Q3 2026: Market View Quarterly

The third quarter reminded investors that markets rarely move in a straight line. Strong corporate earnings, consumer spending, and continued investment in artificial intelligence provided meaningful tailwinds for equities; however, renewed geopolitical tensions, an upcoming midterm election, rising energy prices, and a Federal Reserve (Fed) interest rate hike (the first since 2023) limited the effect of those tailwinds. The result was a volatile quarter that ultimately ended with a narrow group of large-cap equities performing well, while small- and mid-cap companies, as well as fixed income, struggled in September. Although higher rates challenged both equities and fixed income, commodities benefited from geopolitical and inflationary pressures, and international markets continued to offer areas of relative opportunity. Against this backdrop, maintaining broad diversification and a disciplined long-term perspective is particularly important.

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Domestic Equities¹

The third quarter took domestic equities on a roller coaster ride, and not just in the typically volatile month of September. Markets began the quarter with a sharp tech selloff in July, sparked by worries about potentially excessive AI spending, which drove the Nasdaq to its worst July since 2006. At the same time, a collapsed Iran ceasefire pushed oil higher, leading the Energy and Financial sectors to outperform. Stocks rallied broadly in August on very strong Q2 earnings, with S&P 500 earnings growth reaching 52%.2 The S&P 500 and Nasdaq-100 recorded their best August since 2021. September, as is tradition, turned the tables yet again with multiple headwinds uniting against domestic equity investors: renewed fighting in the Middle East sent Brent crude above $100, the Fed raised rates for the first time since 2023, bringing the Fed Funds Rate to a range of 3.75% – 4.00%, and the 10-year Treasury yield hit 5.10%, surpassing the heuristically important 5% threshold and hitting its highest mark since 2007. Despite these difficulties, AI stocks carried the Nasdaq to a record close in September, but higher rates and oil prices weighed on small- and mid-caps, which generally depend on outside financing and a strong domestic economy. The Russell 2000 and Russell Midcap indices ended the quarter down -7.23% and -3.00%, respectively. The S&P 500 ultimately outperformed all other major domestic indexes, finishing the quarter up 2.30%, while the more cyclical, value-oriented Dow Jones Industrial Average fell -2.34%. Although third-quarter domestic equity performance was both challenging and volatile, the outlook for Q4, historically the best quarter for stock market performance, is positive. The labor market is strong and stable, Fed Chairman Warsh appears committed to addressing stubborn inflation, and for the second straight quarter, analysts are increasing earnings estimates for S&P 500 companies.³

International Equities²

International stocks experienced much of the same volatility as domestic equities. Technology and AIrelated stocks were particularly weak early in the quarter, affecting emerging markets such as Taiwan and South Korea. A rebound followed in August before volatility returned in September as global interest rates rose and geopolitical uncertainty increased. Despite these challenges, developed international equities, as measured by the MSCI EAFE Index, gained 0.81% for the quarter. Japan Market View Quarterly Q3 2026 Philip Blancato | Chief Market Strategist, Osaic was a notable bright spot, supported by improving corporate profits and shareholder-friendly reforms, while European markets continued to look cheap. Emerging markets declined -0.37% during the quarter but remain up 23.38% year-to-date. Within emerging markets, Taiwan and South Korea continue to play important roles in the global semiconductor and AI supply chains, providing potential opportunities as investment in AI infrastructure expands. The outlook for international equities remains positive, as attractive valuations, improving corporate fundamentals, and increased investment in technology, defense, and infrastructure could provide additional opportunities outside the U.S. While geopolitical uncertainty and higher interest rates may continue to drive periods of volatility, international markets remain an important source of diversification and long-term growth potential.

Fixed Income²

Fixed income markets struggled in September as attention remained on the Fed, which raised interest rates by 0.25% for the first time since 2023 and signaled that another increase could be possible before year-end. The move marked a reversal from the start of the year when markets anticipated multiple rate cuts. Strong economic data reinforced the Fed’s view that bringing inflation back toward its 2% target was its top priority. Oil prices also moved higher as geopolitical tensions in the Middle East and in the Black Sea renewed energy inflation concerns. In response to the bond market’s change in interest rate expectations, the 10-year Treasury yield reached its highest level since 2006 as shorter term rates rose faster than longer-term rates. Higher yields will increase borrowing costs across the economy, putting additional pressure on mortgage rates and other loans. High yield corporate credit (-3.81%) declined as investors grew more cautious of increasing debt issuance tied to data centers and AI infrastructure spending. Floating-rate securities, however, were among the few areas to post positive returns, benefiting from their limited interest-rate sensitivity and high payments to investors. The 10-year Treasury yield ended the month at 5.28%, a mark not seen in 20 years. This level of income may attract institutional and retail investors, which could drive rates lower if inflation concerns ease.

Commodities & Alternatives²

Commodity markets delivered strong gains during the third quarter, with the Bloomberg Commodity Index advancing 16.19%, led by an 34.35% surge across the energy sector. Conflict in the Middle East has disrupted global energy flows through the Strait of Hormuz since the onset of the Iran war earlier this year, but hostilities flared with the temporary shutdown of Saudi Arabia’s East-West pipeline, which forced oil prices above $100 per barrel for extended periods and pushed U.S. diesel prices to a record high of $6.38. Commodity strength extended beyond energy, with gold gaining 3.19% as geopolitical uncertainty supported demand for safe-haven assets. Agriculture performed well amid tight supply and weather concerns associated with developing El Niño conditions. Livestock was the lone major commodity subsector to decline, pressured by increased beef imports. Looking ahead, commodity markets are likely to remain sensitive to geopolitical developments, the normalization of global energy flows, and weather-related supply risks. Tensions in the Middle East remain a key driver for commodity prices. Housing activity remained constrained during the third quarter as elevated mortgage rates continued to weigh on affordability in existing home sales. New home sales showed greater resilience, supported by builder incentives and price reductions, though mortgage rates moving back above 7% late in the quarter could present a renewed headwind through the rest of the year.

Conclusion

As investors head into the final quarter of the year, the economic environment and market backdrop remain strong, driven in part by healthy consumer spending. Higher interest rates, persistent inflation, and geopolitical uncertainty are likely to keep volatility elevated, while resilient economic activity, improving corporate earnings expectations, and continued capital investment in AI and infrastructure provide important sources of support. At the same time, higher interest rates have raised yields on fixed income securities, international equities continue to offer attractive valuations relative to domestic stocks, and commodities and alternative strategies may provide valuable diversification benefits in an environment where geopolitical risks remain elevated. With opportunities increasingly extending beyond the narrow areas that have led markets in recent years, we believe a broadly diversified portfolio remains well positioned to participate in continued economic and earnings growth while helping manage the risks and expected volatility ahead of midterm elections. Investors should remember that the fourth quarter historically tends to be the best of the year, and that regardless of politics, the year after midterm elections tends to be the strongest in the four-year presidential cycle.⁴