Markets Brief: Goldilocks for Stocks vs. the Bond Market, Private Credit Exodus Continues

There’s no question that the big event this week will be the Federal Reserve meeting on Wednesday. Friday’s Consumer Price Index report came in close to forecasts, which meant expectations for a Fed rate hike this week jumped to roughly 85%. You wouldn’t know that from the stock market, where growth stocks (whose valuations are sensitive to interest rate changes) led a rally on Friday.

In this week’s Markets Brief:

• The stock market’s Friday gains highlight how investors seem to believe the market is in a goldilocks environment. But a UBS note argues that higher bond yields create risks for a key segment.
• Private market executives predicted that the rush from private credit funds in early 2026 would fade. PitchBook data says they’ve been wrong so far.
• Utilities have benefited from surging demand for power from data center growth. Morningstar analysts Travis Miller and Andrew Bischoff offer their take on the sector’s outlook.
• It’s boom time for investment banks. But are their stocks a buy?

How Long Can Stocks Withstand Higher Rates?

While stocks have wobbled as bond yields pushed to decades-long highs, the market has largely held, not far from record highs set in August. Strong earnings have been central to keeping stocks elevated amid rising rates, along with optimism about the artificial intelligence boom.

“As long as the good times last, such corporate resilience lends credence to the thesis that AI infrastructure spend is material enough to underpin strong economic growth to more than offset bond market concerns,” wrote Michel Lerner, who heads a quantitative research group at UBS, in a report last week. However, he says the clock is ticking: “The key risk to such a goldilocks scenario is that fiscal and funding pressures keep yields elevated before AI-related productivity gains emerge.”

Lerner writes that fiscal pressures, including bond market “vigilantes”—often institutional investors who sell bonds to protect against inflationary fiscal policies, like Treasury Secretary Scott Bessent’s moves to bring down yields—push prices down and yields up in countries with offending budget deficits. “History suggests bond vigilante episodes rarely remain contained, given the challenges of curbing deficits without weakening growth or fueling inflation. Among highly indebted economies, US equities appear particularly vulnerable to a spillover.”

He says the AI trade is especially at risk: “Many US stocks, especially those in the AI value chain, trade at demanding valuations that imply record future cash-flow generation, making their valuations highly sensitive to a rising cost of capital … Higher yields also raise the hurdle rate for growth projects to be value accretive. This is particularly relevant to AI infrastructure spending where the potential ROI of these investments is already being questioned.”

Lerner cites one more risk for the US AI trade: private credit. “The ripple effects of higher rates may also be greater today because of the rapid growth of private markets with less transparency on where some of the tail-risks in the segment are and how they might impact the listed space.”

Private Credit Investors Continue Heading for the Exits

As we’ve reported, strains have continued to build in private credit, despite the assurances of industry executives of “nothing to see here, folks.” Meanwhile, individual investors have seen enough. In the first half of this year, numerous private credit funds, known as non-traded business development companies, locked the gates on surging redemptions.

Marina Lukatsky, global head of credit and US private equity research at PitchBook LCD, wrote last week that many in the industry said investor withdrawals would fade. “Early indications, however, show that Q3 redemption demand remains stubbornly elevated.”

Case in point: Blackstone’s largest non-traded BDC, Blackstone Private Credit Fund, received requests amounting to $4.3 billion in shares (roughly 10%) in the third quarter. Blackstone subsequently limited withdrawals to its 5% cap and saw overall net outflows of about 3% of its net asset value, LCD says. Meanwhile, investors at Cliffwater Corporate Lending Fund CCLFX asked to redeem 16% of shares outstanding, according to an investor letter seen by PitchBook LCD. That’s a marginal reduction from 17% in the second quarter.

Utilities Stocks Struggle, but Outlook Is Bright

It’s been a tough year for utilities. The Morningstar US Utilities Index is up a paltry 1.9% after a nearly 20.0% gain in 2025 and almost a 27.0% return in 2024. Still, between October 2023 and February of this year, the index gained more than 90%, outperforming every sector except tech. Strong earnings and dividend growth helped bolster that performance, and a recent change in how the market views the sector—as growth rather than dividend stocks—persists.

With the AI buildout showing no signs of slowing, Morningstar analysts Andrew Bischof and Travis Miller look at the utilities landscape in a new report. “The commercialization of AI engines represents a transformational source of new electricity demand growth,” they write. They expect US data center electricity demand to quadruple by 2030 and grow 6 times by 2035, and anticipate the Midwest and Southeast regions of the United States to join mid-Atlantic and Texas utility firms as the top hosts for new data center development. Renewable energy sources like wind and solar are growing rapidly too, though they still make up a minority of power generated in the US.

Overall, the analysts think utility stocks are more attractive now than at the peak of the AI rally in 2024 and 2025, with most trading in line with their fair value estimates. Exceptions include the undervalued DTE Energy DTE, American Electric Power Company AEP, and Alliant Energy LNT. Entergy ETR and Vistra Energy VST are rated 2 stars and are trading at a premium.

High Times in Investment Banking

Booming debt and equity markets fueled strong performance for investment banks over the past year. But according to Morningstar equity analyst Austin Taggart and director Sean Dunlop, stock multiples reflect high hopes for an industry with cyclical headwinds right around the corner. Global investment banks in their coverage booked $280 billion in revenue in the 12 months through the second quarter, a striking 34% increase. Profitability has also increased, with US banks’ return on equity hitting 22.4% in the second quarter, the highest in over a decade and above the five-year average of 15.7%.

Strong earnings have helped propel bank stocks, but rising valuations have amplified the gains. US banks trade at 2.6 times tangible book value, their highest level in over a decade and a premium to their 10-year average of 1.9 times. US investment bank stocks are up 36% in the past year on a market-cap-weighted basis, while European banks are up 32%.

Taggart and Dunlop say many of the tailwinds fueling the industry’s growth are likely to persist through the year-end into 2027. “It is the best of times in investment banking and trading,” they write. That said, investors may want to keep their powder dry: “The industry tends to oscillate between euphoria and despair. Investors will invariably get another bite of the apple when the banking and trading cycle turns, but [investors] should wait on the sidelines for now.” The duo’s top picks are Bank of America BAC and Wells Fargo WFC.