Stocks kept climbing in the third quarter, even as bonds had their roughest stretch in four years and oil prices surged. The S&P 500 gained 2.0% for the quarter and is up nearly 12% for the year, a solid result for a third quarter, which in midterm election years has historically been one of the weakest periods for stocks.
The headline numbers, however, tell only part of the story. Gains have been concentrated in a relatively small group of large companies, while many other stocks have struggled. Meanwhile, the Federal Reserve raised interest rates for the first time in three years, and inflation remains above its target.
This update covers three areas:
1. What happened across stocks, bonds, and commodities
2. The latest readings on inflation, jobs, and the Fed
3. Our interpretation and how we are approaching portfolios.
Stocks climb despite a bond rout
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What Happened in the Markets
- Stocks: up, but led by a few. Technology did most of the heavy lifting. The sector’s contribution alone was larger than the S&P 500’s entire quarterly gain, meaning the rest of the market was a slight drag in aggregate. Energy was the top-performing sector, up about 16.5%, helped by higher oil prices. Interest-rate-sensitive areas fell sharply, with Utilities down 13% and Real Estate down 6%. Large companies outperformed small companies by the widest margin since early 2020, and “value” stocks beat “growth” stocks.
- Bonds: a difficult quarter. When yields rise, existing bond prices fall, and the broad U.S. bond market lost 3.4%, its worst quarter in four years. Longer-term bonds were hit hardest; long-term Treasuries fell 8%, and municipal bonds had their worst quarter since 1981. Shorter-term and floating-rate bonds held up far better, a good reminder of why we pay close attention to how sensitive a portfolio is to rate changes.
- Commodities: the standout. The ongoing conflict involving Iran, with shipping through the Strait of Hormuz still disrupted, pushed oil prices higher. A broad commodity index jumped nearly 18% in the quarter and is up more than 33% for the year.
- International: mixed. Developed international stocks were roughly flat, while emerging markets fell about 3%, largely due to a 21% drop in South Korea as semiconductor stocks cooled. Even so, emerging markets remain the best-performing major region for the year.
A Note of Historical Perspective
Quarters in which stocks rose, bonds fell, and commodities gained more than 10% have been rare, occurring only five times since 1970. In each of those cases, stocks rose in the following quarter, by a median of about 6.7%. History does not repeat precisely, but it suggests that rising yields and commodity prices have not, by themselves, signaled immediate trouble for stocks.
The economy is cooling, not cracking
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Inflation is running at 3.4% (3.0% excluding food and energy), versus the Fed’s 2% goal.
September job gains were 29,000, and the unemployment rate is 4.2%.
Inflation, Jobs, and the Fed
- Inflation is cooler than thought, but still too high. Government data revisions lowered recent inflation figures by about 0.3 percentage points, which is welcome news. Still, inflation remains well above the Fed’s goal. Price increases for services remain stubborn, and higher fuel costs could add pressure in the coming months.
- The job market is cooling gently. Job gains fell well below expectations, and the prior two months were revised lower. The uptick in unemployment came largely from more people looking for work, generally a sign of confidence rather than distress. Wage growth slowed to 3.0%, its slowest pace in this expansion outside of the pandemic. That squeezes household budgets, but it also means the labor market is not fueling further inflation.
- Consumers are still spending. Household spending rose a solid 0.9% in August, and revised data paint a healthier picture of consumer finances than previously reported. Spending is growing faster than income, which bears watching, but overall the data point to an economy that is still expanding.
- What it means for the Fed. The Fed raised rates in mid-September. The softer jobs report makes another increase in October less likely, though another hike before year-end, most likely in December, remains a reasonable expectation. Importantly, interest rates adjusted for inflation are not yet at levels that have historically threatened the stock market.
Beneath the surface: a narrow market
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In late September, the S&P 500 was within 1% of its all-time high, yet only about one in four U.S. stocks was trading above its two-month average price, a combination not seen in more than 40 years of data.
Why Market Breadth Matters
In plain terms, a handful of very large companies are carrying the index higher while the “average stock” has been pulling back. Analysts refer to this as weak market “breadth.” It matters because healthy bull markets usually see broad participation.
History offers a balanced message. Most periods of narrow leadership eventually resolve with other stocks catching up. However, similar divergences also appeared ahead of the market peaks in 2000, 2015, and early 2022. In the handful of comparable cases, the market tended to grind higher for several months before giving back gains, ending roughly flat a year later on average.
Our interpretation
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We see reasons for both optimism and caution, and we think it is important to hold both views at once.
The Case for Optimism
The economy is still growing, consumers are spending, and corporate earnings, particularly in technology, remain strong. Many stocks that have lagged are approaching levels where rebounds have often occurred, and we are entering what has historically been a seasonally favorable stretch for markets through year-end. Our base case is a year-end rally.
The Case for Caution
Inflation is still elevated, the Fed has resumed raising rates, and the market’s gains rely heavily on a small group of companies. If a year-end rally fails to broaden out to more stocks, that would be a meaningful warning sign heading into 2027.
How We Are Approaching Portfolios
- Staying diversified and disciplined. Recent swings across sectors, regions, and asset classes show why we avoid concentrating in any single trend, however strong it looks.
- Rebalancing thoughtfully. After strong gains in certain areas, we are reviewing allocations to ensure portfolios remain aligned with each client’s long-term targets.
- Managing interest-rate sensitivity. While the bond market had a difficult quarter, today’s higher yields mean bonds now offer meaningfully more income than they have in years, improving their role in portfolios going forward.
- Watching breadth closely. We will be paying close attention to whether more stocks participate in any year-end advance. If they do not, we are prepared to take a more defensive stance.
As always, short-term market movements should be viewed in the context of your long-term goals. If you have questions about your portfolio or would like to discuss your plan, please reach out to us at any time.
Sound Management for your Secure Future
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Pacific Wealth Management is a fee-based, fiduciary firm offering comprehensive Retirement Planning expertise.
Our disciplined retirement planning process includes:
· Goals Based Needs Analysis
· Social Security Planning
· Long term Projections
· Monte Carlo Analysis
· 401(k), 403(b), 457 retirement plan analysis
· Retirement Distribution Strategies
Pacific Wealth Management, LLC
11512 El Camino Real, Suite 350
San Diego, CA 92130
858.509.9797
Important Information: This commentary is provided for informational purposes only and reflects our views as of October 2026, which are subject to change without notice. It is not a recommendation to buy or sell any security and does not account for any individual’s specific circumstances. Past performance is not a guarantee of future results. Index returns are shown for illustration only; indexes are unmanaged, and investors cannot invest directly in an index. All investing involves risk, including possible loss of principal. Please consult your advisor before making investment decisions.