Q3 2026 Investment & Market Update

by Jon Adams of Calamos Investments, 10/19/26

Q3 2026 Investment & Market Update

A Broader Foundation

The third quarter brought a mix of encouraging and cautionary signals. On the positive side, the economy kept growing, corporate earnings held up well, and the S&P 500 Index gained 2.03% for the quarter, bringing its year-to date return to 11.77%.1 At the same time, energy prices surged. The price of West Texas Intermediate (WTI) crude oil rose 29.26% during the quarter amid supply disruptions tied to the ongoing conflict involving Iran,1,2 keeping inflation elevated. In September, the Federal Reserve (Fed) raised the federal funds rate for the first time since 2023, lifting its target range to 3.75% to 4.00% and signaling that another increase may follow.3 Long-term interest rates moved higher as well, with the yield on the 10-year U.S. Treasury note ending the quarter at 5.29%.4 Rising rates weighed on the more rate-sensitive parts of the market. Small-cap stocks, which led in the first half of the year, gave background, with the Russell 2000 Index falling 7.52%.1 The result is a market with many moving parts. In this commentary, we look at three themes shaping our thinking: a shift in who is leading the market, the return of income as a meaningful source of return, and an economy that, in our view, is growing steadily rather than heading toward either extreme.

The Market Leadership Shift

For much of the past three years, the Magnificent Seven, a group of seven of the largest U.S. technology-oriented companies, accounted for an outsized share of stock market returns. That concentration began to ease in the first half of 2026, when U.S. small-cap stocks returned 22.93%, compared with 9.55% for large-cap stocks, their strongest first half on record relative to large caps.5 The strength was broad: all eleven small-cap sectors outperformed their large-cap counterparts over the period.5

The third quarter was a reminder that a broadening market rarely moves in a straight line. As interest rates climbed, the Russell 2000 Index fell 7.52%, while the S&P 500 gained 2.03% and the technology-heavy Nasdaq Composite Index gained 2.47%.1 Smaller companies tend to rely more on borrowing, which can make them more sensitive to rising rates. Year to date, the Russell 2000 is up 12.69%, slightly ahead of the S&P 500 at 11.77%, while the Nasdaq Composite, up 15.57%, shows that the largest technology companies remain a powerful force.1

We believe that earnings suggest the broadening has further to run. Profits for the other 493 companies in the S&P 500 grew 31.8% in the second quarter, the fastest pace for that group since the fourth quarter of 2021, and analysts expect those companies to grow earnings faster than the Magnificent Seven in the fourth quarter of 2026 (26.8% versus 23.2%).6 In our view, the spread of profit growth, more than any single quarter’s price moves, is the more durable signal of where leadership is heading.

This does not mean the largest companies have stopped being strong businesses. It means the opportunity set is wider than it has been in some time, even if the path is uneven, and many investors have not adjusted. Some portfolios have become heavily tilted toward a few names, often simply because those names performed so well. For those portfolios, this may be a good time to review balance across company size, sector, and region with your advisor.

year over year earnings

Income Matters Again

For more than a decade, bond yields were low enough that fixed income did little more than steady a portfolio. That has changed. The yield on the 10-year U.S. Treasury note ended the third quarter at 5.29%, up 0.85 percentage point from the end of June and roughly two and a half times its 2012 to 2021 year-end average of 2.12%.4

year over year earnings growth

The idea is simple. When you buy a high-quality bond, its starting yield offers a useful reference point for what it may earn if held to maturity, assuming the issuer meets its obligations. Higher starting yields can provide more income, though returns are not guaranteed and bond prices will fluctuate.

Higher rates cut both ways, and we want to be clear about that. The sharp rise in yields this quarter weighed on the prices of existing bonds, particularly those most sensitive to changes in interest rates, and the Fed’s signal that another increase may follow keeps that risk in view. That is why we are being deliberate about the mix of shorter- and longer-term bonds rather than reaching for the highest available yield.

The same dynamic extends to private markets. Private credit, which consists of loans made directly to companies, often carries floating rates, meaning the income it pays can adjust as interest rates change. Higher rates also raise borrowing costs for those companies, which makes careful lending standards and manager selection more important, not less. Rental income continues to be a primary source of return in private real estate. Higher financing costs have reset valuations in ways that, in our view, may create more attractive entry points over time.

See more: Q3 Strategic Income Outlook: The Times They are a Changin’