Markets are starting the first full week of the fourth quarter on a positive note, thanks in part to a jobs report that came in softer than anticipated, which has tempered expectations for interest rate hikes from the Federal Reserve later in 2026. This week appears to be relatively quiet regarding economic data, but next week should ramp up significantly with the release of the September Consumer Price Index and the kickoff of third-quarter earnings reports.
In this week’s Markets Brief:
- Utility stocks initially benefited from the artificial intelligence boom, but rising interest rates have caused a downturn in that sector. Analysts at Morningstar are questioning whether utility stocks are still a worthwhile investment.
- The stock market’s bullish momentum slowed during the third quarter. However, the head of equity strategy at Citadel Securities sees September as more of a necessary pause and remains optimistic about the fourth-quarter outlook.
- The initial public offering (IPO) market is largely focused on what could transpire with Anthropic’s anticipated filing. However, Oura’s decision to delay its offering has created some apprehension in this area.
Utilities Stocks Lose Steam
Utility stocks have dropped 7% since February, following a two-year surge that was mostly driven by AI infrastructure development, while the broader market has seen a 10% increase. Morningstar senior equity analysts note that high interest rates and inflation are starting to be felt. They remark, “Without a significant market reversal in the fourth quarter, utilities’ two-year market-beating streak could end.”
It’s a stark contrast to last year, when investors were treating utility stocks more like growth stocks, rather than keeping them as defensive, income-driven investments. A rush to buy these stocks in anticipation of AI demand disrupted the historical pattern of underperformance during periods of rising interest rates, leading to historically low dividend yields. According to the analysts, “Utilities investors mostly overlooked the consistent rise in interest rates over the past two years.”
The current yield for the utility sector is still under 3%, while Treasury yields have surged to over 5%, making them a more appealing option for income-seeking investors. This situation poses potential risks for utility stocks, though analysts suggest that projected earnings growth of 6%-8% in the coming years may help counterbalance some of the downward pressure from higher rates.
Following the recent decline, the analysts believe the sector is now fairly valued, rather than overpriced as it was earlier. Some individual stocks are even considered inexpensive, with top picks including Alliant Energy, American Electric Power, DTE Energy, and Portland General Electric.
Citadel Securities’ Constructive Q4 Stock Market Outlook
While the stock market’s upswing may have slowed during the third quarter, Scott Rubner from Citadel Securities suggests this pause could be beneficial. He mentions that September allowed for a resetting of positions and reduced leverage, resulting in a “cleaner” environment as markets enter the fourth quarter.
Rubner observes that there remains some underlying stress, and he isn’t expecting a smooth trajectory upward; October might still see some volatility, potentially providing a better buying opportunity. His reasoning for a more optimistic fourth-quarter outlook includes cleaner positioning, decreased valuations, returning earnings, and an increase in participation from significant market players. He notes that S&P 500 Q3 earnings estimates have risen by 2.2% over the last two months, contrasting with a typical drop of 1.9% during the same period since 2000.
Is the IPO Market Deteriorating or Normalizing?
Even with the excitement surrounding major IPOs like SpaceX and anticipated filings from Anthropic and OpenAI, the IPO market seems to be cooling off.
After a summer of growth, the third quarter saw a disappointing performance for IPOs, affected by concerns over AI spending, soaring bond yields, and rising interest rates. Only 32 IPOs occurred, the lowest for any quarter since early 2024, raising about $35.4 billion, but the total drops to just $8.9 billion when excluding one major listing.
Recently, Oura made headlines by postponing its $2 billion IPO due to “uncertainty in the IPO market,” and there are others, like SB Energy and NScale, who have similarly delayed their offerings as market risks appear to mount.
An anticipated IPO from Anthropic is now pushed back to November, despite earlier expectations of a $100 billion raise at a $2 trillion valuation, while OpenAI has indicated a public offering won’t happen until next year.
Analysts from Renaissance attribute these delays to high valuation expectations after a strong second quarter. They pointed out that many issuers were preparing for a market that no longer reflects those inflated expectations. However, there are positive signs, as more diverse sectors beyond AI and biotech are emerging in the IPO market, which some view as encouraging.
