Economic and Financial Market Update - Q3 2026
Updated: 14 minutes ago
Recent Market News
U.S. equity indices were mixed in the third quarter. The S&P 500 and Nasdaq gained 2.03% and 2.47%, respectively, extending their second-quarter rebounds, while the Dow Jones Industrial Average declined 2.70%, primarily due to its heavier Financials sector weighting. The Nasdaq has strengthened considerably from its late-March low, now outperforming the S&P 500, the Dow, and the interest rate-sensitive mid- and small-cap indices year to date. Emerging market equities were down 5.63% from their June 22 peak but remain the top performer of 2026. Year-to-date performance for major indices as of September 30 is shown in the chart below.
The AI infrastructure buildout remained a central theme in the third quarter, as demand for compute continued to support capital expenditures and corporate profit growth. Several high-profile security breaches earlier this year, involving models from OpenAI, Anthropic, and Meta, prompted discussion of legislative or self-imposed guardrails that could slow frontier model development while promoting responsible growth and preserving the U.S. lead in AI. Despite robust demand and immense backlogs, the technology sector saw rotation away from semiconductors and semiconductor capital equipment makers and into hyperscalers and software, consistent with concerns that tighter governance could limit future demand for chips and chipmaking equipment.1
Corporate earnings remain a primary driver of equity market performance. For the third quarter, earnings growth for the S&P 500 is currently forecast at 29.6%, with all eleven sectors expected to report year-over-year earnings growth. The chart below displays year-over-year third quarter earnings growth estimates as of June 30 (grey) and September 30 (navy). Earnings per share estimates for the index have increased by 1.3% during the quarter, an encouraging sign given that initial estimates tend to be optimistic and are often downwardly revised as additional information becomes available throughout the quarter. In contrast, earnings estimates have fallen by 3.2% on average during a typical quarter over the past fifteen years.2
Though earnings growth is currently led by the energy, technology, and communication services sectors, it is important to note that the breadth in earnings momentum has improved meaningfully in recent years. The percent of S&P 500 companies reporting growth in earnings and revenue are now 86.7% and 88.9%, respectively.3
Forward guidance also remains constructive. Of the 116 companies within the S&P 500 index that have issued Q3 earnings guidance, 62% (72 companies) issued positive guidance – well above the 10-year average of 41%. This is the highest percentage of S&P 500 companies issuing positive earnings guidance since FactSet began tracking this metric in 2006.2
Treasury yields rose steadily over the third quarter, and the yield curve steepened as a confluence of factors pushed long-term yields higher. Among these were expectations for further monetary tightening amidst persistently above-target inflation, as well as ongoing concerns over mounting federal debt. Additionally, expectations for continued economic expansion and intensified competition for capital due to domestic business investment added to the rise. The chart below displays the yield curve as of September 30 (blue), along with month-ago and year-ago figures (green and orange, respectively) showing the steepening trend and upward movement in rates across the curve.
Consistent with market expectations, the Federal Reserve raised the federal funds target range by 25 basis points to 3.75%-4.00% in September, its first increase since July 2023.1 The Fed’s official statement reiterated its commitment to “support a timelier return to the Committee’s 2 percent goal”, suggesting greater concern about upside risks to inflation than about downside risks to employment.4 This outlook aligns with our thinking, as robust capital investment and resilient consumer spending continue to support GDP growth, while the unemployment rate remains historically low at 4.2% and both initial and continuing jobless claims remain subdued. After the September meeting, Fed funds futures are pricing a hold in the October meeting and a further 25 basis point hike in December (4.00%-4.25%).5
While rates have risen meaningfully from the near-zero levels that characterized the post-financial-crisis decade, we view the current environment as normalized rather than elevated. The current fed funds target sits below the 4.75%-6.50% range of 1995-2000, the last period defined by a major technology-driven investment cycle.6 For additional context, the chart above displays the yield curve at the end of the third quarter (blue), which remains well below levels reached in 1997 and 1999 (grey and yellow, respectively) during the prior technology investment cycle.1 Ultimately, the third quarter demonstrated how economic growth and strong corporate earnings can continue to support equity markets even as geopolitical uncertainty, inflationary pressure, and fiscal concerns push interest rates higher.
Economic Growth
Economic growth remains robust, with Q2 GDP upwardly revised from 1.5% to 2.2%, beating Wall Street expectations of 1.5%. The stronger result reflected upward revisions to consumer spending, business investment, and exports, while an increase in imports largely related to the technology buildout continued to drag on the headline figure.7
The Atlanta Federal Reserve GDPNow – a running estimate of the current quarter which incorporates updated economic data as it is released – estimates third quarter GDP growth of 3.64%. The range of institutional forecasts has narrowed and consensus continues to trend upward, nearing 2%.8 The subcomponent contributions to GDP growth, led again by consumer spending and business investment, are listed at the top left in the chart below.
Economic Implications of the Wealth Effect
After years of significant asset appreciation, the wealth effect continues to support economic growth, as consumer spending appears increasingly supported by balance sheets rather than income growth. Real personal consumption has been rising faster than real disposable income, and if recent trends continue, could result in a negative personal savings rate around 2030 (below, left). Currently, spending shows few signs of slowing, as major categories within nominal retail sales are at or near record highs (below, right).
This spending trend reflects an underlying demographic shift. Baby boomers are retiring in growing numbers, with retired workers receiving Social Security benefits now equal to 19.5% of the working-age population, up from roughly 13.5% in the late 2000s (below, left), and households headed by someone 65 or older now totaling nearly 42 million (below, right). The retirement of experienced, higher-earning employees will likely slow growth in real disposable income; however, we expect consumption to remain resilient, supported by household wealth accumulated over decades of asset appreciation.
Because most are retired or nearing retirement, their spending is likely less sensitive to labor market conditions. Higher interest rates also work in their favor; rates that are primarily a borrowing cost for younger generations are often a source of income for older ones.
As of the second quarter of 2026, households headed by baby boomers held $97.4 trillion in net worth, and those headed by members of the Silent Generation held another $19.8 trillion (below, left). Boomers account for 53% of total U.S. household net worth, or roughly 63% including the Silent Generation (below, right). They also hold 55% of household equities and mutual fund shares and 41% of real estate wealth, the largest share of any generation. This significant asset base may enable baby boomers to continue to spend despite slowing growth in real disposable income. 3
In aggregate, the wealth effect created by these conditions enables baby boomers to remain an important driver of consumer spending and broader economic growth, as it ties consumption more closely to asset values rather than labor conditions and income growth.
Our Thoughts
Despite our concerns, the U.S. economy remains remarkably resilient. Our outlook with respect to the economy and financial markets is more positive than it was a year ago, supported by strong momentum in corporate earnings, steady GDP growth driven by consumer spending and business investment, and a stable labor market. Inflation remains above the Fed’s target, further exacerbated by energy prices, though it has moderated meaningfully from its COVID-era peak. The Federal Reserve is currently focused more on upside inflation risks than on downside employment risks, but we expect additional tightening to be modest in both scale and duration. We continue to monitor inflation and employment, and their effects on consumer health and corporate profitability. We are also watching several broader risks: mounting federal debt and its implications for long-term yields and borrowing costs; the pace of technology adoption, including AI’s contribution to productivity and earnings; and geopolitical conflict, which continues to disrupt energy markets and add to inflationary pressure.
Against this backdrop, our focus remains on managing risk in accordance with client investment policy statements. Strong market performance has pushed many client portfolios to the upper bounds of their equity guidelines, and we are continuing to rebalance to reduce equity exposure. In large taxable relationships, managing risk increasingly requires realizing capital gains, which we continue to discuss on a case-by-case basis with tax implications in mind.
Within the equity portfolio, our focus remains on high-quality companies that consistently demonstrate strong fundamental characteristics: consistency of growth in earnings and revenue, margin improvement, strong free cash flow, and lower long-term debt to capital than the S&P 500 index. Fixed income exposure remains high quality and short in duration, which limits sensitivity to interest rate movements while preserving liquidity. Within taxable relationships, we are evaluating opportunities to add exposure to short-duration, high-quality municipal bonds, as higher interest rates have lifted tax-equivalent yields to increasingly attractive levels relative to corporate and treasury securities of comparable duration.
As always, we appreciate the opportunity to serve you and highly value our relationship. We look forward to meeting you in the near future and are always available and pleased to assist in the interim.
Sources
1 FactSet StreetAccount Summary
2 FactSet Earnings Insight
3 Yardeni Research
Disclosures
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd. and Parkview Partners Capital Management are separate entities from LPL Financial.
The information contained herein has been obtained from sources known to be reliable. However, no guarantee, representation, or warranty, express or implied, is made as to its accuracy, completeness, or correctness.
There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification and asset allocation do not protect against market risk. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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