For most people, waiting is difficult. Whether waiting on the result from the doctor or for feedback on the new business pitch, the delay in moving forward creates stress. Add in the uncertainty of not knowing the outcome and the stress level rises further. Even if there are reasons to be optimistic, the waiting and the uncertainty create doubt that can overshadow the reasons for the optimism. The current economic and market environment has a lot of investors waiting for what is next, with an increasing sense that it will get worse before it gets better, despite a few strong positives holding up parts of the economy and markets.    

Let’s start with those positives that should be encouraging for investors.

• First, the economy continues to grow. In fact, the latest GDP Now forecast from the Atlanta Fed predicts Q3 GDP growth to be 3.7%, which is above the final Q2 2026 GDP result of 2.2%. Acknowledging that in recent quarters the forecasted GDP has trended higher than the actual result, it is reasonable to expect the U.S. economy will grow at a positive rate in Q4.
• Capital spending, for AI related investments and increased industrial production, is expected to rise into 2027. While more concentrated in AI related segments, there are indications that CapEx will rise across many sectors, which will support economic growth.
• Q2 earnings were very strong, with most S&P 500 companies beating their consensus estimates, fueled by higher revenues and expanding margins.
• Finally, the resiliency of the U.S. equity markets during a challenging few months provides a basis for optimism. The S&P 500 is up almost 13% YTD, and the Russell 2000 is up 14% YTD.

A growing economy and a rising stock market should provide the underpinnings of investor optimism. However, investors are increasingly anxious about a host of growing concerns that temper their optimism. Many of these concerns involve waiting for more clarity of outcomes, adding to their anxiety.

• Front and center for nervous investors is the sharp rise in interest rates, with the U.S. 10YR Treasury and 30YR Treasury yields reaching levels not seen since 2002. Elevated interest rates cause concern as they may signal expectations for rising inflation levels and fiscal deficits. The recent decision by the Fed to raise interest rates in an attempt to slow the rise in inflation, while viewed by many as necessary, also has added to investor stress as they wait for future rate increases that are more likely, based on the most recent inflation readings.
• Tied to elevated inflation are rising energy prices due to the oil supply shock caused by the ongoing Iran Conflict. Rising gas prices weigh heavily on consumers and are starting to impact consumer spending. Again, investors are waiting for a resolution of the conflict so oil supplies can revert to normalized levels and geopolitical tensions can abate.
• Continuing concentration within AI related themes across equity markets has been an ongoing concern for some investors who are nervous that the music will stop for AI and markets will collapse. While there is always a possibility a theme will run out of steam, the underlying strengths of the AI story are likely to continue.
• Lastly, the U.S. midterm elections are weeks away. Though little may change in terms of fiscal policy, the nation is left waiting on the outcome amidst a stressful partisan environment. Historically, split governments have been good for equity markets but given the level of division within and across the major political parties, the next twelve months may prove to be an outlier.

As is typically the case, there are reasons to be optimistic and pessimistic about where the economy and investment markets are headed. Uncertainty is what can create opportunities for investors. It is the waiting for the outcomes that is hard for many investors.

A review of what drove investment results for the month and quarter must start with the rise in interest rates which started earlier in 2026 but accelerated in the second half of this quarter. The 10Yr U.S. Treasury yield rose more than 0.5% in September and nearly 0.9% in Q3. This degree of change last occurred in the taper tantrum period in 2023. Bond market returns were negative for the month and the quarter and are now negative for YTD and 1 year periods. The higher bond yields have not been enough to fully offset the price declines. The rise in rates has been explained by multiple factors: expectations that inflation will move higher despite efforts by the Fed to bring it back down to target and the ballooning federal deficit. While many do not expect the economy to overheat, the impact of elevated inflation and concerns about the deficit are going to be more difficult to manage going forward.

On the equity side of the portfolio, rising interest rates impacted returns but not in every market segment. The AI theme lifted many growth stocks in September helping to offset their weaker returns in July and early August. Financial stocks sold off sharply as rates moved higher in September. This weighed on value-oriented indexes. More rate sensitive smaller cap stocks were also hard hit in the month and quarter. YTD returns show larger cap stocks nearly catching up to smaller cap stocks, which had a strong start to 2026.

Overseas markets were also impacted by rising interest rates as well as renewed geopolitical tensions and rising energy prices. After outperforming the U.S. for much of 2026, MSCI EAFE lags the S&P 500 on a YTD basis by 2%.

Here are observations on what occurred across market segments in September and Q3 2026:

Broad Market Performance¹

Domestic Equity²

• U.S. broad market indexes were generally negative with the exception of the Russell 1000 Growth in September. For the quarter, large caps held up while mid and small cap stocks declined.
• For the month, growth outperformed value and large beat small. In Q3 value outperformed and larger caps outperformed smaller, highlighting the impact of rising interest rates and energy costs on smaller businesses.

International and Global Equities³

• International developed markets lagged in September and Q3 compared to U.S. broad indexes. European stocks were similarly hurt by rising interest rates, higher energy prices, and softness in regional economies. Japan was the bright spot, outperforming most other countries for the month and quarter.
• Emerging market stocks outperformed developed markets for the month, boosted by a bounce in S. Korea, but were hurt by a decline in China. In the quarter, the opposite occurred; China rallied while S. Korea declined sharply.    

Fixed Income Markets⁴

• Rising interest rates weighed heavily on bond market returns for the month and the quarter. The U.S. 10Yr Treasury yield rose 0.5% in September. The impact of higher interest rates flows through to YTD and longer-term results.         

Specialty Markets⁵

• Rising interest rates and a relatively soft equity market pulled REIT returns down for the month and quarter. Commodities were helped by rising oil prices, delivering strong returns for Q3.   

Sectors⁶

• Technology and Communication Services were the two positive sectors for September, joined by Healthcare as the only positive performers in Q3. Financials were the worst performing sector in September, as higher interest rates hit bank balance sheets.    

Over time, markets and investors have a way of working things out. While the path traveled may be rocky and have a few setbacks, the outcomes have proven to be favorable more often than not, particularly for those investors who are patient and play the long game. In these periods where there seem to be more negatives than positives, investors may want to wait for more clarity. They can pause and assess how their portfolios are positioned in case there are more negatives ahead, particularly after the strong equity rally over the last three years. Building strength and resiliency into the portfolio, along with liquidity, provides ballast and opportunity for most investors. Yes, waiting is the hardest part.

^1-6 All data referenced in the table and comments supplied by Morningstar as of 9-30-2026

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