Wealth Matters Newsletter - October 2026

Staying Grounded in a Shifting Landscape

Written by: Mark P. Bernier, CFA, Senior Vice President/Wealth Management Officer, Jonathan M. Williams, CFA, CFP®, Vice President/Trust Investment Manager, Zachary S. Herigan, Trust Portfolio Manager

The third quarter of 2026 continued to demonstrate the remarkable resilience of the global economy amidst a persistently complex backdrop of macroeconomic shifts and geopolitical challenges. The quarter was characterized by prolonged conflict in the Middle East, alongside mounting public and corporate concerns over the safety and regulatory frameworks surrounding artificial intelligence (AI). To top it all off, government bond yields across the globe rose to levels not seen in decades in some circumstances. Despite these headwinds, the markets were bolstered by exceptionally strong corporate earnings growth. Markets also adjusted to a reversal in the monetary policy outlook: rather than delivering the rate cuts expected at the beginning of the year, the Federal Reserve enacted its first interest rate hike since 2023.

Interest Rates Moving Higher

Monetary policy took center stage during the quarter as the Federal Reserve shifted back toward a tightening posture to address persistent price pressures. The Fed raised the federal funds rate by 25 basis points to a range of 3.75%-4.00% during its September meeting, explicitly leaving the door open for additional hikes by the end of 2026 and heading into 2027. Longer-term U.S. Treasury yields climbed to levels not seen since the early 2000s, fueled by intensifying concerns over expanding fiscal deficits among developed economies globally, sticky energy inflation caused by the ongoing conflict between the U.S. and Iran, and competition for capital stemming from a massive influx of AI hyperscalers tapping debt markets to finance immense infrastructure buildouts. The surge in yields across the curve negatively impacted total bond returns across the board, with the Bloomberg U.S. Aggregate Bond Index down over 3.5% for the quarter and the Bloomberg U.S. Municipal Bond Index down well over 6%. It is important to note that bond prices move in the opposite direction of yields, as existing lower coupons become less attractive compared to higher current market rates.

Core PCE (Personal Consumption Expenditures), the Federal Reserve's preferred measure of underlying inflation, came in at 3% year-over-year in August, remaining a full percentage point above the central bank's long-term 2% inflation target. It has been over five years since inflation was at the Fed’s 2% target, contributing to the rationale behind the rate hike at the September Federal Open Market Committee (FOMC) meeting. The unemployment rate remained low at 4.2% as the labor market persists in a "low hire, low fire" state, per the most recent Job Openings and Labor Turnover Survey (JOLTS) data in August. Consumer sentiment surveys continued to diverge noticeably from real consumer spending data – an anomaly as the two are historically positively correlated. This follows the narrative that despite American consumers’ disapproval of current economic conditions, they continue to spend anyway. An important feature of current consumption data is the dependence on high income consumers, as lower income consumers have been more negatively impacted by inflationary pressures on a relative basis.

The manufacturing sector exhibited continued strength as September marked the 9th consecutive month in which the Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI), a key indicator of the health of the U.S. manufacturing sector, remained in expansionary territory, although increased pricing pressures due to high energy and commodity prices were highlighted in the report. The adjacent ISM PMI report for the services sector of the economy reported similar continued expansion and pricing pressures. 

Looking at the bigger picture, second quarter real GDP came in at 2.2% from the Bureau of Economic Analysis (BEA), indicating the broad economy continues to chug along at a modest pace. At the time of this writing, the Atlanta Fed currently estimates a pickup in economic activity from the second quarter.

Energy Prices Remain Elevated

Commodities were the best performing asset class during the third quarter – a reflection of the prolonged geopolitical conflict in the Middle East and its effect on the movement of physical goods and raw materials. This outperformance was a direct consequence of the continued closure of the Strait of Hormuz and attacks on Saudi Arabian energy infrastructure which has pinned crude oil prices near $100 per barrel. The U.S. has maintained a naval blockade of the strait to restrict Iran from exporting its own oil, further squeezing their already distressed domestic economy. Direct talks between the U.S. and Iran have remained non-existent following a cooling period after recent attacks. President Trump has made it clear that the administration does not intend to negotiate a temporary deal at this time, with the hope that the Iranian economy will buckle under the inability to generate revenue from oil exports, bringing them back to the negotiating table with minimal leverage. The U.S. maintains that any future agreement must permanently open the strait with no tolls and bar Iran from developing nuclear weapons. 

With the mid-term elections approaching in November, political forecasts widely expect the Republicans to lose some ground in Congress as voters are expressing growing impatience with the prolonged conflict in Iran, sticky inflation, and domestic gas prices that continue to average well over $4 per gallon.

According to Truist Chief Market Strategist Keith Lerner on Yahoo Finance, historical patterns offer structural support for equities: "every midterm election since 1946 has been followed by positive one-year stock returns (S&P 500)", yielding an average one-year forward gain of 14.4%.

Stocks Defy Surging Bond Yields

Despite broader structural concerns over AI safety, infrastructure deployment and magnificent corporate earnings drove robust market fundamentals. The Energy sector’s 16.5% total return during the third quarter led all other economic sectors of the S&P 500, followed by Healthcare, Communication Services and Technology; all other sectors ended up in the red for the quarter. The index still generated a positive total return of approximately 2%: an impressive result considering the rapid rise in bond yields, which typically creates headwinds for equities. 

Data from FactSet indicates that the estimated Q3 2026 year-over-year earnings growth rate for the S&P 500 stands at an impressive 29.5%. Rapidly rising corporate profits have outpaced equity price gains collectively, pulling the forward 12-month P/E ratio for the S&P 500 down to a more moderate 19x. Emerging market equities continues to lead global equity markets, returning approximately 24% year-to-date, followed by U.S. small cap with a year-to-date total return as of September 30^th of 14% and U.S. large cap at 13%.

Final Thoughts

The third quarter of 2026 has proven that the American consumer and corporate earnings are substantially more durable than previously assumed. Corporate America and consumers alike have so far successfully navigated tariff disruptions, severe energy shocks, and the highest government bond yields observed in over two decades. As we transition into the final quarter of the year, maintaining a diversified asset allocation tailored to each client’s individual needs remains our primary mandate.