Q3 Economic and Market Review
In this quarterly update, Jay Sanford, Director of Investment Strategy at HUB Retirement & Private Wealth, is joined by Brian Collins, Chief Investment Officer, and Cameron Cooke, Executive Vice President, to discuss the economic and market themes that shaped the third quarter of 2026.
The quarter’s theme, “Rates, Debates, and the AI Race,” references the upcoming midterm elections and the ever-present artificial intelligence discussion, while also reflecting that Q3 was, at its core, an interest rate story.
Key Highlights:
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Interest rates drove the quarter: Large caps and developed markets held relatively steady in Q3, while small caps, real estate and fixed income saw big moves.
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Earnings and the consumer held up: Corporate earnings growth and consumer spending remained remarkably resilient despite daily headlines about the Iran war, oil prices, inflation, geopolitical concerns involving China, Russia, Europe and Ukraine, and a K-shaped consumer economy that reflects income inequality.
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AI is a major economic driver: AI has become a primary source of economic growth and is affecting many corners of the economy. Combined with the geopolitical headlines, it has left investors in a “hurry-up-and-wait” mode.
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Diversification continued to pay off: Diversified portfolios outpaced a traditional 60/40 portfolio in both 2025 and 2026 so far.
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Fixed income may not be as bad as it looks: Despite a difficult Q3, today’s higher starting yields provide a meaningful cushion against further rate increases.
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Four themes are likely to shape Q4: Interest rates, AI, oil prices and inflation, and the midterm elections will all be in focus.
Interest Rates Moved Markets in Q3
Rates rose significantly over the last three months of the quarter. In September, the Federal Reserve raised rates by 25 basis points, but the larger story was further out the curve. Yields at the five-, 10- and 30-year points moved sharply higher, with the 10-year rising almost 80 basis points in the third quarter alone.
That move weighed on bond market returns for the year. It also affected equities unevenly: large-cap growth stocks were not dinged as much as small caps, which are more rate sensitive.
A shift like this can be read two ways. On the positive side, strong corporate earnings have raised expectations for future growth, which usually pushes interest rates higher. On the other hand, rising rates can signal concern about inflation, the federal deficit and the overall debt burden, both in the US and around the globe. Either way, it is not necessarily a negative signal. After a period of inverted yield curves, the curve now has a more normal shape, suggesting a return to a more normalized interest rate environment.
Fixed Income Offers a Better Cushion
After a decent year for fixed income in 2025 and a rocky start to 2026, many investors are wondering whether tough times are back for bonds. The answer may be more encouraging than the Q3 numbers suggest.
An analysis of how a 1% move in interest rates would affect different segments of the bond market shows why. The Bloomberg US Aggregate Bond Index (the “Agg”) currently yields north of 5% to 5.5%, which provides a cushion to absorb rate increases. If rates rose another 1%, the Agg would be expected to be roughly flat over the next 12 months. If rates fell 1%, investors would earn that yield plus price appreciation, for a total return of more than 11% over 12 months. Credit portfolios offer even more incremental yield.
This is a notable change from the zero-interest-rate environment, when the same analysis would have shown nearly symmetrical bars up and down because there was no yield cushion. Investors have been burned in fixed income over the last few years, but the buffer on the downside is finally back.
Diversification Continues to Pay Off
A traditional 60/40 portfolio had a very good 2025, driven in large part by fixed income. In 2025, a diversified asset allocation returned 15.49%, compared with 13.65% for a straight 60/40 portfolio of the S&P 500 and the Bloomberg US Aggregate Bond Index. So far in 2026, rising rates have created a modest drag from bonds, but diversification still made a difference, with the diversified portfolio returning 8.73% versus 6.39% for the 60/40.
The pattern has shifted over time. In 2023 and 2024, more US-centric portfolios delivered greater returns. Beginning in 2024, and continuing into 2025 and 2026, adding international and emerging markets, and even a little commodities exposure, has helped portfolios and reduced reliance on the US-centric bias of recent years.
Four Themes to Watch in Q4
Interest rates: After rates were near 0% in 2020 through early 2022, a massive move up in rates by the Fed then steady cuts, the Fed has now returned to rate increases. At least one hike has occurred, and another is likely before year-end. Rates affect more than bond portfolios, as the performance gap between large and small caps showed this quarter.
AI: The AI ecosystem has expanded rapidly, with new announcements and ideas almost daily, including concepts such as renting chips. At the same time, the market appears to be in a period of pause or retrenchment as investors work out who the long-term winners will be. Some memory-chip manufacturers that had a big run earlier this year have pulled back as investors have realized that they may not be able to keep up the same pace.
Oil prices and inflation: Rising oil prices are affecting everyone. Even when oil is stripped out of inflation readings, higher oil and diesel prices work their way through nearly everything consumers buy, making this an important factor for the rest of this year and into next.
The midterm elections: With the midterms just weeks away, volatility is common in midterm periods. However, over the last 10 midterm cycles, the following 12 months have been positive for US equity markets every time. One reason often cited is that a divided Congress, with a president of the opposite party, tends to get less done, which allows investors to plan for the next couple of years. These are not necessarily typical times, so it remains a wait-and-see situation.
Looking Ahead
As Q4 begins, fundamentals remain strong. Corporate earnings are solid, segments of the consumer continue to spend, and AI investment is still going strong. Interest rates are high, but they are closer to normal over long periods than they were earlier, and investors are adjusting their portfolios to reflect more attractive yields.
There are reasons to be cautious and pay close attention to what is happening. Even so, the guidance remains the same: stay focused on the long term and on your plan.
