Q3 2026 Wrap-Up: Rising Rates Test a Resilient Market
Stocks edged higher in the third quarter while bonds absorbed the sharpest rate move in years. Here is what happened, why it happened, and how we are thinking about it.
Raffaele Mazzone, Lead Portfolio Analyst | October 2026
Key Takeaways
The S&P 500 gained about 2% in the quarter and finished September up 11.8% for the year. The Nasdaq rose about 3%, while the Dow slipped 2.6%.[1,2,3]
The Federal Reserve raised its target rate for the first time since July 2023, to a range of 3.75%–4.00%, saying inflation remains elevated.[4,5]
The 10-year Treasury yield climbed from about 4.5% to 5.3% and the broad bond market fell about 4%. The flip side: bond yields now sit near their highest levels in 25 years.[3]
The economy sent mixed signals: second-quarter growth was revised up to 2.2%, but hiring slowed to 29,000 jobs in September and consumer confidence fell to a 12-year low.[7,8,9]
Stocks: Modest Gains, Narrow Leadership
After a powerful second quarter, when the S&P 500 rose about 15%, the third quarter was quieter. The index gained roughly 2% and closed September 30 at 7,651.54, up 11.8% for the year.[1,3] The technology-heavy Nasdaq Composite rose about 3% for the quarter, while the Dow Jones Industrial Average fell 2.7%, much of that in September that saw the Dow drop 4.3%.[2]
Beneath the headline, leadership was narrow. Large companies carried the market while mid- and small-cap stocks declined for the quarter. Value stocks outpaced growth stocks across company sizes.[3] Spending on artificial intelligence remained a powerful force: the largest AI chipmaker reported quarterly revenue more than doubling from a year earlier.[14]
Overseas, developed international markets gained about 1%, and emerging markets were roughly flat after surging in the second quarter.[3]
Bonds: The Quarter's Real Story
The bigger move happened in fixed income. The 10-year Treasury yield rose about 0.8 percentage point to close the quarter near 5.3%.[3] It first crossed 5% on September 14, its first visit to that level since October 2023[10], and on September 30 it touched its highest level since 2002.[11] The 2-year yield rose from 4.2% to 4.9%.[3]
Because bond prices fall when yields rise, the broad investment-grade bond market declined about 4% for the quarter and municipal bonds about 6%. Several forces pushed yields higher at once: a resilient economy, inflation above the Fed's target, heavy borrowing by both the government and corporations (including debt raised to build AI data centers), and a Fed that has turned back toward tightening.[3] Mortgage rates followed, with the average 30-year fixed rate reaching 7.3%, the highest since November 2023.[11]
There is another side to this. The yield on the broad bond index rose from 4.7% to 5.6% during the quarter.[3] Higher starting yields mean more income from new bond purchases and reinvested interest, which is the cushion that helps high-quality bonds do their job over time. Corporate credit spreads also stayed relatively tight despite concerns around private credit.[3]
The Fed, Inflation, and Oil
On September 16, the Fed voted 12–0 to raise its target range by a quarter point to 3.75%–4.00%, its first increase since July 2023. The Committee described economic activity as expanding at a solid pace and said inflation remains elevated.[4,5] The median projection of Fed officials now places the policy rate at 4.1% at the end of 2026, which would imply one more increase this year.[5]
Energy is a large part of the inflation picture. Renewed attacks on tankers in the Strait of Hormuz late in July pushed oil prices back up[12], and U.S. crude climbed from about $85 to $97 a barrel between late August and early September[13] before closing the quarter near $90.[3] Headline consumer prices were up 3.4% from a year earlier in August, while core inflation, which excludes food and energy, was 2.4%.[6]
The broader economy is sending mixed signals. Second-quarter GDP growth was revised up to a 2.2% annual rate.[8] Hiring, however, slowed sharply: employers added just 29,000 jobs in September and the unemployment rate ticked up to 4.2%.[7] The Conference Board's consumer confidence index fell to 81.9, its lowest reading since 2014, as views of business conditions and the job market worsened.[9] The softer jobs report lowered market-implied odds of another rate increase in October.[15]
What This Means for Your Portfolio
Periods when both stocks and bonds face pressure from rising interest rates can be uncomfortable. They are also a reminder that markets do not always move in predictable ways—or in the same direction we might expect based on the economic headlines.
Our focus remains on managing portfolios according to each client's goals, time horizon, and risk tolerance rather than reacting to short-term market moves.
Positioning. Our strategies have favored shorter and intermediate-term bonds and inflation-sensitive holdings, reflecting our view that inflation could remain persistent. Shorter-term bonds are generally less sensitive to rising rates than longer-term bonds, though they are not immune to rate movements.
Rebalancing. We actively review our portfolios. When allocations drift or our outlook changes, we adjust our portfolios as our investment committee sees fit.
Taxes. In taxable accounts, declines in bond prices can create opportunities to harvest losses that may offset gains elsewhere.
Income. New money and maturing bonds can now be invested at yields meaningfully higher than they were just three months ago.[3] While those higher yields reflect a more challenging interest-rate environment, they can also improve the income potential of high-quality fixed-income investments over time.
Staying the course. Despite the sharp rise in bond yields, the S&P 500 spent much of the quarter near record highs.[3] Developments like these are difficult to anticipate consistently, which is why we build portfolios around long-term objectives rather than short-term forecasts.
What We're Watching in the Fourth Quarter
Several scheduled events could move markets in the months ahead:
October 14: September consumer price index (CPI) report.[15]
October 27–28: The Fed's next policy meeting.[5]
October 29: First estimate of third-quarter GDP.[16]
November 3: Midterm elections.
November 6: October jobs report.[7]
Ongoing: Third-quarter corporate earnings, oil prices, and developments in the Strait of Hormuz.
Let's Talk
Have questions about how the quarter affected your accounts or whether recent market developments have implications for your financial plan? Call us at 410.280.7202 or reach out directly to your LFA advisor. We're always glad to talk.
Sources
Associated Press via ABC News, "How major US stock indexes fared Wednesday 9/30/2026," Sept. 30, 2026. Link
Investrade, "Market Review: September 30, 2026." Link
First Citizens Wealth, "Quarterly Market Review – Q3 2026" (Bloomberg data as of 9/30/2026), Oct. 1, 2026. Link
Board of Governors of the Federal Reserve System, "Federal Reserve issues FOMC statement," Sept. 16, 2026. Link
StockAnalysis, "Fed returns to rate hikes after 3-year pause." Link
CPI Inflation Calculator, "The Consumer Price Index Rises 0.4% in August 2026" (BLS data), Sept. 11, 2026. Link
U.S. Bureau of Labor Statistics, "The Employment Situation – September 2026," Oct. 2, 2026. Link
U.S. Bureau of Economic Analysis, "GDP (Third Estimate), 2nd Quarter 2026," Sept. 30, 2026. Link
National Association of Home Builders (Eye on Housing), "Consumer Confidence Fell in September" (Conference Board data), Sept. 2026. Link
Euronews, "US 10-year Treasury yield breaches 5% as global bond sell-off deepens," Sept. 15, 2026. Link
24/7 Wall St., "The 10-Year Yield Just Broke Its 2007 Peak," Oct. 1, 2026. Link
Oil & Gas Journal, "EIA raises third-quarter Brent forecast to $85/bbl on Strait of Hormuz disruptions." Link
24/7 Wall St., "10-Year Treasury Yield Just Passed 5%," Sept. 14, 2026. Link
NVIDIA Corp., Form 8-K, "Financial Results for Second Quarter Fiscal 2027," Aug. 26, 2026. Link
BabyPips, "US jobs report September 2026: payrolls miss, Fed hike odds." Link
U.S. Bureau of Economic Analysis, GDP release schedule. Link
Important Disclosures
Legacy Financial Advisors, LLC ("LFA") is a registered investment adviser.
This material is provided for informational purposes only. It is not individualized investment, tax, or legal advice and is not a recommendation to buy or sell any security. Any companies mentioned are referenced for market context only. Opinions expressed are as of the date of publication and are subject to change without notice.
Index returns are shown for illustrative purposes only. Indexes are unmanaged, do not reflect fees or expenses, and cannot be invested in directly. Past performance is no guarantee of future results. Market data is as of September 30, 2026 unless otherwise noted and comes from third-party sources believed to be reliable, but its accuracy and completeness are not guaranteed.
All investing involves risk, including the possible loss of principal. Bonds are subject to interest-rate, credit, and inflation risk; bond prices generally fall when interest rates rise. Diversification, asset allocation, and rebalancing do not ensure a profit or protect against loss. Tax-loss harvesting may not be appropriate for every investor; consult your tax professional regarding your situation.
