Resiliency with Caveats

Publication Date: October 8, 2026

As we reflect on the third quarter and the general prognosis for the balance of the year (and beyond), there are several issues and factors on our mind. Some of the topics have been emphasized and shared in previous communications but remain persistent and relevant in today’s environment. 

Precariously, the only certainty at the moment is uncertainty.  Many of the constituents that have been the primary drivers of this uncertainty have not changed. As is often the case, each constituent is linked and related in some way to each other. 

For most investors, it is not difficult to recognize the effects and impact of the following sequence. 

• The Iranian conflict has significantly impacted energy costs, which has heightened inflation and has been detrimental to the global consumer. 
• Inflation has led to a significant FED policy adjustment that has pushed interest rates higher but also portends the notion of rates being “higher for longer” (30-year Treasury yield stands at 5.67% as of this writing).

This heightened cost of capital can become a drag on both companies and the consumer alike, which can impact general expenditure on both fronts. This sequence, if not altered, will impact GDP growth over time, thus increasing the risks for the economy.

These linkages, as described, are strong enough to be concerning given that the one “common denominator” to periods of economic erosion and deterioration has been interest rates being high for too long.  Higher costs of capital have material impacts on margins and profitability. And when markets are viewed as overvalued or are trading at a premium, profits and profitability are critically important. Downward adjustments to EPS performance (Earnings Per Share) combined with high P/E Ratios (Price to Earnings Ratio) can and will send markets (equities) lower.

The good news is that earnings have been solid and growing and estimates for earnings growth continue to be healthy and optimistic. But to be clear, stocks trading at elevated multiples have sustained those multiples because of certain assumptions. Changes in these assumptions that are presently economic tailwinds, such as the large technology companies (“hyperscalers” like Microsoft, Amazon, Google, and Meta) continuing to spend heavily on AI infrastructure and technology, will be impactful. If we end up seeing changes in corporate and consumer demand due to economic changes (GDP erosion), these elevated stock prices and multiples will adjust lower. 

We sit at very interesting crossroads now. A well-known adage in the investment industry is that “you don’t fight the FED”.  Investing during FED tightening initiatives has historically been a challenging proposition. You then factor in treasury yield increases making debt a legitimate alternative and the mid-term election on November 3^rd, and again we sit at a time where risk and volatility are heightened. 

Broad diversification has served investors well throughout the year, and we continue to believe it is an important component of long-term portfolio success. That said, if current market conditions and near-term risks are causing concern, it may be worthwhile to discuss potential portfolio adjustments through disciplined rebalancing. While short-term market developments should not drive changes to long-term investment objectives, we are always available to discuss the evolving market environment, the assumptions underlying current valuations, and the potential risks and opportunities that may lie ahead.