Q3 Market Review: A Strong Market Meets New Headwinds
The third quarter of 2026 did not announce itself with a single dramatic moment. Instead, it was a quarter of crosscurrents, in which stocks, bonds, interest rates, oil, and technology each pulled in a different direction, and in which the most important developments often sat just beneath the headlines.
The S&P 500 reached new highs and finished the period higher, yet the average stock lagged the index, and bonds endured one of their more difficult quarters in recent memory. Oil prices climbed back above $100 a barrel, the Federal Reserve raised interest rates for the first time since 2023, and long-term Treasury yields rose to levels not seen in more than two decades.
It was a reminder that the index everyone watches rarely tells the whole story. Diversified investors are not asked to own the headline. They are asked to own a plan.
Geopolitics: Old Headlines, New Chapters
The conflict involving Iran, which had begun to fade from the front page by the end of the second quarter, returned as a market driver. Renewed tension around the Strait of Hormuz pushed oil prices back above $100 a barrel, and energy became the strongest sector in the market by a wide margin. Higher energy prices also fed back into inflation concerns and, in turn, expectations for interest rates.
This is the second consecutive quarter in which we have had a version of this conversation, and that is the point. Headlines rotate; principles do not. In the second quarter, investors were told to worry about oil and then, within weeks, to stop worrying. In the third, the worry returned. Investors who adjusted their portfolios to each new chapter would have been very busy, and rarely better off.
The same discipline applies closer to home. With the November midterm elections approaching, we expect no shortage of commentary about what the outcome may mean for markets. History suggests that elections tend to matter more for sentiment than for long-term investment outcomes. Geopolitics may shape the conversation, but neither should dictate strategy.
U.S. Stocks: A Calm Surface, A Narrow Market
After a 15.2% gain in the second quarter, U.S. large stocks took a breath. Early in the quarter, enthusiasm for artificial intelligence cooled and technology stocks sold off. A rebound in August, supported by very strong corporate earnings, carried the S&P 500 and the Nasdaq to record highs before higher interest rates brought volatility back in September.
Beneath the surface, the picture was less friendly. Rising rates and tighter financial conditions weighed heavily on smaller companies, which tend to depend more on outside financing and a healthy domestic economy. After gaining 21.5% in the second quarter, small company stocks gave back a meaningful portion of those gains. Leadership rotated as well, with energy and healthcare among the stronger sectors.
U.S. Large Companies (S&P 500 Index) returned 2.3% while U.S. Small Companies (Russell 2000 Index) returned -7.2% in the third quarter.
International Markets: A Quiet Quarter After a Strong Start
International stocks mostly treaded water. Developed markets were slightly positive and emerging markets slightly negative, as technology-related stocks in places such as Taiwan and South Korea gave back some of their earlier gains.
A quiet quarter should not be mistaken for an unimportant one. Emerging markets remain the strongest major equity category of the year, up more than 23% through September, while developed international stocks are up roughly 10%. Those results have arrived with far less fanfare than the headlines about U.S. technology, which is precisely why global diversification matters. Leadership rarely announces itself in advance.
International stocks (MSCI EAFE Index) returned 0.8%, while Emerging Markets (MSCI Emerging Markets Index) returned -0.4% in the third quarter.
Interest Rates and Bonds: A Difficult Quarter, A Better Starting Point
Bonds had their most difficult quarter in several years. Persistent inflation, higher energy prices, and rising government borrowing pushed yields sharply higher. In September, the Federal Reserve raised short-term rates by a quarter point to a range of 3.75% to 4.00%, its first increase since 2023, and the 10-year Treasury yield ended the quarter near 5.3%, its highest level since 2002. When yields rise, the prices of existing bonds fall, and September was an uncommon month in which stocks and bonds declined together.
Why do we continue to hold bonds? First, their role in a diversified portfolio has never been to avoid every difficult quarter. It is to provide income, diversification, and stability over a full market cycle. Second, the same higher yields that caused this quarter’s losses now work in the other direction. The broad bond market yields more than 5.5% today, well above its average for the past decade and a half, which means investors are being paid far more to hold bonds than they were for much of that time.
We do not know whether rates will move higher or lower from here, and we are not attempting to forecast it. We do know that higher starting yields have historically been associated with higher future bond returns, and that patience is often what allows investors to benefit from them.
The U.S. Bond Index (Bloomberg U.S. Aggregate Bond Index) returned -3.5% in the third quarter.
Alternative Investments: Differentiation When It Matters
Alternative investments are designed to behave differently from stocks and bonds, and September, when both fell together, put that design to the test. Reinsurance benefited from a relatively quiet stretch for catastrophe losses, private credit remained anchored by the income that higher interest rates produce while investors watched borrower credit quality closely, and multi-strategy approaches continued to serve as a diversifying complement within portfolios.
Our philosophy remains unchanged. We do not pursue complexity for complexity’s sake. We look for strategies where the evidence suggests diversification benefits and attractive risk-adjusted returns may exist.
Reinsurance (Swiss Re Global Cat Bond Index) returned 5.2%, Direct Lending (Cliffwater Direct Lending Index) returned 1.6%, and Multi-Strategy (combination of Credit Suisse Multi-Strategy and Wilshire Liquid Alt Multi-Strategy indexes) returned 1.9% in the third quarter.
Looking Ahead: Discipline Is Built in Calm Markets and Tested in Uncertain Ones
Third-quarter earnings season is underway, the Federal Reserve is weighing what comes next, the midterm elections are approaching, and events in the Middle East continue to unfold. Each of these will generate headlines. None of them will come with a guarantee.
What we can say is that the conditions that unsettled investors in the third quarter, including rising rates, narrow leadership, and stocks and bonds under pressure at the same time, are the very conditions diversified portfolios are built to navigate. We continue to focus on what we can control: owning a globally diversified mix of investments, managing risk thoughtfully, rebalancing with discipline, minimizing unnecessary costs, and pursuing tax efficiency.
We do not know what the fourth quarter will bring and we do not know which headline will command attention next. What we believe is that patient investors have historically been rewarded for staying committed to a well-constructed plan, even when the path is uncomfortable.
Calm markets do not ask much of us. Uncertain markets ask for discipline. That is why we plan for the second kind.
Index returns are sourced from Morningstar and are as of 9/30/2026.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices or categories. Past performance is no guarantee of future results.
C. Zach Ivey
Chief Investment and Advice Officer
CFA®, CFP®, MBA