The third quarter of 2026 was characterized by solid economic growth, strong corporate earnings, rising energy prices, and increasing concerns about inflation and interest rates. The U.S. economy continued to demonstrate surprising strength, supported by consumer spending and substantial investment in artificial intelligence infrastructure, while persistent inflation and geopolitical tensions in the Middle East pushed oil prices higher and complicated the Federal Reserve’s efforts to restore price stability.
In September, the Fed raised its benchmark rate by a quarter point to a range of 3.75%–4.00%, as ten-year Treasury yields climbed to their highest levels since 2002.1 Trade-policy uncertainty and higher borrowing costs also presented challenges to businesses and investors. Despite these headwinds, equity markets remained somewhat resilient, with the S&P 500 reaching record levels during the period. Overall, the quarter highlighted the tension between a relatively strong economic and corporate earnings backdrop and the risks posed by persistent inflation, higher interest rates, and geopolitical uncertainty.
For the quarter, market performance was mixed with large cap U.S. stocks (S&P 500 Index) leading the way, up 2.30%. U.S. small cap stocks (Russell 2000 Index) struggled, down 7.19%, as rising interest rates and renewed investor demand for large-cap tech stocks weighed on the sector. Real estate (Dow Jones U.S. Real Estate Index) was also affected by rising interest rates and inflation concerns, falling 8.1% for the period. Developed international stocks (MSCI EAFE Index) had modest gains, up .90% reflecting similar resilience in its overseas corporate earnings. Fixed income (Bloomberg U.S. Aggregate Bond Index) declined 3.5%, as rising Treasury yields, inflation concerns, and a more restrictive Federal Reserve policy outlook spooked investors.
As we enter the fourth quarter, financial markets could continue to face a challenging mix of persistent inflation, rising interest rates, geopolitical uncertainty, and pressure for corporate earnings to remain strong. Third-quarter earnings will be an important test of whether they can support current valuations, especially among large technology and AI-related companies. Meanwhile, consumer spending and labor-market conditions will help determine whether the U.S. economy can maintain its resilience or begin to show signs of weakness. Investors will be measuring corporate fundamentals, interest-rate trends, and price stability with the hope that our economy and markets can remain strong. One more issue will be on investor’s minds, and that is the upcoming midterm election on November 3rd.
A High-Stakes Midterm
The midterm elections are rapidly approaching and will serve as a referendum on the current president’s administration. This midterm will directly affect the Trump administration’s legislative agenda and could significantly influence tax policy, government spending, tariffs, regulation, and the broader economic trajectory.
Historically, voters have used midterm elections to check the party in the White House and are often referred to by political scientists as the “midterm penalty.” In the post-World War II era, the sitting president’s party lost an average of 26 seats in the House of Representatives and 4 seats in the Senate.2 While this provides a baseline expectation, individual midterms have seen significant fluctuations depending on many factors, such as the president’s approval rating, present economic cycles, and the general political climate. For example, in the first Trump administration, his party lost 41 House seats, as opposed to the Biden administration who lost only 9.
Midterms and the Markets
We have broached the subject in the past of how elections affect economic and market cycles, but it bears repeating. The historical record has been generally favorable for U.S. equities in the year following a midterm election, however, volatility tends to increase in the days leading up to and following the election day. The average return for the 12 months before midterms has been +2.9%, and the average return for the 12 months after the election is +12.4%. Further, in a Market Insights Report published by J.P. Morgan Asset Management, they found that the S&P 500 posted a positive 12-month return following every midterm election since 1950, with an average gain of ~15%.3
As encouraging as it may be, this precedent should be viewed as historical context rather than a reliable forecast. The impact of the election will depend on the extent to which the outcome differs from investor expectations and translates into meaningful policy changes or a continuation of present ones. A divided Congress could limit major legislative initiatives while increasing the potential for political gridlock, whereas unified control could create greater scope for changes in fiscal and regulatory policy. Ultimately, corporate earnings, inflation, interest rates, and economic growth are likely to remain the primary drivers of market performance.
The following are three possible scenarios in this election that will have different potential implications for corporate earnings, fiscal policy, and market leadership:4
| Possible outcome | Potential market implications |
| Democrats gain both chambers | Greater congressional oversight and possible efforts to change tax, tariff, and regulatory policies. Some financial and industrial stocks could face pressure if investors anticipate higher regulation or reduced support for certain business initiatives. |
| Divided government | Greater legislative gridlock could limit major tax and spending changes, potentially reducing some policy uncertainty. However, government funding disputes and debt-ceiling negotiations could create bouts of volatility. |
| Republicans retain both chambers | Greater leverage to advance the administration’s legislative priorities, including potential tax and spending measures. Investors would assess the effects on corporate profits, deficits, inflation, and Treasury yields. |
These scenarios emphasize that the election could influence the policy environment, while the executive branch would continue to shape important areas such as trade and foreign policy.
What to Watch for Post Election
As the post-election environment presents itself, here are a few areas investors will be watching to determine the general direction of the market and the economy:
- Corporate earnings: Whether companies maintain profit margins despite energy costs, tariffs, and wage pressures.
- Treasury yields: Whether fiscal policy expectations put further upward pressure on long-term interest rates.
- Federal Reserve policy: Whether inflation and economic growth support rate cuts, stable rates, or additional tightening.
- Legislative priorities: Which proposals are likely to advance, and which may be blocked by a divided government.
- Market breadth: Whether gains extend beyond large technology stocks to smaller companies, international markets, and other sectors.
The 10-Year Treasury- High or Higher?
The direction of interest rates, especially on the benchmark 10-year Treasury, has the attention of investors and the market. The 10-year Treasury yield is one of the most important numbers in the financial markets because it connects the bond market to almost every major financial decision in the economy. This Treasury security has come under significant pressure recently as yields have climbed to their highest levels in more than two decades.
The debate on Wall Street has been whether yields are approaching a tipping point or merely higher than in the recent past, but in line with long-term trends. PIMCO, a leading bond manager, has warned that yields could continue to rise if inflationary pressures and selling further intensify.5 Yet, a Reuters poll of fixed-income strategists says yields will ease by year end.6 The direction of oil prices, upcoming inflation data, Fed policy, and Treasury debt issuance will be critical in determining which view prevails. For investors, persistently elevated yields could pressure bond prices, mortgage rates, real estate, and highly valued equities. Yet, the higher yields will provide more attractive income opportunities for new bond purchases, and if yields subside, there could also be some capital appreciation relief to bond holders.
The Outlook for Fourth Quarter
As we enter the final quarter of 2026, the outlook is most likely one of continued economic resilience, but greater uncertainty and heightened market risk. Inflation, rising long-term Treasury yields, geopolitical tensions, and elevated stock-market valuations are creating a somewhat challenging environment for investors. We are cautiously optimistic that the economy will continue to grow, supported by consumer spending, corporate investment, and artificial intelligence (AI), but the margin for error seems to be narrowing. The central question is whether corporate earnings and economic growth can remain strong enough to support financial markets while borrowing costs stay elevated.
For our clients, our disciplined financial planning and investment management services can help provide a framework for navigating periods of market volatility and uncertainty. Our approach seeks to maintain an asset allocation designed to reflect each client’s individual objectives, risk tolerance, time horizon, and liquidity needs.
As always, we are here to discuss your portfolio, evaluate your strategy, and help you turn uncertainty into opportunity.
– The Wealth Dimensions Team
Disclosures
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
Indices themselves are not investible products.
The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in
the U.S.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Dow Jones U.S. Real Estate Index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
Sources
- www.reuters.com/world/10-year-us-treasury-yield-hits-highest-since-2002-2026-10-01/
- The Brookings Institution, Vital Statistics on Congress.
- J.P. Morgan Asset Management, Market Insights report.
- These scenarios are consistent with the policy analysis published by S&P Global Market Intelligence and Morgan Stanley.
- PIMCO Chief Investment Officer Dan Ivascyn, as reported by the Financial Times, October 9, 2026.
- Reuters poll of fixed-income strategists, October 7, 2026