Market Performance & Trends

US large cap stocks advanced, 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. The quarter experienced all-time highs for all three major U.S. indices driven by strong earnings reports in the 3rd quarter.  However, the index market returns obscure a more challenging investment experience with narrow market breadth beyond the Energy, Technology and Healthcare sectors.  While these large cap stocks enjoyed strong positive returns, other areas of the financial markets struggled.  Small cap stocks lost ground during the 3rd quarter due to concerns related to increasing financing costs.   The 10-year US Treasury yield increased from 4.42% to end the 2nd quarter of 2026 to 5.29% to end the 3rd quarter.  The highest yield for the 10-year US Treasury since 2022.  This resulted in market losses in the bond markets for the 3rd quarter. 

Economic Landscape

The Federal Reserve raised the Federal Funds rate in September, the first increase since July 2023.  Expectations going forward are for as many as three additional rate hikes during the 4th quarter of 2026 and into 2027.  It seems the Federal Reserve is now focused on one side of their dual mandate, to reduce the rate of inflation, and can do so, if the labor market continues to be stable in the near term.  During Q3, the 2-year US Treasury yield increased from 4.14% to 4.88%, while the 10-year US Treasury increased in yield from 4.42% to 5.29%.  These yields are the highest going back to 2007.  GDP for Q1 and Q2 was 2.5% and 2.2% respectively.  Q3 is currently tracking to be 3.6%.  The US labor market continues to demonstrate its strength as the unemployment rate for the first three quarters of 2026 has moved in a range of 4.2% to 4.3% (currently at 4.2%).     

Investment Committee Update

The Investment Committee instituted no changes to current investment allocations or investment portfolios in the third quarter.  Our scheduled passive portfolio rebalance was completed in September.  Our last full rebalance to the taxable active portfolio was in August 2025.  The fixed income allocations to our portfolio models have outperformed applicable performance benchmarks, while equity allocations have underperformed applicable benchmarks. 

Investment Outlook

While value stocks have enjoyed a rebirth since the 4th quarter of 2025, the tide turned in favor of growth stocks toward the end of the 3rd quarter.  The Communications and Technology sectors were the only two sectors with positive returns in September.  Also, the breadth of the positive stocks in the US stock markets has deteriorated.  While the S&P 500 is 2% below its all-time high, 83% of the S&P 500 stocks are down more than 10% from their 52-week high and 42% of these stocks are down more than 20% from their 52-week high.  The US stock markets have moved back into dependance upon Large Cap Growth stocks to lead continued outperformance.  S&P 500 companies are expected to deliver strong results on both the top and bottom line for Q3 2026.  Q3 earnings growth year over year (YoY), is expected to be approximately 19% higher and revenue growth is expected to increase 12% YOY.