Third Quarter 2026 Review and Outlook

Written by Tim Rigby

According to The Wall Street Journal, the popular stock indexes posted returns for the quarter and year as follows:

 			                                                 Quarter		           Year

The Dow Jones Average -2.70% 5.90%

The S&P 500 2.03% 11.80%

The NASDAQ Composite 2.47% 15.60%

This year, corporate earnings have boomed, and analysts keep raising their forecasts. Typically, corporate profits lead to an increase in stock prices, but we are in an unusual time when stock prices are again not performing well across the board.  More stocks are hitting new lows for the year than are hitting new highs.  This divergence is unusual given the overall indexes are at or near all-time highs with strong earnings.    

The war with Iran has caused oil prices to soar which makes prices at the pump jump and the inflation rate to continue to persist above the 2% target set by the Federal Reserve.  Our outlook is that inflation should start falling back to the 2% Fed target, especially if oil prices start to fall.  Two reasons: productivity should boom with all the data centers and AI growth, and the money supply is constrained. Those two factors should cause the inflation rate to moderate in the next few months. Should that start to occur, the Federal Reserve could flip to lowering rates instead of raising them further. That would make a big positive difference for the economy and the growth outlook.  

Bond yields have increased to 5% + and are at the highest level in nearly two decades.  Bond prices and yields move inversely, meaning when yields go up, bond prices go down.  You could end up with losses if you need to sell before maturity.  Treasury securities paying over 5% are attractive, but we continue to favor shorter-dated bonds which carry less risk if yields continue to rise. The total debt of many countries is also a concern, but our best thought is inflation will moderate short term, so bond prices should rally a little into year's end and end the year with flat total returns.  Not a great year for bonds, but new investments could do well going forward. For the first time in a long time, investors can earn a “real” rate of return over inflation. 

The midterm elections seem especially important this year as there doesn't seem to be any room for compromise between the two parties.  It is a very polarizing time in politics, so we will monitor things closely and try to take advantage of expected volatility in prices.  Corporate profits are the mother’s milk for stock prices, and profits are exceedingly strong.  The major tech companies are investing heavily in AI, and this is expected to continue for the next several years at a minimum.  Some are comparing this time to the Industrial Revolution with massive positive consequences for the economy.  There will be some dislocations to business as usual and employment, but we are in the camp that technology will have a very positive impact on the economy and the world.      

Call with any questions, or if we can help by reviewing your financial situation. 

All the best,

Tim Rigby