Markets Don’t Wait for Certainty, and Neither Should Investors
As recently as May, investors saw almost no chance that the Federal Reserve would raise interest rates in September. By the time the Fed met, that probability had climbed above 90%. The hike arrived right on cue; a quarter-point increase that lifted the federal funds target range to 3.75%–4%, the Fed’s first rate increase in more than three years; and the bond market barely flinched. It had already done its adjusting.
That pattern defined much of the third quarter. Persistent inflation, renewed U.S.–Iran tensions around the Strait of Hormuz, rising bond yields around the world, and growing scrutiny of the pace of AI development all gave investors plenty to worry about. And yet stocks continued to advance. The S&P 500 gained 2.3% and the Nasdaq rose 2.6%, with the S&P 500 reaching record highs in August before giving back some ground in September. Global stocks rose 1.6% and developed international markets added 0.9%. Emerging markets slipped 0.4% for the quarter but remained up 23.4% for the year; nearly double the gains of developed markets. Bonds had a tougher stretch as yields climbed.
If this quarter taught us anything, it’s that markets rarely wait for the news to arrive. They price it in long before the headlines catch up.
The Wisdom of Crowds
Inflation is what changed the Fed’s calculus. Headline inflation ran at 3.4% in August, and a hotter-than-expected inflation report in early September pushed the odds of a rate hike past 90%. Treasury yields responded immediately: the one-year yield jumped about 0.22 percentage points in the days surrounding that release; roughly the size of the eventual hike; then leveled off until the Fed’s unanimous decision, rising only slightly afterward on signals that another increase could come this year.
This illustrates one of the most important principles of investing: markets are forward-looking. Prices reflect the collective expectations of millions of investors, so by the time an event is widely anticipated, much of its impact is already reflected in prices. That’s why correctly predicting a Fed decision doesn’t necessarily translate into investment success. To profit from a forecast, you need to know something the market hasn’t already priced in—a far more difficult task.
Higher Interest Rates Are Both Bad and Good News
For many investors, the more consequential development was the rise in longer-term rates. The yield on the 10-year U.S. Treasury reached 5.29% at quarter-end, its highest level since 2002. For bondholders, rising yields bring an uncomfortable short-term result: falling prices. U.S. Treasuries lost 3.0% for the quarter, and the broader Bloomberg U.S. Aggregate Bond Index fell 3.5%.
But there’s another side to that equation. Bond yields are now higher than at any point since the Global Financial Crisis, which means newly purchased bonds offer meaningfully more income. A $10,000 Treasury yielding 5% pays $500 a year; at the roughly 1% yields of the low-rate years earlier this decade, it paid about $100. For investors drawing income from their portfolios, that difference matters.
How much a portfolio feels these rate swings depends largely on duration. Investors concerned about bond volatility can favor shorter-duration bonds, whose prices are less sensitive to rate changes, while natural holders of longer-term bonds; those less concerned with interim price movements; can take advantage of the higher yields those bonds now offer.
Looking Past the Headlines
Several of this quarter’s headlines sounded more alarming than the market’s reaction would suggest. U.S. government debt topped $40 trillion this summer, a milestone that understandably drew attention. But debt concerns aren’t new; they were cited when Moody’s downgraded the U.S. credit rating last year. And credit default swap spreads, which reflect the cost of insuring against a U.S. default, have held near the same level for three years, apart from a brief spike in April 2025. By that measure, the market’s view of U.S. creditworthiness hasn’t gotten worse.
Global context helps, too. Rising Treasury yields can look like a uniquely American problem, but government bond yields have climbed across most major developed economies. Since January 2025, long-term yields have actually risen more sharply in Japan and France than in the U.S. The global data doesn’t suggest investors are losing their appetite for U.S. bonds relative to those of other countries.
Even the jump in oil prices tied to U.S.–Iran tensions carries less weight than it once did. The U.S. economy is more services-oriented and less dependent on oil than in decades past, and the U.S. is now a net oil exporter; both of which have helped mute the impact of price shocks.
None of this means these issues don’t deserve attention. It means market prices already reflect them; and a notable milestone, on its own, isn’t a reason to abandon a well-built plan.
Leadership Keeps Rotating
Artificial intelligence remained a dominant force. Technology stocks carried the S&P 500 to new highs in August, helped by continued gains in AI stocks and the summer debut of SpaceX, the largest IPO ever. But enthusiasm cooled late in the quarter as AI stocks pulled back amid scrutiny of the pace of AI development and signs that companies were taking a more cautious approach to advancing their models. SpaceX itself finished the quarter well below its post-IPO peak; a reminder that, historically, newly public companies have tended to underperform the market in their first year.
Transformative technologies can create enormous economic value, but identifying a world-changing technology isn’t the same as identifying which stocks will reward investors. Returns depend not only on business success, but on the expectations already embedded in prices.
Meanwhile, some of this year’s biggest AI-related winners weren’t American at all. Emerging markets’ strong year has been led by Taiwan and South Korea, which have vaulted into the ranks of the world’s 10 largest stock markets on the strength of chipmakers like TSMC, Samsung, and SK Hynix that supply AI companies. Outperformance can emerge anywhere; and diversified investors are positioned to capture it wherever it appears.
Leadership shifted in other ways as well. Value stocks beat growth stocks in the U.S., in developed international markets, and in emerging markets. Small caps outpaced large caps outside the U.S., but at home, small caps fell 7.2% for the quarter while large caps gained 1.8%. Last quarter’s leaders don’t always lead the next.
Plan – Don’t Predict. Your Portfolio Was Built for Changing Conditions
The third quarter delivered the first Fed rate hike in more than three years, the highest 10-year Treasury yield in more than two decades, falling bond prices, renewed scrutiny of AI, ongoing tension in the Middle East, and a $40 trillion debt milestone. Yet global stocks finished the quarter higher.
Your portfolio isn’t built around predicting the Fed’s next move, the next winning sector, or when interest rates will peak. It’s designed to hold up across many environments through broad diversification across countries, sectors, company sizes, and asset classes; and to be adjusted when your circumstances, not the headlines, warrant it. Higher yields may offer opportunities to improve portfolio income. Shifting market leadership reinforces the value of global diversification. And continued uncertainty is a reminder of why discipline matters.
The goal isn’t a portfolio that works only if our expectations prove correct. It’s one that can serve your needs across many possible futures.
A Final Word
Every quarter brings a new set of questions. Will inflation keep rising? Will the Fed raise rates again before year-end? Will AI justify the extraordinary investment being made in it? Will international markets keep leading? There are thoughtful arguments on every side; but successful long-term investing has never required knowing all the answers.
As we enter the final quarter of 2026, our philosophy remains unchanged. We’ll keep focusing on what we can control: diversification, costs, taxes, risk management, and keeping your investments aligned with the life you’re building. Markets will keep changing. Your financial plan is designed with that in mind.
And if this quarter’s developments left you with questions about your portfolio; whether about bond income, interest rates, or anything else – we’re here.
