QUARTERLY MARKET UPDATE as of October 2026
Equity markets had a mixed third quarter beneath a calm headline number. The S&P 500 gained 2.3%, touching a fresh record above 7,800 in August. The energy sector continued to lead the way, climbing 15% as crude oil rose from below $70 in July to over $90 a barrel. Healthcare also fared well, increasing 6%. Technology had a rockier stretch, slipping through July before rebounding strongly over the quarter to finish close to new highs and gaining 5%, for the quarter. International markets increased marginally, with the MSCI EAFE Index up by 0.88%. Small caps told a different story: after a torrid first half, the Russell 2000 fell 7.3% as rising yields and interest rate pressure hit smaller companies borrowing costs harder.
Bond yields moved up sharply over the quarter as inflation concerns resurfaced. The 10-year Treasury climbed from around 4.5% in early July to 5.3% by quarter-end, a jump of over three-quarters of a point to its highest level since 2007. New Fed Chair Kevin Warsh, who has largely set aside the Fed’s old habit of pre-signaling its moves, raised the Federal Funds rate a quarter point on September 16, the Fed’s first hike since 2023, to 3.75%-4.00%, calling it the removal of “a dose of accommodation.” Markets read that as a signal more increases could follow. Mortgage rates tracked Treasury yields higher, climbing from around 6.4% to just above 7% over the quarter, a fresh headwind for housing.
A rate increase mid-way through what had been an easing cycle is unusual, and it has stirred real debate. Some economists argue that raising rates amid conflict in the Middle East and Ukraine risks fighting an energy shock the Fed has little power over, noting that prices excluding energy are up only modestly from a year ago. Others had expected the Fed to hold steady through year-end; September’s hike suggests policymakers are now more worried about inflation expectations than about slowing a still-healthy economy.
That underlying strength shows up in the growth data. The government’s latest estimate put second quarter GDP growth at 2.2%, a meaningful upward revision, with first quarter growth also revised higher to 2.5%. The Atlanta Fed’s GDPNow model tracked third quarter growth running even faster, near3.7%, but down from their prior projection of 5%. Other forecasters remain more cautious, expecting growth closer to 2%.
The U.S. continues to outgrow most of its major trading partners; the IMF’s latest outlook puts global growth near 3% for 2026, with Europe, Japan, and Canada all growing more slowly than we are. Headline inflation here remains elevated at 3.4%, driven mostly by energy costs, but the underlying trend keeps cooling, with core CPI at 2.4% year-over-year in August, its lowest reading since March 2021. The labor market has held up as well, with unemployment steady at 4.1% and labor force participation ticking higher, even as the pace of new hiring has slowed from earlier in the cycle.
Trade policy remains fluid and continues to complicate planning for many businesses, though its inflationary bite in the U.S. has been smaller than many economists originally feared. Higher borrowing costs and tariff-related uncertainty are the current overriding concerns for the economy. Yet we are seeing consumer spending that has picked up pace and looks very healthy. This is attributed to increases in disposable income from steady upward wage growth, low national layoffs, and stock market gains. Continued increases in productivity from AI-related investments are also helping businesses large and small, and it has not led to large scale job eliminations as widely predicted earlier this year.
Corporate profits were a bright spot again this quarter. S&P 500 companies are tracking a third straight quarter of annual earnings growth above 25%, led by Energy, Technology’s AI supply chain, and Communication Services, and share prices still haven’t fully caught up—the index gained roughly 2% this quarter while forward earnings estimates rose nearly 9%. Away from the market, some economists have flagged a less cheerful figure: interest paid on the national debt, as a share of GDP, has now surpassed the personal savings rate for the first time on record—a reminder that today’s favorable backdrop sits atop a fiscal position that will eventually need attention.
Valuation, measured by the market’s forward price-to-earnings ratio, tells a more reassuring story than the headlines suggest. That ratio eased from roughly 20x at the start of the quarter to about 19x by quarter-end, even with the index near record highs, as earnings estimates climbed faster than share prices. Technology and AI-related businesses now make up well over a third of the index, versus about 5% in the 1960s, and their faster growth helps justify a somewhat richer multiple. Interest rates today, while higher than in recent years, remain far below the double-digit rates from decades past, which also supports current prices.
None of this argues for complacency—higher rates, elevated energy prices, and an active Fed all bear watching—but we don’t see the kind of imbalances that typically precede a serious downturn. Our approach remains the same: own durable, well-financed businesses capable of growing earnings and dividends through varied economic environments.
