The third quarter reminded us why it’s important to look beyond headline market returns. While the S&P 500 posted modest gains, those results masked a tougher environment for many stocks. The index advanced approximately 2.3%, while the Russell 2000 declined about 7.2% and the equal-weight S&P 500 also lost ground. Market leadership remained concentrated among a relatively small group of large companies, including businesses benefiting from artificial intelligence spending. Strong profits helped support these leaders as rising interest rates pressured valuations elsewhere.
The Impact of Higher Interest Rates
Higher borrowing costs were central to this uneven performance. In September, the Federal Reserve raised its policy rate by a quarter percentage point to a range of 3.75% to 4.00%, citing persistently elevated inflation.1 Treasury yields also climbed during the quarter.
Rising rates affect companies through both financing costs and the prices investors are willing to pay for future profits. Businesses with substantial cash reserves and strong cash generation have more flexibility to fund expansion internally. Companies that rely on refinancing or outside capital face tougher choices as borrowing costs rise. Smaller businesses and industries closely tied to economic activity can be particularly exposed, although balance-sheet strength matters more than company size alone.
Despite these pressures, the economy has remained resilient. In its September statement, the Fed described solid economic growth, sustained domestic spending, and strong capital investment.1 Yet a resilient economy doesn’t necessarily mean an easy environment for investors. Healthy business activity can support earnings, while persistent inflation keeps interest rates elevated and limits how much investors will pay for those earnings. Continued profit growth will be especially important if valuations remain under pressure.
Looking Ahead: Risks and Opportunities
Several unresolved themes could influence markets through year-end. Inflation and the path of monetary policy remain prominent, while geopolitical conflicts can affect energy prices and business confidence. November’s midterm elections add questions about the direction of fiscal and regulatory policy. Federal borrowing is another longer-term issue: under current law, the Congressional Budget Office projects that public debt will continue rising relative to the economy.2 These developments deserve attention, but their investment implications depend on how outcomes compare with what markets already anticipate.
We see reasons for a constructive longer-term outlook, even as near-term volatility may continue. Recent declines across much of the market may be creating opportunities where prices have fallen more than business prospects justify. It is too early to conclude that the correction has ended. We would gain confidence from steadier interest rates, resilient earnings expectations, and participation by a wider range of companies. Greater policy clarity could help, although markets can begin recovering even as significant questions remain unanswered.
Election history provides some encouragement. U.S. stocks have often performed well in the months following midterm elections, as investors move beyond the campaign and reassess the policy environment. This tendency offers useful perspective, but the historical sample is limited, and past performance does not guarantee future results. Earnings, inflation, and economic conditions will ultimately determine whether a sustained advance develops. The calendar alone is not sufficient grounds for an investment decision.3
Beyond the next quarter, technological progress and changing household finances provide reasons for optimism. Artificial intelligence could improve productivity across industries, but companies will need to show that their spending delivers lasting economic benefits. Many Millennials are entering years with higher earnings and greater capacity to save, while adult Gen Z members are building careers and beginning to accumulate assets. We view these developments as potential sources of support for economic growth and investment over time, with benefits that will vary across households and businesses.4
FCA Corp’s Investment Approach: Diversification and Discipline
At FCA Corp, our investment approach remains focused on diversification and the relationship between a company’s prospects and its price, with attention to each client’s goals and tax circumstances. Today’s uncertainty calls for selectivity and patience. Waiting until the outlook feels comfortable carries its own risk, as prices may have risen substantially by the time confidence returns. We remain disciplined in our approach rather than trying to time the market’s ups and downs. We believe maintaining a thoughtful asset allocation and a laddered approach to fixed income can help clients navigate changing market conditions, manage reinvestment risk, and stay focused on their long-term goals.
As always, if you have any questions about the markets or your portfolio, please don’t hesitate to reach out.
- Federal Reserve. FOMC statement, September 16, 2026
- Congressional Budget Office. The Budget and Economic Outlook 2026 to 2036
- Schwab Center for Financial Research. What the 2026 Midterms Could Mean for the Markets. Historical analysis uses S&P 500 price returns following midterm elections since 1974.
- Pew Research Center and Bureau of Labor Statistics. Generational definitions; Q2 2026 earnings by age
This commentary is for informational purposes only and should not be considered individualized investment advice. Economic and market conditions are subject to change, and past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. Clients should consult their advisor regarding their specific financial situation, investment objectives, risk tolerance, and time horizon.
This document reflects the views of FCA Corp based upon information believed to be reliable as of the publication date. There is no guarantee that any forecast or opinion will be realized. Information and opinions presented have been obtained or derived from sources believed by FCA Corp to be reliable. FCA Corp makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change.
