Quarterly Update

Source: JPMorgan Guide to the Markets. Data as of September 30, 2026. Performance in %.

Backdrop

The third quarter of 2026 marked a notable shift in the investment landscape. While U.S. Large-cap equities remained resilient, investors faced renewed inflation pressures, rising interest rates, continued geopolitical uncertainty, and increasingly uneven performance beneath the surface of the major market indexes.

Inflation once again became a central concern. After making meaningful progress earlier in the year, headline inflation accelerated as the conflict with Iran and disruptions across global energy markets pushed oil and transportation costs higher. Core inflation remained more contained, but renewed pressure from energy has complicated the broader path back toward the Federal Reserve’s inflation target.

These developments contributed to another significant adjustment in interest-rate expectations. The Federal Reserve raised its benchmark interest rate by 0.25% in September, bringing the federal funds target range to 3.75%–4.00%, as policymakers placed renewed emphasis on containing inflation. Longer-term interest rates also moved sharply higher, with the 10-year U.S. Treasury yield ending September near 5.3%. As a result, bonds experienced renewed volatility despite the attractive income available from today’s higher yields.

Equity markets presented a similarly mixed picture. The S&P 500 continued to advance during the quarter, supported by healthy earnings and continued enthusiasm surrounding artificial intelligence and other secular growth themes. However, market participation narrowed considerably. Small- and Mid-cap companies struggled, while a relatively small group of very large companies once again accounted for an outsized share of market performance.

International markets also faced a changing backdrop. After benefiting from a weaker U.S. dollar earlier in the year, foreign investments encountered a renewed currency headwind as the dollar strengthened during September. Despite this shift, many international markets continue to trade at more attractive valuations than their U.S. counterparts, reinforcing their potential role as both a source of opportunity and long-term diversification.

Economic activity remained resilient through much of the quarter, but signs of moderation became increasingly visible. Consumer spending and business investment continued to support growth, while corporate earnings remained generally healthy. At the same time, employment growth slowed and higher energy prices, borrowing costs, and inflation placed additional pressure on consumers and businesses.

Taken together, the third quarter produced a more challenging investment environment. Equity valuations remain elevated in important areas of the U.S. market, interest-rate volatility has returned to fixed income, inflation risks have increased, and geopolitical uncertainty remains significant. We believe these conditions warrant greater attention to valuation, diversification, and risk management.

Looking Ahead

As we enter the final quarter of 2026, we believe the investment environment warrants a greater degree of caution. Markets and the economy have demonstrated considerable resilience, but persistent inflation, elevated interest rates, geopolitical uncertainty, and expensive valuations leave less room for disappointment than earlier in the year.

Inflation remains one of the most important risks. The conflict with Iran and its impact on global energy markets have demonstrated how quickly geopolitical events can influence oil prices, transportation costs, and ultimately the prices paid by businesses and consumers. With inflation still above the Federal Reserve’s long-term objective, monetary policy may remain restrictive for longer than previously anticipated. Federal Reserve policymakers have also signaled that they may consider an additional rate increase appropriate before year-end if inflationary pressures persist.

At the same time, the outlook for economic growth has become less certain. The economy continues to expand, but higher borrowing costs, elevated energy prices, and a cooling labor market could increasingly weigh on activity as we move toward 2027. We therefore believe portfolios should be prepared for a wider range of economic outcomes rather than relying on continued strong growth.

U.S. Large-cap equities deserve particular attention. Valuations remain elevated relative to historical averages, while index performance has again become heavily influenced by a relatively small number of Mega-cap companies. These businesses may continue to deliver strong earnings growth, but high expectations and concentrated leadership can leave markets more vulnerable when results fall short.

International equities remain an important source of diversification. The recent strengthening of the U.S. dollar has created a near-term headwind for U.S. investors, but valuations across many international markets remain attractive relative to the United States. Maintaining global exposure can help reduce dependence on both the U.S. economy and an increasingly concentrated U.S. Large-cap market.

Fixed income continues to provide attractive levels of income, but recent volatility is an important reminder that bonds are not immune to inflation and interest-rate risk. We believe flexibility within fixed income and careful management of interest-rate and credit exposure remain particularly important in the current environment.

Alternative investments may also play an increasingly valuable role within appropriately diversified portfolios. Certain alternative strategies seek returns from sources that are less dependent on the direction of traditional stock and bond markets. At a time when inflation and interest-rate uncertainty can pressure both asset classes simultaneously, these differentiated sources of return may provide an additional layer of diversification and risk management.

Our more cautious outlook does not mean abandoning long-term investment opportunities or attempting to predict the next market downturn. Corporate earnings remain healthy, the economy continues to expand, and innovation continues to create compelling long-term opportunities. Rather, we believe the current environment favors balance: participating in long-term growth while maintaining greater attention to valuation, income, diversification, and downside risk.

As always, we continue to focus on the factors we can control: systematically rebalancing portfolios, maintaining appropriate diversification, implementing tax-efficient strategies where appropriate, and ensuring each portfolio remains aligned with its intended level of risk. A disciplined investment strategy and thoughtfully constructed financial plan remain the strongest foundations for navigating changing market environments.