This year has presented no shortage of challenges for investors. Geopolitical conflict, trade tensions, rising energy prices, shifting interest rate expectations and an increasingly active political backdrop have each taken turns dominating the headlines. Yet despite these obstacles, the economy has continued to expand, corporate profits have marched higher and markets have climbed one wall of worry after another.
Economy and the Federal Reserve
While investors often focus on the latest economic headlines, it is the underlying fundamentals that ultimately determine direction. Growth, inflation, employment, consumer spending, productivity and energy prices all influence the outlook. As we enter the fourth quarter, economic conditions continue to point toward an expansion. Consumer spending has cooled but remains healthy. The labor market continues to create jobs. Meanwhile, investment tied to artificial intelligence, data centers, infrastructure and productivity-enhancing technologies remains a powerful tailwind. Taken together, these forces support our expectation for US economic growth of approximately 2.3% in 2026.
That does not mean the path to economic expansion is without obstacles. Inflation has remained above the Federal Reserve's (Fed) 2% target for more than six years. Oil prices remain vulnerable to geopolitical disruptions, with gasoline having risen back above $4 per gallon. Fed policy expectations continue to shift, while the approaching midterm elections add another layer of uncertainty. While conditions may become choppier as the support from tax refunds fades, the economy continues to demonstrate enough underlying strength that we see only limited recession risk as we move toward 2027.
Navigating these dynamics remains one of the Fed's most difficult tasks. Cut rates too quickly and inflation could reaccelerate. Keep policy restrictive for too long and growth and employment could weaken. The delicate challenge for policymakers is trying to balance between competing risks while keeping the economy on course.
We expect Chair Warsh to draw on the work of the Fed's five task forces as part of what appears to be an evolution, not a revolution, in the Fed’s policy framework, decision-making process and communication strategy. While changes are likely to be gradual, investors should expect continued efforts to strengthen policy effectiveness and adapt the institution to an increasingly complex economic landscape. For now, the path appears manageable. Growth remains positive and job creation continues, but elevated inflation remains a concern. As a result, after raising rates in September, we expect one more rate hike before year-end in this mid-cycle adjustment. Progress on inflation could eventually create room for lower rates at the tail end of next year, but absent a more meaningful deterioration in the labor market, policymakers are unlikely to move quickly.
See more: Missiles, Markets, & Momentum: Why the Market Outlasts the Headlines
Bond market
Periods of uncertainty often serve as a reminder of the value of bonds within a portfolio. An important shift in the investment landscape has been the return of attractive income opportunities. After years of near-zero yields, high-quality fixed income once again offers compelling income, diversification and stability. Over the next 12 months, we expect the 10-year Treasury yield to be in the range of 4.50% to 4.75% and continue to favor investment-grade corporate bonds and municipal bonds. Importantly, investors do not need to move down in credit quality to generate attractive income.
While fiscal deficits, rising debt levels and elevated Treasury issuance remain long-term considerations, current yields provide a meaningful cushion against volatility while enhancing portfolio income. Strong demand for both Treasury and corporate debt should also help limit upward pressure on interest rates. Deficit spending can support growth in the short run, but rising debt burdens, higher interest costs and reduced fiscal flexibility may eventually emerge as unintended consequences. For now, however, investors are well compensated for those risks. In our view, fixed income is no longer simply a source of diversification; it has once again become a source of return.
Cash, meanwhile, continues to offer attractive yields and a sense of preservation. But preservation and opportunity are not always the same thing. Holding too much cash for too long can create reinvestment risk if interest rates move lower and may cause investors to miss opportunities elsewhere.
Equities
When it comes to equities, the technology sector is the market leader. Artificial intelligence continues to drive earnings growth, capital spending, productivity gains and market performance. Naturally, investors continue to search for potential weaknesses. For some, that means concerns about valuations, concentration or the market's dependence on a handful of mega-cap technology companies. Yet the reality is that the fundamentals remain remarkably strong.
Earnings growth across many technology companies has outpaced share price appreciation, leaving valuations at some of their most attractive levels in nearly a decade. Just as importantly, visibility into future earnings remains unusually strong, with consensus expectations calling for earnings growth above 25% throughout 2027. On a valuation-to-growth basis, the technology sector remains one of the most compelling opportunities in the market.
More broadly, our outlook for US equities remains constructive, though not complacent. Corporate earnings continue to solidly expand, outlooks remain favorable and market participation is gradually broadening beyond a narrow group of companies. As a result, we forecast the S&P 500 moving toward 8,450 over the next 12 months.
Against that backdrop, our preferred sectors remain technology, industrials and consumer discretionary. Industrials stand to benefit from ongoing investment in infrastructure, power generation, construction and defense. Meanwhile, the currently underperforming consumer discretionary sector should be supported by a resilient labor market, rising incomes and continued consumer spending.
Turning from a sectoral perspective to a geographic one, our preferred destination remains the United States, supported by stronger economic growth, superior earnings momentum, leadership in artificial intelligence and, in our view, a still-attractive valuation backdrop. Outside the US, we continue to favor Japan over Europe, reflecting Japan's greater exposure to technology, improving earnings trends and renewed emphasis on corporate governance and shareholder value. We also remain constructive on emerging markets and view emerging Asia as well positioned to benefit from the AI-driven investment cycle. In our view, international investing is becoming less about broad regional allocations and more about identifying the markets best positioned to benefit from the secular and cyclical forces shaping the global economy.
Ultimately, every investor has a goal. For some, it is a comfortable retirement. For others, it is preserving wealth, generating income, building a legacy or simply having confidence that a long-term financial plan remains on track. The challenge is that the journey is rarely linear. Markets will always test conviction with uncertainty, volatility and unexpected developments.
As we enter the fourth quarter, our message remains unchanged: Successful investing is not about predicting every twist in the road. It is about maintaining perspective, staying disciplined and remaining focused on long-term goals.
All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office. The S&P 500 Total Return Index: The index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Sector investments are companies focused on a specific economic sector and are presented here for illustrative purposes only. Sectors, including technology, are subject to varying levels of competition, economic sensitivity, and political and regulatory risks. Investing in any individual sector involves limited diversification. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
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© Raymond James
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