The third quarter of 2026 showed that markets can remain resilient even as the economy and geopolitics become more complicated. Strong corporate earnings and continued economic growth kept stocks near record levels for much of the quarter, while rising interest rates, energy-market uncertainty, tariffs, and renewed Federal Reserve tightening created a more challenging environment for investors.
Rather than producing one clear market narrative, the quarter brought several forces together. Economic strength supported company profits and investor confidence, but it also contributed to higher interest rates. Our view is that this environment continues to favor diversification and disciplined strategy over trying to predict each turn in the market.
Earnings Continued to Support Stocks
Corporate earnings remained the foundation for equity-market resilience during the quarter. Companies generally continued to report stronger profits, as business conditions remained healthy despite higher borrowing costs and ongoing uncertainty around energy and trade policy.
AI infrastructure and the large tech companies building data capacity generated a large share of earnings growth, although the median company also reported healthy profit growth. After several years in which a relatively small group of companies led the market, we are encouraged by broad market participation as investors continue to spread their dollars.
As artificial intelligence continues to shape investment decisions across semiconductors, memory, data centers, and cloud infrastructure, investors are looking beyond the amount companies are spending and asking whether those investments can increase revenue, improve productivity, and support profit margins over time.
The potential applications are wide-ranging, but expectations for many companies connected to AI are already high. That can lead to sharp reactions when earnings are good but fall short of what investors had hoped to see. We believe clients benefit from participating in areas of growth while remaining diversified across technology, energy, value-oriented companies, smaller businesses, and international markets.
Energy and Geopolitics Kept Inflation in View
The conflict involving Iran, along with disruptions to shipping routes in the Strait of Hormuz and the Red Sea, remained an important source of uncertainty. Because those routes are central to the movement of global energy supplies, any threat to them can affect oil prices quickly.
Higher energy prices affect more than the cost of gasoline. They can raise transportation and manufacturing costs, pressure household budgets, reduce corporate margins, and influence the outlook for inflation and interest rates. If energy pressure persists, the Federal Reserve has less room for lower rates even if other parts of the economy begin to slow.
Inflation reports during the quarter were not uniformly troubling, but the combination of energy risk, tariffs, and steady economic growth made it difficult to conclude that inflation had been fully contained. Markets will continue to watch whether oil price increases remain isolated or begin to affect prices more broadly.
Higher Rates Put Pressure on Stocks and Bonds
Long-term interest rates continued to climb during the quarter, becoming one of the most important issues for both stock and bond investors. By late September, the 10-year Treasury yield approached 5.25%, while the 30-year Treasury yield moved above 5.62%, levels not seen since before the Global Financial Crisis of 2008.
When rates rise, the effects reach across the economy. Mortgage rates and other borrowing costs increase; businesses can become more cautious about investment, and the higher income available from bonds can make stocks less attractive by comparison. Rising yields also reduce the value of existing bonds, which created a difficult period for traditional core bond funds.
Several forces likely contributed to the move, including steady economic growth, concerns about inflation, federal borrowing needs, and changing global demand for U.S. Treasury bonds. We do not think one explanation tells the whole story. Interest rates are responding to several forces at once, and those forces can change quickly.
Higher yields have also improved the income available in fixed income. Bonds now offer more attractive starting yields than they did in recent years, which can improve their longer-term return potential if rates stabilize or decline. Our approach remains focused on balancing interest-rate exposure with investments designed to be less dependent on the daily direction of bond markets.
The Fed Returned to Raising Rates
The Federal Reserve held rates steady through much of the quarter, but stronger economic data and persistent inflation concerns changed expectations. August payroll growth came in well above forecasts, reinforcing the view that the economy still had momentum despite already-elevated interest rates.
At its September meeting, the Fed raised rates by 25 basis points, its first increase since mid-2023. We expect another rate increase at the next Fed meeting as policymakers continue working to prevent inflation from regaining momentum.
To us, ultra-short term fixed income continues to provide attractive income; borrowing remains expensive, and portfolios should be built for a range of interest-rate outcomes rather than one specific Fed forecast.
Looking Ahead
Markets enter the fourth quarter with earnings, economic growth, and interest rates pulling in different directions. Investors will be watching whether companies can continue meeting elevated earnings expectations, whether energy and tariff pressures affect inflation, and whether long-term yields settle after their sharp rise.
The 2026 midterm elections will also receive more attention in the months ahead. Discussions around taxes, tariffs, federal spending, regulation, and economic policy can influence market expectations, particularly where the outcome could affect corporate costs, consumer confidence, or government borrowing.
The third quarter reinforced that markets could handle uncertainty when the underlying economy and corporate profits remain sound. Our focus remains on maintaining diversified portfolios, rebalancing when market moves create opportunities, and keeping investment decisions aligned with each client’s long-term financial plan rather than the latest headline.
