October 2026

Capital Markets Recap

• The final reading of the Seasonally Adjusted Annual Rate for GDP in 2Q26 rose 2.2% QoQ, up from prior 1.5% and consensus of 1.5%, AI-related spending, including on infrastructure, continued to support US growth. 
• The unemployment rate rose to 4.2% in September, up from prior 4.1% as 485,000 people entered the work force.
• CPI Inflation stayed at 3.4% in August as continued disruptions in the Middle East and the Black Sea have kept oil and grain prices elevated. Excluding food and energy, the MoM increase was 0.3%, above the 0.2% expected.
• The S&P 500 rose 2.0% in 3Q26 and was up 11.8% YTD. For the quarter, Energy (16.5%) and Tech (7.1%) led the sectors while Utilities (-13.3%) and Industrials (-9.9%) were the laggards.
• The 10-year Treasury bond yield rose by 83 bps during the quarter to end at 5.27%. The Aggregate US Bond Index declined by 3.85% in 3Q26 and was down 2.85% YTD.
• The price of gold rose 3.7% in 3Q26 and was down 3.8% YTD. Silver was up 1.1% in 3Q26 and was down 14.2% YTD.
• We favor investment grade intermediate term bonds. While long-maturity bonds offer higher price appreciation in a recession scenario, the yield difference versus intermediate bonds is too small for the elevated risks of future declines if the US does not reduce fiscal deficits.
• We recommend bond ladders of IG Intermediate bonds with attractive yields. The risk/ reward for bonds has improved as yields are attractive and we see less price risk given the price rise in 3Q26. Why? Further increases in yields will have less of an impact on bond prices, while declines in yields will have a bigger impact.
• Short term interest rates follow the FED rate. The FED raised rates by 25 bps in September after 200 bps of cuts in 2025 and 2024. The FED has stopped future guidance under chairman Warsh. The market expects another 25 bp raise by the FED in December and 50-75 bps of raises in 2027.
• Studies show that market timing typically produces inferior returns. We encourage diversification and a focus on working towards financial planning goals.

Model Portfolio Positioning

Fixed Income & Alternatives 

 Equities

Looking Ahead

• Geopolitical unrest and global growth:
  • The June MoU between the US and Iran collapsed in July when Iran attacked ships in the Strait of Hormuz followed by US retaliation, including a strict embargo on Iranian oil exports.
  • The June MoU between the US and Iran collapsed in July when Iran attacked ships in the Strait of Hormuz followed by US retaliation, including a strict embargo on Iranian oil exports.
  • In September, Iraqi militia attacked the Saudi East-to-West pipeline with drones, and Yemen’s Houthi militia attacked other Saudi infrastructure, and increased its control of the Mandeb-El Bab strait that sits at the entrance to the Red Sea, reducing this alternate export route. 
  • While oil prices declined in June as oil exports rose during the ceasefire, oil prices rose rapidly in 3Q26 when the ceasefire collapsed and attacks resumed, including on Saudi energy infrastructure. 
  • Dark ships (transponders turned off), ship-to-ship oil transfers, and the US navy protecting convoys have supported a recovery in Strait of Hormuz exports, which along with SPR releases have kept a lid on rising oil prices. 
  • As neither the US nor Iran have been willing to compromise post the ceasefire collapse, we don’t expect normal volumes to resume until all hostilities end. Unfortunately, this stand-off could last a while, keeping oil prices elevated plus it will require substantial inventory rebuilds. 
  • Ukraine and Russia have been targeting each other’s energy infrastructure, including Ukraine attacking Russia’s refineries. This has led to a substantial reduction in Russian exports of diesel and jet fuel, and gasoline shortages in Russia. Along with reduced supply from the ME, this has led to a rapid rise in diesel and jet fuel prices. 
  • Both Russia and Ukraine have been large grain exporters, but these exports have become a casualty of their war along with fertilizer exports and led to agriculture and food price inflation.
  • The January removal of Maduro as president of Venezuela led to the lifting of oil sanctions. Already, oil production has started to recover, led mostly by smaller companies. However, the country will need massive investments to bring oil production back to pre-Maduro levels, but the big oil companies have been reluctant given how much they are owed from the expropriation of their assets under the regime of Chaves.
  • US tariffs have had less impact on global trade than feared.○ Both the Ukraine and Iranian wars have shown that future wars will be substantially different than the past with drones and unmanned systems doing more of the fighting. Low-cost drones can overwhelm expensive defense systems, and superior weapons are not enough to win in an asymmetrical war where your opponent is willing to endure civilian mass casualties to win.
  • Countries hostile to the West have noticed the reluctance of Western Countries to commit troops to win wars amid their reliance on missiles and air forces. This could lead to miscalculations and higher geopolitical risks. 
  • Economists revised down 2026 economic growth due to the war in the Middle East, partly offset by AI spending.
  • The political wind in Europe has changed as the continent realizes welfare spending is not sustainable and they have to pay for their own defense. Historical ruling party coalitions are losing support among populations. 

• Economic growth, unemployment, and FED action:
  • The US economy remained strong in YTD26, boosted by spending on AI and AI infrastructure. Expectations for 2026 are real GDP growth of 2.3% followed by real GDP growth of 2.1% both in 2027 and 2028. 
  • The FED has a new chairman, who canceled forward guidance, increasing market speculation on future FED moves. The FED increased the overnight rate by 25 bps in September and expectations are for another hike in December, followed by several hikes in 2027.
  • The corporate sector remains strong as the profit margin for the S&P 500 reached a new record high of 17.2% in 2Q26 and EPS rose ~53% YoY. According to FactSet, the consensus EPS for 2026 S&P 500 is 26.4% growth, followed by 18.8% EPS growth in 2027 EPS.

• US Government budget deficits:
  • The US continues to run large budget deficits despite robust tax revenues. The fiscal 2025 deficit was ~$1.7 Trillion, estimated at $2.0 Trillion in 2026, or 6.2% of GDP, and projected at $2.2 Trillion for fiscal 2027

• US Government Debt:
  • US Federal debt-to-GDP has risen to 125% + versus 57% in 2000. Already Federal debt is north of $40 Trillion, and the CBO projects US Federal debt to rise by $20 trillion + in the next decade.
  • Continued large budget deficits will make this worse and eventually force harsher changes when the music stops.
  • Federal interest payments for 2027 are projected to exceed $1.2 trillion, or nearly 16% of Federal spending.
  • As the interest on the Federal debt will consume a higher, and higher percentage of the government’s budget, it will crowd out other spending, making it harder to make changes the longer we wait.

• Emerging market growth:
  • South-East Asian countries such as South Korea and Taiwan have benefited as component manufactures used for the development of AI and AI infrastructure such as data centers but are heavily dependent on imports from the Middle East for energy, fertilizer, and helium used in semiconductor manufacturing.
  • China has gone from an economic growth machine pre-covid to requiring government stimulus to deliver growth.
  • China’s population has peaked, is aging, and requires less infrastructure and housing spending, slowing growth.
  • Poor top-down economic policies from China’s communist party helped to create a real estate bubble and an overhang of bad debt from large real estate developers.
  • Wages in China have become less competitive, and China has become very assertive to its neighbors in the South China Sea. Combined with tariff threats, it has led companies to move or establish new production away from China to diversify risks.
  • India has been a beneficiary as the country’s economic growth surpassed China. India is dependent on imports from the Middle East and this has led to fuel shortages, including critical cooking fuel, that hurt the country.
  • Mexico has benefited from near-shoring to the US.
  • Higher demand for key raw materials used in the energy transition will benefit select EM economies such as Brazil, Chile, and Indonesia that have these resources.

• Economic growth, corporate earnings, and financial markets:
  • Putting it all together, 2026 has surprised to the upside despite headwinds. Strong 1H26 EPS growth has reduced forward multiples on many stocks, and the SPX P/E on NTM EPS of 19.4x is ~four multiple points lower compared to 12 months ago.
  • While economic growth both in the US and globally has been resilient, the off and on-again attacks on shipping in the Strait of Hormuz have led to reduced traffic and closure. This negatively impacted global economic growth.
  • Both the duration and magnitude of shipping disruptions matter. Prolonged disruptions are inflationary, and have already led to higher interest rates, and could lead to a recession in a worst-case scenario.
  • US equity valuations have become more attractive as corporations have delivered much stronger than expected EPS growth aided by record margins, led by robust AI infrastructure spending and resilient consumers.
  • Analysts expect the S&P 500 to deliver strong EPS growth for the next few years. Achieving this will support equities. Should geopolitical turmoil such as the Iran war led to negative EPS revisions, equities could face a correction.
  • We think the FED’s job has become more challenging as elevated inflation remains stubborn and hurt by higher oil and food prices.
  • We favor intermediate IG corporate bonds due to a combination of strong balance sheets and attractive yields. Stay away from long-duration bonds given much higher price risks.
  • We recommend long-term investors to stay invested despite bouts of volatility as market timing has not been effective historically. Ultimately, fundamentals drive markets in the long-run despite negative headlines in the short-run.