2026 Third Quarter Letter

After three quarters of 2026, markets remained resilient despite ongoing wars and persistent inflation. Large-cap U.S. stocks continued to climb in the quarter with the S&P 500 up 13% year-to-date. Small-cap U.S. stocks gained 14% as developed international stocks rose 10%. U.S. stocks are on track for a fourth consecutive year of double-digit gains for the first time since the 1990s. Short and intermediate-term bond prices declined modestly as interest rates rose; the 10-Year U.S. Treasury yield increased from 4.5% to 5.3% during the quarter, implying higher expected returns for bonds going forward.

Economic growth appears to have accelerated in the third quarter with the Atlanta Fed estimating real GDP growth of 3.7% fueled by business investment and consumer spending. On the business investment front, there’s little sign of a slowdown anytime soon. The Brookings Institution recently estimated that investment into AI data centers and other AI infrastructure could total over $10 trillion from 2025 to 2032. Looking at the consumer, survey data continues to indicate the people feel pessimistic about the economy even as the hard data shows strong consumer spending. Personal consumption expenditures, a measure of how much Americans spend on total goods and services, has increased over 6% in the past 12 months. However, wage growth has begun to soften, and if that trend continues, we’d expect it to eventually affect the average consumer.

We have received questions from clients about rising interest rates this year. Part of the rise is attributable to inflation sticking near 3%, above the Fed’s target of 2%. The bond market expects 3 more short-term rate hikes over the next year as the Fed takes inflation seriously. There’s been fresh concern in the news about the U.S. fiscal situation as federal debt surpassed $40 trillion for the first time. The long-term U.S. fiscal outlook is challenging but the recent rise in interest rates has been a global trend not unique to the U.S. In many respects, interest rates around the world have normalized after the extraordinarily low-rate environment of 2020 and the years following.

Higher interest rates are painful for borrowers, especially those financing a new home or car. For long-term investors, however, higher rates create attractive opportunities in fixed income investments. Risk-free U.S. Treasury bonds yield around 5%, investment-grade corporate bonds around 6%, and high-yield bonds 8%, on average. For balanced client portfolios we have recommended rebalancing by trimming stock gains and buying bonds.

Please don’t hesitate to give us a call if you have questions.