Market Write-up- Third Quarter 2026 Stock Market Write Up
After a mid-August bounce, U.S. stocks largely went sideways in the third quarter, as upward momentum from the artificial intelligence trade waned and rising interest rates weighed on investor sentiment. For more than three years, the AI boom has been driving the overall stock market higher. But those stocks slowed to a crawl as a growing chorus of AI executives and researchers sounded the alarm on safety concerns for the rapidly advancing technology. Chip and memory stocks, which had been the stock market’s big winners in the first half of 2026, were among the hardest hit in the third quarter. The quarter’s most notable moves were mainly in energy and bonds.
Energy prices continued to fuel day-to-day volatility in the stock market, with the WTI oil price benchmark climbing above $107 a barrel in mid-September as the Iran conflict resurged. Oil prices have contributed to the overall rise in inflation since the war began, even as economists say there has been little evidence of pass-through effects to the rest of the economy. Elevated energy prices contributed to the Fed’s decision to raise interest rates in September.
Bonds faced a challenging quarter as resilient economic activity and persistent inflation led investors to reassess the outlook for policy rates. Competition for capital also intensified amid growing fiscal deficits and corporate debt issuance to finance the AI buildout. Global government bonds were gripped by a sell-off in the third quarter, as a lack of diplomatic breakthroughs on ending the Iran war fueled bets on higher inflation and interest rate hikes. As the bond market came under increasing pressure, yields on 10-year and 30-year Treasury notes hit their highest levels since 2007 and 2002, respectively. The U.S. has some of the highest government borrowing costs in the G7 group of advanced economies, with the benchmark 10-year Treasury yield holding above 5% and the 30-year yield trading above 5.5%. Meanwhile, the Federal Reserve delivered its first interest rate hike in three years on the back of hotter-than-expected inflation data and persistently elevated oil prices. After the latest Fed meeting, Wall Street turned its attention to the remainder of the cycle. Bond futures traders currently (as of the end of the third quarter) see 30% odds of two more hikes by the end of the year.
The U.S. economy remains resilient as business activity in the Midwest U.S. was stronger than economists had expected. Much of the strength in the U.S. economy is due to consumers, who are increasing their spending by more than their incomes are rising. Can this trend continue as borrowing rates continue to rise?
Bank stocks retreated during the third quarter, mirroring the spike in the 10-year U.S. treasury yield to 5% and climbing. There have also been a number of postponed initial public offerings that contributed to weakened market sentiment. The rise in rates also put at risk loan growth for the fourth quarter and into 2027. The KBW Nasdaq Bank Index posted a 6.3% decline during the third quarter of 2026 (down by 8.3% during the month of September) compared with a rise of 17.6% in the second quarter of 2026. This index was up by 117% over the past three-year period. By comparison, smaller banks posted slightly better returns during the third quarter of 2026, with the S&P U.S. SmallCap Bank index decreasing by 7.3% in the quarter (down by 5.5% during the last month of the quarter) with the index being up by 10.1% during the past year while posting a three-year rise of 64.3%. The S&P U.S. MidCap Bank index decreased by 7.7% during the third quarter of 2026 (down by about 6.4% in September) compared to the increase of 14.7% during the first quarter of 2026 leaving it up by 8.1% over the past year, and up by 72.7% over the past three years. By comparison, the S&P 500 was up by 2.0% during the third quarter of 2026 leaving it up by 14.4% during the past year. The S&P 500 was up by approximately 78.4% during the past three-year period compared to the 117% increase for the KBW Nasdaq Bank Index and the 103.2% increase in the technology heavy Nasdaq. The Nasdaq increased by 2.5% during the third quarter of 2026 and was up by 18.5% over the past year.
