Quarterly Market Review 2026 Q3

The third quarter showed that strong growth and solid company earnings can keep markets moving higher in spite of inflation, geopolitical tension, and unprecedented levels of government debt keeping interest rates elevated. Business activity in the U.S. and Europe hit multi-year highs, driven by AI-fueled corporate investment, a resilient job market, and steady consumer spending.

That underlying strength, combined with better-than-expected company earnings, helped push global stock markets to new record highs, despite climbing bond yields. Interestingly, corporate profits grew faster than stock prices, meaning stocks became more reasonably valued in many parts of the world even as markets moved higher.

Below is a snapshot of key top-line economic indicators:

U.S. Stocks

After a strong start to the year, U.S. stocks lost some momentum in the third quarter, finishing up 1.41%. The S&P 500 hit new record highs in August but couldn't hold the gains as Middle East tensions persisted, questions grew about the pace of AI development, and bond yields climbed in the U.S. and around the world. By quarter's end, the S&P 500 was up 2.3% and the Nasdaq added 2.6% — solid gains, despite the bumpy ride.

Oil prices rose as tensions with Iran continued, but the U.S. economy now relies more on services and now exports more oil than it imports, it’s better insulated from these kinds of shocks.

Overall, the S&P 500 has reached 27 record closing highs this year, despite the many ongoing concerns over geopolitics, inflation, and Federal Reserve policy uncertainty — a good reminder to invest even when the market seems high, as you never know when or how many new records highs are yet to come.

International Stocks

International developed markets posted slightly smaller gains than the U.S. (+0.89%), while emerging markets lagged for the quarter (-0.37%). European stocks lagged, as investors questioned whether the region could keep pace with earnings growth seen elsewhere, and worried about the European Central Bank's rate hikes weighing on growth and stock valuations. While improving economic growth and increased government spending on defense and infrastructure offered some support, Europe has less direct exposure to AI investment that has been driving gains in the U.S. and parts of Asia.

In emerging markets, Colombia and Brazil were standouts in Q3. However, the strong year for emerging markets overall has been led by Taiwan and South Korea, with both countries now in the ranks of the world’s 10 largest stock markets. Much of their outperformance has been driven by semiconductor leaders such as TSMC, Samsung, and SK Hynix, which provide chips for AI-related companies. Overall, emerging markets are up about 22% for the year.

Fixed Income

Fixed income markets faced a rough third quarter due to persistent inflation, resilient economic growth, mounting government deficits, and a surge of debt issuance tied to the AI infrastructure buildout. The combination of these factors pushed Treasury yields to the highest levels in decades.

At its most recent meeting in September, the Federal Reserve raised the federal funds rate to a target range of 3.75% to 4%. The vote in favor of a rate hike, which was the first since July 2023, was unanimous, unlike some other recent Fed decisions. This increase was an effort to curb inflation, which has now run above the Fed's mandated target (2%) for more than five years. Headline inflation remained elevated at 3.4% in August, while core inflation, which excludes more volatile food and energy items, rose 2.4% from a year ago.

The 10-year U.S. Treasury yield, a benchmark that influences everything from mortgage rates to corporate borrowing costs, climbed above 5% in mid-September, its highest level since 2002. It rose as high as 5.33% by the end of the month. Exceeding 5% is notable; some see it as a tipping point where higher borrowing costs could weigh on corporate earnings, consumer spending, and overall economic growth.

Generally speaking, rising bond yields are a double-edged sword. On one hand, they offer income-focused investors more attractive rates on bonds than what the bond market has offered in years. On the other hand, existing bond prices move inversely to yields, meaning portfolios holding longer-duration fixed income experienced price declines this quarter. Higher borrowing costs can also ripple into stock valuations, particularly for sectors sensitive to financing costs.

Unfortunately, we don’t have a crystal ball to know what the Fed will do in the final meetings of the year, but the bond market has priced in roughly 30% odds of two additional rate hikes before the end of the year, a signal that investors don't believe the Fed's fight against inflation is over.

What This Means for You

This quarter offered investors an important reminder: market prices reflect expectations about the future, including government debt levels and what they may mean for stocks and bonds. As those expectations shift, markets will adjust, which is why we remain focused on long-term fundamentals rather than reacting to short-term swings. We are always happy to discuss this in more detail and answer any questions you may have, so please never hesitate to reach out.

As always, we are grateful for the trust you place in us and send our best as we head into the final stretch of 2026!

Sincerely,

Your Taurus Capital team