Q3 Markets and Events

After the blistering +15.1% surge in Q2, the third quarter of 2026 was a much quieter affair. The S&P 500 gained just 2.4%, still leaving the index up a solid 12.7% year-to-date. The Nasdaq 100 barely budged at +0.6% for the quarter (though it remains up 20.8% YTD), and the real action rotated out of the AI and semiconductor complex that had dominated the spring and into oil, bitcoin, and a handful of mega-cap survivors.

The geopolitical backdrop stayed messy. The June 17 peace MOU between the U.S. and Iran — with its 60-day negotiating window — largely unraveled over the summer. By mid-August the ceasefire framework had effectively stalled, the Strait of Hormuz remained constrained, and oil prices moved sharply higher again.

The Federal Reserve delivered the hawkish follow-through the new Chair Warsh had telegraphed. In July the FOMC held the funds rate at 3.50-3.75% on a divided 9-3 vote (three members wanted a hike). In September the Committee hiked 25 basis points to 3.75-4.00% in a unanimous decision, citing elevated inflation and the need for a more timely return to the 2% target. The 10-year Treasury yield climbed to roughly 5.3% by quarter-end and hit the highest level in 25 years. That rate move weighed heavily on bonds and rate-sensitive equities.

Earnings for the broader market were fine but no longer the singular story. The AI buildout boom that carried Q2 cooled meaningfully, even as a few mega-caps continued to shoulder almost the entire index return.

Asset Classes

The quarter was a sharp rotation story rather than a broad risk-on or risk-off move (Exhibit 1). Bitcoin roared back +42.2% after a brutal first half, though it is still down 4.7% year-to-date. Oil surged 36.8% in Q3 and is now up an eye-popping 110.6% for the year on the back of ongoing Hormuz disruption. Gold managed a modest +3.4% rebound. On the equity side, the S&P 500’s +2.4% masked a wide dispersion: the Nasdaq 100 was nearly flat, developed international slipped 0.7%, emerging markets fell 2.4%, and small caps dropped 7.3% — a complete flip from Q2, when small caps had actually led.

Bonds had a rough quarter across the board. Treasuries fell 3.1%, the aggregate bond market dropped 3.5%, investment-grade corporates lost 5.2%, and munis were down 5.3%. High yield held up a bit better at -2.0%. Rising yields and the September Fed hike left little place to hide in fixed income.

Sectors and Stocks

Energy and gold miners led the sector pack by a wide margin (Exhibit 2). Energy gained 16.5% (and is up 40.3% YTD), while gold miners rose 16.4%. Biotech and Internet also posted solid gains, as did Healthcare. Technology itself was only +2.9% — a far cry from Q2’s +43.5% — and the semiconductor complex that had ripped 95% in Q2 gave back 11.2% (it is still up a staggering 89.2% year-to-date!). On the losing side, we have Homebuilders, Utilities, Defense, Industrials, and Transports. Rate-sensitive and late-cycle areas felt the Fed hike and higher long rates most acutely. The sector picture flipped almost perfectly from Q2 again.

At the individual stock level (Exhibit 3), the story is really about concentration. By dollar market-value change, the top five — Microsoft, Nvidia, Apple, Meta, and Palantir collectively added almost $3 trillion and accounted for a remarkable 214% of the entire S&P 500 return (not very intuitive but basically they singlehandedly kept the market from crashing). Microsoft alone drove roughly 76% of the index return. That math only works when the rest of the index is net negative — and it was. The bottom five by dollar impact has several semiconductor equipment names taking particularly hard hits after the Q2 blowoff.

On a percentage basis the winners looked different: Moderna ripped +176.4%, followed by Palantir, two oil refiners (Marathon Petroleum, Phillips 66), and Workday. The percentage losers were Fair Isaac (FICO score competition), AppLovin (AI ad platform), Corning (data centers), Lennox (HVAC), and Builders FirstSource (housing).

International Markets

International markets were mixed in Q3 after an extraordinary spring (Exhibit 4). Developed international slipped 0.7% and emerging markets fell 2.4%, even as both remain solidly positive year-to-date (+14.1% and +22.7%). The leaders this quarter were Poland, Greece, Singapore, and Norway. Taiwan managed +3.9% in Q3 but is still up an extraordinary 77.7% YTD; South Korea cooled hard at -9.5% after its parabolic Q2, though it remains up 88.0% for the year.

The laggards included Turkey, China, South Korea, and Vietnam. The bigger picture continues to favor international diversification — cheaper valuations, faster earnings growth in many markets, and less of the extreme mega-cap concentration that now defines the U.S. index.

Economy and Rates

The U.S. economy remains resilient even as the Fed tightens. Second-quarter GDP was revised up to a 2.2% annualized pace (from an earlier 1.5% advance), and first-quarter growth was revised to 2.5%. The labor market has been choppy but stable: July payrolls were revised to a modest +21,000, August bounced to +162,000, and September just came in at +29,000. The unemployment rate has held around 4.1%. Job growth has slowed from the mid-decade pace, but there is no clear break in the labor market yet.

Inflation has cooled from the May spike but remains above target. Headline CPI has been running around 3.4% year-over-year through August (down from 4.2% in May), and core PCE eased to roughly 3.0% — progress, but not enough for a Warsh Fed that wants a faster path back to 2%. That is why September brought a hike rather than a hold, and why the bond market has pushed the 10-year yield toward multi-decade highs near 5.3%.

Looking ahead, the setup into year-end is more complicated than it was in June. Earnings are still supportive, AI investment continues, and year-to-date equity returns remain healthy. But valuations are elevated, the Fed has moved from “maybe hike” to actually hiking, long rates have risen sharply, oil is back near wartime levels, the Iran peace process remains unresolved, and market returns are extraordinarily concentrated in a handful of mega-cap names. Midterm elections in November add another layer of political uncertainty. We continue to believe that broad diversification across asset classes and geographies — including the international allocations that have added so much value this year — is the right posture. Please reach out if you would like to discuss your portfolio.