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The third quarter was awash in uncertainty around rising rates, upcoming midterm elections, geopolitics, and the artificial intelligence (AI) revolution to name a few of the more notable items. But despite all the nervous news flow and pivotal changes, returns for the major asset classes were largely flat once the dust settled. Heightened focus is now on interest rates, not only for the potential impact on the bond market, but also for the likely ripple effects on other asset classes—and even on the fiscal stability of the United States as the national debt has now topped $40 trillion. The 10-year Treasury yield increased more than 0.5% in the quarter, and as of this writing stands north of 5%, the highest level in nearly two decades.
The conflict in the Middle East continues to drag on, wreaking havoc in energy markets. Politicians on both sides of the aisle are beginning to attack data center construction as an easy soundbite to try and win votes. Both could become market and economic headwinds as power and data center capacity are essential ingredients for sustaining the AI-fueled economic boom.
In the third quarter the four major asset classes—equity, fixed income, real assets, and diversifying strategies (hedge funds)—were all roughly within +/-3% of flat results. Global equity markets were on the right side of zero, posting slightly positive results. Fixed income and real assets, on the other hand, were down roughly 3% in the quarter given rising rates and the corresponding decline in bond prices and impact on duration sensitive assets like real estate and infrastructure. Finally, diversifying strategies came in somewhere in between fixed income and risk assets (i.e., equity and real assets).
Key Areas of Focus for the Remainder of 2026 Include:
- Inflation: As Warren Buffett famously said, “interest rates are to asset prices, what gravity is to the apple.” The direction of rates from here will have a meaningful impact on asset class performance. That includes short-term rates as set by the Federal Reserve, as well as longer-term rates as set by the market.
- AI: Much attention has been given to the magnitude and momentum of hyperscaler capex spending. For that to continue, the major frontier AI labs, Anthropic and OpenAI chief among them, must continue their meteoric revenue growth rates to drive the demand for compute power, data centers, chips, etc. This is the epicenter of the strong equity market earnings we have experienced year to date, and key to the future earnings trajectory. One company’s capex is another company’s revenue.
- Capital Markets: How the conflict in the Middle East plays out and the ongoing impact on energy prices and supply chains is another key item to watch closely. Additionally, which political party is in control of the House and Senate after the midterm elections will carry consequences for what can or cannot get done in Washington D.C. and what market-shaping economic policies may be in play or on the horizon.
While the third quarter was relatively flat for investment returns, the year-to-date results for 2026 have been robust. Equity markets have delivered mid-teen returns over the first nine months of the year, while real assets and hedge funds are in the mid-to-high single digit return range. The market movements, technological change and policy dynamics are incredibly fascinating to study and research. For long-term investors, we also must not overreact to any of them and keep our sights on the strategy and objectives we have in place and codified in investment policy statements.