WESCAP Q3 2026 Quarterly Commentary: AI Strength, Soaring Yields, and Election Risks
Stocks and bonds declined in September as several pressures weighed on markets. Higher energy prices and limited progress
toward ending the Iran conflict contributed to inflation and higher short-term interest rates. Long-term interest rates also rose
sharply amid inflation concerns, federal budget deficits, and substantial borrowing needs for artificial intelligence (AI)
infrastructure and other capital-intensive projects. The University of Michigan’s consumer sentiment survey reached its second-lowest
reading on record, while election uncertainty added to investor caution.
Despite a weak September, the S&P 500 returned 2.3% for the third quarter, as gains in AI-related companies offset weakness
elsewhere. The equal-weighted S&P 500, which better reflects the performance of the average stock in the index, lost 1.9%. U.S.
small-cap stocks, measured by the Russell 2000, fell 7.2%, and emerging-market stocks, measured by the MSCI Emerging
Markets Index, declined 0.4%. Developed international stocks, measured by the MSCI EAFE Index, gained 0.8%. Commodities
performed strongly, with the GSCI Index returning 25.1%.
The 10-year U.S. Treasury yield reached 5.3% at the end of September, up from a low of 4.0% in late February. Rising yields
pushed the Bloomberg U.S. Treasury 20+ Year Index down 8.9% for the quarter. Higher yields make intermediate-term fixed
income increasingly attractive, though we see no need to rush purchases while upward pressure on rates persists.
Nevertheless, the intermediate-term outlook remains promising. Oil shipments are recovering as Iran’s disruption of oil supplies
diminishes. Tariffs have declined from their peaks. These developments could help inflation trend down, although stronger
economic growth and rising rents may slow that progress and interest rates may climb further in the short term. Corporate
earnings have been very strong. Spending on AI and other infrastructure continues to support economic and earnings growth,
more than offsetting weakness in housing, restaurants, and other consumer sectors.
Weak consumer sentiment has weighed on stocks and consumer spending, but it can also be a contrarian indicator. According to
J.P. Morgan’s Guide to the Markets, the S&P 500 returned an average of 24.1% in the 12 months following nine consumer
sentiment troughs since 1971, with no return below 14.2%. By comparison, returns following the ten highest sentiment peaks
averaged 4.8%, with half negative. These historical results suggest that widespread pessimism can create investment
opportunities, while excessive optimism can warrant caution. We remain cautious ahead of the midterm elections while
maintaining a favorable intermediate-term outlook for stocks and other risk assets.