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Q3 2026 | A Quarter in Review
2026 Q3 MARKET INSIGHTS
The third quarter was shaped by rising interest rates, persistent inflation, and continued concentration in equity market leadership.
While higher Treasury yields pressured bonds and rate-sensitive areas of the market, U.S. and developed international equities helped support diversified portfolios.
As we enter the final quarter of 2026, inflation and the Federal Reserve's path for interest rates are two of the key factors we are watching.
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KEY TAKEAWAYS
Investment Philosophy and Outlook
With continued uncertainty around inflation, interest rates, geopolitics, and the midterm elections, this quarter reinforced the importance of maintaining a diversified portfolio that can participate across a range of market environments.
Market Performance
Equity market returns were mixed during the third quarter. Despite uneven performance across asset classes, strength in U.S. equities and developed international equities helped to offset sectors in the market that underperformed.
Bond Market
Bond markets faced significant pressure as Treasury yields rose sharply and pushed existing bond prices lower. While higher rates pressured bond prices during the quarter, higher yields have improved the potential returns of bonds going forward.
Federal Reserve Guidance
The Fed shifted toward a more restrictive stance this quarter. The target interest rate was raised by 25 basis points as inflation remained above target. Looking ahead, another rate hike is possible, but persistent inflation could force the Fed to aggressively raise rates.
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Investment Philosophy and Outlook
This quarter reinforced why we believe in building well-diversified portfolios. Rather than trying to predict what comes next, diversification allows portfolios to participate as market leadership and economic conditions change.
With ongoing uncertainty surrounding inflation, interest rates, geopolitics, and the midterm elections, periods of volatility are a possibility as we close out the year. Our focus remains on building portfolios for a range of outcomes rather than reacting to each headline or attempting to identify the next market leader.
Success does not require correctly predicting whether technology, energy, bonds, or another area will lead the markets higher. By owning investments that respond differently as conditions change, portfolios can participate in opportunities across markets without chasing whichever investment has recently performed best.
Market Performance
Equity market returns were mixed in the third quarter, with technology and AI-related stocks driving indices to new record highs.
Looking at the U.S. markets on a price-return basis, the Dow Jones Industrial Average returned -2.70%, the S&P 500 returned 2.03%, the NASDAQ Composite advanced 2.47%, and the Russell 2000 Index struggled the most, posting a return of -7.52%.
The U.S. Dollar Index (DXY) rose 0.26% during the quarter. The U.S. dollar weakened earlier in the quarter before strengthening in September, as rising Treasury yields and expectations for tighter Federal Reserve policy provided support for the dollar. While a stronger dollar can create headwinds for the U.S. dollar returns of unhedged foreign investments, it does not fundamentally change our long-term investment philosophy or approach.
Like U.S. equities, international markets also posted mixed results. Looking at the MSCI World ex USA Index, we saw a positive price return of 0.81%. The MSCI Emerging Markets Index returned -0.37% during the quarter while the MSCI ACWI, a broad measure of global equity markets, returned 1.60%.
This quarter emphasized the importance of maintaining a strategically diversified portfolio. While some areas of the markets faced headwinds (U.S. Small Cap, Emerging Markets, and Bonds), strength in the U.S. and developed international equities helped to ballast portfolios.
Bond Market
The bond market was full of volatility in the third quarter as markets repriced both inflation expectations and the future path for interest rates.
Yields hit their highest level since the early 2000s, with the 2-year Treasury rising 74 basis points (bps), the 5-year rising 86 bps, the 10-year rising 85 bps, and the 30-year rising 72 bps during the quarter. The 10-year U.S. Treasury finished September at 5.29% while the 30-year reached 5.64%.
Since bond prices and yields move inversely, the sharp rise in market yields pushed the prices of existing bonds lower. As newly issued bonds began offering higher yields, older bonds with lower coupon payments traded at lower prices to remain competitive. The other side of the repricing is that investors can now earn considerably more income from high-quality bonds than they could when yields were lower.
Treasury supply was also a focus in the third quarter as investors weighed heavy issuance against the yields required to absorb the supply. Outside of Treasuries, high-yield bonds held up better than longer-duration bonds, as their shorter duration and higher coupon provided some relief from rising rates.
Credit spreads also widened during this period, which does indicate investors are wanting more compensation for taking on credit risk. Floating-rate bonds were one of the stronger areas of the bond market in the third quarter. Since the coupon rates for these bonds reset periodically, they were able to benefit from the rising rates.
While rising rates hurt bond prices during the quarter, the repricing has also created a more attractive environment for bond investors. Higher starting yields now provide more income and a larger cushion against future rate volatility, while any eventual decline in market yields could provide an additional benefit to bond prices.
Federal Reserve Guidance
In the June Federal Reserve meeting, the Fed voted to keep the federal funds rate steady at 3.50%-3.75%. Economic growth continued to remain solid with stable labor markets.
One concern noted was that inflation continues to run above its 2% target. In June, unemployment projections stood at 4.2% and the Fed estimated headline and core PCE inflation at 3.7% and 3.3%, respectively.
While most of the Fed voted to continue to stay data dependent before making any changes to the target federal funds rate, 3 members recommended an immediate increase, reflecting a growing concern of sticky inflation.
In September, the Fed voted to unanimously raise the target rate 0.25% to 3.75%-4.00%. This was the first rate hike since July of 2023.
Unemployment projections had declined to 4.1%, while estimated August headline and PCE inflation were 3.8% and 3.4%. Along with this, the Fed also raised their projections for economic growth and lowered their unemployment forecasts while projecting higher interest rates.
Looking ahead, the Fed continues to expect inflation to gradually move back to its 2% target, but its September projection pointed to stronger growth, lower unemployment, and higher interest rates than previously expected. With two more Fed meetings before the end of the year, an additional 0.25% rate hike is possible.
Key risks to watch are persistent inflation and the potential for more aggressive tightening by the Fed. Historically, rate hiking cycles have created short-term volatility without necessarily derailing equity markets.
The bigger risk, in our view, is a scenario where persistent inflation forces the Fed to tighten more aggressively, which could place additional pressure on bonds and areas of the equity markets that are more sensitive to interest rates.
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DeLeon Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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