Global equity markets continued their steady climb.
The U.S. equity market returned approximately 2.3%1 in the third quarter and 12.8%1 year to date, reflecting continued resilience. Value stocks continued to outperform growth stocks, extending a rotation that has been evident throughout much of 2026. International markets continued to generate solid gains. International developed markets were up 10.8%2 year-to-date, while emerging markets gained 23.5%3, both in U.S. dollar terms.
Interest rates moved higher as inflation concerns intensified.
In September, the Federal Reserve raised the federal funds target range by 25 basis points to 3.75%–4.00%, citing elevated inflation and the need to support a timely return toward its 2% inflation objective. Persistent energy costs and the continued pass-through of tariff costs have complicated the inflation outlook.
The U.S. Aggregate Bond Index declined nearly 4%4 in the third quarter and is down 2.7%4 year-to-date. When interest rates rise, bond prices fall in the short term. However, price is only one part of a bond fund’s return; the other is the interest the bonds pay. As bonds in a fund mature or are replaced, the proceeds are reinvested at today’s higher yields, so the income the fund earns rises. Over time, that higher income works to offset the price declines. For long-term investors, higher starting yields mean the bond portion of a portfolio is now positioned to earn more going forward.
The global economy has remained resilient.
The IMF’s latest 2026 forecast calls for approximately 3.1% global real GDP growth, while the Federal Reserve’s September projections put U.S. real GDP growth at approximately 2.3% for 2026. The U.S. labor market has started to show signs of softening, although layoffs remain limited and unemployment remains relatively stable. At the same time, supply disruptions and geopolitical conflict have kept oil and other raw material prices high, and that is showing up in household budgets through food and gasoline costs. Our clients do not hold commodities directly, but energy prices matter to portfolios because of their influence on inflation, interest rates, and corporate profits.
The AI story is changing rapidly.
AI is an extraordinary investment and productivity opportunity, but it is increasingly accompanied by questions about valuation, capital intensity, cybersecurity, and the security of autonomous AI systems. Recent incidents involving AI-enabled attacks and autonomous agents highlight why safety and governance will be increasingly important considerations as adoption expands.
Can fundamentals continue to support further appreciation in equity markets?
The answer, of course, is unknown. Despite recent signs of softness in employment, corporate fundamentals and economic activity remain relatively resilient. That resilience could provide further support for equities, but higher interest rates, inflation, and geopolitical risks have created meaningful uncertainty.
In an environment where the future cannot be predicted with confidence, we believe diversification is paramount. Maintaining exposure across asset classes and global markets helps ensure that portfolios are not overly dependent on any single geopolitical, economic, or market factor.
Notes: 1 Russell 3000 Index; 2 MSCI EAFE Index; 3 MSCI Emerging Markets Index; 4 Bloomberg U.S. Aggregate Bond Index.