Market Summary

Markets delivered divergent results during the third quarter as resilient economic growth and corporate earnings competed with rising interest rates and renewed energy price pressures from the ongoing Iranian conflict.

US large cap stocks advanced, but gains were largely concentrated to the Energy, Technology and Healthcare sectors, while smaller companies and much of the bond market struggled. The quarter reinforced an important distinction: a healthy economy does not necessarily translate into strong returns for every asset class.

Economic conditions continued to present a mixed picture for policymakers. The Fed’s preferred inflation measure, the Personal Consumption Expenditures price index, increased 3.4% over the year through August, still stubbornly above the 2% target rate. At the same time, consumer spending and business investment remained resilient. That combination supported corporate activity but complicated the case for lower borrowing costs.

Markets began the year pricing in additional Federal Reserve interest rate cuts. Instead, September brought the first increase since July 2023, with the Fed raising its target range by one-quarter percentage point to 3.75%–4.00%. The reversal reinforced the risk of building a fixed income portfolio around a single interest-rate forecast.

Artificial Intelligence (AI) remained an important source of investment and earnings growth, but the scale of that spending also raised questions about the eventual payoff. Spending on data centers, computing capacity and power infrastructure continued to expand, while attention increasingly turned to the returns those investments could generate. The key question for investors is not simply how much companies will spend on AI, but whether those investments ultimately generate attractive returns through durable revenue growth and improved efficiency.

In the near-term, markets will remain sensitive to inflation and interest rate expectations, AI related spending and returns and the upcoming Midterm elections. Through periods of volatility, we continue to favor diversified exposure to quality businesses at reasonable valuations, alongside fixed income investments aligned with clients’ income needs, tolerance for risk and time horizon.

Equities

US large cap stocks extended their gains, with the S&P 500 Index returning 2.3% for the quarter and 12.8% year to date. However, the headline result obscures a more challenging investing experience with narrow market breadth. Two thirds of the companies in the S&P 500 lagged the index and over 60% posted a negative return for the quarter. The index’s gains were led by energy stocks, which rallied alongside oil prices, while strength in select technology and health care companies contrasted with broad weakness across much of the market. Smaller capitalization stocks declined largely as a result of rising borrowing costs, with the S&P MidCap 400 and the S&P SmallCap 600 Indexes declining -6.4% and -7.9%, respectively, during the quarter.

Overseas, higher energy prices put renewed pressure on company costs and energy-importing economies. For US investors, currency volatility presented additional challenges as the dollar gradually depreciated during July and August before rapidly appreciating during September. The dollar ended the quarter near where it began but added significant additional volatility. Throughout it all, developed international markets posted modest returns, with the MSCI EAFE Index up 0.8% during the third quarter.

In emerging markets, some early 2026 winners became sources of weakness. South Korea’s memory chip stocks retreated as investors questioned the sustainability of AI-related growth and crowded positions unwound. India faced a different squeeze from higher oil import costs, while Brazilian shares advanced. Those contrasting experiences left the MSCI Emerging Markets Index with small 0.4% decline in US dollars, underscoring why emerging markets should not be viewed as a single economic story.

Fixed Income

Bonds felt the full force of the shift in interest rate expectations. Long-term Treasury yields rose to levels not seen in roughly two decades, with the 10-year yield climbing from approximately 4.4% to more than 5.2%, as persistent inflation concerns and heavy government borrowing needs weighed on bond prices. Longer maturity bonds generally suffered larger price declines, reflecting their greater sensitivity to changes in interest rates. The quarter was a reminder that high credit quality does not eliminate interest rate risk.

September was particularly challenging, with the Bloomberg US Aggregate Bond Index declining more than -2.6% for the month and causing the index to end the quarter down -3.5%. High Yield bonds held up better on a relative basis, supported by larger coupon payments and lower interest rate sensitivity, with the Bloomberg US Corporate High Yield Index declining -1.8% during the quarter.

Commodities

Oil once again linked geopolitical developments to everyday economic concerns, rising to $102 (+21%) per barrel during the quarter. Renewed tensions involving Iran and disruption risks around the Strait of Hormuz led to higher prices, benefiting energy producers while increasing costs for consumers and other businesses. Unlike a rally driven by stronger demand, a supply-driven rise in oil can hinder economic growth. Energy helped support a 16.2% quarterly return for the Bloomberg Commodity Index while undoubtedly complicating the outlook for inflation.

Gold demonstrated that while it is generally uncorrelated to broad markets, it does not always provide a smooth ride. A strong August rally was supported by a weaker dollar and approximately $18 billion inflows into gold exchange traded funds (ETFs). September reversed part of that advance as the dollar strengthened and bond yields rose. Higher yields increased the opportunity cost of holding an asset that produces no income, contributing to gold’s 6.3% decline during the month. Those swings left gold with a 3.2% quarterly return.