Higher Rates Persist: Indices and Individual Stocks Diverge

The indices rose. What happened to individual stocks?

At the U.S. market close on September 18, the S&P 500 was up 0.17%, the Nasdaq gained 0.39%, and the Dow fell 0.18%. Although the headline indices turned positive, most individual stocks declined, and sector performance diverged sharply. Semiconductors stood out with a 2.78% one-day gain, while utilities fell about 1.4%, alongside weakness in materials and real estate. Capital was shifting from highly rate-sensitive sectors towards those less affected by interest rates.

The 10-year yield tops 5%: higher rates for longer are the central issue

Why is capital moving between sectors? Start with the price of money.

On September 18, the 10-year Treasury yield closed at 5.01%, up from 4.94% in the previous session. The entire yield curve rose. The shorter end moved more sharply: the 2-year yield rose 9 basis points, the 5-year 8, the 10-year 7, and the 30-year 5.

The shape of the move shows that markets are primarily pricing policy rates staying high for longer, rather than inflation becoming uncontrolled again.

On September 16, the Fed had just raised rates by 25 basis points, lifting the policy-rate range to 3.75%–4.00%. The 10-year Treasury yield, however, is determined by market trading rather than directly set by the central bank. Interest rates effectively act as the discount rate for assets: higher rates reduce the present value of assets whose returns arrive further in the future. Utilities and real estate, with stable cash flows and often regarded as bond-like assets, therefore came under concentrated pressure.

Capital is choosing, not merely waiting

LSEG Lipper data show that U.S. equity funds recorded net outflows of $31.44 billion in the week ending September 16, while global equity funds saw net outflows of $23.21 billion. The two figures use different statistical definitions and cannot be directly subtracted from one another. That week preceded the policy meeting.

Looking at weekly performance for September 14–18, the Nasdaq gained 0.7%, the only broad index to finish higher. The S&P 500 fell 0.1%, the Dow fell 1.7%, and the Russell 2000 fell 1.5%. Capital was leaving equity funds overall, yet some indices remained resilient. This does not indicate a broad recovery in risk appetite. Instead, it shows that capital has become highly selective, positioning in only a few areas.

What does this mean for investors watching the indices?

The indices are weighted by market capitalisation. Gains in a handful of large companies can therefore mask declines in hundreds of individual stocks. On the same trading day, the market-cap-weighted S&P 500 rose 0.17%, while its equal-weighted counterpart fell 0.48%, a gap of 65 basis points. The corresponding equal-weighted ETF can be used as a reference for equal-weighted performance.

An index gain therefore does not mean an individual's holdings have risen. The index cannot serve as a thermometer for the actual performance of the whole market.