Index market in September 2026: rising yields pressure global equities

1. Global equity indices saw declines in September, largely due to rising bond yields.
2. Corporate earnings remain strong, and investor sentiment shows underlying resilience, particularly in the US.
3. Monetary tightening, persistent inflation, and geopolitical risks continue to shape market dynamics.

US equity markets face yield headwinds

US equity markets experienced a downturn in September, with the S&P 500 closing at 7,636, down 1.5% month-over-month (MoM), though still up an impressive 16.9% year-over-year (YoY). The Nasdaq 100 also dipped 0.7% MoM to 29,442, while the Dow Jones saw a more significant 3.1% MoM decline to 52,380. This correction occurred despite robust Q2 EPS growth of 27.6% YoY for the S&P 500 and stabilized sentiment, with the VIX at 16.5 indicating risk-seeking activity. However, the 12-month forward P/E for the S&P 500 now stands at 19.1, and the forward implied Equity Risk Premium has fallen sharply to 2.15%, making valuations highly sensitive to rising bond yields. The US 10-year bond yield climbed to 4.84%, significantly impacting equity appeal.

European equities and broader market indicators

European markets also felt the pressure, with the DAX 40 falling 2.8% MoM to 25,571, despite hitting an all-time high of 26,619 earlier in August. Its 12-month forward P/E is 15.1x. The FTSE 100 declined 1.8% MoM to 10,670, though its 17.1% YoY EPS growth and estimated fair value of 12,250 suggest an 11.5% undervaluation. However, its CAPE ratio of 18.6x remains above its post-millennium average. Broader indicators reflect the challenging environment: WTI crude oil surged 16.1% MoM to $97.30/bbl, up 51.9% YoY, largely due to the Iran War. Gold held steady at $4,400/oz, up 20.9% YoY. The US 10-year bond yield's rise to 4.84% (up 0.14% MoM) underscores the global shift towards higher interest rates.

Key decisions and events shaping the coming months

Investors will be closely watching several critical events that could influence market direction:

1. Wednesday, September 16th: US: Federal Reserve FOMC meeting, with a 25 bps rate hike to 4.0% widely anticipated.
2. Thursday, September 17th: UK: Bank of England monetary policy decision, expected to maintain the Bank Rate at 3.75%.
3. Wednesday, September 30th: US: August Personal Consumption Expenditures (PCE) Deflator, a key inflation gauge for the Fed.

Summary for investors

September's market performance highlights a critical tension: robust corporate earnings and underlying positive sentiment are clashing with the relentless rise in bond yields and persistent inflation. While US equities show strong earnings growth, their elevated valuations and falling equity risk premium make them highly susceptible to interest rate movements. European markets face similar pressures, though the FTSE 100 appears undervalued. Investors should brace for continued volatility as central banks navigate inflation, and geopolitical events like the Iran War continue to impact energy prices and broader economic stability.

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