October 2026 Outlook: Strong Earnings Meet Higher Rates and Persistent Inflation
Newsletter — September 2026
Dear Clients and Friends,
As we enter October, the investment environment remains constructive in several important respects, but it is also more complex than it has been for much of the past several years. Corporate earnings have remained strong, consumer spending has continued to support economic activity, and large-scale investment in artificial intelligence, data centers, power infrastructure, and related industries is creating meaningful long-term opportunity. At the same time, inflation has proven persistent, interest rates have moved higher, energy markets remain volatile, and investors are navigating geopolitical, fiscal, and policy-related uncertainty.
These conditions do not call for abandoning a long-term plan in response to short-term headlines. They do reinforce the importance of a disciplined, diversified approach—one that balances participation in long-term growth with appropriate attention to income, liquidity, valuation, downside risk, and each client’s individual goals.
Inflation and Energy
Inflation has moderated materially from its earlier highs, but the return to a durable 2% inflation environment has been uneven. Recent data have shown that price pressure can reemerge when energy, transportation, and services costs rise at the same time. Producer prices were recently up 5.4% year over year, while consumer prices rose 3.4% year over year. Core consumer prices, which exclude food and energy, rose 2.4% from a year earlier, and core services excluding housing increased 0.5% during the most recently reported month. These figures underscore why policymakers and investors remain focused not only on headline inflation, but also on more persistent service-sector price pressures.
Energy is central to this outlook. Crude oil has traded near $100 per barrel, and diesel prices have increased sharply, recently reaching approximately $6.40 per gallon. Diesel has a broad influence on the economy because it supports freight transportation, rail, farming, construction, manufacturing, warehousing, and refrigerated distribution. Fuel can account for an estimated 15%–30% of the cost structure for some food products, particularly perishables that require temperature-controlled transportation. As a result, prolonged increases in diesel and other transportation costs can ultimately contribute to higher food, consumer-goods, and industrial-input prices.
Energy-market uncertainty is amplified by geopolitical risk. Security concerns affecting the Middle East and critical shipping routes in the Red Sea can influence oil supply expectations, transportation costs, insurance costs, and global trade flows. Supply disruptions are difficult to forecast, but they are an important reason to expect continued volatility in energy markets and to recognize that inflation may not move in a straight line lower.
Interest Rates and Fed Policy
The Federal Reserve has remained focused on preserving its inflation-fighting credibility. It recently raised its target federal-funds rate by 25 basis points, bringing the target range to 3.75%–4.00%. Policymakers cited a stronger economic outlook, persistent inflation concerns, and elevated geopolitical uncertainty. Most Federal Reserve participants projected at least one additional rate increase during the year, while futures markets and the two-year Treasury yield indicated that investors expect policy to remain relatively restrictive through 2027.
The challenge for the Federal Reserve is that not all inflation responds equally to higher rates. Monetary policy cannot directly resolve a disruption in oil supply, a geopolitical conflict, a tariff-related cost increase, or a temporary surge in a particular service category. It can, however, slow demand, influence credit conditions, help anchor inflation expectations, and reinforce confidence that inflation will not be allowed to become entrenched.
Higher rates affect nearly every part of the economy. They raise borrowing costs for homebuyers, businesses, commercial real estate owners, and the federal government. They also influence equity valuations, especially for companies whose anticipated profits are expected further in the future. The 10-year Treasury yield has risen materially this year and recently reached its highest level since 2007. This move reflects a combination of persistent inflation, substantial government borrowing, heavy corporate bond issuance, strong demand for investment capital, and a higher expected path for short-term policy rates.
It is important to place these yields in perspective. A 5% 10-year Treasury yield is not historically extreme, and many households remain protected by fixed-rate mortgages. Aggregate consumer debt-service payments have remained near 11% of disposable income, while the median S&P 500 company has an interest-coverage ratio of approximately 7.5 times, suggesting that many large companies remain well positioned to service their debt. However, high borrowing costs are a meaningful headwind for prospective homebuyers, smaller businesses, highly leveraged companies, and commercial real estate borrowers.
Equity Markets and Corporate Earnings
Equity markets have been notably resilient despite the rise in interest rates, volatile energy prices, geopolitical concerns, fiscal uncertainty, and questions about the return on substantial AI-related capital spending. The S&P 500 remains only about 1.9% below its early-June high, even as the 10-year Treasury yield reached its highest level in nearly two decades. That resilience has been supported by strong corporate earnings and continued economic growth.
Corporate profitability remains a critical source of market support. Earnings growth has been strong, with S&P 500 earnings expected to increase approximately 35% in 2026 before moderating toward 15% in 2027. The forward price-to-earnings ratio for the S&P 500 is approximately 19.1 times expected earnings, down from about 21.3 times in early June. In other words, earnings expectations have improved while valuations have adjusted lower in response to higher interest rates.
There are, however, areas of market vulnerability. Leadership remains concentrated in a relatively small group of large technology-oriented companies. Approximately 27% of expected S&P 500 earnings next year are projected to come from Nvidia, Alphabet, Micron, Microsoft, and Apple, which together represent approximately 26% of the index. In addition, market breadth has been uneven: fewer than 29% of stocks have traded above their 50-day moving average, and only about 52% have traded above their 200-day moving average. These measures suggest that the index’s resilience has not been shared equally across the broader market.
The concentration of earnings and index weight in a handful of companies does not necessarily imply that those businesses lack quality or long-term opportunity. It does, however, increase the importance of diversification. When a narrow group of companies accounts for an outsized share of market returns, a change in earnings expectations, regulatory policy, capital-spending plans, or investor sentiment can have an amplified impact on broad market indexes.
AI, Productivity, and Capital Investment
Artificial intelligence remains one of the most significant long-term investment and productivity themes in the economy. Major technology and cloud-computing companies are investing at an extraordinary pace in advanced semiconductors, data centers, network infrastructure, power generation, transmission, electrical equipment, cooling systems, and related construction and engineering capacity.
The scale of this investment is substantial. The largest technology and cloud companies are expected to commit hundreds of billions of dollars annually to capital spending, with cumulative AI-related investment potentially reaching several trillion dollars over the next several years. This creates opportunity not only for companies developing AI software or advanced chips, but also for businesses that supply the infrastructure necessary to power, cool, construct, connect, and secure AI-computing capacity.
The potential benefits are meaningful. If AI investments produce durable revenue growth, better operating efficiency, and broad productivity gains, they could support corporate margins and economic growth over a multiyear period. Productivity gains are also relevant to the inflation outlook: an economy that can produce more output without proportionally increasing labor and material inputs is better positioned to grow without generating the same degree of price pressure.
At the same time, the investment cycle carries real risks. Large capital expenditures can pressure near-term free cash flow and lead to additional borrowing. Investors will increasingly expect evidence that the returns on AI-related spending justify the scale of the investment. Data-center expansion also depends on reliable electricity supply, transmission capacity, land, water in certain regions, permitting, construction capacity, and local community acceptance. These constraints can increase cost, slow development, and create meaningful differences between companies that can execute effectively and those that cannot.
Fixed Income and Portfolio Income
The bond market has endured a challenging period as yields rose from historically low levels. Over the past five years, the Bloomberg U.S. Aggregate Bond Index declined nearly 3% on a total-return basis, while the S&P U.S. Treasury 10-Year Index declined 12.4%. Rising interest rates reduce the market value of existing bonds, with longer-maturity bonds generally experiencing greater price sensitivity.
This difficult period has also created opportunity. Higher yields mean that high-quality fixed income can again contribute meaningful income to diversified portfolios. The starting yield on a bond is a major determinant of its long-term return potential, and today’s yields are materially more attractive than those available during the near-zero-rate period.
High-grade, long-term municipal bonds have recently offered yields above 5%, their highest levels since the financial crisis. For investors in higher tax brackets, the taxable-equivalent yield on tax-exempt municipal income can be particularly compelling. Taxable bonds, Treasury securities, investment-grade corporate bonds, and municipal securities each have different roles, risks, maturity structures, liquidity characteristics, and tax implications. Our approach is to evaluate fixed-income exposure deliberately, with attention to credit quality, duration, income needs, tax circumstances, and the role each holding plays in the broader financial plan.
Higher rates may remain volatile in the near term because federal deficits, Treasury issuance, corporate borrowing, AI-related capital requirements, inflation uncertainty, and geopolitical risk continue to compete for investor capital. Yet current yields provide investors with a more attractive income base and potentially a greater cushion against future price volatility than was available several years ago.
Diversification and Downside Management
Recent market conditions are a reminder that diversification is not simply about owning more investments; it is about building a portfolio that does not depend upon a single economic outcome, sector, company, rate path, or market narrative. Inflation shocks can pressure stocks and bonds simultaneously. Technology leadership can broaden or narrow. Energy prices can affect corporate margins, consumer spending, inflation expectations, and interest rates. Geopolitical developments can change market sentiment quickly.
Diversification across asset classes, sectors, geographies, company sizes, investment styles, bond maturities, credit quality, and tax characteristics can help manage these changing risks. It does not prevent volatility or guarantee against loss, but it can reduce the dependence on any one area of the market and provide multiple potential sources of return over a full market cycle.
Structured investments may also be appropriate tools for certain clients when used selectively and in the context of a diversified portfolio. Depending on the structure, these investments can provide defined downside protection, a buffer against a specified decline in an underlying index, contingent protection at maturity, enhanced income, or a clearly defined range of potential outcomes.
When used appropriately, these strategies can help define risk, support portfolio income, reduce behavioral pressure during volatile periods, and provide a more intentional balance between return objectives and tolerance for loss.
Looking Ahead
The investment landscape continues to offer both meaningful opportunity and credible risk. The economic backdrop remains supported by consumer spending, strong corporate earnings, and substantial investment in technology and infrastructure. However, inflation remains above target, borrowing costs have increased, energy markets are vulnerable to geopolitical shocks, fiscal deficits are large, and equity-market leadership remains concentrated.
Our focus remains on the factors that can be controlled: aligning investment strategy with long-term objectives, maintaining sufficient liquidity for anticipated needs, emphasizing quality and appropriate income, diversifying thoughtfully, managing tax considerations, and evaluating risk in the context of the entire financial plan.
Short-term market developments will continue to create uncertainty. Rather than attempting to predict every inflation release, Federal Reserve decision, energy-market move, geopolitical development, or election outcome, we believe a disciplined long-term approach remains the most effective way to participate in opportunity while managing the risks that naturally arise in changing markets.
Sincerely,
Eric Boyce, CFA
President & CEO
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.
Additional Source Reference: Diane C. Swonk, “Economic Compass: Rolling a Boulder Uphill, Structural Change Watchlist,” July 2026.
Investment advisory services offered through Boyce & Associates Wealth Consulting, Inc., a registered investment adviser. Boyce & Associates Wealth Consulting, Inc. has Representatives Licensed to sell Life Insurance in TX and other states.
