Fall 2026 Market Commentary
By Marc Usem and the Affiance Financial Investment Committee
Stocks vs. Bonds
The third quarter of 2026 saw large-cap tech stocks and the energy sector leading markets higher, with the S&P 500 gaining 2.4% and up 12.75% for the year. The stock market advance was preceded by a whopping 15.2% gain in the second quarter, driven largely by hope of a resolution of the conflict in Iran. During the quarter international stocks remained flat, and emerging markets slid by -2.3% but still stand 22.7% higher for the year. Small- and mid-cap stocks gave up their first half of the year lead and are now near the S&P 500 for the year after ending the quarter lower by nearly -8% and -6.4% respectively.
The good news is that stocks generally held their ground during the quarter in a challenging interest rate environment, where the 10-year treasury rate jumped from 4.5% to 5.3%. For the full year, 10-year treasury rates have gained 1.3%, driving down bond prices (which move inversely with interest rates) and leading the aggregate bond index to swing from a gain of nearly 2% in March to a year-to-date loss of -2.5%.
The Fed raised the Fed Funds Rate by 0.25% to 4% in September for the first time in three years. The Fed’s hand may have been forced as the new Fed chair, Kevin Warsh, needed to act to back up his words about inflation reduction with action.
As interest rates rise, it generally puts pressure on stocks for several reasons. Investors can earn higher rates in bonds, making them relatively more attractive as an investment alternative. Stocks are often priced based on the present value of future cash flows, and when interest rates increase future cash flows are worth less. Finally, there is investors’ concern about higher long-term inflation and record government debt driving interest rates higher.
Even in this challenging interest rate environment, corporate profit growth has supported stock prices. S&P 500 earnings are expected to grow by more than 30% in 2026 to $363 per share while stock prices have gained less than half of that amount. Other stock market support comes from corporate profit margins that are near all-time highs as the high-margin technology sector has become a larger part of the stock market - reaching a record 40% of the S&P 500 index weight. Margins are expected to be in the 16% to 17% range, up from 12% to 13% just five years ago.
We would be remiss to leave out that AI remains a key driver of future profits and may account for up to half of S&P 500 earnings growth this year. Over the next five to seven years there remains an estimated $10 trillion that may be spent on AI infrastructure. “The projected buildout would be larger relative to the economy than the major U.S. canal, railroad, electrification, highway, and telecommunications investment booms,” writes the author, Stijn Van Nieuwerburgh, a finance and real estate professor at Columbia University. We continue to expect this cycle to be longer than expected as data center and related infrastructure remain gated by availability. Communities are pushing back on data center construction, memory chip inventories are sold out through 2027, and power and water requirements will take time to procure. We look at gates to AI infrastructure growth as a positive, increasing the cycle length and providing time for proof of expected returns on invested capital and overall monetization of the technology.
Geopolitics likely will remain a key driver of short-term market sentiment and volatility. Continued tariff discussions with Canada and China, the conflict in Iran, and upcoming mid-term elections will likely shape the narrative.
In the meantime, we will remain focused on the things we can control, including our disciplined investment processes designed to provide tax-efficient, globally diversified portfolios that suit our clients’ investment planning needs.
Thank you for your continued confidence in our work.
Sources: YCharts, Facet, Yardeni Research, Reuters, CME Group, Goldman Sachs, IGN, Brookings, Federal Reserve Bank of San Francisco
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Different types of investments involve varying degrees of risk. Past performance and detailed processes do not guarantee future results. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives. Asset allocation, rebalancing, and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses.
