Doc’s Economic Insights

October 2026

During the third quarter, US stocks alternated between gains and losses as investors balanced strong corporate earnings against concerns about rising bond yields and oil prices.   July began with semi-conductor stocks leading a stock market rally.  By the close on July 10, the S&P 500 was up more than 1% for the month overall.  US stocks began to slide on July 13 as oil prices rose in response to escalating tensions between the US and Iran.  Stocks drifted lower for more than two weeks, with Artificial Intelligence (AI) related stocks under particularly strong pressure due to concerns that the high-level of spending to build-out data centers was unsustainable and rising oil prices would stoke inflation, forcing the Federal Reserve to raise interest rates.  Stocks reached their low for the month on July 29, as oil prices surged following a surprise Iranian attack on a US military base in Jordan.  At the close on the 29th, the S&P 500 was down more than 2% for the month overall.  On July 30, Microsoft led a strong US stock market rally after it reported a 31% increase in profit and strong growth in revenue from cloud computing.  The rally continued July 31 after Amazon also reported strong growth in cloud computing revenue.  The strong two-day rally reduced the magnitude of the S&P 500’s loss for the month overall to only -0.06%.

August began with a strong US stock market rally, as oil prices declined on President Trump’s announcement that he had called off planned US strikes on Iran.  US stocks extended their gains on August 4, as robust corporate earnings reports pushed the S&P 500 to an all-time high, up 3.3% for the month overall.  The S&P 500 achieved another record high on August 7, after a weaker than expected employment report suggested the Federal Reserve could hold off on raising interest rates.  On August 13, the S&P 500 achieved its third record high of the month when the July Producer Price Index showed no increase relative to the prior month and oil prices declined, increasing the probability that the Federal Reserve could hold rates steady.  At this point, the S&P 500 was up more than 4% for the month overall.  On August 14, US stocks declined due to disappointing earnings from retailers and a report of weaker than expected consumer confidence.  Stocks remained under pressure for several sessions, due to rising oil prices and long-term bond yields.  By the close on August 20, the S&P 500’s gain for the month overall had been reduced to 2.1%.  US stocks traded in a narrow range for much of the remainder of the month.  The one exception was August 27, when Nvidia gained 8.74% after reporting $96 billion in revenue for its most recent quarter, an increase of more than 100% year over year.  Nvidia was responsible for more than half of the S&P 500’s 0.72% return on the 27^th.  For the month of August overall, the S&P 500 returned 2.72%.

September began with stock prices under pressure from rising oil prices and bond yields.  Stocks rallied back during the next two sessions, with technology shares leading the way.  By the close on September 4, the S&P 500 was up 0.8% for the month overall.  Stocks began to slide on September 4 after the report of much larger than expected August employment growth raised expectations that the Federal Reserve might vote to increase the Fed Funds rate later in the month.  As subsequent economic reports reinforced the idea that the Fed would need to increase the Fed Funds rate to fight inflation, long-term bond yields marched higher and stock prices drifted lower for several sessions.  After the Federal Reserve announced a quarter point increase in the Fed Funds rate on September 16, the 10-year US Treasury yield closed above 5% for the first time in more than 10 years and the S&P 500 was down more than 1.6% for the month overall.

On September 17, a furious bond market rally lowered the 10-year bond yield to 4.93%, prompting a stock market rally led by technology shares.  Stocks extended their gains on September 21, led by a double-digit increase in Meta’s stock price following reports of strong demand for its AI-application Muse.   At the September 21 close, the S&P 500 was up more than 1.1% for the month overall.  From this point onward, stock prices once again came under pressure from rising bond yields and oil prices.  The S&P 500 returned -0.35% for the month of September overall, 2.30% for the third quarter, and 12.75% for the year-to-date.

Although we remain optimistic about the stock markets’ long-term prospects, stock prices are likely to remain under pressure near-term due to concerns about oil prices, rising interest rates, the sustainability of AI investment spending, and the profitability of AI investments.  It now appears the Federal Reserve is likely to raise the Federal Funds rate again before the end of the year.  Also, valuations remain elevated for many of the companies participating in the buildout of AI data centers.

It should be noted that some segments of the market are likely to hold up better than others.  Stock valuations outside of the technology sector continue to be attractive.  Market volatility also leads investors to rotate their portfolios toward stable stocks.  For further details, please see below.

 

 

The Economy:

• Consumer spending and the labor market remain strong, providing near-term support for the economy.
• Thus far, elevated fuel costs have not prompted a slowdown in economic activity.
• The recent increase in long-term bond yields is a concern because it appears to be driven by growing demand for investment dollars to fund government deficits and AI infrastructure buildout.  While the increase in interest rates will encourage more saving, increasing the supply of investment dollars, the increase in saving is unlikely to be enough to fund all investments.  There is evidence that the increased demand for funding government and AI-related spending may be crowding out critical investment in sectors of the economy that are more sensitive to interest rates, such as non-AI manufacturing and residential construction.
• Although aggregate corporate earnings growth for 2026 is currently expected to exceed 30%, this rate of earnings growth is unlikely to be sustained for two reasons.
  • First, current earnings include appreciation in the value of ownership stakes in unlisted AI companies such as OpenAI and Anthropic.  The book values of those stakes may go down after the AI companies complete their planned initial public offerings and/or enthusiasm for AI investments decline.
  • Second, the profits earned by technology companies selling chips and other equipment needed in AI data centers are fully reflected in aggregate earnings while the full costs paid for the chips and equipment by the builders/operators of data centers are not.  Those costs will be depreciated over time, reducing aggregate future earnings.

 

Investment Valuations & Rotation Toward Stability:

• Investors continue to reassess the valuations of technology shares.  Many stocks outside this sector have attractive valuations.  This is a great environment for active stock managers, particularly ones that look for stocks with reasonable valuations.
• In volatile markets, investors tend to rotate toward stocks that have provided more stable returns in the past.  Stocks that possess economic moats tend to have more stable returns and often benefit in these environments.

 

This report has been generated from information that Arbor Financial believes to be reliable and accurate. We do not represent or warrant the accuracy or completeness of the information contained in this report. As such, all calculations, estimates, and opinions included in this report constitute our best judgment as of this date and may be subject to change.  Past performance does not guarantee future results.