Corporate earnings remain strong, artificial intelligence investment is supporting capital spending, and attractive yields are continuing across much of the public and private credit asset classes.
At the same time, higher interest rates, elevated equity valuations, tight credit spreads, geopolitical uncertainty, and signs of cooling employment present meaningful risks.
Domestic GDP growth has remained consistent through most of 2026 with consumer spending and business investment being key factors, but higher energy prices, restrictive monetary policy and a less supportive fiscal backdrop could change the landscape.
Public equities remain a principal source of liquid, long-term growth. Corporate earnings have been one of the strongest supports for the market, and AI-related capital investment has begun to produce measurable revenue and operating benefits.
General expectations are calling for 2026 to become the third consecutive year of double-digit S&P 500 earnings growth.
Domestic equities had mixed returns with large-cap stocks (represented by SPY below) finishing the quarter up 2.5%, while mid-cap emerging markets (EEM below) were subdued at 0.5%, and small-cap stocks (IWM below) sank down -6.9%. International equity returns (EFA below) were poised for a stellar quarter through mid-August but finished up 0.8%.
On a global basis, public equities (ACWI below) rose 1.7% on the quarter. As we have noted previously, we do not maintain a direct allocation to small-cap stocks, which has continued to benefit our client portfolios.
Even with the mostly positive quarter, the market is not without vulnerabilities. Expectations are high and index concentration has increased substantially.
As of the end of the quarter, the top ten largest S&P 500 companies account for approximately 40% of the index, and it is no surprise the largest sector of the index is Information Technology at an equal 40%.
We continue to favor domestic total-market exposure while incorporating global ex-US exposure on a smaller scale. We believe this allocation captures broad global economic growth without requiring a tactical judgment about whether U.S., developed international, or emerging-market equities will lead during the next quarter.
Fixed income markets faced a more challenging environment during the third quarter as stronger-than-expected economic growth and persistent inflation pressures pushed interest rates higher across much of the yield curve.
The focus shifted from potential policy easing to the possibility that rates may remain elevated for longer than previously anticipated.
Interest-rate volatility reemerged during the quarter as economic data continued to demonstrate resilience.
The Federal Reserve raised the federal funds rate by 25 basis points in September, citing stronger economic conditions and insufficient progress toward its inflation objective. Policymakers also revised their projections to reflect a higher expected path for interest rates over the coming years.
Treasury yields moved higher throughout the quarter, with the 10-year Treasury yield ending the quarter at 5.3% - a level not seen in more than two decades as investors demanded additional compensation for inflation and fiscal uncertainty.
Higher rates created headwinds for longer-duration bonds, while shorter-duration and floating-rate strategies generally remained more resilient.
Credit spreads widened modestly but remained relatively stable given the increase in yields.
Corporate fundamentals generally remained consistent, supported by continued economic growth, healthy capital markets access, and a still-solid labor market backdrop.
Municipal bonds experienced a difficult quarter as rising Treasury yields weighed on prices across much of the market.
Tax-exempt income is still attractive relative to recent history, but higher rates largely offset the benefit of coupon income during the period. Despite near-term volatility, municipal credit fundamentals remained sound.
State and local government balance sheets continued to benefit from conservative budgeting practices and healthy reserve levels. Higher absolute yields may also improve the longer-term opportunity set for investors seeking tax-efficient income.
The broader takeaway remains that public credit once again offers a meaningful income opportunity, even as higher rates introduce periods of price volatility.
Today's yield environment is significantly more beneficial than the low-rate conditions that prevailed for much of the previous decade.
We remain consistent in our belief that rates will remain elevated. Higher starting yields can continue to provide an important component of total return.
Investors who maintain a disciplined approach to duration and credit selection may be better positioned to navigate an environment characterized by both economic resilience and inflation uncertainty.
Through 2026 the number of active evergreen funds reached 567, with a net AUM of $560.8B, which seemingly has hit a plateau since 2022’s figures of 377 funds at $271.0B.
This trajectory is evidence of the evergreen fund movement from a niche product set toward institutional scale.
The secondaries market is increasingly becoming a more important liquidity channel for venture capital, which in-turn is exposing the gap between private marks and market-clearing prices.
The near-term environment for private equity remains mixed. While deal and exit activity has expanded, distributions remain weaker than historical norms and older portfolio holdings continue to create liquidity pressure for traditional private equity funds.
Fund managers cannot depend on inexpensive leverage and multiple expansion to generate the returns achieved during the exceptionally low-rate period we have experienced in recent past.
This makes manager selection and portfolio construction central for utilizing secondaries and continuation vehicles in the given allocation.
The area of private equity we utilize is the attractive entry pricing, which must be weighed against the elevated underlying acquisition multiples.
The US median buyout Enterprise Value/EBITDA hit 13.2x earlier in the year, an increase from 11x in 2023. This indicates that future returns depend more heavily on revenue growth, margin improvement, deleveraging, and operational execution simply because multiple expansion offers less support than historical norms.
Private credit continued to generate attractive income during the third quarter, benefiting from elevated base rates, growing financing demand, and lender-friendly market dynamics.
The asset class continues to benefit from long-term structural tailwinds. As traditional banks remain selective in their lending activities, private lenders have maintained an important role in financing middle-market companies, infrastructure projects, and increasingly diverse forms of asset-backed lending.
Industry leaders continue to forecast substantial growth across direct lending, infrastructure credit, and specialty finance strategies.
At the same time, widening spreads in portions of the market have improved prospective return opportunities for new investments.
Several managers have noted that supply and demand conditions are becoming increasingly favorable for lenders, allowing them to negotiate stronger structures and more attractive pricing.
Like private equity, the third quarter reinforced an important reality: private credit remains a highly selective asset class.
Borrower fundamentals generally remained constructive, but performance dispersion across managers, sectors, and underwriting standards continues to be significant.
As financing costs remain elevated, investors must remain mindful of refinancing risk, leverage levels, covenant protections, and the increased complexity that can exist within certain segments of the market.
Private credit continues to offer diversification benefits relative to many traditional asset classes.
The return profile is driven primarily by contractual income and borrower cash flows rather than daily market pricing.
At the same time, investors must recognize the tradeoffs associated with the asset class; liquidity constraints, valuation considerations, and manager-selection risk are important factors when evaluating allocations.
Real assets delivered mixed results during the third quarter, with fundamentals remaining strongest in infrastructure and digitally connected sectors while portions of traditional real estate continued their gradual recovery.
Real estate fundamentals continued to stabilize during the quarter, although conditions remained highly dependent on property type and location.
Sectors tied to logistics, residential housing, data centers, and specialized infrastructure generally maintained stronger fundamentals than more challenged areas of the market.
Higher financing costs continue to influence transaction activity and valuation trends. However, several years of repricing have improved prospective entry points for long-term investors, particularly in segments where operational fundamentals remain healthy.
Infrastructure remains one of the more attractive areas within real assets. Demand for power generation, transmission, fiber networks, data centers, and related digital infrastructure accelerate as AI adoption expands and economies require increasing levels of connectivity and computing capacity.
Many industry observers now describe data-center development and associated power infrastructure as being in the early stages of a long-term investment cycle.
The growing need for electricity, connectivity, and physical infrastructure has created opportunities that extend beyond data centers themselves and into supporting assets throughout the broader ecosystem.
Infrastructure also continues to offer characteristics that many investors find attractive, including contractual cash flows, inflation sensitivity, and historically lower correlation to traditional public markets.
From a long-term perspective, the investment case for real assets remains intact. The asset class is not immune to higher interest rates, economic slowdowns, or valuation pressures, but structural demand tied to infrastructure development, energy needs, digitalization, and artificial intelligence continues to provide a supportive backdrop.
As capital becomes more selective, we believe the most attractive opportunities are likely to be found in sectors supported by durable cash flows, favorable supply-demand dynamics, and long-term secular growth trends.
The quarter was characterized by persistent geopolitical tensions, evolving inflation expectations, and strength in corporate earnings weighed against signs of a moderating labor market.
These competing forces contributed to periods of heightened market volatility and divergent performance across major equity indexes.
Economic growth softened from the previous quarter, with second-quarter GDP contracting by 0.3%. Consumer spending and business investment were major contributors to GDP figures, supported by expanded investments in artificial intelligence and related infrastructure.
A surge in imports and uncertainty surrounding global trade and tariff policies weighed on overall growth.
While pockets of strength remain across the economy, recent data suggest a gradual moderation in activity in the short-term.
Inflation remained a key focus for investors during the quarter. While it remained above desired levels, quarter-end readings suggest price pressures may begin to ease in the right direction toward the Fed’s long-term 2% target.
The Federal Reserve’s interest rate decision in September signaled its ongoing commitment to maintaining price stability while balancing the risks of slowing economic growth.
The labor market also showed signs of resilience. Unemployment remained in line with recent levels, although hiring activity and job openings continued to moderate compared to prior years.
Looking ahead, continued development of artificial intelligence and increased regulatory focus may influence labor market dynamics, productivity, and workforce demand across industries.
While the various forces impacted short-term market fluctuations, underlying economic activity and corporate fundamentals remained relatively constructive.
The economy continues to expand, though at a slower pace, and with an even narrower margin for error.
Current market conditions continue to reward balance, and we believe long-term investors are generally best served by maintaining a consistent investment approach rather than reacting to individual data points or short-term market movements.
Investors benefitted from commitment to their long-term plans despite a volatile quarter, as many major equity markets posted positive year-to-date returns.
As we look ahead, economic and market conditions will continue to evolve as investors assess inflation trends, monetary policy, corporate earnings, and geopolitical developments.
Diversification remains one of the most effective tools for managing uncertainty, and we maintain the belief that incorporating exposure across asset classes, sectors, and geographic regions can help create a more consistent investment experience across varying market environments and add to total return.
The focus remains centered on staying disciplined and thoughtfully positioning portfolios around long term outcomes rather than short term predictions.