Current Outlook & Portfolio Strategy
Posted on October 6, 2026
Financial markets enter the final stretch of 2026 facing an unusual combination: economic growth remains remarkably strong, corporate earnings continue to advance, and capital investment is booming, yet inflation, oil prices and interest rates have re-emerged as meaningful headwinds. Our outlook remains cautiously optimistic, but the path forward will not be a straight line.
We saw a perfect example of conflicting data in September when the S&P Global Composite PMI jumped to 58.4 from 56.0, its highest reading since July 2021. Both services and manufacturing accelerated as employment and new orders strengthened as well. This is good news. However, the market reaction was focused on the inflation implications of an economy running hotter than expected. The 10-year Treasury yield jumped significantly to 5.15% which was the highest level since 2007, while the two-year yield approached 4.95%. Equities declined following this headline as the probability of additional Fed tightening increased.
The irony is that this particular selloff was driven primarily by economic strength, not weakness. Welcome back to the “good news is bad news” environment.
Oil remains one of the most important variables in our outlook. WTI retreated into the $90s in Q3, down significantly from the high of $117 but still very much elevated. Middle East disruptions continue to constrain global supply. Higher energy prices have filtered into inflation with August headline CPI at 3.4% year-over year. However, encouragingly, underlying Core CPI came in at 2.4% in Sept, the lowest reading in 6+ years.
We continue to view much of the recent inflation acceleration as a supply-driven energy shock rather than a broad deterioration in the underlying inflation trend. Oil therefore remains critical. The EIA expects gradually improving flows through the Strait of Hormuz and alternative export routes to eventually restore supply, forecasting both Brent and WTI to recede into the $70s in 2027. If energy prices normalize, headline inflation should receive meaningful relief…and then the Fed would be welcomed to pause.
Nevertheless, the Fed raised its target rate in September by 0.25% to 3.75%–4.00%, citing elevated inflation alongside resilient spending and robust capital investment. Following the PMI report, markets increased expectations for additional rate hikes in 2026. While one or two additional modest hikes would tighten financial conditions, we do not believe that alone would end the economic expansion.
The strongest argument for equities continues to be corporate fundamentals. Current estimates call for another exceptionally strong quarter of S&P 500 earnings growth, while corporate guidance has generally remained constructive. Recent FactSet data showed that 72 of 114 companies providing third-quarter EPS guidance were above consensus expectations, far exceeding the five-year average.
Interestingly, U.S. equities have not only risen this year, they’ve become cheaper on the way up. The forward PEG Ratio (Price to Earnings to Growth) of the S&P 500 now sits at 0.90, the lowest level in over 10 years. This is only one of many valuation metrics we use to evaluate companies, but a very encouraging sign that equities are not as expensive as advertised.
Midterm elections will certainly bring near-term volatility. Markets will evaluate how changes in congressional control could affect fiscal policy, regulation, energy, healthcare, technology and other industries. Rather than attempting to anticipate an electoral outcome, we believe investors should remain focused on the underlying fundamentals that ultimately drive long-term returns: earnings, economic growth, inflation and interest rates.
Our outlook remains cautiously optimistic. Valuations are elevated, Treasury yields above 5% create legitimate competition for equities, oil remains unpredictable, and Fed policy represents a near-term risk. However, strong corporate profitability, accelerating productivity and one of the largest investment cycles in decades should prevail as the stronger of market driving forces.
Logan S. Webb, CFA, CFP®
Chief Investment Officer
My Account