US stocks and government bonds face a challenging September as the Federal Reserve’s announcement of slower rate cuts sends shockwaves through financial markets. Wall Street’s benchmark S&P 500 index struggles, nearing its first quarterly loss in 12 months.

The US bond market experiences a notable retreat following the Fed’s signals of a less aggressive approach to rate cuts in the coming years. The yield on 10-year Treasuries rises significantly, reaching levels not seen since 2007, contributing to the largest monthly jump in a year.

Expectations of prolonged high rates negatively impact equities. Higher bond yields affect investors’ pursuit of returns, particularly impacting the real economy. While the S&P 500 remains up 11% for the year, the equal-weighted index, reflecting broader market performance, falls into negative territory.

Corporate debt markets also feel the heat as investors worry about highly leveraged companies’ ability to refinance amid rising rates. The average interest rate for US junk bonds climbs, outpacing the increase in Treasury yields.

The shift in the US contrasts with the economic landscape in the eurozone and the UK, where fears of a downturn prevail. The Fed’s response to robust economic data and a strong labor market contributes to market uncertainty, reflecting diverging economic scenarios.

Market participants grapple with the impact of higher rates on the economy. While some believe that the market is recognizing a more stable economic outlook, concerns persist about the lagged effect.