Stocks and bonds diverged sharply in Q3: AI-driven earnings lifted U.S. equities (S&P 500 up 2.3%), while the 10-year Treasury yield topped 5% and bonds fell 3.5%. We expect continued growth with elevated volatility in Q4, and favor high-quality U.S. large-cap equities and short- to intermediate-duration fixed income.

The second quarter of 2026 was marked by strong market performance, resilient economic growth, and continued momentum in artificial intelligence investment. In this quarterly market recap, we review how U.S. equity markets reached new highs, why fixed income experienced heightened volatility, and the economic forces shaping the outlook for the third quarter. We also examine key risks, including inflation, geopolitical developments, and elevated market valuations.

Markets entered 2026 focused on interest rates, but geopolitical tensions quickly took center stage. The conflict in the Middle East pushed oil prices higher, adding inflationary pressure and driving market volatility. Equities declined during the quarter, while bonds offered limited protection. Looking ahead, markets are seeking clarity on geopolitics and Fed policy, with a likely return to fundamentals as conditions stabilize.