullback. The most consequential change was the sharp rise in bond yields. The US tenure Treasury yield increased by roughly half a percentage point during the month, moving it up to 5.25%. That is a meaningful increase in the return investors can earn from bonds, but also the borrowing costs businesses and households face. When interest rates rise.
Stocks have to work harder to justify their valuations. Companies need stronger earnings growth to offset a higher required return. Businesses carrying significant debt also face an additional challenge as refinancing becomes more expensive. That pressure was visible beneath the surface, even though the broader S&P 500 index is still trading near record highs, its equal weight counterpart fell almost 5%, and US small caps also lost more than 5% in the month.
This means that the average stock had a much tougher September than the headline index would suggest. Technology and communication services continued to advance, supported by enthusiasm for AI investment, but their strength concealed losses across the remaining nine S&P sectors. I focused on rates, though admittedly they weren't the only driver continued conflict in the Middle East, and a new wave of tariffs certainly didn't help markets cause either.
Overall, my reading is that September did expose some of the limits of the market's resilience. Investors continued paying for companies with compelling growth prospects, while becoming less forgiving toward businesses facing higher financing costs or just less convincing earnings outlooks. It's all worth recognizing that markets tend to shift their focus throughout the quarter. During the earnings season, investors are primarily focused on bottom up fundamentals, evaluating the earnings growth and profit margin updates released by companies outside of earnings season.
However, attention shifts toward the macro environment. The bigger picture interest rates, inflation and geopolitics. As we've discussed before, those two narratives are really in stark contrast to one another. Corporate fundamentals remain strong, with businesses continuing to grow earnings and cash flow. But that broader big picture backdrop is just far less attractive. The market's behavior reflects that tension when investors focus on company fundamentals.
Stocks tend to respond positively, but when it shifts back to that macro landscape, the risks become harder to ignore and the market struggles. If you step back this year and look at monthly returns, this dynamic becomes even more obvious. September was a reminder that, at least for now, that macro story remains an ugly Henwood despite strong company level fundamentals.
Now Japan. Japan has been one of the strongest major equity markets in the world this year. The Nikkei the index is up roughly 32% year to date, compared to about 13 for the US market and 13 for the Canadian market and single digit returns in Europe. In other words, this isn't a simply story about a good month. Japan has been a standout through all of this year.
The clearest immediate driver was demand for AI and semiconductor related companies. Japan's supply equipment, testing systems and components essential to the global technology build out. Those businesses benefit from the same investment cycle, supporting leading US technology stocks. The performance differential story also includes a structural change in how Japanese companies manage shareholders capital. Japan's corporate reforms are pushing management teams to address weak returns on equity, reconsider excess cash and dispose of underperforming businesses.
Capital that previously sat idle can instead fund productive investment, dividend and or share buybacks. That matters because improving the return earned on existing capital can increase shareholder value. Even without exceptional economic growth, my view is that Japan's rally reflects two forces working together that powerful investment cycle and improving corporate capital discipline. Now, currency also helped overseas investors in September, as the Japanese yen strengthened against the US dollar.
But currency can't explain a 32% year to date gain in local currency terms. The underlying equity performance matters. This has fared well in Macros global equity strategy, which has a 7% allocation to Japanese markets. Finally, interest rates warship September increase confirmed that the inflation fight remains unfinished. The fed season economy expanding solidly resilient domestic spending, but inflation still hovering above its target.
Yes, rates still matter in September demonstrated where they matter most for stock market or equity investors. The critical number extends beyond the Fed's overnight short term rate. Long term bond yields influence mortgage rates, corporate financing costs, and the discount rate investors assign to future company earnings. Even if the fed pauses at its next meeting. Elevated long term yields can continue tightening financial conditions.
My base case is that another US increase before year end remains more likely than a return to cuts. Persistent inflation and resilient demand give the fed little reason to reduce rates. However, the hike is less likely to happen before the US midterm elections and likely closer to your end. The timing matters less. What's most important is that investors should no longer assume that cheaper money is here to stay.
Canada faces a more complicated decision. The Bank of Canada held its rate at 2.25%, while employment weakened. Growth remained on even in. Tariffs continue to weigh on the economy. That makes the case for following the fed less straightforward. I expect the Bank of Canada remain on hold through year end, and this, just in Canada, released its September jobs report this morning.
Expectations were for 10,000 net new jobs, but the release showed a loss of 68,000 jobs, a disappointing result highlighting the continuing challenge being faced here in Canada. Now, before we wrap up, it's worth stepping back from a monthly headlines perspective and looking at how this environment has translated to Matt Coe's portfolio results. While September was more challenging, 2026 has been a strong year across macOS platform.
The global equity fund has returned 12.8% this year, ranking in 38th percentile. The Opportunities Fund has gained 12%, ranking in 44th percentile. The Canadian Equity Income Fund has returned 11.9%, ranking in 35th percentile, and our balanced fund has delivered a return of 7.1%, placing it in 34th percentile within its category. Perhaps also notable as our diversified income fund in a year characterized by significant interest rate volatility and rising bond yields.
The fund has limited losses to just point 3% and ranks in 15th percentile in its peer group, demonstrating the defensive characteristics our investors expect when conditions become difficult and interest rates. What's particular encouraging is that these results have been achieved during a year that has challenged us in many different ways. Equity markets have become increasingly concentrated. Bond yields have remained volatile.
Interest rate expectations have shifted back and forth repeatedly. Despite those crosscurrents are funds continue to rank favorably relative to our peers while remaining aligned with their long term objectives. As always, our focus remains on high quality businesses, disciplined portfolio construction and thoughtful capital allocation. We believe those principles are important in all market environments, but they're especially important during times of uncertainty.
They continue to guide every single investment decisions we make, and have been the foundation of our approach through every cycle. I'll see you next month as we continue to read between the headlines.
