A strong August sandwiched between two negative months powered the S&P 500 index to a 2.49% gain in the third quarter of 2026. Traders took solid first half profits from the ‘value’ sectors and rotated back into technology stocks, led by the beaten-down software industry and that handful of familiar mega-cap names driving the AI buildout.
While Big Tech’s stellar Q2 earnings reports and the energy sector’s huge revenue and earnings surge amid the ongoing conflict with Iran are keeping the index afloat, a look under the hood reveals that all is not well in the stock market. Breadth turned negative in Q3 as 60% of the S&P 500 companies’ shares declined in the quarter. The equal-weighted version of the S&P 500 lost 5.2% in Q3, underperforming the market-cap weighted index by 7.7%. Further evidence of distress was found in small cap stocks, as the Russell 2000 index dropped 7.5% over the quarter.
Meanwhile, inflation fears continue to rattle the bond market. The Fed’s decision to raise the discount rate by 0.25% confirmed the market’s concerns about accelerating inflation, and the US Treasury’s latest 5-year debt auction was met with very tepid demand as investors demanded higher yields to buy in. The bond market has finally taken notice of the drastic rise in our country’s debt-service outlays as interest payments on the $40 trillion debt surpassed what we spend on defense for the first time ever. The flood of new corporate bond issuance by AI hyperscalers has also created a crowding-out effect as bond investors in search of higher yields chose to lend to the likes of Nvidia and Google instead of Uncle Sam. These factors contributed to a miserable quarter for the Bloomberg Aggregate Bond Index, which plunged 3.85%.
Investors looking only at major indices like the cap-weighted S&P 500 and NASDAQ Composite trading at or near all-time highs can be easily led to believe that all is well. Profits benefited from inflation as corporations passed it along to their customers. Wall Street baked those earnings into stock prices in the first half of the year; the market’s rotation out of consumer sectors and back into the richest growth companies suggests traders may be betting that consumers have reached their limit on how much they’re willing to pay or buy. Unusually strong profit growth has pushed stocks to record high levels that will be difficult to sustain if the pace of growth slows.
Financial Disclosures
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
Stock investing includes risks, including fluctuating prices and loss of principal. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Because of their narrow focus, investments concentrated in certain sectors or industries will be subject to greater volatility and specific risks compared with investing more broadly across many sectors, industries, and companies.
The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.