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In September, U.S. stocks declined as the Federal Reserve (Fed) signaled that interest rates could remain higher for longer. The rise in the August Consumer Price Index (CPI), boosted by higher energy prices, further supported the Fed’s message on interest rates needing to remain at restrictive levels for an extended period. Reduced expectations of future rate cuts weighed on equity markets, with the S&P 500 and Nasdaq Composite down -4.8% and -5.8%, respectively in September, ending the quarter negative while still holding year-to-date gains. Small-cap stocks underperformed in both September and Q3, while higher yields weighed on growth stocks, especially small cap growth. Cyclical and interest rate sensitive sectors generally underperformed the S&P 500 while the Energy sector benefitted from rising oil prices.

Despite a stronger U.S. dollar, international equities performed relatively better in September. The MSCI ACWI ex-US index declined by -3.2%, while the MSCI Emerging Market (EM) index fell by -2.6% during the same period. The stabilization of Chinese equities played a role in the relatively better performance of emerging markets, as investors were encouraged by recent stimulus measures.