Record Stocks, 2002-Level Yields, and CPI have to pick a side

Market Analyst

12 October 2026

There were two events that happened at the same time last week that rarely occur together. The S&P 500 closed at a record high, and the 10-year Treasury yield reached its highest since 2002. Equity investors expect strong corporate earnings to support valuations through the high-rate environment. On the other hand, bond investors are demanding more to lend to the US government no matter what the Fed does. This week will put both sides to the test at once. September CPI will be announced on Wednesday, which is the last major inflation print before the Fed’s October meeting, and will be followed by PPI + Retail Sales on Thursday. Moreover, a third-quarter earnings season is quite tight, with the big banks on Tuesday and Wednesday, and two key chip stocks such as ASML and TSMC close behind.

Where we’re starting from

The S&P 500 gained around 1.2% on the week, a record close, even as small-cap stocks fell and the market spent its midweek period digesting a chip-sector selloff by an OpenAI’s earnings report. The 10-year yield also hit 5.32% on Wednesday before settling down at 5.24%, with the 30-year sitting around 5.60%.

The FOMC in September also confirmed the 12-0 hike to 3.75-4.00% and showed most officials expected another hike “by year-end”. Many described the rate hike as “mildly restrictive,” while others chose to bet on a December move instead. With soft data on payrolls and PCE, futures now put the odds of an October hike at around 1 in 5. Warsh also has not been spoken publicly spoken since the September press conference.

Theme 1: Is inflation an energy problem or an everything problem?

Wednesday’s September CPI is the week’s defining release, and the split between headline and core data is the whole story. Headline inflation is expected to increase from 3.4% to 3.7% YoY, which will be at a four-month high, as energy costs feed through. On the other hand, Core inflation that exclude food&energy is expected to rise only 0.2% MoM and hold at 2.4% YoY.

The split matters because it’s the question that the Fed is debating. If the high energy prices stay in headline inflation and do not spread to other things, the rate hike would be more likely to be more patient cause Fed can treat the oil shock as something that can look through. If core CPI aligns with the headline, a hawkish tone will get their feet back cause it would tell us that the energy problem is now becoming a broader inflation problem.

One point worth knowing is that right now core CPI is running below core PCE. Usually it is the other way around. That gap is partly down to how the two measures weight different items, and partly from the change in methodology in last month’s PCE report. It means that a soft CPI headline would not mean there’ll be a soft PCE number later this month.

What would shift the whole situation: Core CPI at 0.3% or higher on MoM, with airfares and services doing the lifting. That would mean energy prices are spreading into broader prices and bring back a December hike back to the centre of pricing.

Theme 2: Is consumer still holding up?

The answer to this question will be coming from two sources this week, and they should be read together. The first data is Thursday’s Retail Sales for September, which forecast at +0.3% after a strong +1.2% in August. But some of the August jump was likely from the increase in price, not the increase in buying, so volume behind the number matters more than the headline.

Next is the big bank earnings on Tuesday and Wednesday, such as JPMorgan, Goldman Sachs, Wells Fargo, and Citigroup first, then Bank of America, Morgan Stanley, and BlackRock. Banks see all the consumer behavior before the data does so, listen to these three things. 1. Whether card spending is slowing. 2. Credit-card & auto-loan delinquencies are rising as real wages fall or not. And 3.) Are banks setting aside more money for bad loans? The last one is most likely an early-warning signal for us.

What would change the entire story: A soft retail sales report combined with banks raising loan-loss provisions. Combined with September’s 29k payrolls, it means that consumers are starting to buckle up, and it’s harder for the Fed to make another hike.

Theme 3: Can earnings keep outrunning 5% yield?

This is the bet behind the record S&P 500. Higher yields make future profits worth less in today’s money and make bond become more attractive alternative to stocks. The only way that equities will keep rising with this yield is the earning that grow fast enough to compensate. Bank reports give us a first read on the market, but the real deal is coming from the chip sector.

ASML reports on Wednesday and TSMC on Thursday. These two reports will show how much AI-related investment is actually committed (ASML indicates this from equipment orders, and TSMC from the demand of key clients such as Nvidia&Apple). Last week there was a chip selloff, which showed how sensitive the market has become to any sign of AI spending. Any caution on next year’s spending would land on the most crowded part of the market.

What would change the story: A hot CPI pushes 10-year yields to their record highs in the same week that ASML and TSMC guide cautiously. The combination of higher discount rates and softer growth expectations is what markets have not yet priced in.

The one Thing to watch

Core CPI on Wednesday, specifically whether energy is leaking into it through airfares and services. If the core came out near 0.2%, the Fed can still keep treating the oil shock as temporary, and the October meeting might become a non-event meeting. If it doesn’t, the market will stop debating whether the Fed will hike again and start debating how soon.