Market Outlook | Q4 2026

As we enter the fourth quarter of 2026, it is hard to believe how quickly the year has passed. More importantly, given everything that has transpired, I think it is worth reflecting on where we started, what has changed, and what investors should expect as we approach the end of the year.

We entered 2026 with considerable optimism. The S&P 500 had just finished another strong year, gaining 16.39% in 2025, or 17.88% including reinvested dividends, following impressive gains in both 2023 and 2024. Investors were optimistic that the Federal Reserve would continue reducing interest rates, finally bringing an end to the multiyear period of restrictive monetary policy implemented to combat inflation. Lower borrowing costs, continued corporate earnings growth, and accelerating investment in artificial intelligence appeared to provide a favorable backdrop for financial markets.Source: S&P Global

Unfortunately, that outlook changed considerably.

Geopolitical Conflict Has Reintroduced Inflationary Pressures

The war in Iran, which began in February, introduced a significant new source of uncertainty into the global economy. Disruptions to energy production and transportation sent oil prices sharply higher, contributing to a correction in financial markets and renewed concerns about inflation.

While markets have recovered much of their earlier losses, energy prices remain elevated, and the economic consequences are becoming increasingly apparent.

As of October 14, West Texas Intermediate crude oil was trading around $95 per barrel, while Brent crude was approximately $106. More concerning is the impact on refined petroleum products, particularly diesel fuel, which plays an essential role in transportation, agriculture, manufacturing, and the distribution of goods.

According to the U.S. Energy Information Administration, the national average price of diesel reached $6.18 per gallon on October 12, approximately 69% higher than a year earlier. In California, diesel averaged $8.09 per gallon, with some individual stations charging considerably more.Source: U.S. Energy Information Administration

These are not insignificant increases.

Consider the implications for a trucking company operating hundreds of vehicles, a farmer harvesting crops, or a manufacturer transporting raw materials and finished products. Rising diesel prices directly increase operating expenses, and those costs do not simply disappear. Businesses must either absorb them through reduced profit margins or pass some portion of the increases along to customers.

Ultimately, those higher costs can find their way into the prices consumers pay for everyday goods and services.

Compounding the problem is the ongoing conflict involving Russia and Ukraine. With two major geopolitical conflicts influencing global energy markets, the potential for continued supply disruptions remains a meaningful risk.

This is especially concerning because energy-driven inflation is not easily addressed through traditional monetary policy. The Federal Reserve can influence borrowing costs and consumer demand, but it cannot directly increase oil production or resolve geopolitical conflicts.

The Federal Reserve Faces an Increasingly Difficult Decision

At the beginning of the year, investors were largely focused on when the Federal Reserve would lower interest rates.

Today, the conversation has shifted toward how many additional rate increases may be necessary.

Kevin Warsh assumed the chairmanship of the Federal Reserve in May 2026, and in September, the Federal Open Market Committee raised its benchmark interest rate by 25 basis points, bringing the federal funds target range to 3.75% to 4.00%. It was the first increase since 2023.Source: Federal Reserve

That shift in policy expectations has important implications for both the economy and financial markets.

Following the latest inflation report, traders significantly increased their expectations for additional monetary tightening. According to CME FedWatch data reported on October 14, the probability of an October rate increase climbed from approximately 22% before the report to nearly 49% afterward. Markets were also pricing in a 61% probability of at least four additional 25-basis-point increases by the end of October 2027, although these probabilities can change substantially as new information becomes available.Source: The Wall Street Journal

For perspective, the 10-year U.S. Treasury yield has recently traded above 5%, reaching approximately 5.3% during October. These higher yields have implications far beyond the bond market.

Mortgage rates have risen sharply. According to Freddie Mac, the average 30-year fixed mortgage rate reached 7.40% on October 8, compared with 6.30% a year earlier. More recent daily lender surveys have shown average rates approaching 7.5%, with some borrowers encountering rates closer to 8%, depending on their qualifications and loan structure.Source: Freddie Mac

Higher mortgage rates are placing renewed pressure on an already challenged housing market.

For a buyer financing a $750,000 mortgage, the difference between a 6% and 8% interest rate translates into approximately $1,007 in additional monthly principal and interest payments, assuming a 30-year fixed-rate loan. That is approximately $12,079 in additional annual housing expenses before accounting for property taxes, insurance, and maintenance.

It is not difficult to understand why homebuyers are hesitant and why existing homeowners with mortgages secured at substantially lower rates are reluctant to sell.

But the implications extend well beyond residential real estate.

Higher interest rates increase corporate borrowing expenses, make capital-intensive projects more expensive to finance, and reduce the present value of future cash flows. These effects can place pressure on equity valuations, particularly for businesses whose valuations depend heavily on expectations of future earnings growth.

Bonds are not immune, either. As interest rates rise, the market prices of existing fixed-rate bonds generally decline.

This presents investors with an unusual challenge: the traditional diversification benefits of holding stocks and bonds can become less reliable during periods when inflation and interest rates are rising simultaneously.

The Federal Reserve is effectively attempting to balance two competing risks.

Should it continue raising interest rates to suppress inflation, knowing that doing so could weaken economic growth, increase unemployment, and pressure financial markets?

Or should it exercise patience, allowing time for the inflationary effects of geopolitical energy disruptions to subside?

The latter approach carries its own risks. If inflation remains elevated for an extended period, expectations of future inflation may become more deeply embedded in the economy, potentially making price stability even more difficult to achieve.

For now, there are no easy answers.

The Latest Inflation Report Raises Additional Concerns

The September Consumer Price Index, released on October 14, reinforced the challenges facing the Federal Reserve.

Headline CPI increased 3.7% year over year, accelerating from 3.4% in August and exceeding economists’ expectations. Consumer prices increased 0.6% in September alone.

Energy was a significant contributor. Gasoline prices increased 9.1% during September and an extraordinary 34.2% over the preceding 12 months.

However, inflationary pressures were not limited to energy.

Core CPI, which excludes food and energy, increased to 2.6% year over year, up from 2.4% in August. Meanwhile, the Federal Reserve’s preferred inflation measure, core Personal Consumption Expenditures, remained at 3.0% in August, still well above the Fed’s 2% objective.Source: Bureau of Labor Statistics

Financial markets responded negatively to the latest inflation report.

On October 14, the S&P 500 declined 1.11%, while the technology-heavy Nasdaq Composite fell 1.88%. The Russell 2000, which is generally more sensitive to domestic economic conditions and borrowing costs, declined approximately 1.9%.Source: AP News

What concerns me most is not simply that inflation has increased. It is the possibility that inflation continues accelerating while the underlying economy begins to weaken.

According to the Bureau of Labor Statistics, the U.S. economy added just 29,000 jobs in September, compared with 133,000 in August. The unemployment rate stood at 4.2%.Source: Bureau of Labor Statistics

A single month of employment data does not establish a trend, but the slowdown deserves attention.

Historically, a combination of persistent inflation, weak economic growth, and deteriorating labor market conditions has proven particularly difficult for policymakers to manage.

There is also another variable entering the equation, one that I believe investors should be paying much closer attention to.

Artificial intelligence.

Artificial Intelligence May Fundamentally Change the Labor Market

While much of the economic conversation has focused on inflation, interest rates, and geopolitical developments, I believe another significant transformation is taking place simultaneously.

Artificial intelligence has advanced at a remarkable pace, and its capabilities are beginning to challenge some long-held assumptions about employment, productivity, and the relationship between economic growth and job creation.

We are no longer discussing technology that simply assists employees with relatively basic tasks. Increasingly sophisticated AI models and autonomous agents can perform research, analyze information, write software, manage workflows, interact with customers, and complete assignments that previously required considerable human involvement.

This raises an important question: What happens when businesses can maintain, or even increase, their productivity without increasing their human workforce?

Historically, during periods of economic weakness, businesses reduce expenses by slowing hiring, freezing compensation, and, when necessary, laying off employees. As economic conditions improve, companies gradually resume hiring.

However, I have a growing theory that the next economic downturn could produce a different outcome.

If businesses are forced to reduce their workforce during a recession or prolonged economic slowdown, a meaningful portion of those positions may never return. Rather than rehiring employees as conditions improve, companies may increasingly turn to AI agents and automated systems to absorb the workload.

Consider a business with 100 employees. If economic conditions require management to reduce its workforce by 15%, the traditional expectation would be that some of those positions would eventually return as revenue recovered.

But what if, during that period, management discovered that AI systems could perform a substantial portion of the displaced employees’ responsibilities at a fraction of the cost?

Would the company necessarily rehire those 15 employees?

Or would it redirect those savings toward technology investments, potentially increasing profitability while operating with fewer employees?

I suspect we will see more businesses seriously consider the latter.

This is not to suggest that AI will eliminate the need for human workers or that every displaced position can be automated. Many occupations require human judgment, interpersonal relationships, physical capabilities, and responsibilities that current AI systems cannot reliably replicate.

AI may also generate entirely new industries, occupations, and sources of employment, just as previous technological innovations have done.

Nevertheless, I believe the speed at which this technology is advancing creates the possibility of a more disruptive labor market transition than many economists currently anticipate.

The concern is what happens when this transition coincides with an already fragile economic environment.

Persistent inflation reduces consumer purchasing power. Higher borrowing costs weigh on business investment. Slower hiring limits employment opportunities. And if AI adoption begins placing additional pressure on employment or wages, consumer spending could weaken further.

The resulting combination of elevated prices, slowing economic growth, and labor market disruption could create a particularly challenging environment.

There is also an important distinction between what benefits an individual company and what benefits the broader economy.

For example, a company that increases productivity while reducing labor expenses may experience substantial earnings growth. Its shareholders may benefit from improved margins and stronger cash flow.

However, if this transformation occurs across a significant portion of the economy, the resulting reduction in employment income could eventually affect consumer spending.

In other words, what is favorable for corporate profitability may not always translate into favorable outcomes for the broader labor market.

This is a dynamic I believe investors will need to understand more deeply over the coming years.

Why We Remain Bullish on Artificial Intelligence and Large-Cap Technology

Despite my concerns about the broader economy, I remain optimistic about the long-term investment opportunities associated with artificial intelligence, advanced semiconductors, cybersecurity, and the infrastructure supporting these technologies.

In fact, I believe the potential economic challenges discussed above could accelerate certain aspects of AI adoption.

As businesses face increasing pressure to control expenses and improve efficiency, the financial incentive to invest in automation becomes more compelling.

Companies capable of developing and deploying effective AI systems could benefit from growing demand, even during periods of slower economic growth.

We are already seeing substantial evidence of this investment cycle.

On October 14, semiconductor equipment manufacturer ASML reported approximately €11.7 billion in third-quarter revenue and €5.0 billion in net income, with management raising its full-year revenue outlook to between €44 billion and €45 billion.

Perhaps even more interesting was commentary from ASML CEO Christophe Fouquet, who indicated that customers were expressing interest in placing equipment orders for delivery as far into the future as 2029 and 2030.

ASML also indicated that its currently planned production capacity for 2027 and 2028 may be insufficient to meet anticipated customer demand. This is a remarkable indication of the scale of investment taking place across the semiconductor industry.Source: ASML Investor Relations, October 14, 2026

Importantly, this investment opportunity extends well beyond the companies developing AI models.

The continued expansion of AI computing requires increasingly sophisticated semiconductors, advanced memory, networking equipment, data centers, electrical infrastructure, and enormous amounts of energy.

These requirements create opportunities across multiple industries, including some that historically would not have been considered technology investments.

However, there is an important distinction between being optimistic about the long-term prospects of an industry and believing that its stocks are attractive investments at any price.

Even exceptional businesses can become poor investments when purchased at excessive valuations.

The AI investment cycle also faces legitimate risks, including higher financing costs, potential infrastructure overcapacity, competition, and uncertainty surrounding how quickly customers will generate sufficient returns on their AI investments.

These considerations are particularly important in the current interest rate environment.

A company investing billions of dollars in new infrastructure must ultimately generate economic returns that justify those expenditures. As the cost of capital rises, that hurdle becomes more difficult to overcome.

Furthermore, AI-related equities are not entirely insulated from broader market conditions. The October 14 selloff demonstrated that even companies benefiting from strong secular growth trends can experience significant volatility when investors reassess interest rates, valuations, and future profitability.

Still, our long-term conviction remains intact.

At Wealthstone, we continue to believe that artificial intelligence represents one of the most consequential technological and economic transformations of our lifetime.

The question is not whether we want exposure to this transformation. We do.

The more important questions are which companies will capture the greatest economic value, what valuations are reasonable, and when the risk-to-reward opportunity is most attractive.

Our Outlook for the Remainder of 2026

Although I remain optimistic about the long-term prospects for artificial intelligence and selected areas of large-cap technology, my outlook for the broader stock market over the remainder of 2026 is considerably more cautious.

We are approaching a period characterized by several overlapping uncertainties.

Inflation has accelerated, the Federal Reserve may raise interest rates further, geopolitical conflicts continue to threaten global energy supplies, and the November midterm elections introduce another source of uncertainty for investors.

At the same time, the stock market has already generated substantial returns this year.

As of October 14, the S&P 500 was up approximately 12.8% year to date, despite the day’s 1.11% decline. The Nasdaq Composite had gained approximately 14.8%.

Those returns are impressive, particularly considering the economic and geopolitical challenges that have emerged throughout the year. However, positive historical returns do not necessarily imply attractive prospective returns.

In my opinion, the current market environment does not present a particularly compelling risk-to-reward opportunity for aggressively increasing broad equity exposure.

That does not mean I necessarily expect a recession or a significant market correction.

Rather, I believe the potential upside from current valuations must be weighed against several increasingly consequential risks.

Another consideration is the return investors can currently earn without taking substantial equity market risk.

With short-term government securities and government money market funds offering yields near 4%, depending on the investment and prevailing market conditions, investors have access to meaningful income while maintaining liquidity.

To put this into perspective, the S&P 500 closed June 30 at approximately 7,499 and October 14 at 7,719. That represents a price increase of approximately 2.9% over the period, excluding dividends.

While that is a positive return, it also illustrates how relatively modest the broad market’s appreciation has been in recent months compared with the gains experienced earlier in the year.

This does not mean cash has universally outperformed equities. The outcome depends on the specific investment, purchase date, dividends, and the period being measured. However, it demonstrates why maintaining liquidity can be an attractive tactical decision when yields are elevated and we believe equity valuations do not adequately compensate investors for near-term uncertainty.

For Wealthstone clients, our decision to reduce certain portfolio risks earlier in the year was driven by these considerations.

We recognized that the market environment was changing, particularly as geopolitical tensions escalated and inflationary pressures reemerged.

Rather than attempt to capture every incremental percentage point of market appreciation, we elected to take a more defensive approach in certain portfolios, increasing allocations to cash equivalents and high-quality short-term fixed-income investments where appropriate.

That decision was never intended to represent a permanent departure from equities.

It was a tactical decision designed to preserve flexibility, manage downside exposure, and maintain the ability to capitalize on opportunities should market conditions become more favorable.

Importantly, we continue to evaluate each client’s portfolio individually. Asset allocation decisions depend on investment objectives, liquidity needs, tax considerations, risk tolerance, and the composition of existing holdings.

For clients whose portfolios have experienced substantial appreciation, preserving those gains and avoiding unnecessary portfolio risk can be particularly important.

We recognize that investment success is not simply a matter of generating the highest possible return in any individual year.

It is about managing wealth intelligently over time, balancing the pursuit of attractive returns with the need to preserve capital and remain positioned for future opportunities.

Our Strategy: Patience Today, Opportunity Tomorrow

As we enter the final months of 2026, our strategy remains centered on patience, flexibility, and disciplined portfolio management.

We continue to monitor financial markets daily, paying particular attention to inflation trends, Treasury yields, Federal Reserve policy, corporate earnings, and geopolitical developments.

We are also closely monitoring market valuations and momentum, particularly within the industries and companies that we believe possess the strongest long-term growth prospects.

Should market volatility intensify and produce a meaningful correction, we intend to evaluate opportunities to increase equity exposure and rebalance eligible client portfolios toward their strategic target allocations.

In preparation, we continue researching and evaluating companies positioned to benefit from the technological transformations we believe will shape the next decade.

These include artificial intelligence, advanced semiconductor manufacturing, high-bandwidth memory, cybersecurity, automation, intelligent robotics, and the energy infrastructure required to support the next generation of computing.

Our objective is not simply to purchase stocks because prices have declined.

It is to identify high-quality businesses with attractive long-term prospects and invest when valuations offer a compelling relationship between potential returns and the risks involved.

In some cases, this may involve adding to existing positions. In others, it may involve introducing new companies or investment themes into portfolios.

We also recognize that markets may continue advancing despite the risks we have outlined. Should economic conditions improve, inflation moderate, or corporate earnings exceed expectations, we will reassess our positioning accordingly.

We are not committed to a permanently defensive outlook, nor do we believe successful investing requires predicting every short-term market movement.

Our responsibility is to evaluate the information available, identify where we believe opportunities and risks are mispriced, and position client portfolios accordingly.

For now, I would rather exercise patience and potentially sacrifice some short-term upside than expose client capital to risks that I do not believe are sufficiently compensated by expected returns.

The coming months may bring additional volatility. But periods of uncertainty can also create some of the most attractive long-term investment opportunities.

Our intention is to remain prepared for both possibilities.

Final Thoughts

If there is one lesson I would take away from 2026 thus far, it is how quickly the economic and investment landscape can change.

We began the year expecting lower interest rates, moderating inflation, and a relatively favorable environment for equities.

Instead, we have experienced escalating geopolitical tensions, sharply higher energy prices, renewed inflationary pressures, and a Federal Reserve that has shifted back toward monetary tightening.

Meanwhile, artificial intelligence continues to advance at an extraordinary pace, potentially reshaping industries, corporate profitability, and the labor market in ways that are only beginning to become apparent.

These developments reinforce why we believe a forward-looking, disciplined approach to wealth management is so important.

At Wealthstone, our objective remains unchanged: to preserve and grow our clients’ wealth through thoughtful financial planning, proactive risk management, and investment strategies designed to capitalize on long-term economic and technological change.

Although our short-term market outlook remains cautious, our conviction in the long-term opportunities ahead remains strong.

We will continue evaluating market conditions, adjusting portfolio exposures where appropriate, and looking for opportunities to put capital to work when we believe the potential rewards justify the risks.

As always, if you have any questions about the markets, our outlook, or how these developments may affect your portfolio, please do not hesitate to reach out.

Zak Gardezy, CFP®

Zak Gardezy is the Founder & Managing Partner of Wealthstone Private Wealth Management, an independent, fiduciary registered investment adviser with offices in San Ramon, California and Scottsdale, Arizona. In-person meetings are by appointment only.