Stocks Climbed, Bonds Slipped: What Q3 2026 Means for You
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Stocks Climbed, Bond Prices Slipped, and Diversification Did Its Job
The third-quarter headlines were loud: a Fed rate hike, bond prices still underwater, a frozen housing market, and worries about AI taking jobs. Beneath the noise, U.S. and international stocks both finished the quarter higher even as interest rates rose, likely driven by a strong outlook for corporate earnings.
Bond prices, by contrast, went the other way. Optimism about economic growth, higher government debt, and persistent inflation pushed global bond yields up, thus pushing bond prices down.
Remember: when interest rates rise, existing bond prices usually fall, and when rates fall, prices usually rise. That’s why bonds can lose ground in a quarter like this one, even though they’re still a core building block of a balanced portfolio.
Here’s how some of the major asset classes have done so far in 2026:
Total Returns of Stocks, Bonds, and Other Investments
Last 12 Months Through 9/30/2026
*Opportunistic asset classes. ^ Real Estate Investment Trusts. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against loss. It is not possible to invest directly in an index. All indexes are unmanaged. U.S. Stocks—Dow Jones U.S. Total Stock Market Index; Developed International Stocks—MSCI EAFE; Emerging Market Stocks—MSCI Emerging Markets Index (G); Domestic Growth Stocks—Russell 3000 Growth Index; Domestic Value Stocks—Russell 3000 Value Index; Mag 7—Bloomberg Magnificent 7 Total Return Index; Bonds—Bloomberg US Aggregate Bond Index; Short-Term— Bloomberg US Treasury Bellwether 3 Month Index; High-Yield Bonds—ICE BofA US High Yield Index; Treasury Inflation-Protected Securities (TIPS)—Bloomberg US Treasury US TIPS Index; Commodities—Bloomberg Commodity Index; Real Estate Income Trusts stocks (REITs)—FTSE Nareit Equity REITs Index. Please see Important Information for index definitions. Source: Fidelity Investments.
Notice who’s leading on this list. Emerging markets, commodities, and value stocks are ahead, while developed international stocks largely kept pace with large U.S. companies. For most of the decade-plus since the Great Financial Crisis, big U.S. stocks, especially growth-oriented big tech, dominated, and diversification was often dismissed. No one knows which region or sector will lead next, and this year shows why owning a broad mix matters.
It’s also worth zooming out. Over the last 10 years, investors have seen gains in U.S. stocks, international stocks, and bonds, though not equally. A hypothetical $100,000 invested in U.S. stocks grew to about $393,000, international stocks to about $246,000, and bonds to about $112,000.
Stocks Rose, but Bonds Declined in Q3
Hypothetical growth of $100,000, 9/30/2016–9/30/2026
This chart illustrates the performance of a hypothetical $100,000 investment made in the asset classes noted below. Past performance is no guarantee of future results. Index returns include reinvestment of capital gains and dividends, if any, but do not reflect any fees or expenses. This chart is not intended to imply any future performance of the investment product. It is not possible to invest directly in an index. All indexes are unmanaged. Please see Important Information for index definitions. Source: Fidelity Investments, as of 9/30/2026. U.S. stocks—Dow Jones U.S. Total Stock Market Index; international stocks—MSCI All Country World ex USA Index (Net MA); bonds—Bloomberg US Aggregate Bond Index.
Along the way, a diversified portfolio has often provided stability when stock markets got shaky. That’s the point of owning a broad basket of assets: no single holding has to carry the whole portfolio, and a rough quarter for one portion of it doesn’t change that.
Companies Are Thriving, and Stocks Actually Got Cheaper
S&P 500 earnings are expected to grow nearly 30% in the third quarter, which would be the third straight quarter above 25%. Profit margins, meaning how much of each sales dollar a company keeps as profit, have set a new record every quarter this year, climbing from 14.8% in the first quarter to 17% in the second – above the 13% profit margin from one year ago and above the 5-year average of 12.4%. J.P. Morgan expects 2026 to be the strongest year for profits since the pandemic, with much of the growth tied to the AI buildout, and the benefits have spread well beyond the technology sector.
Stock prices generally follow earnings over time, but this year earnings have grown faster than prices. The S&P 500 now trades at about 19 times earnings, down from about 23 earlier in the year – while still slightly elevated, these numbers are back within a historically normal range. Put simply, you’re paying less for each dollar of profit than you were earlier this year. Today’s stock gains rest on real profits, not just excitement.
Companies are also putting those profits to work by buying back their own shares at a record pace. When buybacks exceed new share issuance, as they’re expected to, each remaining share represents a bigger slice of the company and its earnings, without you lifting a finger.
There’s one caution. The ten largest companies now make up nearly 40% of the S&P 500’s total value, an unusually concentrated level. With interest rates moving higher, elevated valuations leave less room for error if earnings growth slows. In that case, the market could become more sensitive to disappointments, whether from worse-than-expected earnings, interest rate changes, or investor sentiment. If a handful of names are carrying the market, you don’t want your entire financial future riding on them.
The Economy Is Expanding, With a Few Caution Flags
The U.S. remains in what’s called the mid-cycle phase of the business cycle, the long stretch of expansion in the middle of an economic cycle. Historically, during mid-cycle expansions, the economy has grown at a healthy rate while U.S. and international stocks have generally risen. Most major economies worldwide are also expanding, though China has been relatively weak.
The consumer, who drives roughly 70% of U.S. economic growth, is holding up better than the headlines suggest:
Real median household income hit a record $87,460 in 2025.
Household debt relative to assets has fallen to 10.3%, the lowest since the 1960s.
Spending has kept growing faster than inflation, even though high prices have dragged down sentiment.
The savings rate has declined recently, but it remains positive.
The job market is holding up too. Unemployment was 4.2% in September, lower than most monthly readings since COVID and the ‘08-’09 recession before that. Meanwhile, more than 80% of Americans in their prime working years (ages 25 to 54) have jobs, within two percentage points of the all-time high set in 2000. With that said, wages aren’t accelerating. Employers are cautious about raising pay meaningfully, and many workers are reluctant to push for bigger raises. That keeps pay from climbing too quickly, which lowers the risk that rising wages will push inflation higher.
Even so, a few caution flags are worth watching. Hiring may cool in the year ahead, and higher interest rates may weigh on consumers and businesses. We may also see growth slow in the fourth quarter as higher energy prices and borrowing costs work their way through the economy. Consumers are still spending, but high prices have dragged down their confidence. However, slower isn’t the same as stalled; growth is still expected to stay positive.
Inflation, the Fed and What It Means for Your Bonds
Inflation is the thread tying the quarter together. The Consumer Price Index (CPI) was 3.7% in September, above the Fed’s 2% goal, largely because energy prices were pushed higher by the conflict with Iran.
The Fed raised rates by a quarter of a percentage point in September, and markets are currently pricing in the potential for one more hike before the end of the year, most likely in December. At the start of 2026, markets were expecting rate cuts, so the shift has been dramatic. Because inflation has been stubborn, the Fed now appears willing to keep rates elevated longer.
Unless tensions ease in the Middle East, we’ll likely see inflation remain above the Fed’s target through the end of the year. The Fed continues to emphasize its commitment to price stability, so we can expect restrictive policy until it is convinced inflation is moving sustainably lower.
A repeat of the aggressive rate hikes of 2022 is unlikely. At that time, inflation hit nearly 9%, and the Fed raised rates from near 0% to more than 5% within months, causing sharp bond losses. Inflation is currently well below that, and the consensus suggests further hikes will be modest. Today’s starting yields are also far higher, and higher starting yields have historically helped cushion returns and led to more muted volatility when rates rise.
Yields across the bond market are far higher than they were just five years ago. That’s the silver lining of this year’s bond losses: bonds can now pay real income.
Fed Funds Rate and Bond Yields, 2022–2023 and More Recently
Source: Bloomberg Finance L.P., 9/30/2026. Fed funds target rate: Fed funds target rate lower bound. Investment-grade bond yields: yield-to-worst on the Bloomberg US Aggregate bond Index. Source: Fidelity Investments.
Moreover, the cash, CDs, and short-term bonds many retirees hold to cover the next one to three years of spending are paying meaningfully more than they did several years ago.
Housing Is the Soft Spot
Housing is the exception to the otherwise healthy picture. Redfin considers a market to favor buyers when sellers outnumber buyers by 10%. As of August, sellers outnumbered buyers by 57% nationally – the most lopsided market in Redfin’s data going back to 2013. With 30-year mortgage rates back above 7%, a quick turnaround seems unlikely. If downsizing or relocating is part of your retirement plan, it cuts both ways: it’s a tougher market to sell in, but a better one to buy in.
Keep in mind these figures pertain to national averages. Results in your locality may differ significantly.
Why Staying Invested Still Matters Even Through Political Uncertainty
Markets will always find something to worry about, and midterm elections are a good example. Since 1938, the S&P 500 has produced a positive total return in the 12 months following every midterm election, whether Congress ended up under Democratic control, Republican control, or divided.
S&P 500 Total Return
12 Months Following Midterm Election
Past performance is no guarantee of future results. Sources: Bloomberg Finance L.P., S&P 500 Total Return (dividends reinvested), and Strategic Advisers LLC. It is not possible to invest directly in an index. Source: Fidelity Investments.
Past performance doesn’t guarantee future results, but it’s a useful reminder that political uncertainty hasn’t historically derailed long-term investors.
So What Does This Mean for You?
Nobody knows what happens next. Inflation could stay stubborn, rates could keep climbing, and the next downturn could be close. Or the opposite could happen. What we can say is that this quarter’s headlines were louder than the fundamentals: profits are strong, household incomes and net worth are at record highs, consumers and the job market are resilient, earnings growth is off the charts, and diversification is doing its job. Here is what that means for you:
Your bonds had a tough stretch, but they’re paying more now. That matters if you’re counting on income.
No single asset class carried the year. Diversification is the best protection against any one strategy struggling for years.
Strong markets can drift your portfolio away from your plan. That’s why regular check-ins and rebalancing matter.
Volatility is likely, but it isn’t a reason to abandon a long-term plan. Patience has been rewarded over the long term.
If you have questions about how these trends affect you, reach out to us!
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Monthly Changes in Indices
| Year-to-Date Changes in Indices
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Monthly Performance By Sector
| Year-to-Date Sector Performance
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Interest Rates: The Federal Open Market Committee (FOMC) meets later this month and will announce any interest rate changes then.
Inflation: The Consumer Price Index (CPI) increased 0.6% month-over-month in September. Over the last twelve months, CPI increased 3.7%. Core CPI (which excludes food and energy) increased 0.3% in September compared to August and rose 2.6% compared to a year ago.
Housing: According to the National Association of Realtors, existing home sales increased 1.5% month-over-month in September and decreased 2.2% from one year ago. The median existing-home sales price rose 1.3% from September 2025 to $417,500. Sales of new single-family houses increased 6.4% in August from July and fell 2% from August 2025. The median sales price of new houses sold in August was $393,700 – a 5.8% decrease from a year ago.
Mortgage Rates: As of October 15th, 2026, the weekly average for a 30-year fixed-rate mortgage is 7.40%, above the 52-week average of 6.42% and up 1.13% from a year ago.
Employment: According to the Bureau of Labor Statistics’ Employment Situation Summary, unemployment changed little in September at 4.2%. Employment in all major industries changed little over the month.
Consumer Sentiment: The University of Michigan’s Surveys of Consumers changed little in October. Compared to its reading from one year prior, consumer sentiment is down 13.6%. Year-ahead inflation expectations ticked up from 4.6% in September to 4.7% in October. Long-run inflation expectations also stepped up to 3.5%.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Any charts and graphs provided are hypothetical and for illustrative purposes only, are not indicative of any investment, and assume reinvestment of income and no transaction costs or taxes.
