Market Update | October 2026

After a busy end to the third quarter, the deluge of news and potential catalysts does not appear to be slowing down. Several key questions have been answered or have at least found more clarity.

The Federal Reserve initiated its first rate-hiking cycle in three years, the S&P 500 quickly rallied to a new high after a 3% pullback, the 10-year Treasury yield has reached its highest level since the 2000s, and (while the war goes on) the U.S. and allies have seemingly found a way to continue getting oil out of the Middle East.

After all these happenings and ongoings, the S&P 500 closed September down just -0.35% and remains modestly higher for October. An array of potential catalysts are in the market’s path of closing a strong fourth quarter to what has been a high returning year.

Most prominently coming into focus are the U.S. midterm elections, set to take place in just under three weeks. Between now and election day, a closely monitored Federal Reserve meeting and interest rate decision will be made.

Influencing both of these key events will be inflation, which as indicated by the latest Consumer Price Index (CPI) data this week (3.7% year-over-year) is above the Fed’s target rate and where it started in 2026.

A slew of economic releases and third-quarter corporate earnings reports will be released over the coming weeks as well.

Despite the seemingly important nature of these factors, historical seasonality suggests that investors may be on the cusp of positive market trends for the quarter ahead. Before we dive into the above, we’ll assess the current market landscape.

Market Summary

Equity markets have maintained strong year-to-date gains following their recovery from the March lows, despite shifting investor concerns over higher oil prices, inflation, and the growth potential of artificial intelligence. The S&P 500 has gained 13.8% midway through October, despite mixed performance across major indices this quarter.

The technology-heavy Nasdaq has led domestic large-cap stocks with a 15.4% year-to-date return, while the Dow Jones has gained 8.7%. Small-cap stocks have lagged recently, falling 2.4% quarter-to-date, while the S&P 500 and Dow remain modestly positive.

Rising oil prices and uncertainty surrounding the Iran conflict have heightened concerns about inflation and the potential for interest rates to remain elevated. Higher energy costs can pressure consumers and businesses while complicating the Federal Reserve’s efforts to restore price stability, creating headwinds for valuations and economic growth.

At the same time, enthusiasm for AI and continued investment in its supporting infrastructure have helped sustain optimism about corporate earnings. The year’s previous quarters have brought strong results from technology companies and semiconductor firms that have reinforced expectations for long-term growth, at times outweighing concerns about energy prices and monetary policy.

These competing forces have contributed to shifts in market sentiment and sector leadership throughout the year. The S&P 500 has advanced overall, but its path has reflected an ongoing tension between inflationary pressures and the hopes for continued sustained earnings growth.

Energy continues to display sector leadership, beating its peers by a wide margin, rising 54.5% year-to-date and gaining another ~10% this month as oil prices have resumed their climb. However, information technology remains the next strongest major growth driver, up 26% for the year. The sector has pulled back nearly 2% this month, but remains an outperformer of the S&P 500 index in its entirety.

This month has seen some broadening in performance to defensive sectors, as consumer staples have gained 7.4%, utilities 5.8%, and healthcare 3.3%. Consumer discretionary remains the weakest sector year-to-date, down 3.6%, while financials have also lagged, gaining just 0.7%. Overall, the divergence between energy and technology leadership, and the recent strength in less cyclical sectors, underscores the market’s ongoing effort to balance inflation risks against expectations for continued corporate earnings growth.

This “tug-of-war” dynamic between energy and technology leadership is displayed prominently outside the U.S. as well. International developed equities, whose constituent countries are more sensitive to the price of oil (and even more specifically oil moving through the Strait of Hormuz), have lagged their counterparts in the U.S., returning just 8.7% on the year.

In comparison, Emerging markets have been buoyed by the surge in semiconductor and A.I. related technology stocks. These markets lead all regional indices, having returned ~20.1% year-to-date. Both developed and emerging markets however, have fallen to start the fourth quarter, with returns of ~-1.5% and ~-2.6% respectively.

The recent rise in Treasury yields has continued to pressure fixed-income returns, reflecting persistent inflation concerns and uncertainty regarding the monetary policy outlook. As yields rise, existing bond prices generally fall, creating a headwind for broad bond-market benchmarks such as the Bloomberg U.S. Aggregate Bond Index.

This dynamic helps explain why core bonds remain down 2.2% year-to-date despite posting a modest 0.8% gain this quarter. While higher yields have weighed on returns in the near term, they also improve prospective income and forward-looking return potential for investors allocating to fixed income.

Going forward, market performance will depend, perhaps largely, on how these forces evolve. Persistent energy-cost pressures and elevated interest rates could weigh on valuations, while stronger-than-expected earnings and realized returns on AI investment could provide support. With neither force clearly dominant, markets remain sensitive to the development across both.

Midterm Elections and Seasonality

We are three weeks away from the midterm election cycle coming to a close.  From an investment perspective, the question is whether a change in congressional control meaningfully alters the outlook for markets. The data suggests that since 1926, all combinations of political parties between the Presidency and Congress (as in unified or divided governments) provided positive returns for investors.  While the consensus projected outcome for this election (Republican President with a divided government), was the lowest returning of the combinations, it still has averaged a 7.3% annual return for stocks.

While the information above does suggest continued optimism that positive returns should be the normal going forward despite the election’s outcome, an often-stated historical observation has been that midterm election years are historically challenging for markets. The truth regarding this statement is similar to the data regarding market performance under different government configurations. While midterm election years have been the worst performing on average, they still produce a positive ~7.5% return.

Furthermore, the historical seasonal trend has not tracked with the year-to-date performance of markets in 2026. As the chart below shows, the pattern for midterm years has trended towards negative total returns in the leadup to the election. This year, the market sits in the double digits year-to-date just three weeks out of the election, a historically strong level of return.

The market tends to rally around a month before the election takes place. It would appear that as uncertainty fades regarding the outcome, equity leadership is established and the market has been able to make its next move higher. The average return in the six months following the election has been 14.1% compared to just 5.7% during similar seasonal periods in non-midterm years. This strength is lessened when focusing on periods where an incumbent unified party loses control, but still exceeds the average six-month performance at 10.4%.

History also suggests that in midterm election years where the market displays strong returns and lower volatility in the lead-up to election day. In midterm years where the S&P 500 experienced fewer than 10 days of greater than 2% moves (positive or negative), the index finished the year with on average a 19.4% calendar year return. Through this point in the year, the index has experienced just four of these days.

Economic Update

Over the past month, the economic landscape has been shaped by several significant developments. Inflation remains persistent, driven by rising energy prices, which has heightened expectations of further rate hikes from the Federal Reserve. Meanwhile, the other half of the Fed’s dual mandate, maximum employment, shows signs of steady deterioration.

Long-term bond yields, while having slipped over the past few days, remain near multi-decade highs, even as AI-driven corporate earnings and resilient spending among higher-income consumers continue to support the broader economy. As these conditions evolve, it is important to recognize that any outlook based on current data remains highly dependent on the ongoing geopolitical conflict in the Middle East and its effect on energy prices.

Following the Federal Reserve’s most recent rate hike on September 16th, August PCE data was released, with headline PCE declining to 3.4% year over year from 3.7% in July. Unemployment, meanwhile, has edged steadily higher, moving from 4.1% in August to 4.2% in September.

Moderating PCE inflation, combined with a nonfarm payrolls report of 29,000 against a forecast of 84,000, led investors to price in a lower probability of an October hike, with the CME FedWatch Tool at one point estimating the likelihood at 17%.

Expectations have shifted somewhat higher, however, as September headline CPI came in at 3.7% against a consensus of 3.6%, and core CPI registered 2.6% against a consensus of 2.5%. At the time of writing, interest rate futures markets price in a ~29% chance of a hike in October and a ~90% chance of a hike in December.

Longer-term bond yields have climbed to multi-decade highs, with the 10-year Treasury reaching 5.37% in early October, its highest level in 24 years, and the 30-year Treasury reaching 5.73%. Rising long-term yields typically reflect higher inflation expectations, as inflation erodes the purchasing power of capital committed to longer-dated investments. Another possible driver is capital rotating out of the bond market and into other asset classes.

The current data supports both explanations. Inflation has proven stubbornly sticky, while U.S.-listed ETFs have set all-time records for inflows, led by equity funds with more than $1 trillion YTD. As mentioned, yields have moved lower in recent days as a selloff in tech stocks has brought Treasuries a bid as a “flight to safety”. The 10-Year Treasury yield still remains above 5%.

Although the Consumer Sentiment Index declined from 48.1 in September to 46.3 in October, spending among high-income households remains resilient, supported largely by strong equity returns driven by AI-related earnings.

Taken together, the current landscape is defined by persistent inflation, sharply higher yields at the long end of the curve, a softening labor market, and rate-hike probabilities that have shifted dramatically with each new data release, all of which remain subject to change as the Middle East conflict evolves. This environment presents investors with a distinct set of challenges and opportunities.

On one hand, investors can capture yields in longer-term bonds not seen in decades, but doing so increases exposure to interest rate risk. On the other hand, investors can earn above-average yields at the front end of the curve, which limits interest rate risk but introduces opportunity cost.

Both approaches have arguments; however, any investor assuming risk must be adequately compensated for it. Our view continues to be that upside risks to inflation outweigh risks of an economic growth slowdown. This leaves the immediate risk in bond yields to the upside.

Conclusion

Markets enter the final months of 2026 with substantial gains behind them, but navigating the path forward to a strong finish is not without its obstacles. Competing forces of persistent energy driven inflation and expectations for AI-motivated corporate earnings growth has netted to overall resilient equity market performance that awaits a continuing or pivoting catalyst. Such a catalyst could be escalation or deescalation in the Iran War, the results from this quarter’s corporate earnings reports and economic data releases, and the outcome from the midterm elections.

Elevated inflation and a softening labor market leave the Fed facing difficult policy decisions. Rising long-term bond yields offer more attractive income opportunities, but the ceiling on these longer maturity rates is far from apparent.

Historical evidence suggests that neither the party controlling Washington nor the uncertainty surrounding midterm elections has prevented equities from delivering positive returns over time. Seasonality is encouraging, with midterm years historically experiencing stronger performance following Election Day, particularly as political uncertainty begins to fade. These trends offer investors optimism, even if history is not a guarantee of future results.

Ultimately, the sustainability of this year’s rally will depend less on political outcomes or seasonal patterns than on whether corporate earnings can continue to grow amid persistent inflation and tighter financial conditions. We remain focused on balancing participation in long-term market opportunities with risk tolerance anchored portfolio construction, even as these competing forces shape the near-term outlook for the remainder of the year.