Update on the Markets:
| Index | 3rd Quarter 2026 | Full Year 2026 |
|---|---|---|
| S & P 500 (Large US Stocks) | 2.63% | 13.21% |
| Russell 2000 (Small US Stocks) | (6.75%) | 14.82% |
| FTSE All-World ex-US (International Stocks) | (3.42%) | 10.91% |
| Barclays US Aggregate (Bonds) | (2.80%) | (2.75%) |
October 2026
Key takeaways
► A resilient economy
► Inflation remains sticky
► Bonds selloff
► Big bet is AI
► Bonds selloff
US economy shrugs off inflation
Sticky inflation, a hawkish Fed, tariffs, 7% mortgages, AI panic… the US economy is weathering it all quite well. Growth remains strong. The S&P Global PMI rose to 58.4 in September – the highest level of accelerating growth since July 2021.
The Manufacturing PMI hit 57.0, and Services PMI rose to 58.7.
The unemployment rate remains historically low at around 4.4%. The U.S. economy added 162,000 jobs in August 2026, according to the Bureau of Labor Statistics. Business activity, investment, and the labor market are robust. The AI buildout (think data centers) has now surpassed peak dot-com tech spending. The Atlanta Fed estimates third-quarter GDP growth at 5.0%.
The flip side of strong growth is rising inflation. A strong economy, high oil prices due to the US-Iran war, a hawkish Fed, and higher debt levels (The U.S. national debt officially surpassed the $40 trillion milestone on August 18, 2026, according to Treasury Department data) are also helping raise rates.
Bonds selloff
Historically, September and October are the worst months for stocks and bonds. On cue, the bond selloff in September has been swift. Bond yields worldwide are at multiyear highs (bond prices and yields move in opposite directions).
On the last day of the quarter, the 30-year Treasury yield touched 5.65%, its highest intraday level since June 2002. The 10-year traded at 5.31%, a fresh 24-year peak this month.
Where will rates settle? Strong economic data, a resilient labor market, robust AI expenditure, mounting federal debt, and persistent energy inflation are converging to reset bond yields.
Yields remain under upward pressure from energy prices. Iran and the US are barely negotiating. Recently, President Trump rejected an Iranian proposal for a seven-day pause in hostilities to create room for negotiations.
High oil prices are fueling market expectations of further interest rate hikes by the Federal Reserve following the one earlier in September. What’s more important is how quickly the Fed will raise rates. A rapid increase spells trouble for stocks and bonds. However, a gradual increase may allow capital markets to absorb the hit. Historically, a slow tightening cycle has led to dips in stock prices for a few months and then returns to the high single digits within twelve months. After all, higher rates are one sign of a strong economy – great for earnings!
AI: Boom or Bust
A lot is riding on all the money we’re spending on AI: data centers, power plants, transmission lines, semiconductors, and everything else required to support AI. The US is making a huge bet that AI will improve productivity, foster new industries (and jobs), and increase overall life satisfaction. From chips to data centers to water, the US economy’s future hinges on how successful AI will be. And investors want to get paid! When will it pay off? How much longer for productivity gains? How about profits???
According to the Federal Reserve, AI infrastructure and capital spending drive up to 40% of US economic growth. Massive data center build-outs risk overheating the economy, creating upward inflation pressure and, hence, rates. White-collar jobs are at risk as AI is integrated into the workday – a low-hire-low-hire labor market. And the trillions in paper wealth have contributed to healthy spending by high-end consumers. We are monitoring developments. A nasty hangover may follow if AI disappoints.
What to do?
Has the bond selloff gone too far? Higher yields are increasingly competitive with stocks as a home for new money. Rick Rieder of BlackRock says investors don’t need to take big risks to hit attractive fixed income returns in the current environment. “My funds are yielding 7-plus percent with a three-year duration,” he said. He is also upbeat that long-term Treasury prices will stabilize. In previous instances when the 10-year yield breached 5%, returns over the following 12 months were strong, he has been telling clients.
Though playing it safe by staying on the short end of the yield curve may have been smart in the past few years, it may be time to add a bit more to longer maturity bonds and lock in these high yields.
And a lot is happening “under the hood” in the stock market. The headline numbers, e.g., the S&P index, may look calm and steady, but many individual stocks are down… a lot. US small caps are down over 8% from their highs, and transport stocks are down over 20%. This isn’t catastrophic, but it’s worth monitoring. Stocks are trading at high multiples. Seven-percent yields on high-quality bonds look attractive and may match or even surpass stock returns going forward.
Thank you for your continued confidence.
Sincerely,
Henry
Henry Gorecki, CFP®
HG Wealth Management LLC
401 N Michigan Ave, Suite 1200
Chicago, IL 60611
312-723-5116
