Two Sided Equation
While the first half of 2026 closely mirrored 2025, the third quarter brought a period of consolidation and the emergence of key differences as we head into year-end. Overall economic fundamentals still remain remarkably resilient - unemployment sits near the bottom of its historical range at 4.2%, wage inflation is in a 4% sweet spot, and a generational capital investment cycle continues to drive expansion. However, this strong growth combined with sticky consumer prices continued to push global yields and interest rates higher during the quarter. Benchmark 10- and 30-year U.S. Treasury yields breached the 5% level, and the Federal Reserve, navigating its leadership transition under new Chairman Kevin Warsh, delivered its first rate hike in over three years.
Despite the pressure from rising rates and narrowing market breadth, which weighed heavily on fixed income and rate-sensitive small cap stocks, broader equity markets have digested this shift remarkably well. The primary catalyst propelling equities forward is exceptional corporate profitability. Even in the face of geopolitical conflicts, inflation shocks, and shifting monetary policy, S&P 500 earnings are on pace for 30% year-over-year growth in 2026 and an estimated 15% in 2027. While IPOs and index mechanics account for a portion of this surge, underlying earnings growth is still accelerating on the back of robust AI-related capital expenditures and a resilient consumer (although there are beginning to be signs of weakening consumer spending).
As we enter the fourth quarter, markets continue to balance these competing dynamics of growth and pressures. On one side lies strong economic expansion, technological breakthroughs, and historic corporate profit growth. On the other side investors must navigate stretched valuation multiples, sticky inflation that could prompt additional rate hikes, and short-term volatility surrounding the upcoming U.S. midterm elections. We outline these dynamics in more detail in our full Q3 economic letter, which is available as part of your quarterly performance report and attached. These reports can be accessed on your secure online portal here. Please login to view your reports and feel free to reach out if you have questions or updates to your financial situation.
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