Market Commentary

The third quarter marked a noticeable change in market leadership and investor sentiment. After a strong start to the year, rising interest rates and higher bond yields became increasingly important drivers of market performance. While economic growth remained relatively stable and corporate earnings generally held up well, investors became more focused on how long interest rates might remain elevated and what that could mean for financial markets.

That shift was reflected across major asset classes. U.S. large-cap stocks were the only asset class in the accompanying summary to post a positive return during the quarter, while small-company stocks, bonds, international equities, and emerging markets all moved lower. September added to those challenges, with every major asset class posting a negative return for the month. The steepest declines occurred in small-company stocks, while U.S. large-cap stocks and emerging markets proved comparatively resilient.

The primary driver behind these results was the continued rise in market interest rates. During the quarter, Treasury yields moved higher as investors reassessed the outlook for inflation and Federal Reserve policy. Higher yields affected both stocks and bonds, creating pressure across several areas of the market and leading investors to re-evaluate the prices they were willing to pay for future growth.

Inflation provided mixed signals throughout the quarter. Conditions improved from the energy-driven surge experienced earlier in the year, and the latest reading of the Federal Reserve’s preferred inflation measure came in below expectations. Even so, inflation remains above the Fed’s long-term objective, leaving uncertainty regarding the future path of monetary policy. Investors entered October with encouraging evidence that price pressures are moving in the right direction but without complete clarity regarding what comes next.

One noteworthy feature of 2026 has been the difference between short-term market movements and longer-term results. Although the third quarter proved challenging for many asset classes, equity returns remain positive year to date, led by emerging markets, U.S. small-cap stocks, and U.S. large-cap stocks. The contrast between September’s results and year-to-date performance serves as a reminder that short-term market movements do not always reflect longer-term trends.

As the fourth quarter begins, attention is likely to focus on corporate earnings, inflation data, labor market conditions, and interest-rate expectations. The fourth quarter begins with a healthier economy than many expected, but also with interest rates at levels investors have not seen in years. How those factors ultimately balance will help shape market conditions during the remainder of 2026.