The third quarter gave investors a useful reminder: markets can look calm on the surface while significant changes are happening underneath.
After a very strong second quarter, stocks delivered a mixed result in the third quarter. The S&P 500 advanced 2.03% and the NASDAQ rose 2.47%, while the Dow declined 2.70% and the Russell 2000 fell 7.52%. The equal-weighted S&P 500 also declined, lagging the cap-weighted index by more than 400 basis points, which tells us market breadth remained weak.
At the same time, the bond market continued to reprice aggressively. The 10-year Treasury yield rose from 4.38% at the end of June to 5.26% at the end of September, reaching its highest level since 2002. Oil also moved sharply higher, with WTI crude advancing roughly 30% as hopes for a U.S.-Iran peace deal faded.
In plain English:
Stocks held up because earnings remained strong. Bonds weakened because inflation, deficits, oil, and growth all pushed rates higher.
That combination is the defining issue heading into the fourth quarter.
The Market’s Foundation Is Still Solid
Despite the headlines, the economy has shown real resilience.
Earlier in the year, the Middle East conflict created pressure, but more recently global industrial production and exports have rebounded toward record highs. Corporate earnings also remain much stronger than expected, helping offset the drag from higher borrowing costs.
The basic setup remains a tug-of-war.
On the positive side:
The labor market remains stable.
Technology investment is still booming.
Earnings growth remains strong.
On the negative side:
Oil prices have risen.
The cost of money has increased.
Fiscal stimulus is fading.
That is the market in one sentence: strong fundamentals facing higher financial pressure.
The Bond Market Is Now the Main Story
For most of the last decade, investors were conditioned to believe that low rates were normal.
That period appears to be over.
Treasury yields have been moving higher since the pandemic lows, but the pace accelerated meaningfully during the third quarter. The report notes that the 10-year Treasury’s total return is now negative over the last 10 years, and the rise in yields has already compressed the S&P 500’s forward price-to-earnings multiple from roughly 22x to 19x.
That matters.
Stocks are not up this year because valuations expanded. They are up because earnings grew faster than valuations compressed.
That is a much healthier foundation than pure speculation, but it also means earnings must continue to do a lot of heavy lifting.
If bond yields keep rising quickly, equities will have a harder time ignoring them.
The Fed Still Has Work to Do
The Federal Reserve raised rates in September for the first time since July 2023 and repeatedly emphasized its 2% inflation target. Futures markets are now pricing another potential hike later in the year.
The larger issue is that monetary policy may still not be truly restrictive.
Fed funds remain below nominal economic growth, which suggests policy is still stimulative rather than tight. The two-year yield sitting meaningfully above the current Fed Funds rate also suggests the bond market believes the Fed has more work to do.
This is the challenge:
The Fed wants inflation lower.
But the economy is still strong, oil remains elevated, government deficits are large, and corporate borrowing is rising.
That is not an easy backdrop for lower rates.
Earnings Remain Strong, But the Bar Is Getting Higher
Earnings have been the market’s strongest support.
Corporate profits and margins have remained elevated, and companies continue to show confidence through hiring and investment.
However, earnings growth is likely to slow next year from an unusually high level. The report notes that rising bond yields and uncertainty around the evolution of AI make stocks more vulnerable to a correction.
That does not mean earnings are weak.
It means expectations are high.
When expectations are high, markets become less forgiving. Good results may no longer be enough. Companies may need to deliver strong earnings, defend margins, and provide confident guidance just to maintain investor confidence.
AI Is Still Powerful — But Also More Complicated
Artificial intelligence remains one of the dominant forces driving investment and earnings.
The report notes that AI-related capital expenditures accounted for an estimated 27% of U.S. fixed investment in the second quarter, and cumulative AI-related investment has exceeded 2% of U.S. GDP over the past three years.
That is significant.
AI is not a passing headline. It is a major capital spending cycle.
But history also reminds us that transformative technologies can create both extraordinary winners and painful excesses. The technology may be real, while some valuations still get ahead of reality.
That distinction matters.
The Fourth Quarter May Be More Difficult
The assumptions for the fourth quarter are straightforward:
The Fed may raise rates again.
Inflation will likely remain sticky.
Growth may slow somewhat after a strong third quarter.
The labor market should remain stable.
Earnings should remain strong, but visibility into a first-half 2027 slowdown may begin to surface.
Bond market volatility is likely to continue.
Stocks may struggle to make meaningful forward progress.
AI investment will remain central.
Oil prices may remain stubbornly high.
That is not a bearish outlook.
It is a more realistic one.
The market has already absorbed a lot this year: higher oil, Fed hikes, rising yields, geopolitical tension, AI volatility, and weak market breadth.
The fact that stocks are still positive is impressive.
But the cushion is thinner.
My Perspective
I still believe this is an investable market.
The economy remains resilient. Corporate profits remain strong. AI investment continues to support growth. Credit conditions are not yet signaling broad systemic stress.
But we are entering a different regime.
The low-interest-rate environment of the 2010s is gone. Higher rates, more bond volatility, elevated oil prices, sticky inflation, and weaker market breadth are now part of the investment landscape.
That does not require panic.
It requires discipline.
The next phase is likely to reward investors who focus on quality, cash flow, valuation, balance sheet strength, and risk management — not simply momentum.
Bottom Line
The third quarter showed us that markets are changing.
Stocks can still move higher, but the path is narrower.
Earnings are strong, but likely slowing.
AI is powerful, but volatile.
The economy is resilient, but higher rates are beginning to matter.
Bonds finally offer more attractive yields, but bond volatility has returned.
And most importantly, investors can no longer assume the Fed will quickly rescue markets at the first sign of trouble.
For business owners and families managing significant wealth, this is exactly the kind of environment where planning matters.
Investment strategy, tax planning, estate planning, asset protection, and business succession should not be handled in isolation. They need to work together.
Planning Perspective
Markets will always move through cycles. What matters most is whether your planning is prepared for them.
If you are a business owner thinking about succession, a future sale, tax exposure, estate planning, or protecting the wealth you have built, the best time to begin is before a major decision is on the table.
We help business owners coordinate the financial, tax, estate, and investment decisions they cannot afford to get wrong.
About Gary Hager
Gary K. Hager, CFP®, CBEC, CTFA is the founder of Integrated Wealth Management. He advises business owners and families on exit planning, estate strategies, asset protection, and long-term wealth structuring.