Market Minutes - October, 2026

The Big Picture: Resilience Does Not Mean Uniform Strength

The economy and financial markets are presenting a mixed but understandable picture. Consumer spending remains resilient, corporate earnings expectations are strong, and artificial intelligence is supporting a substantial investment cycle. At the same time, inflation remains persistent, financing costs are elevated, and economic strength is not being shared evenly across households or businesses.

During the third quarter, the S&P 500 gained approximately 2%, and the Nasdaq gained about 2.5%, even as crude oil rose roughly 30% and the 10-year Treasury yield increased approximately 87 basis points. Treasury-market volatility, measured by the MOVE index, increased 53%. Stocks managed to advance while important costs rose and financing conditions became more unsettled.

That resilience reflects confidence in earnings and demand. It does not mean the pressure from energy and borrowing costs has disappeared. Investors have been willing to look through those challenges because they anticipate sufficient profit growth to absorb them.

The useful distinction is between continued activity and a broadly comfortable economic environment. Households with substantial financial assets may feel supported by rising portfolios. Households dependent on wages may feel squeezed. Companies generating cash internally may continue investing, while businesses dependent on refinancing face more difficult choices.

The central investment questions are therefore where the strength is coming from, how durable it is, and how much of it is already reflected in prices. The answer requires looking beyond the major indexes and beyond broad labels such as growth, value, or technology.

Growth and Consumption: The Sources of Support Matter

Second-quarter GDP growth was revised upward from 1.5% to 2.2%. Consumer spending growth within the quarter was revised to 3.8%, while real final sales to domestic purchasers reached 4.6%. Consumer spending also increased nearly 1% in August.

The domestic-demand measure helps separate household and business spending from inventory changes and trade effects. Its strength suggests the economy had more underlying momentum than the headline GDP figure alone might indicate.

But the durability of consumption depends on its financing. Spending supported by sustained real income growth has a different foundation from spending supported by asset appreciation, tax refunds, savings withdrawals, or credit. Those sources can all support activity, but they need not be equally dependable.

Tax refunds were approximately 11% above the prior year, and financial-market gains have helped support consumption through the wealth effect. The wealthiest 0.1% of Americans held about $28 trillion, approximately 15% of national wealth. Their wealth increased by $14.5 trillion since the end of 2019, with roughly $10 trillion coming from stocks and mutual funds. The bottom half held approximately $4 trillion.

These figures help explain how aggregate spending can remain strong while many households experience limited financial improvement. Wealth gains can support purchases among asset-owning households even when earned income provides less support elsewhere.

Financial confidence is not determined by income alone. In a retirement survey, 36% of respondents earning $300,000 or more said they were not meaningfully saving. The share who felt retirement savings were on target fell from 68% to 58%. Those are self-reported assessments, not audited measures of distress, but they reinforce the difference between spending capacity and a durable financial foundation.

A more balanced expansion would feature improvement in purchasing power across a broader set of households. That would make consumer demand less dependent on asset gains and temporary financial supports.

Employment and Wages: A Softer Signal

September payroll growth was 29,000 jobs, approximately 55,000 to 60,000 below expectations. The preceding two months were revised lower by a combined 60,000. Unemployment edged up to 4.2%.

Over the preceding year, private employers added an average of approximately 60,000 jobs per month, while government employment declined by about 20,000 per month. That combination points to modest employment growth rather than a broadly vigorous hiring environment.

Wages increased only 0.1% in September and 3% over the preceding year. There had been five consecutive months of flat or negative inflation-adjusted wage growth. Slower wages may ease some inflation pressure, but they also constrain household purchasing power.

A separate ADP estimate showed 90,000 private-sector jobs added in September. These measures differ in coverage and methodology, so they should not be treated as directly interchangeable. The initial payroll collection rate was only 53.1%, creating room for revisions.

The appropriate interpretation is not that one release establishes a recession. Rather, the employment picture deserves attention alongside stronger spending and earnings indicators. Continued activity can coexist with slowing hiring, but the divergence raises questions about how demand will be sustained.

For companies, the effect depends on the customer base and business model. Businesses serving financially stronger customers may experience more stable demand, while others face greater price sensitivity. The economy can therefore feel quite different across households and industries even when the aggregate growth number remains positive.

Inflation: Demand, Supply, and Timing

Headline PCE inflation was 3.4% over the preceding year, while core inflation was 3%. The monthly core increase was 0.2%, somewhat better than expected. A more encouraging monthly reading is helpful, but it does not resolve the longer-term inflation question.

Energy remains an important source of pressure. West Texas Intermediate crude was near $91 a barrel after increasing roughly 30% during the third quarter. The availability of crude, however, is only part of the fuel-supply equation. Refining capacity determines how much becomes gasoline, diesel, and other usable products.

One estimate placed Persian Gulf oil exports 11% below prewar levels, while refined-product exports remained 42% below normal. Approximately 12.1% of global refining capacity was offline in September. Those figures help explain why recovering crude flows may not produce equivalent relief in fuel prices.

U.S. refining capacity declined from approximately 18.6 million barrels per day in 2017 to 17.6 million in 2025. The number of operating refineries fell from 301 in 1982 to about 130, although refinery count alone does not measure the change in capacity. Processing bottlenecks can benefit refiners while raising costs for consumers and fuel-intensive businesses.

AI infrastructure creates another source of demand for equipment, materials, power, and skilled workers. Memory sales increased 36% in August, while DRAM and NAND prices rose 8% and 5%, respectively. Strong demand can support supplier profits while making expansion more expensive for buyers.

The timing is central. AI may ultimately improve productivity and lower costs, but building that capacity can create inflation pressure first. The macro question is whether supply and efficiency can expand quickly enough to accommodate demand without requiring a more pronounced economic slowdown.

Interest Rates: The Real Cost of Capital

The 10-year Treasury yield has been around 5.25%, the 30-year around 5.6%, and mortgage rates above 7%. The quarterly increase in the 10-year yield was approximately 87 basis points, or 0.87 percentage points.

The inflation-adjusted 10-year yield was approaching 3%, compared with about 1.7% before the escalation in the Middle East conflict. That indicates a higher real cost of capital, not simply a higher nominal rate reflecting inflation.

Long-term yields reflect more than Federal Reserve policy. Resilient growth, inflation risk, government issuance, private investment needs, and expectations for future productivity all play a role. The demand for AI financing is occurring alongside substantial public-sector borrowing.

The economic effect is uneven. Housing, autos, smaller companies, real estate, and businesses with substantial floating-rate debt are more exposed to elevated costs. Companies with strong cash generation and less dependence on external financing may have greater flexibility.

Credit markets show some differentiation. High-yield spreads widened nearly 50 basis points from late August through September, while investment-grade spreads changed relatively little. Investors were demanding more compensation from riskier borrowers without an equivalent repricing across higher-quality corporate debt.

The timing of cash flow also matters. Businesses producing cash today differ from those valued mainly on profits expected many years ahead. Rising discount rates reduce the present value of distant cash flows. That is not an argument against all growth businesses; it is a reason to evaluate the assumptions and financing requirements behind each growth story.

Bonds: Better Income, Continuing Price Risk

Higher yields create a stronger income proposition for bond investors and provide some cushion against potential price declines. But income and price stability are separate considerations.

Treasury auctions demonstrated demand at elevated yields. Nearly $60 billion of three-year notes, $39 billion of 10-year notes, and $22 billion of 30-year bonds were sold across three auctions. The 10-year auction cleared at approximately 5.3%, with a bid-to-cover ratio of 2.77, compared with a recent average of 2.55.

The 30-year auction cleared at 5.618%, with a bid-to-cover ratio of 2.42, down from 2.61 at the preceding auction. Demand existed, but it was not equally strong across maturities. Successful issuance shows buyers willing to invest at the offered yield; it does not establish that rates have peaked.

Long-term inflation-protected Treasuries offered real yields around 3.3%. That creates a different proposition from a fixed nominal yield by linking compensation to inflation. It still involves market-price sensitivity and should not be confused with a guarantee of stable account value.

The MOVE index rose 53% during the third quarter, underscoring uncertainty around the rate path. Persistent inflation and debt issuance can keep pressure on yields, while slower rate-sensitive activity or easing energy costs could work in the opposite direction.

The useful bond discussion therefore concerns income, maturity, inflation exposure, and price sensitivity rather than relying on a single call about the peak in rates.

Government Debt and the International Backdrop

The federal deficit for the fiscal year ending September 30 was estimated at approximately $1.99 trillion, up 12% from the prior year and roughly 6% of GDP. Spending reached about $7.4 trillion, up 6%, while revenue was approximately $5.4 trillion, up 3%.

Federal debt was around $40 trillion. Interest expense of approximately $1.1 trillion represented more than one-fifth of tax revenue. Elevated rates can therefore consume an increasing share of budget resources while ongoing deficits require additional financing.

The issue is not an assumption of immediate crisis. It is the relationship among issuance, financing costs, growth, and the capacity to manage obligations over time. Near-term market access and long-term fiscal sustainability are not the same question.

France illustrates the international dimension. Its debt-to-GDP ratio was approximately 120%, its deficit was 5.4% of GDP, and its 10-year borrowing yield approached 4.9%, alongside economic growth of roughly 1%. Its deficit was projected to reach 6.8% of GDP by 2030.

High debt becomes more difficult to manage when growth is modest and financing costs are elevated. Fiscal uncertainty can also affect business investment when companies are unsure about future taxes, regulation, and policy direction.

These conditions matter to investors because government and business financing occur in the same broader capital environment. A strong auction can coexist with unresolved fiscal challenges, just as attractive income can coexist with significant rate uncertainty.

Equities: Earnings, Expectations, and Participation

Analysts projected S&P 500 third-quarter earnings growth of 29.5%, with technology-sector earnings expected to rise about 65%. Bottom-up estimates for full-year 2026 earnings increased 6.2% during the third quarter. These forecasts help explain investor confidence, but they are not completed results.

Among 116 companies issuing quarterly guidance, 72 provided positive guidance and 44 provided negative guidance. The positive count was the highest since FactSet began tracking the measure in 2006. The figures describe companies issuing guidance, not the entire S&P 500.

The index earnings multiple declined from approximately 23 to 19. A lower multiple can result from rising profit estimates rather than declining prices. Its attractiveness therefore depends partly on whether the expected profits are realized and sustained.

Market participation remains uneven. At one snapshot, roughly 80% of S&P 500 companies were at least 10% below their 52-week highs, and more than 40% were at least 20% below. A subsequent snapshot put the median stock about 17% below its one-year high.

Four stocks accounted for almost half of year-to-date index performance. Over a separate period beginning July 29, five megacap companies contributed 93% of the index’s 3.8% gain. Those are different time windows, but both illustrate concentration.

There have been encouraging signs of broader participation. In a recent weekly interval, the equal-weighted S&P 500 rose 1.58%, versus 1.15% for the capitalization-weighted index, while nine of 11 sectors advanced. But that followed a 5% September decline in the equal-weighted index. Sustained improvement across more businesses would provide a broader foundation for market strength.

Valuation: Look Beyond the Average

Morningstar estimated its covered stocks within the U.S. Market Index traded at approximately a 10% discount to composite fair value at September 30. But the aggregate dollar amount of undervaluation was accounted for by seven companies: Nvidia, Alphabet, Broadcom, Microsoft, Meta, Amazon, and Tesla.

Excluding those seven, the remaining coverage was approximately fairly valued. That does not imply every other stock was fairly valued; it means discounts and premiums across the remainder largely offset one another.

This adds another form of concentration. The apparent market-wide opportunity depends heavily on a small set of businesses and assumptions about future cash flow, including continued AI investment and monetization over the subsequent three to five years.

An earnings multiple and an intrinsic-value estimate answer different questions. The multiple describes price relative to a particular earnings measure. Intrinsic valuation attempts to assess a longer stream of future cash flows. Neither eliminates uncertainty about growth, margins, discount rates, or competition.

The important practical distinction is among an attractive industry, a strong company, and an attractive purchase price. A company can have excellent prospects while its shares already reflect those prospects. A depressed stock can appear inexpensive while facing serious structural challenges.

Rather than leaning heavily on sector rankings, the investment discussion benefits from examining business economics and the price paid. Broad categories can be useful for organizing a portfolio, but they do not replace understanding what drives value within each holding.

AI: The Buildout Must Eventually Produce a Payoff

AI investment is large enough to influence economic growth, corporate earnings, inflation, and financing conditions simultaneously. Capital-spending projections exceeded $1.4 trillion in 2027 and reached about $1.5 trillion in 2028.

Analysts at 22V Research suggested annualized revenue across AI developers would need to reach $400 billion to $600 billion by the end of 2027 and approach $1 trillion by 2028 or 2029 to sustain that trajectory. These are analytical estimates, not assured revenue outcomes.

A separate academic analysis estimated approximately $3.5 trillion in AI revenue would be needed by 2032 under its assumptions. That longer-term framework should not be treated as interchangeable with the developer-revenue estimates or added to them.

The distinction between the buildout and its return is essential. Suppliers can recognize revenue from equipment sales while buyers spread the expense of long-lived assets through depreciation. Strong supplier profits do not, by themselves, establish that the buyers will earn adequate returns.

Pricing is uncertain. In a 22V Research survey, 54% of investors said competition from lower-priced Chinese models affected their outlook for U.S. infrastructure spending. Lower prices could broaden adoption while requiring much greater usage to sustain revenue.

History offers a caution about extrapolating scarcity pricing. Fiber-optic bandwidth prices between London and New York fell 96% between 1997 and 2001. AI need not follow the same path, but the example shows why technological importance and investment success are different questions.

The ultimate test is sustainable customer demand, useful applications, and productivity gains that justify the capital committed. A transformative technology can create enormous economic value without every company financing its expansion earning an attractive return.

AI Adoption, Employment, and the Distribution of Gains

The operating economics of adoption are still developing. In a survey of nearly 400 businesses, only 11% accurately forecast AI spending. A lower advertised model price may not establish a lower total cost if completing a task requires substantially more processing.

Human review and integration into existing workflows also matter. Producing more code or completing more isolated tasks does not automatically create proportionate improvements in reliable, end-to-end output.

Professional services selling expertise by the hour may experience pressure on pricing and staffing models. But the scale and timing of disruption remain uncertain. Automating tasks is not the same as replacing complete roles, and technical capability is not the same as economical deployment.

Productivity gains can benefit customers through lower prices, owners through improved margins, or workers through higher compensation. The distribution influences consumption and employment as well as profitability.

There is a fiscal connection too. Individual income and payroll taxes together represent roughly 85% of federal revenue, while corporate taxes account for about 9%. That is not the same as saying all individual income taxes come from wages, but it illustrates how changes in the composition of income can matter for the tax base.

The broader question is how technological efficiency becomes durable economic prosperity. Adoption, profitability, wage growth, and government revenue are related, but they do not necessarily improve at the same speed.

The Federal Reserve: Managing Competing Risks

The Federal Reserve faces a balancing act between persistent inflation and uneven economic conditions. Strong spending, profits, and infrastructure investment suggest continuing momentum. Softer hiring and pressure on rate-sensitive businesses point to vulnerabilities.

With the federal funds rate around 3.88%, core PCE inflation at 3%, and the two-year Treasury yield around 4.8%, policymakers and markets face differing signals about the degree of restriction already in place. Those figures alone do not establish the appropriate policy setting.

Some officials favor patience, while others see additional tightening as necessary. The reasoning can differ even when the decision is the same: An increase may reflect a central economic forecast or an insurance approach to the risk of persistent inflation.

Energy disruptions, trade friction, and infrastructure demand make it harder to judge how much inflation will ease without intervention. The neutral rate - the rate that neither stimulates nor restrains activity - could also be higher if demand for investment capital remains strong.

The useful focus is the relationship among employment, inflation, demand, and financing conditions, rather than treating every release as a verdict on the next meeting. The underlying question is whether supply and productivity will improve quickly enough or whether activity must slow more substantially.

Portfolio Perspective: Quality, Selectivity, and Balance

A demanding financing environment places greater emphasis on the quality of business economics. Durable competitive advantages and pricing power can help protect margins. Strong cash generation provides flexibility. Manageable debt exposure reduces vulnerability to changes in borrowing costs.

Companies producing cash today differ from businesses that continually need external financing. The latter must deliver on their operating plans while also retaining access to capital. Higher rates and weaker market confidence can make that second requirement more difficult.

Dividend quality also depends on the cash supporting it. A high yield alone does not establish sustainability. A history of consistent dividend growth can be informative, but the underlying ability to fund payments and reinvestment remains central.

Investment labels are starting points rather than complete theses. Growth can mean established, profitable leaders or speculative companies with distant profits. Value can mean resilient businesses at reasonable prices or companies facing structural deterioration. The analysis should go beyond the category.

Selectivity and diversification belong together. Concentrating in a handful of perceived bargains may create shared exposure to the same assumptions, particularly AI investment. Different company names do not necessarily mean different underlying risks.

For bonds, higher income should be evaluated alongside maturity and price sensitivity. For equities, earnings strength should be weighed against valuation and the durability of demand. Across both, the objective is to understand the drivers of risk and return rather than make every decision depend on a single macro forecast.

Closing: What Would Make the Expansion More Balanced?

The central message is that resilience and risk are coexisting. Domestic demand has been firm, earnings expectations remain strong, and AI is generating substantial activity. But purchasing power is uneven, financing costs are elevated, and market leadership is concentrated.

A more balanced expansion would include stronger real wages, broader earnings growth, easing supply constraints, and investments that generate durable cash flow. Those outcomes would strengthen the foundation of demand rather than leave it dependent on a narrower group of consumers and companies.

The conditions worth watching are therefore practical: Does employment support purchasing power? Can profits extend beyond the dominant leaders? Does energy and infrastructure supply catch up? Do AI investments produce sufficient economic returns?

These questions connect through the cost of capital and the durability of cash flow. They provide a more useful perspective than treating every market move or economic release as a definitive signal about the entire economy.

The investment task is to remain attentive to those relationships, understand the assumptions supporting valuations, and balance opportunities with the risks that could prevent them from being realized.



Disclosures and Disclaimers

Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Risks: All investments, including stocks, bonds, commodities, alternative investments and real assets, should be considered speculative in nature and could involve risk of loss. All investors are advised to fully understand all risks associated with any kind of investment they choose to make. Hypothetical or simulated performance is not indicative of future results.

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