Market Trends | Autumn 2026

Facing sticky headline inflation, geopolitical conflicts leading to elevated energy prices, and a resilient labor market, the Fed increased rates at its Sept. 16 meeting by 0.25% to a range of 3.75% to 4.0%.²

"We are committed to a discipline, not a decision [but] we will deliver on our price stability objective on a timely basis," Fed Chairman Kevin Warsh said in the post-meeting press conference. "Today’s decision shows we’re serious about this."³

While the Fed’s first rate hike since 2023 is certainly significant, we don’t believe this is the start of an aggressive tightening cycle. The Chairman has emphasized his intention to provide less forward guidance, but a demonstrated commitment to bringing inflation back towards the Fed’s 2% target could help contain inflation expectations and support longer-term bonds.

Against this backdrop, we believe elevated Treasury rates and inflation-adjusted yields provide an attractive starting point for fixed income returns in the current environment.

We see opportunities for investors to put cash to work, potentially allocating to floating rate exposures, managing interest rate risk with intermediate maturities, building bond ladders, and seeking higher income outside of core bonds.

Equities can still do well in higher-rate regimes, particularly if rate volatility stays contained. With U.S. equity valuations in-line with historical averages (19 times 12-month forward P/E), we remain convicted in U.S. stocks, as detailed in our 2026 Fall Investment Directions.⁴

Micro fundamentals remain strong, with Q2 earnings growth for the S&P 500 at 31% (on an adjusted basis), even as macro dynamics become incrementally more challenging.⁵

Second-quarter results cleared an already-high bar, with near-record beats—86% of S&P 500 companies beat Q2 earnings estimates and issued stronger-than-usual guidance.⁶ AI was at the center of the earnings story but, importantly, strength broadened across sectors while valuations compressed.

The good news? The fundamental story has largely held up. Still, higher rates make us more selective. Within equities, we favor higher-quality companies, large caps and dividend payers over more rate-sensitive small caps.

While we remain constructive, pullbacks are likely to be a part of the path with U.S. midterm elections and the Middle East conflict adding separate sources of event risk.

Historically, midterm election years have delivered weaker-than-average annual returns of 7.5% vs. 12.4% in all years.⁷

In addition, volatility tends to rise ahead of midterm elections as illustrated below.

However, midterms can help reduce uncertainty – regardless of the outcome – with markets often rallying post-election. As event risk passes, equities have historically experienced tailwinds, with an average return of 14.1% in the following six months compared to 5.7% in non-midterm years.⁸

The Fed’s rate hike reinforces that inflation remains the key concern, creating both opportunities and risks across portfolios. Higher yields can improve the return potential of bonds, and stocks can still perform well if economic and earnings growth remain resilient, although markets may face greater volatility as investors adjust to a higher-rate environment.

Investors should consider diversifying their diversifiers. Since 2020, stock and bond correlations have been 0.51, up from -0.22 from 2010-2019, making the traditional 60/40 portfolio potentially less dependable as a source of diversification.⁹ Adding alternatives, including liquid alternative strategies with different return drivers, may help reduce reliance on stock and bond correlations and build greater portfolio resilience across changing inflation and interest-rate environments.

Bond yields rose this summer, but arguably the more important fixed-income story was the extraordinary amount of corporate debt investors were asked to absorb.

The five hyperscalers (Amazon, Microsoft, Alphabet, Meta and Oracle) issued approximately $200 billion of investment grade debt in the first half of 2026, almost double the issuance during all of 2025.¹⁰

"Competition for capital" was one of the three “leading, not exclusive” reasons Chairman Warsh cited for rising bond yields in his post-meeting press conference. Warsh also mentioned economic strength and geopolitics.¹¹

Notably absent from the Chairman’s comments? Ongoing deficit-debt concerns: U.S. debt surpassed $40 trillion this summer while the deficit picture continued to worsen at $1.8 trillion for fiscal year 2026, which ends Sept. 30.¹²

While the stock market and bond investors seemed able to stomach a 5.3% 30-year Treasury yield last month, U.S. Treasury Secretary Scott Bessent was not. On August 19 at the peak of rates, Bessent announced that the Treasury would double their buyback of long end Treasuries.¹³

This was the second intervention from the Treasury secretary, the first coming in the form of support for the Japanese Yen earlier in the summer. The result has been a weaker dollar and renewed optimism in gold, bitcoin and emerging markets.

One month doesn’t make a trend, and higher real rates will certainly bite the recent rally in commodities, but the Treasury’s enhanced buyback program is expected to continue, with a goal of providing support for the bond market.