Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, share their latest market commentary, reflecting on Q3 2026 market performance and what to expect as we move into Q4 2026.

The S&P 500 gained 2.3% in Q3 as resilient corporate earnings and economic growth helped offset the headwinds of rising interest rates, persistent inflation, and elevated equity valuations. Developed international markets, as measured by the MSCI EAFE, rose 0.8%, supported by resilient economic activity despite increasingly restrictive monetary policy and higher bond yields. Emerging markets, as measured by the MSCI Emerging Markets Index, declined 0.4%, as continued strength in technology-oriented countries was offset by persistent weakness elsewhere. In fixed income, the Bloomberg U.S. Universal Index lost 3.4% as sharply higher Treasury yields and the Fed’s first rate hike in three years weighed broadly on bond prices. Q2 GDP was revised meaningfully higher, though inflation remained elevated and labor market conditions continued to soften. 

The S&P 500 rose 2.3% during Q3 2026 amid a turbulent three months, as strong corporate earnings competed with rising interest rates, persistent inflation, and growing concerns around elevated equity valuations. Corporate earnings remained a primary source of support throughout the quarter, particularly among large technology companies, even as investors increasingly questioned elevated valuations and the sustainability of AI-related investment following the sector’s exceptional gains earlier in the year. At the same time, consumer confidence fell to one of its lowest levels on record, though household spending remained resilient, underscoring the continued disconnect between sentiment and underlying economic activity. Trade policy also returned to focus as higher tariffs took effect on most imports, adding another source of uncertainty for businesses and investors. Despite signs of cooling in parts of the economy, underlying growth remained resilient, keeping pressure on interest rates and contributing to a more challenging backdrop for equities. Monetary policy became an increasingly important market driver as the quarter progressed. Persistent inflation and resilient economic activity initially reinforced expectations that interest rates would remain elevated, while growing concerns around government borrowing pushed longer-term Treasury yields higher. The Federal Reserve (Fed) ultimately raised interest rates in September for the first time in three years. However, softer inflation and labor data released around quarter-end complicated the outlook once again, increasing expectations that the Fed could pause further tightening. 

Just four of the 11 underlying sectors of the S&P 500 rose in Q3, with a wide dispersion between the best- and worst-performing sectors. Energy led the pack, gaining 17.2% as the conflict with Iran persisted, despite numerous attempts to reach a deal, and oil prices remained elevated. Technology followed, rising 7.2% as investors continued to favor mega-cap technology companies despite concerns surrounding elevated valuations, the pace of AI development, and potential regulation. Conversely, utilities and industrials were the weakest sectors of the quarter, falling 12.4% and 9.7%, respectively. Utilities were pressured by sharply higher interest rates, while industrials struggled amid higher tariffs, trade uncertainty, and concerns that elevated borrowing costs could weigh on future capital spending. 

After outperforming large-cap stocks during the first half of the year, small-cap stocks significantly underperformed their large-cap counterparts in Q3, as rising borrowing costs and tighter financial conditions disproportionately weighed on smaller, more rate-sensitive companies. Value stocks also outpaced growth stocks during the quarter, supported by strong performance in energy and a broader shift away from some of the higher-valued growth areas of the market. 

International developed markets, as measured by the MSCI EAFE Index, increased by 0.8% over Q3, as early-quarter gains were largely erased by a September selloff amid rising global interest rates and a stronger U.S. dollar. In the eurozone, economic conditions remained relatively resilient, with Q2 GDP exceeding expectations and corporate earnings improving despite persistent inflation pressures. Inflation remained elevated throughout Q3, prompting the European Central Bank to maintain a cautious stance before ultimately raising interest rates for the second time this year in September. The increasingly restrictive policy backdrop pushed European bond yields sharply higher and weighed on equities late in the quarter. Still, improving manufacturing activity and stronger corporate earnings provided some support to the region’s economic outlook. In the UK, inflation remained above the Bank of England’s target throughout the quarter, leading policymakers to keep interest rates unchanged and maintain a restrictive stance. Labor market conditions continued to soften as wage growth slowed and job vacancies declined, while consumer activity remained uneven. In Japan, economic conditions proved comparatively resilient, with manufacturing activity strengthening and exports and business investment providing support. Persistent inflation kept expectations for additional Bank of Japan tightening elevated, while the yen strengthened against the U.S. dollar after falling to a 40-year low earlier in the quarter. 

Elsewhere, the MSCI Emerging Markets Index ticked down 0.4% over the quarter, though performance varied significantly across countries. China gained 3.7% in Q3, supported early in the quarter by renewed interest in its comparatively inexpensive technology sector and optimism surrounding the country’s growing domestic semiconductor industry. However, persistent weakness in consumer demand, deflationary pressures, and continued stress in the property sector weighed on sentiment as Q3 progressed. Manufacturing activity returned to expansion territory in September, providing some evidence that government support measures may be helping stabilize the economy, though questions remain around the durability of the recovery. Performance among the technology-oriented Asian markets was mixed following their exceptional gains in Q2. Taiwan rose 4.8% as continued semiconductor demand and AI-related investment supported the market, bringing its year-to-date gain to 70.2%. South Korea declined 9.6% as investors took profits following its outsized gains earlier in the year, though the market remained up an extraordinary 97.7% year to date. Brazil was another standout, gaining 8.2% during the quarter as easing inflation and expectations for lower interest rates supported investor sentiment. Conversely, India fell 5.6% as slowing export growth and elevated valuations weighed on the market despite continued strength in manufacturing activity. 

Over Q3 2026, the Bloomberg U.S. Aggregate Index lost 3.5%, and the broader Bloomberg U.S. Universal Index declined 3.4% as Treasury yields moved sharply higher across the curve. Persistent inflation, resilient economic growth, and growing concerns surrounding government borrowing kept upward pressure on rates throughout the quarter, while the Fed’s first rate hike in three years further reinforced expectations that monetary policy could remain restrictive for longer. The U.S. Treasury also took steps to alleviate pressure on longer-term borrowing costs, including targeted bond buybacks and shifting issuance toward shorter-term debt, though the impact on yields proved short-lived. The yield on the 10-year U.S. Treasury jumped 81 basis points during Q3, ending at 5.29%, its highest level in 24 years, while the two-year Treasury increased 71 basis points to 4.88%. As longer-term yields rose more sharply, the Treasury yield curve steepened further during the quarter.  

Credit spreads widened modestly during Q3, though corporate credit fundamentals remained relatively stable overall as investors continued to show confidence in higher-quality borrowers. Rising Treasury yields were the primary headwind across fixed income, weighing particularly heavily on longer-duration sectors such as municipal bonds and mortgage-backed securities. Emerging market debt also struggled as higher U.S. yields and a stronger dollar pressured returns late in the quarter. In contrast, short-term Treasuries held up relatively well, while floating-rate bank loans were the quarter’s strongest-performing fixed income segment, benefiting from their limited interest-rate sensitivity and the higher-rate environment. Signs of greater caution emerged among lower-quality corporate borrowers late in the quarter, as investors began demanding additional compensation for taking on greater credit risk. 

U.S. gross domestic product (GDP) grew at an annualized rate of 2.2% over the second quarter of 2026, the latest period for which data are available, revised meaningfully higher from the previous 1.5% estimate. Consumer spending, investment, and exports all contributed positively to growth, reflecting a broader base of economic activity than earlier in the year. Consumer spending accelerated after contributing relatively little to Q1 growth, while business investment remained strong as companies increased capital expenditures, particularly in technology and AI-related infrastructure. Trade activity also remained elevated amid tariff uncertainty, with strong imports of AI-related equipment contributing to a wider U.S. trade deficit as businesses continued investing despite higher tariffs. Overall, the upward revision reinforced the resilience of the U.S. economy despite elevated interest rates, persistent inflation, and ongoing policy uncertainty. 

Labor market conditions weakened throughout the third quarter as hiring slowed and demand for workers continued to moderate. Payroll growth consistently came in below expectations, culminating in September’s weaker-than-expected employment report. Revisions to prior months also showed fewer jobs were created than initially estimated, reinforcing the view that hiring momentum softened more than previously believed. The unemployment rate increased modestly to 4.2%, while wage growth continued to ease, suggesting the labor market is becoming less tight. Despite the weaker employment data, broader labor market conditions remain relatively healthy by historical standards. 

The Fed faced an increasingly delicate balancing act throughout Q3 as inflation showed further signs of moderating while broader economic activity remained resilient. The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, came in lower than expected late in the quarter, though inflation remained well above the central bank’s 2% target. With GDP revised meaningfully higher and consumer spending continuing to hold up, policymakers raised interest rates in September for the first time in three years, emphasizing that inflation remained policymakers’ primary concern. By quarter-end, however, softer inflation data and a weaker-than-expected September employment report led investors to increasingly expect the Fed to pause additional rate hikes in the months ahead, illustrating how quickly the policy outlook shifted over the course of the quarter. 

U.S. markets enter the final quarter of 2026 supported by resilient economic growth and strong corporate earnings, though financial conditions have become increasingly restrictive. The sharp rise in long-term Treasury yields has increased borrowing costs across the economy, which could begin to weigh more meaningfully on business investment, housing activity, and consumer spending if sustained. At the same time, corporate earnings remain healthy, while continued investment in AI remains an important long-term tailwind for companies positioned to benefit from its adoption. Recent economic data suggest the pace of growth is slowing rather than contracting, reinforcing expectations that the economy may continue to avoid a recession despite tighter financial conditions. However, after three consecutive years of strong equity returns and elevated valuations across parts of the market, investors may become increasingly selective, placing greater emphasis on corporate earnings, cash flow generation, and valuation discipline. While recent labor and inflation data suggest the Fed may be nearing the end of its tightening cycle, monetary policy will likely remain data dependent, with inflation and labor market trends continuing to shape the outlook.  

Developed international markets face a more challenging backdrop heading into year-end as persistent inflation and rising bond yields complicate the outlook for monetary policy. Despite these headwinds, attractive valuations relative to U.S. equities and improving corporate fundamentals continue to provide support. In Europe, resilient economic growth and strengthening manufacturing activity could help sustain earnings momentum, though elevated energy prices and the prospect of additional interest rate hikes remain key risks. In the United Kingdom, softer labor conditions and subdued consumer demand may weigh on growth, while persistent inflation limits the Bank of England’s flexibility to ease policy. Japan remains relatively well positioned, supported by improving manufacturing activity, resilient exports, and ongoing corporate governance reforms. However, expectations for further Bank of Japan tightening and currency volatility could introduce additional uncertainty. Overall, developed international equities may continue to offer attractive opportunities, particularly if global interest rates stabilize and economic growth remains resilient. 

Emerging markets are likely to remain increasingly differentiated as country-specific fundamentals continue to outweigh broader market trends. In China, recent policy support and improving manufacturing activity suggest the economy may be beginning to stabilize, though weak domestic demand and ongoing challenges in the property sector remain important headwinds. Technology-oriented economies such as Taiwan and South Korea should continue to benefit from long-term investment in artificial intelligence and semiconductor manufacturing, though elevated valuations may contribute to greater short-term volatility following their exceptional gains over the past year. More broadly, emerging market performance will likely remain sensitive to global growth, trade policy, and U.S. interest rates, reinforcing the importance of focusing on individual country and sector opportunities rather than viewing the asset class as a single investment theme. 

Following a challenging third quarter, fixed income markets face continued uncertainty as persistent inflation, elevated government borrowing, and shifting Fed expectations keep pressure on interest rates. Bonds have struggled throughout 2026, and further increases in Treasury yields could continue to weigh on performance, particularly among longer-duration securities. While recent labor and inflation data have raised expectations for a near-term pause, minutes from the Fed’s September meeting revealed that most policymakers anticipate another rate hike before year-end. This uncertainty could keep Treasury yields elevated as investors continue to weigh persistent inflation against signs of a cooling labor market. Still, the sharp rise in yields has created more attractive income opportunities, improving the potential for longer-term returns if rates begin to stabilize. Corporate credit fundamentals remain relatively healthy, though modestly wider spreads and the prospect of tighter financial conditions warrant caution in lower-quality bonds. Overall, while near-term returns may remain challenged by interest rate volatility, elevated starting yields provide a stronger foundation for fixed income over the longer term. 

This information is for educational purposes and is the opinion of Aldrich Wealth LP (Aldrich Wealth). Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Indices are unmanaged, unavailable for direct investment, and do not include any transaction, management, or other fees or costs. Nothing in this commentary should be construed as an investment recommendation. Forward-looking statements reflect current views and are not guarantees of future performance. Past performance does not guarantee future results. All investments involve risk. Aldrich Wealth is an investment adviser registered with the U.S. Securities and Exchange Commission.