Market Commentary - October 2026

October 2026

Technology Leads as Inflation and Rising Rates
Test Markets in Q3 

Global markets navigated a challenging third quarter as strong corporate earnings and continued investment in artificial intelligence competed with persistent inflation, rising interest rates, and renewed uncertainty surrounding the U.S.-Iran war. Despite broad market highs in August, stocks finished the quarter with mixed results as leadership narrowed toward large technology companies.

The Nasdaq gained 1.9% in September and reached another all-time high, finishing Q3 up 2.5%. The S&P 500 declined 0.5% in September but gained 2.0% for the quarter. Both indexes entered Q4 with solid year-to-date gains, supported by strong earnings among companies leading the AI technology and infrastructure buildout.

Performance was weaker beyond the largest technology stocks. Small- and mid-cap companies faced pressure from higher borrowing costs and economic uncertainty, with the Russell 2000 and S&P MidCap 400 declining 7.5% and 6.7%, respectively, during Q3. The Dow fell 4.9% in September, bringing its quarterly decline to 2.7%.

International markets also delivered mixed results. The MSCI EAFE Index edged higher by 0.3% for the quarter, while the MSCI Emerging Markets Index slipped 1.1%. Despite that decline, emerging markets remained the year-to-date leader, gaining 21.4%. Higher interest rates, elevated energy prices, and currency movements continued to influence returns for U.S. investors.

Economic Growth Holds Up as Inflation Persists
Economic conditions remained generally resilient despite elevated inflation and geopolitical uncertainty. Steady consumer spending, a solid labor market, and business investment—including substantial spending on AI infrastructure—supported estimates for annualized real Q3 GDP growth ranging from 2.0% to 2.4%.

The final real Q2 GDP estimate showed annualized growth of 2.2%, while consumer spending increased 0.9% in August. Inflation, however, remained above the Federal Reserve’s 2% objective. August headline inflation, measured by the Personal Consumption Expenditures Price Index, was 3.4% year over year, with core inflation at 3.0%.

Energy prices added to those pressures. Oil began the quarter near $70 per barrel before renewed U.S.-Iran tensions and supply bottlenecks pushed prices briefly above $100 in mid-September. Prices ended the quarter near $90—roughly 30% above where they began—raising concerns about inflation, business costs, and household purchasing power.

Higher Interest Rates Weigh on Bonds
The Federal Reserve raised its policy rate by 0.25 percentage point to a range of 3.75%–4.00%, marking its first increase since 2023. The decision reflected persistent inflation and resilient economic activity. The European Central Bank and Bank of Japan also raised rates during Q3 as policymakers confronted inflation pressures alongside substantial government financing needs.

Bond markets absorbed much of the adjustment. The benchmark 10-year U.S. Treasury yield rose approximately 0.85 percentage point during Q3 to 5.29%, including a 0.54-percentage-point increase in September alone. Shorter-term yields also moved sharply higher.

Rising yields pushed existing bond prices lower, particularly for longer-duration holdings. The Bloomberg U.S. Aggregate Bond Index declined 3.7% for the quarter, bringing its year-to-date return to negative 2.9%. The quarter underscored the importance of carefully managing interest-rate exposure within diversified portfolios.

October Update
U.S. stocks moved higher to begin October despite continued pressure from rising interest rates. The 10-year Treasury yield briefly reached its highest level since 2002 on October 5, yet the Nasdaq and S&P 500 recorded new all-time highs the following day.

International markets began October more cautiously. Developed-market stocks declined approximately 1.5%, while emerging markets were largely unchanged. A stronger U.S. dollar, supported by higher U.S. interest rates, added a headwind to international returns for U.S. investors.

Monetary policy remains a central focus. Expectations for another quarter-point Fed rate increase have shifted toward the December 8–9 meeting, with the market-implied probability exceeding 80% in early October. Inflation trends, energy prices, and incoming economic data will help determine the Fed’s next steps.

Corporate earnings provide an important counterweight to these concerns. As Q3 reporting begins, FactSet forecasts year-over-year earnings growth of 26.9%. If realized, that would mark the third consecutive quarter of growth exceeding 25%. Strong profits, particularly among AI technology and infrastructure leaders, have helped support stock prices and elevated valuations.

The Outlook

As the year’s final quarter unfolds, investors will be watching inflation and monetary policy, developments involving Iran and global energy supplies, corporate earnings, and the upcoming midterm elections. These competing forces could produce additional market volatility.

We remain cautiously optimistic about the close of the year while recognizing that uncertainty remains elevated. Continued earnings growth supports that outlook, although higher borrowing costs, persistent inflation, and narrower market leadership warrant attention.

Staying Focused—and Planning Ahead
Diversification, patience, and discipline remain central to successful long-term investing. Periods of volatility are a normal part of the investment process and can create opportunities for investors who remain focused on their objectives.

As year-end approaches, we encourage you to:
• Remain well-diversified across asset classes, market segments, and geographic regions.
• Maintain discipline and patience, avoiding emotional decisions based on short-term market movements.
• Keep your focus on long-term financial goals while reviewing whether your portfolio continues to reflect your risk tolerance and income needs.
• Begin year-end planning early, including required minimum distributions, where applicable, tax planning, and charitable giving.

Call your Nelson Advisor at 800-345-7593 to discuss your portfolio, financial goals, or any concerns about current market conditions.
Your Nelson Securities Team

Past Performance is No Guarantee for Future Results

This article is for informational purposes only and does not constitute investment advice.