Staying Focused Through Changing Markets

The third quarter brought continued progress for stock investors, although gains were uneven. The S&P 500, a broad measure of large U.S. stocks, returned 2.3% for the quarter, bringing its year-to-date gain to 12.7%, with energy and technology among the strongest sectors. Meanwhile, rising interest rates remained a challenge for bond investors, particularly those holding longer-term bonds. As we enter the final quarter, the question is not whether uncertainty will disappear, but how to stay positioned for long-term progress while recognizing the risks.

Three Key Themes Shaping Q4 2026

1. Resilient Growth, but Interest Rates Are Moving Higher

Despite higher energy costs and geopolitical uncertainty, the economy has continued to show resilience, supported by consumer spending, a stronger-than-expected labor market, and substantial business investment in artificial intelligence. We see these forces supporting continued expansion. Lower-income households are feeling greater pressure from rising prices, however middle- and high-income groups appear to have adjusted to the shock and made up the difference. For most American consumers, they simply don’t see a reason to pull back. U.S. consumer spending rose by 0.2% last month to a record high, exceeding consensus forecasts, according to the Commerce Department.

The interest-rate outlook has also changed. Instead of the additional rate cuts many expected earlier this year, the Federal Reserve resumed raising rates in September as inflation remained persistent. For investors, the practical takeaway is to avoid building a financial plan around the assumption that borrowing costs will quickly fall. The developments to watch are whether inflation eases, energy prices stabilize, and consumers continue spending. We believe matching investments to spending needs is more useful than trying to predict every Fed decision.

2. AI Creates Opportunity, but Diversification Still Matters

Artificial intelligence remains a powerful investment theme, and there are encouraging signs that the opportunity is translating into profits. For example, Google’s cloud business generated operating profits of $8.8 billion in the second quarter, up from $2.8 billion a year earlier, with management identifying AI services and infrastructure as important growth drivers. These are profits for the broader cloud business, not AI alone, but they offer a concrete sign of progress.

The next test is whether profits can continue growing enough to justify the enormous investment underway. We will also be watching whether the benefits spread from companies building the technology to businesses using it. Our preferred approach is to participate without making the entire portfolio dependent on one theme. Diversification cannot prevent losses, but it can reduce reliance on a handful of companies getting everything right.

3. Midterm Elections: Keep Politics Separate from Your Portfolio

Election season can make investment decisions feel unusually urgent. Our view is that portfolios should be guided by financial goals rather than a prediction about which party will win. History offers some reassuring perspective. Lincoln Financial's latest research shows that, across completed midterm election years from 1950 through 2025, the S&P 500's fourth-quarter return, averaged 6.6%, compared with 3.4% in other years. Its research also tracked the one-year return of the S&P 500 from November 1st of each midterm election year since 1950 and in every cycle, that 12-month stretch ended in positive territory, 19 out of 19 times, with an average return of 16.6%. These patterns are context, not a forecast for this quarter or next year, and they do not establish that elections cause market gains. The more useful lesson is to resist turning political uncertainty into an all-or-nothing investment decision.

The Bottom Line

We believe the case remains for cautious optimism. Maintaining a long-term perspective does not mean ignoring risks. It means addressing them through a plan rather than reacting to every headline. Focus on what you can control: maintaining an appropriate mix of investments, reviewing whether market moves have shifted that mix, and keeping money needed for near-term expenses separate from long-term growth investments. For those taking portfolio withdrawals, that separation deserves particular attention. The goal is not to own every winning stock or anticipate every policy decision. It is to keep your investments aligned with your goals and give the plan time to work. Stay diversified, stay disciplined, and let your financial plan, not the news cycle, guide the next decision.