VWG Wealth Management 2026 3rd Quarter Review

By VWG Wealth Management on October 14, 2026

Executive Summary

• Rising interest rates and persistent above-target inflation dominated third-quarter investor attention. The 10-year U.S. Treasury note yield rose above 5% for the first time since 2007 to close at 5.27%. Global bonds joined the selloff, with Japan, U.K., and German 10-year sovereign bonds hitting multi-decade high yields.
• Crude oil prices spiked back up near earlier year highs as the U.S.-Iranian conflict widened with Iranian and Houthi attacks on Saudi Arabian energy infrastructure. Ukrainian drone strikes on Russian refineries forced the suspension of diesel exports, helping to drive diesel prices to all-time highs. This fanned fears of rising inflation and slowing global growth. 
• In comparison to bonds and energy, equities were relatively resilient. The S&P 500 gained 2.0% for the quarter and has appreciated 13.0% this year. Small U.S. stocks dropped 7.2%. International stocks (MSCI All Country World ex-US Index) edged 0.6% lower and have increased 12.6% year-to-date. 
• The U.S. economy and corporate profits continue outpacing expectations. Nominal GDP is running near 6.5% and corporate profits have grown 28% year-over-year, well above the 5.8% 20-year median. This strength supports earnings but also pressures rates. 
• The forces acting upon interest rates arise from multiple factors, most of which have been present for some time. These include the aforementioned health of the economy and corporate profits, persistent inflation, energy shocks, rising demand for capital, ongoing large U.S. fiscal deficit spending, and increased costs of funding the U.S. federal debt. 
• Sharply rising interest rates and persistent inflation are drivers for caution and could bring more volatility. VWG maintains its positive stance on equities and strategies reaching for capital appreciation and total return. Patience and discipline will be required as some of the macro-stresses play out. Portfolios should remain diversified. Please contact your VWG advisor should you experience or anticipate any significant life or financial planning changes.

Review of the Markets

Rising interest rates dominated investor attention in the third quarter. The Federal Open Market Committee voted 12-0 on September 16 to raise the federal funds interest rate by 0.25% to 3.75%. In doing so they acknowledged solid economic growth, resilient consumer spending and employment, and persistent inflation. Both 5-year and 10-year U.S. Treasury yields pushed above 5% for the first time since 2007. The 30-year Treasury bond hit its highest yield since 2004.

September 23’s U.S. purchasing managers’ index (PMI) flash release suggested that the economy and price pressures were intensifying. Interest rate pressure was not limited to the U.S. Global bonds sold off, driven by inflation fears and concerns about sovereign government debt burdens, massive AI infrastructure spending, and renewed energy shocks. Japan’s 10-year government bonds (JGBs) traded to yields last seen in 1996. Yields of U.K. 10-year gilts and German 10-year bonds hit 19- and 17-year highs, respectively. 

The 10-year U.S. Treasury note ended the quarter yielding 5.27%, rising an astonishing 52 basis points in just the last 30 days. The Bloomberg U.S. Aggregate Index fell 3.5% and is down 2.7% for the year. High yield bonds also suffered, but less than government and investment grade bonds. This was due to tightening credit spreads, reflecting investor confidence in corporate profitability and economic conditions. For the quarter the Bloomberg U.S. Corporate High Yield Index dropped 2.1%. It is down 0.3% for the year. The longer duration S&P Municipal Bond Index lost 5.3% in the quarter.

Fanning inflation fears and interest rate woes, crude oil shot back to near March’s and May’s highs. Diplomatic resolution of the U.S.-Iran conflict stagnated, keeping transport through the Strait of Hormuz limited. Iranian and Houthi drones and missiles struck vital Saudi Arabian refinery infrastructure and the East-West pipeline, which delivers crude to the Red Sea. The pipeline was forced into a complete shutdown, restricting about 4 million barrels per day (4% of global supply). 

J.P. Morgan research conceded to the chaos, stating “for the first time since the Iran conflict, we don’t have a baseline of expected forward crude prices. We simply don’t know how to model the endgame.”¹ The Brent Crude (global reference price) ICE continuous futures contract closed the quarter at $98 per barrel. More disturbingly, diesel prices hit all-time highs in the U.S., Europe, and Asia. The current average U.S. retail price of diesel fuel is now a staggering 83% higher than it was on January 1.

Equities were relatively resilient despite bond and energy struggles. Strategas’ Jason Trennert observed, “it’s been said that the market likes to climb a wall of worry and it looks like the bricklayers are fast at work.”²

The S&P 500 Index gained 2.0% in the quarter. It has returned 13.0% this year. S&P earnings grew 28% year-over-year in Q2 (reported in Q3). More significant as a sign of breadth and durability, the median S&P 500 company grew earnings 14% year-over-year. Smaller, more interest rate sensitive companies did worse. The Russell 2000 benchmark dropped 7.5%. International stocks continued their solid performance. The MSCI All Country World (ex-US) Index edged 0.6% lower in the quarter and has appreciated 12.6% this year.

Converging Interest Rate Pressure

The factors pressuring rates existed before the third quarter. Did something change in the quarter, did factors intensify, or did investor sentiment simply swing to acknowledge the facts at hand? Carlyle’s Jason Thomas points out that “markets can reprice suddenly and not because facts change but because the marginal buyer switches interpretive frameworks.”³

Legendary investor Howard Marks believes that “U.S. long-term bond yields are reflecting current fundamentals.”⁴ The picture is extremely complicated. Here are some of the many factors pressuring rates:

Strong US Economy and Corporate Earnings

Nominal U.S. gross domestic product (GDP) is running at 6.5% and does not appear to be decelerating. The Atlanta Federal Reserve is tracking third-quarter real GDP over 5%. Real personal consumption expenditures are tracking 3.0%-3.5% in both Q2 and Q3, although real income growth is lower at 1.0% to 1.5%. U.S. corporate earnings continued to outpace expectations. Profits grew 20% year-over-year, much faster than the 5.8% 20-year median growth rate. Gavekal’s Tan Kai Xian notes that contributing factors “included the AI buildout, falling personal savings, and large budget deficits.”⁵ 

Persistent Inflation

The U.S. core (ex-food and energy) PCE index of personal consumption expenditures, the Federal Reserve’s favored measure of inflation, has exceeded its target for 66 successive months (since March 2021). August’s PCE report, just published on September 30, shows headline PCE of 3.4% and core PCE of 3.0% year over year. Famed monetary expert Allan Meltzer argued that the persistence of inflation is a problem of beliefs, political incentives, and institutional behavior.⁶ Because inflation reduces purchasing power over time, investors buying longer-term bonds demand yields that help protect the value of the money with which they’ll be repaid at maturity. 

Energy Shocks

The U.S.-Iranian conflict, which was expected to be swiftly settled by the end of March, now drags on with no end in sight. The conflict has worsened with Houthi attacks on Saudi Arabian oil infrastructure and regional shipping. The Russia-Ukraine war, now 4½ years long, is adding to global energy stress, as Ukrainian drone strikes deep into Russia have seriously damaged refinery infrastructure. Russia, the world’s second largest diesel exporter, has extended its temporary export restrictions. 

Respected analyst Mike Rothman of Cornerstone Analytics cautions that the spike in the price of diesel is signaling a severe supply shock that, if continued, will damage the global economy.⁷ Apollo’s Torsten Slok adds that “unlike gasoline, diesel is an intermediate input embedded in the delivery cost of nearly every physical good (33% of total consumption is used for transportation that cannot be substituted). This means that the rise in diesel prices does not stay in the energy line of CPI but migrates into goods and services, which is exactly the kind of (inflation) pass-through the Fed cannot dismiss as transitory.”⁸ 

Rising Demand for Capital

Lacy Hunt of Hoisington Investment Management, former Senior Economist of the Dallas Federal Reserve, believes the “US economy appears to be entering a period in which the demand for capital is rising far faster than domestic supply of savings. Net national savings has fallen from its long-run average of around 6.8% to historic lows, while the economy faces enormous investment requirements for electric grid expansion, AI infrastructure build out, reindustrialization, and defense modernization. Persistently low saving implies greater dependence on foreign investment, higher interest rates (funding costs), or crowding out of productive investment.”⁹ 

U.S Federal Budget Deficit

Marks states that the “U.S. displays a total lack of discipline. Today’s annual deficit, near 6% of GDP, is extraordinarily high for an economy enjoying prosperity with only 4% unemployment.”¹⁰ NewEdge Wealth’s Cameron Dawson posits that “choices around government spending and running large deficits now actually carry consequences for markets.”¹¹

Cost of Financing the U.S. Federal Debt

Longer-term yields may have ‘normalized’ to pre-GFC levels (2007) which has been mostly driven by real yields suggesting increased long-term growth expectations. But due to higher rates, and the fact that the federal debt is 4.3 times larger than it was then, the cost of servicing (net interest expense) the debt is now a record high at 3.3% of GDP (surpassing 1991’s previous high). Bank of America’s U.S. Economist Aditya Bhave worries that “history suggests yields might have to rise significantly higher before Washington gets serious about fiscal discipline.”¹² 

Portfolio Positioning

VWG does not make economic forecasts or longer-term predictions on the direction and level of inflation. We do acknowledge that the forces affecting rates and inflation are significant and are unlikely to meaningfully change soon. These, and the energy/diesel shortage are warning signs and demand our close attention. Some caution and patience are currently called for when building allocations to equities and other ‘growth’ assets.

Partly in counterargument, some prominent strategists expect the economy and corporate earnings to soften from very high levels over the coming 12 months, easing some pressure. Goldman Sachs Jan Hatzius cites a “bifurcated economy, weak housing market, predictions for slower consumer spending and a slowdown in S&P 500 earnings to 11% y-o-y, as reducing stresses on rates in 2027.”¹³

An earnings slowdown or a stumble in the U.S. stock market in the coming year could ease rate stress. ISI Evercore reports that “household wealth posted a record increase in Q2, driven by stock market gains. We estimate that the ‘wealth effect’ contributed around half the entire year-over-year in real consumption (consumer spending). We caution that if market gains do not continue in 2027, or even materially reverse, consumption growth could decelerate sharply.”¹⁴ Although this would result in another difficulty, it would presumably be counterbalanced by a decline in interest rate pressures.

In our view, portfolio diversification and long-term focus are paramount in this environment. The U.S. economy and corporate profits are solid. We maintain our positive stance on equities and solid strategies aimed at producing capital appreciation and total returns. If inflation persists at current levels, our stance supporting equities as an essential component of a diversified portfolio remains unchanged. Counterintuitively, higher bond yields present potential to add further diversification and resilience in portfolios. We continue to favor shorter bond maturities. In our view, current coupon levels imply that there is little reason to take on long-duration exposure. Appropriate levels of cash and high-quality short-term bonds should be considered, where suitable, for investors seeking liquidity and flexibility within their overall financial situation.

* All stated index returns are as of 9/30/2026 unless otherwise indicated.

* Index Data and Charts sourced from FactSet Research, Morningstar, Bloomberg, Strategas Research Partners, J.P. Morgan, Bank of America Global Research, Apollo Global Management, Gavekal Research, Hoisington Investment Management.

*Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

1. “Oil Markets Weekly,” J.P. Morgan, September 17, 2026.  ↩︎
2. “Strategas Investment Strategy,” Jason De Sena Trennert, Strategas Research Partners, September 15, 2026. ↩︎
3. “Rules of Relevance,” Jason Thomas, Carlyle, September 15, 2026.  ↩︎
4. Shall We Repeal the Laws of Economics – Part III,” Howard Marks, Oaktree Capital, September 22, 2026. ↩︎
5. “Another Blow for Bonds?,” Tan Kai Xian, Gavekal Research, September 24, 2026. ↩︎
6. Paraphrased from “From Inflation to More Inflation, Disinflation, and Low Inflation,” Allan Meltzer, The American Economic Review, May 2006. ↩︎
7. Paraphrased from Mike Rothman, Cornerstone Analytics, webinar, September 15, 2026.  ↩︎
8. “The Diesel Shock is a Core Inflation Shock,” The Daily Spark, Torsten Slok, Chief Economist, Apollo Global Management, September 23, 2026.  ↩︎
9. “Second Quarter 2026 Quarterly Review and Outlook,” Lacy Hunt, Hoisington Investment Management.  ↩︎
10. “Shall We Repeal the Laws of Economics – Part III,” Howard Marks, Oaktree Capital, September 22, 2026. ↩︎
11. Cameron Dawson, NewEdge Wealth, On the Tape with Danny Moses podcast, September 10, 2026. ↩︎
12. “Morning Market Tidbits,” Aditya Bhave, Bank of America, September 22, 2026 ↩︎
13. “Global Views: Lower Inflation, Limited Hikes,” Jan Hatzius, Goldman Sachs Economics Research, September 22, 2026. ↩︎
14. “The Power of the Wealth Effect on Consumer Spending,” Krishna Guha, Evercore ISI Economics, September 28, 2026  ↩︎