Wealth Management Insights – Q3 2026

by Daniel Kern

Equities posted gains for the quarter, with the MSCI All Country World Index rising 1.7% in Q3, bringing its year-to-date gain to 13.3%. The S&P 500 gained 2.3%, bringing its year-to-date gain to 12.7%.

Market gains were more narrowly distributed in Q3. Small-cap stocks bore the brunt of rising rates, with the Russell 2000 Index declining 7.2%─a reminder that higher rates and sticky inflation weigh most heavily on rate-sensitive, domestically oriented businesses. Outside the US, the MSCI World Ex-US Index was up slightly, and the MSCI Emerging Markets Index was down slightly after gaining more than 23% during the first half of the year.

Bond yields rose in much of the world during Q3, with US 10-year Treasury yields rising from 4.46% at the start of July to 5.28% by quarter-end, a move that reverberated across asset classes. The Bloomberg US Aggregate Bond Index fell 3.5% in Q3, bringing year-to-date performance to -2.9%.

Energy was the best-performing sector for the quarter and year-to-date period, followed by information technology. Interest-rate-sensitive sectors, such as utilities and real estate, declined during Q3.

The Federal Reserve (Fed) raised rates by 0.25% at its September meeting, citing inflation that remains well above its 2% target and a labor market thought to be close to the Fed’s estimates of full employment. Geopolitically, the ongoing war with Iran and the conflict’s expansion to other hot spots in the Middle East continued to exert upward pressure on energy prices and global inflation, complicating the task for central banks on both sides of the Atlantic. The ECB raised its deposit rate to 2.5% in September, its second hike since the conflict began.

The combination of higher interest rates and a prolonged increase in prices at the pump is putting pressure on consumer choices, particularly with lower-income purchasers in the US.  The upcoming midterm elections will be a test of competing narratives around the ability of specific parties to address consumer pain from inflation. In the short term, we expect consumer-facing companies to see more modest spending as consumers are forced to make tough choices to stretch their dollars.

	Q3	YTD
Equity
MSCI All Country World Index	1.7%	13.3%
S&P 500 Index	2.3%	12.7%
NASDAQ Composite Index	2.6%	16.1%
Russell 2000 Index	-7.2%	13.9%
MSCI World ex-US Index	1.0%	10.6%
MSCI Emerging Markets Index	-0.4%	23.5%
Fixed Income
Bloomberg Aggregate Index	-3.5%	-2.9%
Bloomberg 1–5 Year Gov/Credit	-0.9%	-0.4%
Bloomberg Municipals	-6.3%	-4.2%
Bloomberg 1–3 Month T-Bill	0.9%	2.8%

Geopolitical developments

Military conflict between the US and Iran continued in Q3, with airstrikes, drone attacks, and tanker strikes disrupting traffic through the Strait of Hormuz and other chokepoints for oil. The longer that the Strait of Hormuz is closed or partially closed, the greater the impact on inflation and economic growth. If the war ends soon, the energy dislocation would still take time to address given the need to rebuild depleted inventories. A full-on oil spike has so far been averted, as we see evidence that more oil is flowing through the strait to nearly prewar levels, and as Middle East countries find alternate routes to export. But this is a delicate balancing act that will be tested as we near the end of inventory depletion.

Corporate earnings

S&P 500 revenue and earnings growth, as announced in July and August, continued to be strong, with earnings growing by more than 50% and revenue growth in the mid-teens. Full-year 2026 earnings estimates are up from projections at the start of the year. Higher expectations may create elevated risk of disappointment in the upcoming October earnings reports. Much of the earnings success has been tied to the AI build-out, both real and boosted by the financial mechanics of the hyperscalers, chip producers, and model providers. This is leading to a continuation of a narrow market, with winners concentrated in just a few industries and many companies still not seeing much benefit from the AI wave.

Fed Policy and Bond Yields

While long-term yields have breached the symbolic 5% level, they remain below the non-recessionary periods in the 1990s and early 2000s. The selloff in bonds is a global phenomenon that we think is caused by the combination of central banks moving from rate cuts to rate hikes, concerns that repeated supply shocks make inflation stickier, and a return to normalized levels of “term premia” expected by investors to compensate for the risk of owning long-term bonds. We expect the Fed to move slowly to reverse last year’s rate cuts, with one more rate hike likely before year-end and potentially more to come next year. We think there are at least even odds that we remain in a higher-for-longer rate environment that will create further headwinds in interest-sensitive parts of the economy.

Artificial Intelligence

Hyperscaler performance was mixed in Q3, with companies rewarded for convincing investors that AI spending would lead to revenue acceleration. Tougher questions were asked about companies whose spending increase outpaced revenue confidence.

The rally in memory stocks among Q2’s market leaders stalled despite strong earnings. The lackluster performance of emerging markets stocks was largely a function of the memory rally stalling.

Investors continued to make more nuanced decisions about software winners and losers during Q3 in the ongoing quest to distinguish between AI winners and losers. Adoption of AI continues to accelerate, with proprietary (“frontier”) models being used for the hardest tasks and open-source models used for easier tasks. Software companies providing security solutions to growing AI threats, for example, have seen a remarkable run as they demonstrate a different path from software companies that may be dislocated by cheaper AI solutions.

Growing public unease with data center buildouts is creating policy proposals on both sides of the aisle that mainly limit that pace of AI infrastructure development. Real concerns about pace of AI evolution and the resulting dangers of AI related threats have also increased policy scrutiny. The recent Hugging Face data breach, for example, shows the potential impact of rogue agents working in coalition.

It will take time for the benefits of AI to spread more widely across the economy, so investors will need to be patient with developments that may take years rather than months to play out. We expect there may be some policy proposals that ultimately limit the pace of deployment in order to address growing public concern.

Portfolio positioning

As we enter the fourth quarter, the central question for investors is whether the economy can sustain growth in the face of rising rates and continued geopolitical stress. The concentration of equity returns in a narrow band of technology companies warrants attention, as does the underperformance of rate-sensitive sectors and smaller companies.

Upcoming earnings results, the trajectory of the Iran conflict, and the Fed’s next policy moves will be critical variables. We will also be watching the anticipated IPO of Anthropic, which will provide valuable insights into the development and monetization of frontier AI models.

We remain focused on positioning portfolios to navigate this environment with appropriate diversification and risk discipline, and we look forward to discussing our specific views with you in the weeks ahead.

We advise against making any material asset allocation changes in response to market volatility, though we understand it can be tempting to try to time the market. Unless there is a change in your goals, cash needs, income, or obligations, it is prudent to stay the course with your long-term asset allocation.

Our mission is to help individuals and families meet their personal and financial goals through thoughtful planning and advice. Our personalized approach and broad range of services are designed to allow you to enjoy the present and be confident about the future. If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to me or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.

Daniel Kern
Chief Investment Officer
+1 617.345.1044
dkern@nixonpeabody.com