Sep 25, 2026
One economy, two markets, one message
A calm index, a restless market
For the last few decades, the logic of portfolio diversification was straightforward: When stocks struggled, bonds could help cushion the blow. That’s thanks to a negative stock-bond correlation that became the bedrock of investing as global central banks earned inflation-fighting credibility. It means that even in growth scares or recessions, bond market rallies can provide returns.
But in a world where uncertainty around inflation and the prospect of stronger than anticipated economic growth—today, powered by the artificial intelligence build-out—persists, that relationship has turned positive. That means stocks and bonds can rise and fall together. In this environment, investors may seek diversification in other places. Perhaps within the equity market itself.
Underneath the hood
As 10-year Treasury yields have risen nearly 80 basis points over the course of the summer, the stock market hasn’t felt the pain at the index level. Whereas the bond market has taken its cue first from hawkish monetary policy, global fiscal debt fears, higher energy prices and now the prospect of rapid economic growth, equities have been more focused on seven straight quarters of corporate earnings growth. In some ways, that has created a buffer on the index level to yields inching higher.
But beneath a calm index, the rates impact and consequent repricing is more visible. The S&P 500 sits ~6% above its 200-day moving average and within about 2% of its record high, yet only ~43% of stocks in the benchmark are trading above their 200-day average. That figure is down from 75% in mid-August. At the same time, 10-year Treasury yields have risen over 60 basis points.
Whereas the majority of gains in the S&P 500 are driven by the heavyweight technology companies investing heavily in the AI build-out, other sectors that are less resilient are feeling the impact of higher rates. That even applies to sectors like utilities, which are exposed to the AI trade, but don’t necessarily boast the same cash cushions or size as the hyperscalers.
Move in yields prompts narrow stock breadth
Price return since May 2026, %
Source: Bloomberg Finance L.P. Data as of September 30, 2026.
Note: Mag 7 is an equally-weighted basket of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Past performance does not guarantee future results. It is not possible to invest directly in an index.
Note: Mag 7 is an equally-weighted basket of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Past performance does not guarantee future results. It is not possible to invest directly in an index.
It’s not unusual to see a wide dispersion between individual stocks and sectors. However, today, stocks are moving more independently than normal. At a time when bonds are providing little diversification to equities, this dynamic can be particularly useful when constructing a portfolio. This is best displayed in the Cboe 3-month implied correlation index, which measures how closely options traders expect large U.S. stocks to move in sync. The measure currently sits at 11.2, well below the long run average of 41. This means traders expect that gap between individual stocks and the index level to continue. It offers an opportunity to diversify risk exposure within the equities market itself at both a sector and thematic level.
Dispersion within the index is not unusual
S&P 500 3-month implied correlation
Source: Bloomberg Finance L.P. Data as of September 30, 2026.
Past performance does not guarantee future results. It is not possible to invest directly in an index.
Past performance does not guarantee future results. It is not possible to invest directly in an index.
A microcosm of the moment
Utilities have long been thought of as a defensive sector of the stock market. Offering consumer necessities like electricity, predictable earnings and attractive dividends, investors have classified the sector as relatively stable. In a recessionary scenario, these have proven to be attractive attributes alongside lower economic sensitivity. But in the last few months, they’ve played a very different role.
- Powering AI: The data center build-out sits at the center of the capacity expansion for AI. But it requires electricity. There are few power sources that can handle build-out of that size, which has made utilities providers key enablers of AI.
- Midterms overhang: The increasing dependence on utilities as a function of the AI trade has had consequences for the price of electricity for everyday consumers. In a midterms election cycle, in which affordability is a key voting issue, it’s no wonder that public backlash has focused in on reliance on utilities. In response, state governments have put moratoriums on that build-out—something that has weighed on the sector.
- A higher rates environment: At the same time, rising bond yields have also weighed on the sector. Because utilities are often valued for their dividends, higher yields in the Treasury market can compete with this aspect of what the sector has to offer.
Data center restrictions fed underperformance in Utilities
S&P 500 Utilities sector
Source: Bloomberg Finance L.P. Data as of September 30, 2026.
Past performance does not guarantee future results. It is not possible to invest directly in an index.
Past performance does not guarantee future results. It is not possible to invest directly in an index.
Utilities may seem like an unlikely place to look for answers about today’s market. But the sector encapsulates many of the forces driving asset prices globally: the economic promise of AI, the political consequences of that investment boom and the reality of higher interest rates.
That helps explain why the story beneath the surface of markets is increasingly different from the one told by headline indexes. While a handful of companies continue to power benchmark gains, individual sectors and stocks are responding very differently to the same set of macroeconomic forces. In a world where bonds provide less diversification than they once did, that dispersion itself may become one of investors’ most valuable tools.
Important Information
As stocks and bonds increasingly move in sync, the headline rally can hide a quiet repricing. We explore why dispersion is back.
Published Oct 2, 2026
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