The third quarter brought these tradeoffs into sharper focus. Strong AI spending supported earnings while putting pressure on resources. Expectations of tighter Fed policy pushed bond yields higher. The S&P 500 finished positive, while returns varied across markets.
The Iran conflict pushed oil prices above $100 before easing toward quarter-end. Higher energy costs added pressure on households and businesses, but the Fed’s challenge extends beyond oil. Investment spending remained strong, and the economy showed little sign of slowing. In September, the Fed raised its policy rate by 0.25%.
The inflation picture is mixed. Headline consumer price inflation (CPI) was 3.4% in August, while inflation excluding food and energy (Core CPI) was closer to normal at 2.4%. Core PCE, a broader measure favored by the Fed, was stickier in August at 3.0%. Longer-term market-based measures of inflation remained relatively stable during the quarter.
The bond market was the main story during the quarter, reflecting the tension between growth and inflation as investors reassessed the expected path of Fed policy. Rising rates were not driven by government deficits per se, but procyclical fiscal policy is not a side story either. Strong investment demand and government deficits both increase demand for resources and financing, putting pressure on inflation and interest rates. Together, they can lift borrowing costs even when inflation is contained.
The adjustment in yields has been material across every high-quality bond sector. The 10-year Treasury yield ended the quarter near 5.3%. The Bloomberg US Universal Bond Index declined 3.4%. The good news is that rising yields improve future returns. We have been skeptical of interest rate risk, but the size of the adjustment has been sufficient for investors to reconsider the role of high-quality bonds in diversified portfolios.
US large-cap stocks were resilient during the quarter. The MSCI World Index gained 1.9%. The S&P 500 Index gained 2.3%. Smaller companies had a more difficult quarter, as the Russell 2000 Index fell 7.2% (although it is still up 13.7% for the year). Small-cap value held up better than growth, down 4.9% and 9.4%, respectively. Developed international stocks gained 0.9%, while emerging markets declined 0.2%.
Higher interest rates do raise the hurdle for equity valuations, but faster earnings growth has offset the impact. The S&P 500’s forward price-to-earnings ratio has declined this year even while earnings expectations have increased. The combination helps explain why stocks advanced despite higher bond yields. The question is whether these high growth rates will actually be delivered, and how widely those gains will be shared.
These results reinforce the need to examine what each holding contributes to a portfolio. Exposure to AI-related growth can sit alongside high-quality bonds and businesses with different fundamental drivers of return.
| Index as of 9/30/2026¹ | Q3 | YTD | 1 year | 3 years | 5 years | 10 years |
| FTSE 3-month T-Bills | 0.97% | 2.86% | 3.91% | 4.71% | 3.88% | 2.50% |
| Bloomberg Gov’t/Credit Interm. | -1.88% | -1.49% | -0.31% | 4.31% | 0.83% | 1.71% |
| ICE BofA US High Yield | -1.84% | 0.00% | 1.36% | 7.89% | 3.55% | 4.93% |
| Bloomberg Multiverse | -2.41% | -2.48% | -2.15% | 4.09% | -1.60% | 0.27% |
| S&P 500 | 2.30% | 12.75% | 15.74% | 22.89% | 13.79% | 15.33% |
| Russell 1000 Value | 2.61% | 19.27% | 23.81% | 20.07% | 11.92% | 11.43% |
| Russell 1000 Growth | 0.92% | 6.30% | 7.50% | 24.26% | 13.66% | 18.16% |
| Russell Mid Cap | -3.00% | 11.84% | 12.02% | 17.20% | 8.04% | 11.17% |
| Russell 2000 | -7.23% | 13.71% | 16.20% | 17.72% | 6.34% | 9.84% |
| Russell 2000 Value | -4.91% | 16.96% | 20.77% | 17.93% | 7.80% | 9.40% |
| Russell 2000 Growth | -9.39% | 10.71% | 12.05% | 17.55% | 4.72% | 9.90% |
| MSCI EAFE | 0.88% | 10.81% | 16.24% | 18.99% | 9.87% | 9.60% |
| MSCI EAFE Small Cap | 2.99% | 11.21% | 14.25% | 18.79% | 6.28% | 8.51% |
| MSCI Emerging Markets | -0.24% | 23.73% | 29.65% | 24.69% | 9.44% | 9.53% |
| MSCI Frontier Markets | -0.19% | 10.21% | 17.50% | 22.95% | 8.35% | 9.09% |
| Wilshire US REIT | -6.22% | 10.36% | 8.50% | 12.88% | 4.26% | 5.61% |
| DJ Global Select RESI | -5.18% | 5.94% | 6.07% | 11.39% | 2.35% | 3.62% |
| Bloomberg Commodity Index | 16.19% | 32.87% | 40.64% | 15.63% | 11.27% | 7.85% |
| IQ Hedge Multi-Strategy | -1.14% | 8.46% | 10.03% | 9.97% | 5.44% | 4.45% |
| Domestic Balanced | 0.62% | 7.01% | 9.23% | 15.29% | 8.67% | 9.97% |
| Global Balanced | 0.25% | 7.39% | 10.08% | 14.91% | 7.65% | 8.55% |
