The third quarter offered another reminder that markets often climb a wall of worry. While investors continued to focus on inflation, interest rates, energy prices, and geopolitical developments, equity markets remained resilient, supported by strong corporate earnings and continued investment in long-term growth themes.
A Market Driven by Earnings
The primary story behind market performance continues to be earnings growth. The S&P 500 advanced approximately 2.27% during the third quarter, as investors responded favorably to strong corporate profitability. Second-quarter earnings growth reached roughly 50%, and expectations for full-year 2026 earnings growth remain near 30%.
This distinction is important. Bull markets that are supported by rising earnings tend to be fundamentally different from periods driven purely by speculation. While valuations remain a topic of discussion, earnings growth has provided meaningful support for stock prices.
At the same time, companies continue to invest aggressively in artificial intelligence and related infrastructure. Current expectations call for more than $1 trillion of AI-related spending in 2027, a trend that could continue supporting productivity, corporate investment, and broader economic growth in the years ahead.
Inflation and Energy Remain Key Variables
While the overall economic backdrop remains constructive, inflation remains an area to watch closely. Inflation has been influenced in part by higher energy prices, with headline inflation near 3.4% and core inflation near 2.4%. Core inflation remains particularly important because it is one of the measures most closely monitored by the Federal Reserve.
Looking ahead, energy markets may continue to play an outsized role in inflation trends. A reduction in geopolitical tensions could help ease pressure on oil prices, which in turn could contribute to lower inflation readings over time. However, as with any geopolitical outcome, uncertainty remains and bears watching.
Fixed Income Faces Headwinds
Bond markets experienced challenges during the quarter as the Federal Reserve maintained its focus on inflation and raised rates in September. Expectations for additional policy tightening increased as policymakers continued working toward their long-term inflation objectives.
For fixed-income investors, the outlook remains closely tied to the inflation picture. Should inflation continue to moderate, bond markets could benefit from improved interest-rate expectations. As always, fixed income continues to play an important role in diversified portfolios despite periods of short-term volatility.
Economic Fundamentals Remain Resilient
Despite ongoing concerns about a potential recession, the broader economy continues to show resilience. Current expectations remain for the U.S. economy to avoid a recession in 2026.
The labor market remains a significant source of support. Unemployment stands near 4.2%, while job openings remain above seven million, indicating continued demand for workers and a generally healthy employment environment.
Strong labor conditions help support consumer spending, which remains one of the most important drivers of economic growth.
Looking Ahead
History suggests that pre-midterm election periods can experience increased market volatility, and a pullback at some point before the elections would not be unusual. At the same time, history has also shown that equity markets have often performed well during the twelve months following midterm elections.
Many investors remain hesitant to invest when markets are near all-time highs. Yet historical market data has frequently demonstrated that investing at new highs has produced competitive long-term outcomes compared with waiting on the sidelines for a pullback that may never materialize.
The current market environment also differs from the technology bubble of the late 1990s in several important respects. While enthusiasm surrounding artificial intelligence is substantial, today's leading companies are generally generating meaningful earnings and cash flow. In fact, earnings growth has contributed to lower valuation multiples even as share prices have risen.
A Long-Term Perspective
While short-term market fluctuations are inevitable, the combination of solid earnings growth, a healthy labor market, and continued investment in transformative technologies provides a constructive backdrop for long-term investors. That does not eliminate the possibility of volatility, particularly as markets navigate inflation concerns, interest-rate policy, and geopolitical developments. However, maintaining a disciplined investment approach and focusing on long-term objectives rather than short-term headlines remains one of the most effective ways to navigate uncertain environments.
The current bull market continues to reward patience, and while periodic setbacks should be expected, long-term investors are often best served by remaining focused on their financial plan rather than attempting to time market movements. The view remains that the market cycle that began after the October 2022 lows continues to represent a durable bull market supported by underlying earnings strength.