The S&P 500 added 2.3% in the third quarter, but the quarter's real story was the bond market. The 10-year Treasury yield crossed 5% for the first time since 2007, and that single fact explains most of what happened beneath the surface. Below is how markets got where they are, and the five things we are watching as the year closes.
Looking back: how markets performed in Q3
Stocks finished the quarter modestly higher while bonds fell.
S&P 500 — +2.3% in Q3; +12.7% year to date. The index sits within a few percent of its record high.
Nasdaq Composite — +0.6% in Q3; +21.0% year to date. Technology still leads for the year, but the quarter was choppy.
Dow 30 — -2.3% in Q3; +7.2% year to date. Rate-sensitive industrials and consumer names weighed on the average.
Bloomberg U.S. Aggregate Bond — -3.5% in Q3; -2.9% year to date. The broad bond index gave back its first-half gains and more.
Total returns including reinvested dividends, July 1 through September 30, 2026. Source: Bloomberg.
Earnings did the heavy lifting
Second-quarter S&P 500 earnings grew 52% year over year as reported, or 32% after excluding one-time investment gains booked by Amazon and Alphabet. The median S&P 500 company grew earnings 14%. Full-year 2026 earnings growth is now estimated at 31.7%, and because prices rose less than earnings, the index's forward price-to-earnings ratio fell to about 19 times from 20.4 times. The market got cheaper on a valuation basis even as it rose.
Leadership narrowed
The broadening that defined the first half reversed. The equal-weight S&P 500 fell 1.9% and the Russell 2000 fell 7.3%, giving back most of the lead small caps built through June. The reason is on the balance sheet: roughly 32% of Russell 2000 companies carry floating-rate debt, compared with about 6% of the S&P 500, so higher rates reach their interest expense almost immediately. Rate-sensitive sectors took the hardest hit, with utilities down 13.9% and real estate down 7.7% over the three months, while health care and energy led. Developed international markets were roughly flat, and emerging markets slipped 0.4% but remain up 23.5% for the year.
Bonds: the 10-year crossed 5%
The 10-year Treasury yield closed September at 5.30%, its highest level since 2007, and the 30-year reached 5.7%, its highest since 2002. Investment grade corporates fell 5.1% for the quarter and long Treasuries (20+ years) fell 9.0%. High yield held up better at -1.9% because its income cushion is larger and credit spreads stayed near their lows for the year. Rising yields were a global story: German, U.K. and Japanese government yields are all up meaningfully in 2026, with Japan's 10-year above 3% for the first time in roughly three decades.
The move was driven by growth and supply rather than an inflation scare. Nominal GDP is running near 8% annualized, the Treasury has a record amount of short-term debt to roll over, and 10-year inflation breakevens held steady around 2.3% to 2.4% through the quarter.
Inflation re-accelerated and the Fed resumed hiking
The Federal Reserve raised the federal funds rate by 0.25% on September 16 to a range of 3.75% to 4.00%. It was the first increase since 2023, and the vote was unanimous. The Fed also raised its own projections, lifting 2026 core PCE inflation to 3.4% and 2026 real GDP growth to 2.3%, and it no longer expects core inflation to return to 2% before 2029. Sixteen of eighteen participants penciled in at least one more increase this year. The European Central Bank and the Bank of Japan raised rates the same month.
Then came the September inflation report. Headline CPI rose 3.7% year over year, up from 3.4% in August, with energy prices up 5.2% for the month and gasoline up 9.1%. Core CPI rose 2.6%, up from 2.4%. Core PCE, the Fed's preferred measure, is running near 3% and has been above the 2% target for 66 consecutive months.
Looking ahead: five things we are watching in Q4
These are items to watch, not predictions.
1. Third-quarter earnings and 2027 guidance
Analysts expect S&P 500 earnings to grow about 26% year over year, which would be a third straight quarter above 20%. Estimates were revised up during the quarter rather than down, which is unusual. Consensus calls for growth to slow to roughly 15% in 2027, so what companies say about next year will matter as much as what they report about this one.
2. The Fed's next two meetings
The committee meets October 27 to 28 and December 8 to 9. After the September CPI report, market pricing for an October increase rose to roughly even odds. The first estimate of third-quarter GDP arrives in late October; tracking estimates have ranged from the mid-3% range to 5% real growth. A Fed tightening into a strong economy is a different situation from one tightening into a weak one, and the data between now and December will decide which story the market tells.
3. The 10-year yield and oil
History suggests the speed of a rate move matters more than the level. The 10-year is up about 117 basis points from a year ago; past credit stress episodes followed moves of 200 basis points or more within twelve months. Oil feeds directly into the inflation data the Fed is responding to. Brent traded near $100 per barrel for much of the quarter with the Strait of Hormuz still partially constrained, though exports from the region had recovered to roughly pre-conflict volumes by quarter-end.
4. The November 3 midterm elections
The composition of Congress after the election will shape spending, tax and debt-limit legislation in 2027. For context, midterm years have historically been the most volatile of the four-year presidential cycle, with an average S&P 500 intra-year decline of 19%, and the fourth quarter of a midterm year has averaged a 6.6% price gain since 1950. The S&P 500 has been positive in the twelve months following every midterm election since 1938. Historical patterns may not repeat.
5. Year-end planning
The bond selloff created an opportunity. With the Aggregate down 2.9% and long Treasuries down 8% for the year, many taxable accounts hold bond positions below cost. Harvesting those losses before December 31 can offset realized gains elsewhere, and the proceeds can be reinvested in similar (not identical) bonds at today's higher yields without sitting out of the market. Three other items carry a December 31 deadline: required minimum distributions, Roth conversions for the 2026 tax year, and annual exclusion gifts to family members or trusts. Business owners should confirm that equipment placed in service by year-end qualifies for 100% expensing.
The bottom line
Earnings, not headlines, drive returns. Over 126 years of market history, stock prices and earnings have moved together with a 98% correlation. Earnings grew faster than prices in 2026, and valuations came down as a result.
The bond market is doing its job again. Starting yields are the best predictor of future bond returns, and today's are the highest in nearly two decades. Coupon income now offsets a meaningful share of further price declines if rates rise again, and municipal bonds offer tax-equivalent yields above Treasuries for investors in the top brackets.
Narrow markets are normal on the way up. Leadership tends to narrow as an index approaches a high and broaden on the way down. The average S&P 500 stock is down about 20% from its own 52-week high while the index is down about 2%, which is diversification in waiting rather than a warning.
Our approach: stay balanced and stay invested. We are not fighting a market with 30% earnings growth, and we are not chasing it either. Portfolios stay anchored to earnings, diversified across leadership, and positioned to treat volatility as an opportunity rather than a reason to sell.
Questions about your portfolio heading into year-end? Call the office at (615) 591-2490 or reach out through our contact page and we will find a time to talk.
Advisory services offered through United Advisor Group, LLC, a Registered Investment Adviser (CRD #324205). Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC. Ftacek Financial Services, LLC and United Advisor Group are independent entities. Sources: Bloomberg, market data as of 9/30/2026; index returns include reinvested dividends. Indices are unmanaged, cannot be invested in directly, and index returns do not reflect the deduction of advisory fees or other expenses. Opinions are those of Ftacek Financial Services, LLC as of the date of publication and are subject to change; historical patterns may not repeat, and nothing herein should be read as a prediction or guarantee of future market behavior. Investing involves risk, including the potential loss of principal, and past performance does not guarantee future results. This article is for educational purposes only and is not individualized investment, tax, or legal advice. Consult your own advisors before acting on any strategy described.