Q3 2026 market commentary: cartoon hot-air balloon labeled 5% lifts a smiling bond while a stock chart looks up from the ground

Narrow gains beneath the surface

Our Q3 2026 market commentary covers a quarter where the headline numbers hid a lot of strain. The S&P 500 gained about 2% in the third quarter, but the gains were narrow. The equal-weighted S&P 500 fell about 1.9%, small-company stocks dropped more than 7%, and the semiconductor stocks that led the second quarter fell about 11%.

The bigger stories were oil and interest rates. The U.S.–Iran ceasefire broke down in early July, and Brent crude climbed about 42% over the quarter, briefly nearing $110 a barrel in mid-September. Energy was the best-performing sector by a wide margin.

Q3 2026 returns: S&P 500 up 2.2%, equal-weight down 1.9%, small caps down 7.2%, energy up 13.7%

The Fed and the 5% Treasury

In September, the Fed raised its policy rate by a quarter point to 3.75%–4.00%, its first increase since 2023. Chair Kevin Warsh described the move as “removing accommodation,” and said the Fed’s focus is squarely on bringing inflation down.

Long-term rates moved faster than the Fed did. The 10-year Treasury yield crossed 5% in September for the first time since 2007 and ended the quarter near 5.3%. When yields rise, bond prices fall, and the broad bond market lost about 3.5% for the quarter.

The valuation gap got wider

In our earlier commentaries, we pointed out that the S&P 500’s earnings yield had slipped below the yield on a 10-year Treasury. That gap has since widened. At the end of September, the 10-year paid about 5.3%, while the S&P 500’s earnings yield was about 3.8%.

Put simply, a dollar in the stock market is buying about 3.8 cents of current corporate earnings, while a dollar lent to the U.S. government for ten years earns about 5.3 cents in interest, with far less volatility. Stocks can still do well if earnings keep growing quickly, but the cushion for disappointment is thin.

10-year Treasury yield of 5.3% versus S&P 500 earnings yield of 3.8% at the end of Q3 2026

Checking in on our mid-year outlook

In our mid-year outlook, we said we expected the second half of the year to look more like the first quarter. So far, much of that has played out:

  • Higher long-term rates: the 10-year Treasury moved above 5%.
  • Inflation hedges, especially energy: energy was the best-performing sector in Q3.
  • Value over growth: value stocks outpaced growth stocks in Q3, returning 2.6% versus 0.9% for large companies.
  • Precious metals and Bitcoin: both rebounded after a rough second quarter.

Checklist of our mid-year outlook: higher long-term rates, energy, value over growth, precious metals and Bitcoin

Since quarter-end, and looking ahead

Since the quarter ended, stocks have pulled back, led by the technology names that had run up the most, and the midterm elections are now behind us. Lower prices are part of a healthy market, and they bring valuations closer to the levels we’ve been waiting for.

Throughout the year, we’ve emphasized short-term bonds over long-term bonds and expensive stocks. Short-term bonds have done their job. Because they mature quickly, they’ve been far less affected by rising rates than longer bonds, and with yields near 5%, they’ve kept paying solid income while stocks and long-term bonds have swung.

As valuations come in, we see better opportunities developing in stocks. We may gradually and selectively add to stocks where it fits our clients’ goals, rather than all at once, while short-term bonds continue to provide income and stability.

As always, if your goals or circumstances have changed, please reach out so we can make sure your portfolio still fits.

Catch up on the series: Q1 2026 Market Commentary | Mid-Year 2026 Market Outlook

Disclosures

The opinions expressed are those of Eagle Financial Management Services as of 11/5/26 and are subject to change. Forecasts are not guarantees, and actual results may differ materially. This material is for informational purposes only and is not a recommendation to buy or sell any security, including any cryptocurrency. Index returns are shown for illustration; indexes, including the S&P 500, Russell 1000 Value, Russell 1000 Growth and Russell 2000, are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Bonds are subject to interest-rate, credit and inflation risk. Investment advice is offered through Wealthcare Advisory Partners, LLC, an SEC-registered investment adviser. Eagle Financial Management Services is a Wealthcare Company.