Q3 2026 Market Commentary

Hiring has cooled: employers added just 29,000 jobs in September, with prior months revised lower, though unemployment, at 4.2%, has held in a narrow range since March. On October 8, Fed Governor Christopher Waller said, “If the economic data continue to come in as expected, I anticipate additional hikes.” The Fed next meets October 27–28.

Sentiment vs. the Data

Ask Americans about the economy, and the answer is gloomy. The University of Michigan’s consumer sentiment index ended September at 48.1, down 15% since January and not far above the record low of 44.8 set in May. The Conference Board’s confidence index fell to 81.9, which The Wall Street Journal noted was the lowest since 2014. For perspective, Michigan’s index bottomed at 55.3 in November 2008 and 51.7 in May 1980, when unemployment stood at 6.8% and 7.5%, respectively. Today it is 4.2%.

The hard data look more resilient. Second-quarter GDP growth was revised up to 2.2%, inflation-adjusted consumer spending rose 0.6% in August, and retail sales were up 6.0% from a year earlier before adjusting for inflation. Household net worth reached a record $195.9 trillion at midyear, with household debt relative to income near its lowest level since the late 1990s.

That does not mean the gloom is unfounded. Regular gasoline cost about $4.47 a gallon on September 29, roughly $1.35 more than a year earlier, and hourly earnings rose 3.0% over the past year, trailing 3.4% inflation. Mortgage rates over 7% strain housing affordability, and stock market gains have flowed mostly to higher-income households. Partisanship and online survey methods may amplify the swings, though confidence has fallen among Republicans and Democrats alike this year.

Our takeaway: The mood is more downbeat than the economic data alone would typically suggest. Sentiment matters, but what consumers do can sometimes tell us more about the economy than what they say. Federal Reserve researchers studying actual household purchasing behavior put it succinctly: “What consumers have been saying differs from what they have been doing.”³ In other words, when sentiment and behavior diverge, we put considerable weight on employment, income, spending and other measures of actual economic activity rather than assuming that gloomy survey responses necessarily signal a gloomy economy.

Artificial Intelligence: Society, Industry, and Investment

In society. AI use keeps spreading, yet public sentiment has grown more cautious. In a June Pew Research Center survey, 71% of Americans said they expect AI to lead to fewer U.S. jobs over the next 20 years, up from 64% in 2024, and Gallup found that a record 27% of workers worry technology could make their jobs obsolete. For families, these shifts raise practical questions about career paths for the next generation, how to guard against increasingly convincing AI-enabled scams, and how much support heirs may need along the way.

In Washington. On September 29, the White House hosted AI industry leaders who signed a “morally binding” accord. The published accord, signed by leaders of Google, Anthropic, Meta, OpenAI, xAI, and Nvidia, calls for internal safety controls on frontier AI models, independent outside audits, and board-level oversight, adding that “over time, it may make sense to codify these steps into laws or regulations.” For investors, it signals a continued federal preference for industry self-regulation over new mandates.

In our office. We use AI tools, including Microsoft Copilot, as an editorial assistant to help draft and proofread communications like this one, summarize research, and handle routine tasks so we can spend more time with you. Every client communication is reviewed and approved personally by me or a team member. The following AI tools are approved for use within the firm:

• Microsoft 365 Copilot (Business Premium)
• Zocks – meeting note transcriber (Kestra-approved version)

Both tools have been reviewed and approved by Kestra Financial for use within our practice, provided that appropriate internal policies and safeguards are in place.

Microsoft 365 Copilot operates entirely within our secure Microsoft 365 tenant environment and adheres to enterprise-grade security standards.

As an investment. Combined 2026 capital spending by the largest technology companies is expected to top $700 billion, and financing is shifting toward debt as companies seek substantial funding for AI chips and infrastructure. Unlike many companies at the height of the dot-com era, today’s largest AI spenders are highly profitable. Still, the more immediate investment risks may be concentration, financing, and valuation rather than whether AI ultimately matters.

Information technology represented about 38% of the S&P 500 in the second quarter, more than twice its historical average. That means owning “the market” already includes a significant position in the companies most closely associated with AI. Nvidia being the largest is held indirectly by clients through the diversified mutual funds and ETFs we invest in.

Nvidia CEO Jensen Huang is understandably an optimistic proponent of AI, but we highly recommend his September 28 interview on CNBC’s “Squawk Box” as a must-watch for anyone interested in where AI is headed and how the industry is thinking about its risks. Discussing increasingly capable AI agents, Huang framed the challenge simply: “You want it to be super clever so it can perform tasks and do things,” but when an agent is deployed, “the first thing you do is you take away all of its rights.” His argument is essentially that increasingly powerful AI can be controlled through strong technical safeguards and that the challenge is a solvable engineering problem. It is an optimistic view, to be sure, but an important counterpoint for anyone trying to understand both the extraordinary potential of AI and the risks that come with it.

Our approach is to participate in innovation without betting a family’s future on any single outcome. We seek broad exposure across technology and the “picks and shovels” of power, industrials, and infrastructure, while managing concentration, rebalancing when positions drift, and maintaining a foundation of high-quality bonds and cash reserves.

While AI may represent one of the market’s most important growth opportunities, today’s higher bond yields remind us that attractive returns do not have to come from equities alone.

Bonds Are Back at the Table

Bonds have always had a role in diversified portfolios, but that role became much harder to justify when interest rates collapsed in 2020. The 10-year U.S. Treasury yield fell to just 0.52% on August 4, 2020, after beginning the year near 1.9%. At those yields, investors were accepting very little income while still assuming meaningful interest-rate risk when rates eventually rose. We therefore leaned away from traditional bonds and, where we did own fixed income, generally favored shorter maturities to reduce sensitivity to rising rates. Importantly, that did not mean simply replacing bonds with more stocks. Depending on each client’s objectives and risk profile, we also used publicly traded liquid alternative investment strategies as additional sources of diversification with a lower correlation to publicly traded stocks and bonds.

Today’s opportunity is very different. After an extended period of historically low interest rates, investors are once again being meaningfully compensated for owning fixed income. Treasury and high-quality bond yields are now substantially higher than they were throughout much of the past decade, providing more current income and a stronger starting point for longer-term bond returns.

Just as importantly, the yield available when bonds are purchased has historically been a strong indicator of their subsequent longer-term returns. Research using the Bloomberg U.S. Aggregate Bond Index compared starting yields with subsequent annualized five-year total returns over more than three decades and found a 0.93 correlation between the two.⁴ While the relationship is not precise over shorter periods and actual returns will vary as interest rates and credit conditions change, the principle is important: higher starting yields generally provide a stronger foundation for future bond returns.

How we obtain that bond exposure should depend on the investor. Individual bond ladders can be particularly useful for clients with sufficient assets to diversify economically across issuers and maturities. Investors can match maturities to anticipated cash needs, collect contractual interest payments, and, assuming the issuers remain creditworthy, receive principal as individual bonds mature. A ladder also allows maturing principal to be reinvested periodically at then-prevailing interest rates, enabling the portfolio to gradually adjust as the interest-rate environment changes.

Bond funds and ETFs offer broader diversification, liquidity, and convenience, although they generally do not provide the same certainty of a specific principal payment on a specific maturity date. Shorter-duration strategies can also be attractive for investors who want to earn additional yield without taking as much interest-rate risk, while intermediate or longer maturities may make sense when the objective is to lock in yields for longer or potentially benefit if rates eventually decline.

The broader point is that we do not need to make an all-or-nothing call on bonds, stocks, or the direction of interest rates. A portfolio can combine individual bonds, bond funds or ETFs, and alternative investments, with the mix determined by each client’s liquidity needs, time horizon, tax situation, and tolerance for risk. In 2020, exceptionally low yields gave us good reason to be cautious about committing substantial capital to conventional fixed income. Today, higher starting yields have materially improved the risk-and-return proposition. For clients who need income, capital stability, and genuine diversification from equities, bonds once again deserve a meaningful place at the table.

Portfolio Positioning

Our third quarter focus was bonds and rebalancing: as yields jumped and large-company stocks rose while small caps and bonds fell, we rebalanced toward targets as needed, as disciplined maintenance rather than a market call. Rebalancing does not guarantee a profit or protect against loss. In October, we are reviewing our international and emerging-markets positions, including allocation levels and tilts, as part of an ongoing process.

Tax and Planning Notes

This quarter, we will review year-end items with clients, including required minimum distributions, charitable giving, Roth conversions, and tax-loss harvesting.

Beneficiary designations deserve a fresh look. For IRAs, 401(k)s, and life insurance, the beneficiary form on file, not your will, generally determines who inherits. An outdated form after a marriage, divorce, birth, death, or rollover can undo a carefully built plan, so we encourage reviewing both primary and contingent beneficiaries. The SECURE Act’s 10-year payout rule for most non-spouse heirs raises the stakes for larger accounts. We do not provide tax or legal advice, so please coordinate any changes with your attorney and tax professional.

Our three recent guides explore these topics further (links below, or ask us for a copy):

• The Retirement Account Legacy Challenge – large IRAs, the SECURE Act, and keeping family wealth in the family. 
• Who Gets Your 401(k)? – a five-minute beneficiary check.
• Who Will Inherit Your IRA? – why beneficiary choices matter more than you may think.

Final Thoughts

AI may prove to be one of the defining economic stories of our time, and its path is likely to include both genuine breakthroughs and periods of excess. Our job is not to predict every twist, but to help you participate in innovation thoughtfully while protecting the plans that matter most to your family. Headlines create noise; disciplined, diversified, long-term investing is what ultimately builds and preserves wealth.

As we head into the final months of the year, we want to thank you for your continued trust and partnership. We encourage you to schedule a 30-minute Year-End Planning Review to discuss changes in your goals or circumstances and take advantage of planning opportunities before December 31.

We wish you and your family a wonderful fall season.