U.S. stock markets posted gains in the third quarter, with key indexes reaching new highs despite intermittent volatility and signs of increasing investor caution. The S&P 500 advanced by 2 percent over the quarter, supported primarily by strong performance in the energy and technology sectors.

The energy sector surged by 16.5 percent, fueled in part by renewed tensions between the United States and Iran, which pushed oil and gas prices higher. Major energy companies Marathon Petroleum, Phillips 66, and Valero Energy Corp each gained roughly 50 percent during the period, benefiting from elevated commodity prices and bolstered profit margins.

Although energy stocks exhibited the largest percentage gains, the broader influence of the technology sector was more significant due to its overall market weight. The tech sector rose by 7 percent, buoyed by notable performances from companies such as Palantir, which climbed 60 percent to a market valuation of $450 billion, surpassing the combined market caps of the leading energy firms. Microsoft also saw a substantial 38 percent increase, reaching a nearly $4 trillion valuation.

The market’s mixed responses reflect broader economic shifts driven by the rapid expansion of artificial intelligence (AI) technology. AI-related growth has simultaneously propelled the economy, bond yields, and equity markets, although higher prices and interest rates have posed challenges for many companies and consumers.

Bond yields continued to climb, with the 10-year Treasury yield reaching 5.3 percent at the end of the quarter—its highest level since 2002. Rising yields typically lead to increased borrowing costs, which can weigh on stock market performance. While some sectors sensitive to interest rates, such as utilities, declined by over 13 percent, and smaller companies represented by the Russell 2000 index fell 7.2 percent, broader equity markets have not responded uniformly.

Investors have expressed concern about why equities appear resilient despite higher yields. Analysts suggest that while there is a response to rising rates, it is more nuanced than anticipated. The bond-market-driven increase in yields is partially attributed to expectations that continued AI-driven growth may compel the Federal Reserve to maintain elevated interest rates to curb inflation risks.

However, there is recognition that persistently high borrowing costs could eventually slow AI expansion and broader economic growth, potentially undermining the earnings forecasts that have supported recent stock gains. This dynamic has prompted some caution among investors.

Valuation metrics underscore this measured sentiment. The S&P 500’s price-to-earnings ratio has declined from approximately 26 at the start of the year to about 21, indicating greater investor restraint. The technology sector’s ratio has also moderated from 36 to 27 times expected earnings, as profit estimates have risen more rapidly than stock prices.

Companies within the S&P 500 are projected to report third-quarter earnings nearly 30 percent higher compared to last year, with the tech sector expected to deliver an even stronger increase approaching 64 percent. Despite this optimism, some market strategists warn against complacency, drawing parallels to previous market cycles.

David Kelly, chief global strategist at JPMorgan Asset Management, noted that while AI presents transformative potential, the market remains sensitive to risks reminiscent of past technology bubbles. “We are very much leveraged to this AI bet, so it had better go right,” he said, highlighting the fine balance investors face amid evolving economic conditions.