I'm Dan Sheehan, a wealth advisor / financial planner based in Charlotte, NC. I work with high earners, families, and business owners on the things that actually move the needle over a lifetime: building the plan, managing the portfolio, and getting the tax picture right. Most of my clients came to me knowing they were doing well but suspecting they were leaving something on the table. Usually they were. This newsletter is where I share the thinking behind that work, one topic at a time.
Good morning investors,
The market keeps climbing a wall of rising yields. Stocks had a solid day Monday even as the 10-year pushed higher again, helped by strong AI demand numbers out of Foxconn. The S&P rose 0.7%, the Dow 0.2%, and the Nasdaq 1.1% to a record close. Nvidia hit a fresh high and is closing in on a $6 trillion market cap.
Futures are higher this morning, helped by yields easing back, the 10-year down to around 5.28% after touching levels Monday it hadn't seen since 2002. Oil is lower again, Brent near $98. It's a light day, with ADP employment and Constellation Brands earnings the main items, ahead of the Fed minutes tomorrow and earnings season starting to pick up at the end of the week.
The Correction Already Happened, Just Not Where You'd Look
The most useful thing to understand about this market is how much of a reset has already taken place beneath a headline index sitting near its highs. The S&P gained about 2% last quarter, but that number hides an enormous divergence. The equal-weight S&P actually fell 2%, the Russell 2000 dropped 7%, and semiconductors lost 11%, while the Magnificent Seven gained 11%. Research from Citadel showed Microsoft, Nvidia, Apple, and Meta alone accounted for 300 points or more than 200% of the S&P's entire quarterly gain. Today only about a quarter of S&P companies trade above their 50-day average. So while the index has held up, a meaningful correction has already run through most of the market underneath it.
What makes that interesting is that the weakness isn't showing up in fundamentals. Corporate profits rose nearly 23% in the second quarter to a record, and third-quarter S&P earnings are tracking around 27% growth. More unusual still, analysts have raised their third quarter estimates by about 2% over the past two months, when the typical pattern is for estimates to drift down by roughly 2% heading into reporting season. So prices across much of the market have reset while earnings expectations have actually strengthened. That gap between a corrected market and rising profit estimates is the thing I keep coming back to.
There's also real buying capacity sitting idle. US companies have authorized a record $1.3 trillion of buybacks this year, and those windows start reopening in October. Systematic strategies have cut their equity exposure sharply over the past month, and retail activity has cooled from the summer. None of that guarantees those buyers come back, but it means there's considerable room for them to if conditions improve. Layer on the seasonality, where the fourth quarter of a midterm year has averaged a 5.6% gain since 1930 against 2.9% for all years, and the risk and reward looks more interesting than the headline index level alone suggests. I'd be clear that none of this says the market simply goes up from here, and I'm not saying that. It says the setup beneath the surface is healthier than a near record S&P would lead you to believe.
Why I Like the Risk and Reward in Small Caps
This is where I've gotten more interested lately. The Russell 2000 has had a much harder few months than the big indices suggest. After a record high in August, small caps sold off sharply as yields rose, with the Russell down 7.2% in the third quarter and 5.3% in September alone. It's since started to consolidate, leaving it around 7% below its August high even as the S&P has climbed back near its own record.
A lot of that divergence makes sense. Small companies are far more sensitive to interest rates than large caps. Around 41.5% of small cap debt is floating rate, against 18% for large caps, and their interest coverage is lower too. So the surge in yields last quarter was a real tightening of conditions for smaller companies, and their share prices reflected it.
What interests me now is whether that pressure is near a turning point. The Fed raised rates in September, but I don't think we're at the start of another sustained hiking cycle. My expectation is that the Fed holds in both October and December. If oil keeps retreating and some of the recent inflation pressure eases, the market could start removing the extra tightening currently priced into the curve. Helping small caps doesn't require aggressive rate cuts. Simply shifting from "how many more hikes?" to "the Fed is probably done" would be a meaningful change for one of the most rate sensitive parts of the market. The seasonal angle adds to it, with the Russell having historically averaged gains of around 3% in both October and November of midterm years. I wouldn't lean on those statistics alone, but against a group that's already corrected, with positioning reset and the rate outlook possibly near an inflection, the risk and reward looks increasingly appealing to me.
Tech as the Inverse Bond Trade
The flip side of all this is why the megacaps keep leading, and I would say there's a pretty good way to frame it. One strategist described tech right now as the inverse bond trade, buy tech and sell everything else, which has made it feel like an unstoppable juggernaut. The largest tech companies barely care what debt costs, because they generate enormous cash and carry little dependence on borrowing, while demand for compute is strong enough that rates don't dent it. That's turned tech into a kind of safe haven since the pandemic, high growth with low rate sensitivity, which is exactly what investors want when yields are the problem.
Nvidia closing in on $6 trillion captures the strength, but the landscape under the surface is uneven. Amazon is trading at its cheapest multiple since it went public, a reminder that even within the giants there's real dispersion. The coming earnings season is the test, and the number that matters is free cash flow. If the hyperscalers keep growing it despite the massive AI spending, the market stays comfortable with the buildout. If it disappoints, the questions about whether the spending has outrun the returns get louder. AMD got a vote of confidence on that front, with Citi lifting its target sharply on the view that agentic AI is turning CPUs into the new bottleneck, and that AMD is the primary beneficiary as Meta's Muse drives demand. That fits the shift I've written about, where the next leg of AI spending reaches beyond graphics chips into the processors and infrastructure around them.
Diesel Gets Political
The diesel problem I keep flagging got a direct response from the White House last night. With the national average above $6 a gallon and Americans spending roughly $700 million more per day on fuel than a year ago, President Trump signed an order Monday temporarily allowing truckers and farmers to use cheaper red dyed diesel, normally reserved for off road use and exempt from the highway fuel tax, and deferring the federal diesel excise tax through year end. The White House says it could save truckers over $100 per fill up. It comes alongside the G7 agreement to release 100 million barrels of crude and diesel reserves.
This matters beyond the politics because diesel feeds directly into the price of nearly everything through freight and farming, so anything that eases it helps the inflation picture the Fed is watching. With affordability shaping up as a central midterm issue, expect more moves like this. The read for markets is that the refined product squeeze, which has been the stubborn part of the energy story even as crude normalized, is now getting attacked from several directions at once. If it works, it supports the case that inflation can cool without an economic slowdown.
What I'm Watching
The Fed minutes tomorrow for any color on September's hike and how divided the committee really was. CPI on October 14 as the real swing factor for the next decision, far more than the jobs data now. The 10-year, and whether it stabilizes rather than pushes higher, since that single variable decides how far the opportunity widens beyond the megacaps. And diesel, where the combination of reserve releases and the tax move could finally ease the most stubborn corner of the inflation picture.
Best regards,
Dan Sheehan [email protected]
Subscribe to Market Pulse: https://substack.com/@dansheehan3
Market Pulse with Dan Sheehan is a personal market commentary newsletter and is independent from my employer. The content is provided for informational and educational purposes only and reflects my views as of the publication date, which may change without notice. Nothing contained herein should be construed as personalized investment, legal, tax, or financial advice, or as a recommendation to buy or sell any security. Any positions discussed represent my own views and may not be suitable for every reader's objectives, financial situation, or risk tolerance. Information is derived from publicly available sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Readers should conduct their own research and consult their own professional advisers before making financial decisions.