Q4 2026 Market & Economic Outlook

 

Current Economic Views

Thus far through 2026, the global economy has remained sturdy despite geopolitical tensions. With energy prices contributing to persistent inflation pressures, several central banks have either resumed tightening or signaled a willingness to keep monetary policy restrictive.

 

The U.S. economy grew at a solid 2.2% annualized rate in the second quarter, and the unemployment rate remains low at 4.2%. Through September, the U.S. economy added an average of 68,000 jobs per month. Business spending, led by the artificial intelligence build-out, remains robust. Household wealth hit an all-time high, on rising real estate and investment portfolios, while household debt service levels remain low.

 

Inflation remains a challenge, and the Fed recently raised rates for the first time since 2023 and signaled additional rate hikes in the coming months. Measures of inflation have remained above the Federal Reserve’s 2% target for over five years, with the Consumer Price Index 3.4% higher at the end of August than a year prior. Average hourly earnings rose by 3% from a year ago, so the average worker’s paycheck is not keeping up with the cost of living. As a result, consumer confidence remains at levels consistent with a recession.

 

The housing market continues to move at a sluggish pace, with the average 30-year mortgage rate above 7%; it was under 6% before the war in Iran started.

 

Central banks across many developed economies continue to prioritize inflation control. Despite concerns that higher energy prices and the Middle East conflict could weigh on growth, the global economy remains resilient.

 

In addition to the Fed, the European Central Bank, the Bank of England, the Bank of Japan, and the Bank of Australia have all raised rates to bring down inflation. Fortunately, despite fears of slower growth due to dependence on Middle Eastern oil, the global economic expansion has continued.

Looking ahead

Estimates for global growth heading into 2027 remain near 3%, with the U.S. economy projected to grow in the 2-2.5% range. With higher interest rates, some consumer spending could slow, but it is not expected to collapse.

 

Recent strength in consumer spending has been concentrated among higher-income households, which continue to benefit from gains in home values and financial assets. Lower and middle-income households will likely continue to feel the impact of higher interest rates, ongoing tariffs, and sticky inflation. Interest-sensitive industries could be affected, such as autos and housing.

 

Business spending should remain strong, driven by the One Big Beautiful Bill Act and the continued AI-related expenses. Hyperscalers can absorb higher rates, given that their returns on investment are expected to outpace the impact of Fed rate hikes. The uncertainty over the number of additional Fed rate hikes could lead to cautious spending by smaller businesses.

 

Inflation may prove sticky as higher energy prices, tariffs, and strong investment demand from AI infrastructure continue to place upward pressure on costs.

Democrats may very well take control of at least part of Congress, however the tax code is unlikely to change. Also, the Bloomberg consensus forecast has the probability of a U.S. recession within the next 12 months at only 20%.

Current Investment Views: Equities

The S&P 500 gained 2.5% in the third quarter, which outpaced the Nasdaq (up 1.9%), the Dow Jones (down 2.7%), and the Russell 2000 (down 6.7%). Semiconductors and AI-related investments remained the dominant market themes. However, rising energy prices made the energy sector the winner in the quarter. Conversely, utilities, real estate, and industrials all performed poorly amid the rate-driven selloff.

 

Several key catalysts explain much of the quarter’s volatility. First, the Federal Reserve hiked rates in September and signaled one more rate hike this year. The Fed's hawkish messaging was a key driver of the rate-induced selloff across interest-rate-sensitive sectors. Meanwhile, mixed economic data contributed to investor uncertainty. U.S. employers unexpectedly cut 23,000 jobs in July, while August CPI accelerated as gasoline and housing costs pushed inflation higher.

 

AI and technology were also key catalysts in the quarter. Megacap tech companies notched record highs in September, propelled by renewed AI optimism. This also helped the Nasdaq 100 close at a record high for the first time since June before falling later in the quarter.

 

S&P 500 companies continue to generate more profit from each dollar of revenue, even as investors assign lower valuation multiples to those earnings. Margins continue to expand at a substantial pace, fueling one of the strongest earnings stretches outside of post-recession recoveries, even as higher rates, oil prices, and sticky inflation are pushing valuations lower.

 

Technology, particularly semiconductors, has powered much of the margin boom, with energy and materials also contributing. Should these macroeconomic headwinds moderate, the combination of record profitability and compressed valuations might create multiple expansion and renewed equity upside.

Looking ahead

The equity market dynamics will likely remain highly fluid. Geopolitical developments in the Middle East are likely to remain a key factor in market direction and risk sentiment.

 

There has already been a notable deceleration from the double-digit returns earlier in the year, although underlying corporate fundamentals remain highly resilient.

 

Consensus estimates call for fourth-quarter S&P 500 earnings per share of $88.06, implying year-over-year growth of 36.5%. The AI theme remains the dominant earnings driver, though growth is increasingly broadening into cyclical sectors. Full-year estimates of $265 imply a 31% year-over-year growth rate, which would be a potential four-year stretch of double-digit EPS growth. The information technology sector leads quarter-over-quarter growth estimates, with a 20.3% increase, again driven by demand for AI infrastructure.

 

There are risks to watch for through the quarter. The Fed hiked in September, and the signals point toward further tightening.

 

The beat rate in recent quarters has been relatively elevated compared to history, meaning the bar is set exceptionally high. Markets have increasingly penalized earnings misses more than they reward earnings beats, a pattern that is likely to persist as expectations remain elevated.

Current Investment Views: Fixed Income

The Federal Reserve raised its benchmark rate by 25 basis points to 3.75–4.00% in September by a 12-0 vote, the first hike of this cycle. U.S. Treasury yields rose to some of the highest levels in decades. During the third quarter, the 10-Year Treasury Yield surged by roughly 81 basis points to 5.29%, and the 2-Year Treasury Yield rose by about 71 basis points to 4.89%. Reasons include:

 

• The U.S. economy remains solid as households continue to spend, and the labor market rebounded after a soft July.
• There are increasing concerns about the U.S. debt.
• Corporate bond issuance has been notable, especially from hyperscalers funding AI buildouts.

 

Also, the 5-Year and 7-Year Treasury auctions did not go well recently, and Treasury buybacks were underwhelming. This pushed rates higher across the curve, with the long end hitting 20-year highs.

 

Credit spreads remain near historical tights, a sign of confidence in the U.S. economy and the corporate base. Through all of this, the resilient consumer theme largely remains intact, though higher-income consumers are doing the heavy lifting as lower-end consumers feel the squeeze from elevated gasoline prices. Retail sales recently rose by a strong 1.2% month over month.

 

The labor market continues to exhibit a “no-hire, no-fire” dynamic. Unemployment is low at 4.2%, but wage growth of 3% year over year continues to modestly lag inflation of 3.4%, keeping real wages slightly negative. This largely explains the poor consumer sentiment surveys.

 

The 5-year breakeven rate for Treasury Inflation Protected Securities (TIPS) is roughly 2.38%. This measure, derived from the difference between nominal Treasury yields and TIPS, represents the inflation rate at which both investments would deliver similar returns over the next five years.

Looking ahead

In the Fed's latest economic projections, the 2026 GDP forecast was raised to 2.3% from 2.2% in June, and that upward momentum is evident in the data. Second quarter GDP was revised up to 2.2% from 1.5%, with consumption revised up to 3.8% from 3.4%. Consumers have continued to spend despite high gas prices, and that economic strength is a reason the Fed has cited as a motive to raise rates.

 

On the inflation front, the government updated its methodology, bringing both the annual headline and core PCE (the Fed's preferred inflation metric) down by 0.3 percentage points from the previously reported figures. Annual headline PCE now sits at 3.4% and core at 3%. The numbers are not good enough for Chair Kevin Warsh. He described the recent hike as removing "a dose of accommodation" and said it would support a "timelier return" to the 2% inflation target. He added, "The plain fact is that inflation is too high and has been for too long."

 

The Fed’s median unemployment rate projection for the end of 2026 was lowered to 4.1% from 4.3% in June. The strength in the job market continues to surprise many. Between a strong labor market, resilient consumers, and sticky inflation, most Fed officials expect another hike later this year. The market expects several more hikes through the middle of next year.

 

If the economy remains stable, then the Fed’s estimate of one more hike (probably in December) is likely to be the path forward. If economic growth increases, then more hikes are possible.

Asset Spotlight: AI’s Potential

Much like the transformative adoption of electricity and the internet, artificial intelligence increasingly appears poised to become a defining technological force with far-reaching economic implications. Earnings reports have been broadly favorable, helping reduce some uncertainty surrounding AI's commercial viability and profitability.

 

The technology progressively looks to be moving beyond experimentation and toward large-scale commercial deployment.

 

Still, across our public equity exposure, we place a lot of confidence in our active managers' ability to distinguish between durable opportunities and speculation.

 

More broadly, we remain cautious about making significant portfolio adjustments based on any single theme, including AI. Investors today are navigating a complex landscape characterized by geopolitical tensions, evolving political and regulatory dynamics, shifting monetary and fiscal policies, and persistent questions surrounding the pace, scope, and ultimate impact of AI adoption. Although the technology continues to improve at a remarkable rate and its potential applications are increasingly compelling, a wide range of outcomes remains possible, many of which will take years to fully materialize.

 

While some investors (particularly hedge funds/other tactical investors) view these developments as actionable signals, it is unclear whether these strategies will consistently produce superior outcomes.

 

At present, the investment outlook remains characterized by limited (though perhaps improving) visibility. Given this environment, we believe there is merit in maintaining diversified exposures, preserving flexibility, monitoring valuations, and emphasizing downside risk management.

Protecting capital during periods of uncertainty remains a core component of our investment philosophy and an important part of the value we seek to deliver to clients.

Looking ahead

Over the past several months, next year’s earnings-per-share estimates have improved meaningfully in large part because of AI. The bulk of the increases was driven by the second-quarter earnings season and high levels of profitability and growth.

 

The S&P 500 saw the strongest absolute revision, and estimates have continued to drift modestly higher. The Nasdaq followed a similar pattern, with large-cap tech results driving most of the improvements.

 

Enterprise AI adoption is accelerating globally as companies move from experimentation to production deployment. Adoption in developed markets rose to 20% in 2025, up from 14% in 2024 and 9% in 2023, according to Bloomberg.

 

In the U.S., overall corporate usage stands at 20%, and increases to 37% among firms with 250 or more employees.¹ Nearly 90% of Fortune 100 companies are using Alphabet’s Gemini Enterprise. Microsoft reported that the number of paid Copilot seats grew from 10 million at the beginning of 2025 to 33 million recently.

 

Data center expansion faces interconnected constraints, including limited power and grid capacity, lengthy permitting processes, skilled labor and equipment shortages, water scarcity, rising construction and financing costs, and political and technology risks.

 

These challenges could delay project timelines, increase development costs, slow the deployment of AI infrastructure, and reduce expected investment returns.

 

¹ U.S. Census Bureau, May 26, 2026