2026 | 3rd Quarter
2026 Third Quarter Market Commentary
In the 1993 film Groundhog Day, Bill Murray’s character is stuck in an endless time loop, living the same day over and over. For those of us writing quarterly market commentaries, the past few years have felt strangely familiar. Every quarter seems to feature the same recurring themes: Artificial Intelligence (AI) fears, record-high concentration in the S&P 500 Index, tariffs, geopolitical uncertainty, and supply-driven inflation spikes. Thankfully for investors, record earnings growth and strong equity markets have also been part of the plot. Buoyed by strong performance in August, the markets shook off rising oil prices, higher interest rates, and the latest AI fears, rising 2.3% for the quarter and bringing year-to-date performance to 12.75%.
As AI capabilities have advanced, so have concerns surrounding the technology. Early worries of the nascent technology have included: job displacement, hyperscaler overspending, and competition from cheaper Chinese models. More recent developments evoke images of 2001: A Space Odyssey (“Open the pod bay doors, HAL”). Over the summer, autonomous OpenAI models went rogue during security testing, hacking into the AI developer platform Hugging Face. In September, a former Anthropic researcher warned that the technology could have the power to threaten human life by the end of the decade. This was followed by the leaders of multiple AI companies calling on the industry to slow down the rate of model improvement to focus on safety.
Despite the recent AI fears, the Technology and Communication Services sectors once again accounted for a large portion of the S&P 500’s gains, with Microsoft, NVIDIA, Apple, and Meta landing at the top of the leaderboard for the quarter. Those four Mega Cap names were enough to offset a significant pullback in Semiconductor stocks. While Micron, Applied Materials, Intel, and others are among the strongest contributors to performance this year, on AI-demand for chips and memory, they were some of the leading detractors for Q3. Ongoing supply disruption from the war in Iran drove oil prices up almost 30% for the quarter. The Energy sector continues to benefit from higher oil, leading all sectors for the quarter (up 17%) and year-to-date (up 40%). Health Care was the only other sector with gains in Q3. While 7 of the 11 S&P 500 sectors declined for the quarter, year-to-date performance is broader, with 8 sectors in the green.
As oil prices climbed during the quarter, yields rose in tandem. Higher interest rates increase borrowing costs and decrease the present value of future earnings, both of which negatively impact Growth stocks and more-indebted Mid and Small Cap stocks. In a Reversal of Fortune from the second quarter, Mid Cap (-6.4%) and Small Cap (-7.9%) stocks declined in Q3. Year-to-date, Small Cap (up 14.1%) continues to outperform Large Cap, while Mid Cap stocks have lagged slightly (up a respectable 9.88%).
SK Hynix, Samsung, and Taiwan Semiconductor, continue to direct Emerging Markets stocks, accounting for almost three quarters of the year-to-date gain (23.7%). In the quarter, pullbacks in SK Hynix and Samsung offset strength in Taiwan Semi, leaving the index down 0.24%. Technology is not a headliner in International Developed markets, where Financials and Industrials carry more weight. Financials and Energy, benefitting from higher interest rates and oil prices, respectively, performed well in the quarter, contributing to the MSCI EAFE Index’s 0.9% return. The 10.8% year-to-date return has come from a broad cast of characters (Financials, Tech, Industrials, Energy, and Materials).
The biggest plot twist of the quarter may have occurred in Fixed Income markets. Interest rates rose across the globe in Q3, with the 10-Year Treasury seeing its steepest quarterly climb since 1994 (up 0.85% to 5.29%). The 10- and 30-Year Treasury yields ended the quarter at their highest levels since 2002, while yields in the UK, France, Germany, and Japan also hit multi-decade highs. Higher oil prices, rising debt fears, and increased bond issuance from AI hyperscalers all contributed to higher yields. With bond prices moving opposite to interest rates, the Bloomberg Aggregate Bond Index fell 3.5% for the quarter and is down 2.9% year-to-date. Investment Grade and High Yield credit spreads widened slightly in Q3. Investment Grade bonds lagged the broader bond markets, falling 3.9%, and are down 3.1% year-to-date. High Yield bonds, cushioned from the extra yield that lower-rated credits provide, outperformed, falling 1.8%, and are up slightly (0.1%) for the year.
While interest rates are at multi-decade highs and the U.S. debt and deficit continue to increase, we don’t expect rates to rise From Here to Eternity. Yields can rise from current levels, but at some point, we hope to see fiscal restraint from Congress. Higher yields not only provide more income to portfolios today, but they also act as a cushion against principal loss from a further increase in interest rates. At today’s levels, we’d expect potential losses in intermediate-term Fixed Income to resemble The Thin Red Line seen year-to-date, and not a repeat of 2022’s performance (-13%), when the 10-Year rose over 2% from a historically low starting point.
September’s Federal Open Market Committee (FOMC) meeting saw the first change to interest rate policy since December, and the first rate hike since July ’23. FOMC Chairman Kevin Warsh’s prior tough talk on inflation and firm commitment to price stability may have given the Fed no other choice but to raise the federal funds rate. Warsh characterized the hike as removing “a dose of accommodation”. While the Chairman refused to provide forward guidance, the rest of the committee continues to do so, and they expect one more rate hike this year (to a range of 4% to 4.25%) and no additional hikes next year.
Looking at the economy, the labor market is tight, but not strong. Decreased labor supply has kept the unemployment rate in check as the economy averaged 50k new jobs per month in the quarter. Economic growth has been healthy, driven by strength in consumer spending and business fixed investment. Inflation remains above the Fed’s 2% target, and with diesel prices near record highs, the war in Iran remains the wild card. Continued disruption to oil supply could eventually feed through to higher prices for goods, while a resolution to the war could slow the pace of inflation.
The leading actor this year has been corporate earnings growth. Analysts expect the S&P 500 to grow earnings by over 30% this year and 15% next year. With 9 of 11 sectors expected to grow earnings by over 10% this year (led by Energy, Communication Services, and Technology), the S&P 500 is now trading at 19 times forward earnings, in line with its 10-year average. Even after 3 plus years of double-digit returns, markets are cheaper on a price-to-earnings basis than they were at the start of the year.
November brings another potential source of volatility: the midterm elections. While All the President’s Men hope Republicans will retain the House and Senate, divided government is the base case. While this result could continue The Neverending Story of recent partisanship, we would remind investors that policy, not politics, is what impacts the economy and markets. Do not let how you feel about politics impact your investment decisions.
History doesn’t repeat but it often rhymes. This is not exactly the case in Hollywood, as fan nostalgia, the fight for box office dominance, and possibly a lack of creative ideas lead to sequels, prequels, spin-offs, and re-makes. While we don’t know what Cliffhanger awaits, we can prepare for Rocky markets through diversification. U.S. Large Cap stocks have been the top-billed stars in portfolios, but a supporting cast of Mid and Small Cap, International Stocks, and Fixed Income can add value if that star fades. As advisors, we’re here to help you Do the Right Thing. While you won’t win an Oscar for living La Dolce Vita in retirement, with the right cast and crew, sticking to the script (your financial plan) can help you write your own Hollywood ending. Get your popcorn ready.
Fun fact – of the eleven films listed above, nine were nominated for Academy Awards (surprisingly Cliffhanger is one of them). Groundhog Day, unfortunately, was snubbed by the Academy, though it did win a BAFTA.
As always, please reach out to us with any questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Timothy J. DeAngelo, CFA®
Portfolio Manager
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
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