A Quarter Defined by Narrowing Leadership, Oil Back Over $100, and a Fed That Finally Hiked
If the second quarter was a comeback story, the third was a magic trick. The major indexes climbed to fresh record highs. Yet most stocks quietly went the other way. The S&P 500 and the Nasdaq set new records. The average stock had a rough three months.
Underneath the surface, a lot shifted. Oil roared back above $100 a barrel. Treasury yields jumped to their highest level in nearly 20 years. And the Federal Reserve did something it had not done since 2023. It raised interest rates. The quarter rewarded a short list of giants and tested nearly everyone else.
By the Numbers (Third Quarter 2026)
- S&P 500: up about 2%, at new record highs
- Nasdaq Composite: up about 2.5%
- The average US stock fund: down about 2.4% (broad mutual funds and ETFs)
- Big Tech leaders: Microsoft, Meta, Nvidia, and Apple each up more than 10%
- Nvidia market value: approaching $6 trillion
- Brent crude: back above $100, touching about $108 in September
- 10 Year Treasury yield: 5.29% at quarter end, the highest in nearly 20 years
- Fed funds target: raised to 3.75% to 4.00%, the first hike since 2023
- US GDP: second quarter revised up to 2.2%, first quarter lifted to 2.5%
- Positive EPS guidance: a record number of S&P 500 companies, the most since FactSet began tracking in 2006
Record highs and a falling average stock do not usually happen together. This quarter they did. That gap is the whole story.
Revisiting Last Quarter’s Three Questions
As always, we start by grading our own homework. Here is how last quarter’s three questions turned out.
1. Were earnings strong enough to justify the prices, or had the market priced in perfection?
Both, oddly. Earnings stayed strong, and the biggest companies delivered. But the market got picky about who got a reward. The giants were priced for perfection, and they mostly met it. Almost everyone else got punished for anything less. More on that split in a moment.
2. Would the ceasefire with Iran hold, or would it fall apart?
It fell apart. US and Iran forces resumed strikes in the Gulf at the end of August. Brent crude jumped back above $100 for the first time since July. It touched roughly $108 in September. Oil was supposed to be last quarter’s fading story. It came back with a vengeance.
3. Would the Fed actually raise rates?
Yes. On September 16, the Fed raised rates for the first time since 2023. We flagged this risk back in April, when it still sounded unlikely. It is now real, and more may be coming.
Bonus: What happened with those AI mega listings?
We also asked whether Anthropic and OpenAI would move from filing to pricing. It was a split decision. Anthropic pushed ahead and filed publicly. It chose the Nasdaq and is aiming for a debut that could top $2 trillion. That would be the largest IPO in history. OpenAI blinked. Chief Executive Sam Altman said a 2026 listing was off the table, so that one likely waits until 2027.
Story #1: The Index Threw a Party, and Most Stocks Missed It
The defining story of the quarter was not the record highs. It was who actually got to enjoy them. The answer was almost nobody.
A Market of Haves and Have Nots
A small group of giant technology names did the heavy lifting. Microsoft, Meta, Nvidia, and Apple each rose more than 10%. They did it on enormous spending on artificial intelligence. Nvidia alone saw its market value approach $6 trillion.
Now look under the hood. Roughly three out of four stocks in the S&P 500 finished September lower. The equal weight version of the index, which counts every company the same, sat more than 5% below its peak. Broad US stock funds fell about 2.4% on average.
So the headline index rose while the typical stock fell. That does not happen often. It means the gains came from a very short list of winners.
Why Narrow Markets Make People Nervous
A narrow market is not automatically a dangerous one. But it is a fragile one. When four or five names hold up the whole index, their stumbles become everyone’s stumbles. Right now the market is leaning hard on a handful of AI winners. If they wobble, there is not much underneath to catch the fall. Energy was the one bright spot beyond tech, lifted by the jump in oil.
There is a hopeful signal underneath, though. According to FactSet, a record number of S&P 500 companies issued positive earnings guidance for the third quarter. That is the most since FactSet began tracking the data in 2006. Broad, upbeat guidance suggests the gains could eventually spread beyond the giants. That would be a healthy change.
Story #2: Oil and Yields Came Back to Bite
For a few months, it looked like the Iran war was winding down. The third quarter ended that hope.
Oil Reclaims $100
US and Iran forces resumed attacks in the Gulf at the end of August. Shipping through the Strait of Hormuz came under fire again. Brent crude pushed back above $100 a barrel on September 9. By the next day it touched about $108. Oil climbed more than 18% in September alone. One major research firm warned that Middle East production may not return to prewar levels for more than a year.
The Bond Market Flinched
Higher oil feeds higher inflation. Higher inflation feeds higher interest rates. The bond market got the message. The 10 year Treasury yield finished September at 5.29%, the high for the quarter. That is its highest level in nearly two decades. You have to go back to 2007 to find yields this high. Rates in Japan and parts of Europe also reached levels not seen in years. This matters for everyone. Rising yields lift borrowing costs, pressure stock valuations, and make safe bonds a real competitor to stocks again.
Story #3: The Fed Finally Pulled the Trigger
We spent two quarters wondering whether the Fed would actually raise rates. In September, it did.
A Hike, and a Warning
On September 16, the Fed raised its benchmark rate by a quarter point, to a range of 3.75% to 4.00%. It was the first increase since 2023. The vote was unanimous, 12 to 0. New Chair Kevin Warsh chose his words carefully. He called the move “removing accommodation” rather than tightening.
The reason was simple. Inflation would not cooperate. Warsh noted that “too many categories are still posting increases above 3%.” Most officials now expect one more hike before year end. A year ago, the market was betting on cuts. Now it expects the opposite.
The Economy: Stronger Than It Felt
Here is the twist. The economy itself looked pretty good. Second quarter GDP growth was revised up to a 2.2% annual pace. First quarter growth was lifted to 2.5%. The labor market firmed up. Corporate earnings stayed resilient across most sectors.
That strength is exactly why the Fed felt free to hike. A sturdy economy can handle higher rates. The catch is simple. A sturdy economy with sticky inflation gives the Fed every reason to keep rates high.
A Note of Caution as the Quarter Closed
The mood at quarter end was upbeat, but the foundation was narrow. Record highs built on a few names can reverse in a hurry if those names disappoint. Third quarter earnings season will be the real test.
Rising yields are already doing damage in quieter corners. The market for new stock listings cooled fast. Average returns on this year’s IPOs fell from a 24% gain in June to under 1% by late September. That chill is part of why OpenAI chose to wait. When money gets more expensive, the riskiest bets get repriced first.
Add it all up. A narrow market, oil back over $100, yields at multiyear highs, and a Fed with more hikes in mind. The road into year end is balanced on a knife’s edge.
Three Questions for Year End
1. Does the market broaden, or stay hostage to a few names?
If the AI giants keep climbing, the index can keep rising. But a healthier rally needs more stocks to join in. The record earnings guidance we noted is a point in its favor. Watch whether the average stock starts to catch up, or keeps falling behind.
2. How high do yields go, and what do they break?
The 10 year at 5.29% is already a serious headwind, its highest in nearly 20 years. If yields keep climbing, stock valuations and the housing market will feel it. If they settle down, the pressure eases. As one strategist put it, yields do not need to fall. They just need to stop spiking.
3. Does the Fed hike again, or finally pause?
Most officials expect one more increase in 2026. A hot inflation report would likely seal it. A cooler one could buy a pause. Either way, the era of easy money is on hold.
And the one we will all be watching. Does Anthropic actually ring the bell? A debut above $2 trillion would be the largest in history. It would also be a live test of how much appetite is left for the AI trade.
A Seasonal Note Worth Remembering
There is plenty to watch heading into year end. So let us close with some perspective, because history and seasonality are on the market’s side.
Start with a fun fact. The S&P 500 has finished the fourth quarter higher in 12 of the last 13 years. The only decline came in 2018, during President Trump’s first term. History guarantees nothing. But the fourth quarter has a strong track record.
Many of you are also asking about the midterm elections. That concern is fair. Still, the four year presidential cycle offers some comfort. The quarter right after the midterms, and the first two quarters of the year that follows, have historically been among the strongest of the entire cycle. In plain terms, the stretch we are entering now has often been a good one for stocks.
Final Thought
The third quarter was a lesson in reading past the headline. “Record high” sounded wonderful. Underneath it, most stocks struggled, oil surged, yields jumped, and the Fed turned the screws. None of that means the expansion is over. The economy is still growing, and earnings are still holding up.
But it does mean the easy part may be behind us. A market carried by a few giants is thrilling on the way up and lonely on the way down. As always, that is the case for staying diversified, staying invested, and keeping expectations honest. In a quarter like this one, discipline matters far more than headlines.
This commentary is provided for informational purposes only and does not constitute investment, tax, or legal advice, or a recommendation to buy or sell any security. Figures come from sources believed to be reliable, including FactSet, company earnings reports, the Federal Reserve, the Bureau of Labor Statistics, and financial news outlets such as Reuters and CNBC, but accuracy is not guaranteed and figures should be independently verified. Past performance is not indicative of future results. Index returns reflect the period noted, do not reflect the deduction of any fees or expenses, and cannot be invested in directly.