Global equity markets posted more modest, but still positive returns in the third quarter. The Iran War stalemate continued with oil prices climbing back above $100 during the quarter. The stalemate is expected to continue through the US midterm elections. More oil tankers left the Strait of Hormuz under escort, but countries were still drawing down their strategic petroleum reserves. The volatility index (VIX) remained muted, ending the quarter where it began at ~16.5.
AI remained the dominant investment theme, with capital expenditures driving many sectors of the market and impacting prices of related materials. The Hugging Face hack involving OpenAI agents heightened security concerns as it was the first widely reported case where AI agents bypassed controls and carried out illegal cyber activities without direct instruction. While this event raised significant questions about autonomous AI behavior and has potential regulatory implications, AI spending continued, possibly constrained only by the availability of electricity.
The US crossed $40 trillion in debt, up from $3 trillion in 2000. This realization, along with a change in Treasury buyers and potential crowding out from AI-infrastructure debt, drove treasury rates higher, with the 10-year treasury ending at 5.26%, up from 4.4% at the end of June.
Despite concerns about inflation, rates, and the middle east conflict, corporate earnings remained strong. Earnings have been growing by double digits for three years now, and markets have responded to strong margins and revenue growth.
US stock markets[2] returned 1.4% for the quarter. Large stocks slightly outperformed, returning 1.8%. Small cap stocks gave up most of their outperformance year-to-date versus US large stocks, underperforming by ~9%. (Small stocks performed better than large stocks outside the US.) Value stocks outperformed growth stocks with returns of 2.3% and 0.5%, respectively. Small growth stocks were the worst-performing segment of the market, returning ‑9.4% during the quarter as investors favored value-oriented sectors amid rising interest rates.
The Russell indexes reconstituted in June and shifted many chip stocks (such as Micron, AMD and Sandisk) from value to growth. Apple and Microsoft shifted from being entirely growth to having allocations in both the indexes, and Amazon became value. These shifts in leading sectors leads to additional variation between indexes and continuously reconstituted funds.
Developed international and emerging markets underperformed US markets during the third quarter, with returns of 0.8% and -0.4%, respectively. Semiconductor stocks, particularly in Korea and Taiwan, had been driving outsized returns earlier in the year.
Domestic real estate[3] and US Utilities[4] both declined during the quarter, with returns of -5.7% and -12.1%, respectively, as rising treasury yields weighed on both sectors. Alternative lending posted modest gains over the quarter of 1.4%, a strong return when all other fixed income funds are posting losses.
[1] Bloomberg US Aggregate Bond Index.
[2] Large, small, and broad market returns are based on the Russell 1000, 2000, and 3000. Value and Growth are based on the respective Russell indexes. International developed and emerging market equities are based on EAFE and MSCI Emerging Markets indices, respectively.
[3] Dow Jones US Select REIT Index.
[4] Utilities are represented by the MSCI US IMI/Utilities Total Return Index.
[5] This report only considers events and data available as of October 3, 2026. Subsequent events could have an impact on the discussion herein.
