GSAM's Investment Committee Releases Its 3rd Quarter 2026 Market Update

October 16, 2026

As we head into the final quarter of 2026, the U.S. economy is at an interesting crossroads. Inflation has shown little progress this year, the labor market has held steady for more than a year, and the consumer has shrugged off high prices, buoyed by an equity market on track for its fourth straight year of double-digit gains. The Federal Reserve has faced a challenging policy environment, and reinitiated increasing rates to reignite the battle against inflation, though with a new Fed chair. With the holiday season ahead and interest rates still restrictive, we believe the next few months will offer important clues regarding the outlook of the overall economy as we look forward to 2027.

Inflation remains top of mind for investors as we reach the fourth quarter. The Personal Consumption Expenditures (PCE) Price Index is the Federal Reserve's preferred measure of inflation. The most recent PCE reading (August) showed that prices had increased 3.4% during the previous 12-month period, well above the Fed’s 2% target for more than five consecutive years. Energy prices in 2026 have continued to contribution to the stagnant progress on inflation, largely as a result of the on-going geopolitical landscape. Oil prices saw an increase of nearly 30% for the quarter at around $90 per barrel. This has contributed to consumer paying gas prices that are 27% higher than a year ago and has sent diesel fuel prices soaring more than 70%. Diesel prices will eventually trickle into other components as transportation costs are passed through to consumers. The next several inflation readings will be particularly important as evidence of reacceleration could keep rates higher for longer, while a renewed moderation in prices would give the Fed greater flexibility in their policy moving forward.

The labor market has shown resilience throughout the changing macroenvironment. The unemployment rate for September clocked in at 4.2%, stretching the streak of readings under 4.5% to 60 consecutive months. However, the labor force participation rate has declined to 61.8%, reflecting the aging demographics of the labor force. To put this rate in perspective, the average participation rate in the decade prior to Covid was 63.3%; the decade before that, it averaged out to 66.2%. This should not be viewed as a deterioration in the labor market, but rather an interesting anomaly because of the generational make-up. A large contributor to this trend is simply the demographics of the labor force in the U.S. It is estimated that more than 10,000 baby boomers are retiring per day. With less workers in the labor force, it becomes increasing important that those in the labor force are more and more productive, a reality that is being propelled by artificial intelligence. Despite headlines suggesting AI is causing a loss of jobs, the data is showing otherwise, at least in the near term. We expect the unemployment rate to remain fairly tight as a result of these generational demographics, but we anticipate changes over the next decade as AI alters the way we work, not unsimilar to the impact of the internet in the 1990s.  

The monetary policy outlook has been volatile in 2026. Let’s recap the Fed’s movement over the past few years: 5.25% in cumulative hikes from March 2022 through July 2023, followed by a year-long pause until a 0.50% reduction in September of 2024. Throughout the remainder of 2024, and the later months in 2025, rates were reduced an additional 1.25% as the battle against inflation had made significant progress and the labor market showed signs of weakening. Prices were growing at a slower pace, and the need for elevated rates had appeared to subside. Therefore, entering 2026, the consensus was for the Fed to make two or three rate cuts. However, that has not been the case. In fact, the Fed members voted to unanimously increase rates by 0.25% at their most recent meeting in mid-September. Current projections show one more rate hike at the end of this year, with a re-evaluation of the macroenvironment in 2027.

The U.S. consumer entered the third quarter with spending momentum intact, but signs of increasing financial pressure suggest the consumer may become more selective in the final three months of the year. However, holiday spending late in the year tends to sustain overall spending levels even as the consumer becomes more cautious. Balance sheets remain strong as equity markets have continued their upward trend, mostly benefiting higher-income households. Additionally, we have not seen a material increase in delinquency rates across auto loans or credit cards, and personal savings rates are only slightly down from where they stood one-year prior.

While many of the macro headlines have been front and center, large-cap public equities have quietly continued improving their fundamentals. Corporate earnings, profitability, and cash flows are the factors that truly drive stock prices over the long-term. The S&P 500 finished Q3 near a record high, supported by large-cap technology companies and continued enthusiasm around artificial intelligence. However, equity performance varied across market caps and sectors as shown in the table below.

The fundamental outlook for equities remains consistent and supportive of growth. Third quarter earnings are projected to increase across every sector of the S&P 500, and earnings for the index are projected to increase nearly 30% on a year-over-year basis. This boded well for the index, as it rose 2.3% for the quarter and approached 13% for the year. Other segments of the market reacted differently on the news of rising rates. Small and mid-sized companies were disproportionately affected in the third quarter due to the increase in rates, as these companies are more reliant on lending, most of which tend to be floating rate debt, and has a direct effect on their cash flow. If market rates continue to rise, expect this area of the market to feel the effects.

  Artificial intelligence continues to be an important driver of capital spending across various sectors, creating meaningful opportunities for both earnings growth and longer-term productivity gains. The GSAM Investment Committee continues to view a slowdown or disruption in the AI investment cycle as one of the more significant risks to current equity valuations, and it remains an area we are watching closely. At the same time, there are encouraging signs that the market's growth story is becoming broader. Strength has increasingly extended beyond the largest technology companies and into software, industrials, utilities, and other areas that support the buildout and adoption of AI. That broader participation is important because it suggests the current expansion is not solely dependent on a handful of mega-cap companies. We still recognize that the market is carrying high expectations for AI spending and eventual productivity gains, but broader earnings and sector participation would make the overall market backdrop healthier and more resilient. The key question from here is whether today's heavy investment ultimately translates into the productivity and earnings growth investors are expecting.

Fixed income markets were hit the hardest in Q3. Again, we point to the rising rate environment as the culprit. As a reminder, bond prices and interest rates have an inverse relationship. When interest rates rise, existing bonds become less attractive because investors can buy new bonds that offer higher yields. As a result, the prices of existing bonds typically fall to make their yields more competitive. Longer dated bonds also tend to be more sensitive to changes in interest rates because their cash flows are spread further into the future. As a result, when rates rise, the value of those future payments falls more sharply, leading to a larger decline in bond prices. As shown in the chart below, traditional intermediate fixed-income investments were down more than 5% in the past 90 days and have much ground to make up to avoid a negative year of performance in 2026.

Although bonds have lagged the strong performance of stocks, they continue to serve an important purpose in portfolios by providing income, diversification, and a measure of stability when markets become more uncertain. Shorter-term bonds have held up better than longer-term bonds this year, largely because they are less sensitive to changes in interest rates and continue to offer attractive yields. The starting yield is also important: when bonds begin with higher yields, investors have a larger income cushion that can help support total returns over time, even if prices fluctuate. Fixed income can provide a meaningful source of return and stability, particularly if economic growth slows or interest rates decline.

Traditional bonds are not the only way to seek downside protection and portfolio stability. Equity buffer strategies can offer measured downside protection while maintaining greater upside participation than traditional fixed income. The GSAM Investment Committee has continued to lean into the buffered defensive alternatives within client portfolios. The risk-reward profile of these strategies remains very attractive, especially in an environment of volatile interest rates. These funds are more tax-efficient than a traditional fixed-income investment as well.

Entering the final stretch of the year, investors should keep several factors on the radar, including the path of interest rates, starting bond yields, inflation, credit conditions, equity valuations, tax policy, and the potential for renewed market volatility. The upcoming midterm elections will add another layer of uncertainty, particularly around potential changes in fiscal, tax, and regulatory policy. These crosscurrents reinforce the importance of maintaining a well-diversified portfolio that balances growth opportunities with income, risk management, and long-term capital preservation. The GSAM Investment Committee remains focused on economic data, market fundamentals and thoughtfully positioned client portfolios to support clients’ long-term goals. We are grateful for your continued trust and partnership.

GRANT STREET UPDATES: As we continue to grow, we’re thrilled to announce the newest additions to our team of advisors. Please join us in welcoming David Huber and Ashley Chupka to Grant Street.

David grew up in Pittsburgh's North Hills and studied Behavioral Economics at Carnegie Mellon. He then spent nearly six years in Chicago, where he earned a master's in computer science from DePaul, and worked most recently at a large investment research firm. He married earlier this year and spends his free time golfing and hanging out with friends and family.

Ashley has spent the past 15+ years building her career in wealth management both in South Florida and Pittsburgh with large banking and investment banking institutions. She brings added expertise to our team, particularly through her work with ultra-high net worth clients. She lives in Valencia with her husband and children. Outside of the office, she enjoys spending time with her family, cheering on her children at sporting events, traveling, and training Brazilian Jiu Jitsu and aerial silks.

Sincerely,

The Grant Street Asset Management Investment Committee