Key Takeaways
- • The S&P 500 added 2.3% in the third quarter of 2026 (three months ended September 30), with the Russell 1000 Value returning 2.6% and the Russell 1000 Growth gaining 0.9%, while the Russell 2000 fell 7.2%, according to NEPC's Q3 2026 market commentary.
- • The FOMC unanimously raised the federal funds target by 25 basis points in September to 3.75%-4.00%, its first hike since 2023, and market-implied rate expectations for December 2027 rose to 4.8% from 3.89%.
- • The 10-year Treasury yield finished the quarter at 5.27% after an 83 basis point surge, one of the largest quarterly increases in 40 years, driven almost entirely by real rates rather than long-term inflation expectations.
- • The Bloomberg U.S. Treasury Index fell 3.0% and the Bloomberg Long Treasury Index lost 8.0% in the quarter, while spot WTI crude rose 28.1% above $100 per barrel amid escalating U.S.-Iran conflict.
- • NEPC recommends rebalancing to strategic targets, using the full portfolio risk budget, and maintaining a U.S. equity overweight within public equity allocations.
Summary
U.S. equities posted modest gains in the third quarter of 2026 as a resilient economy and strong corporate earnings offset higher interest rates and geopolitical volatility, according to NEPC's quarterly market commentary. The S&P 500 Index rose 2.3% for the three months ended September 30, with value outperforming growth. Rate-sensitive small caps lagged, with the Russell 2000 declining 7.2% as higher borrowing costs weighed on smaller balance sheets. Non-U.S. markets underperformed on a strong U.S. dollar and tighter financial conditions, and the MSCI Emerging Markets Index fell 0.4% as South Korean and Taiwanese equities pulled back sharply after their AI-driven rally in the first half.
Fixed income faced a difficult quarter. The Federal Open Market Committee unanimously raised rates by 25 basis points to 3.75%-4.00%, describing the move as having "removed a dose of accommodation." Market-implied Fed expectations shifted toward tighter policy, with markets pricing roughly 100 basis points of additional tightening through the end of 2027. U.S. Treasury yields rose across the curve, with the 10- and 30-year yields ending at 5.27% and 5.62%. NEPC notes that the real-rate-driven move leaves long-term inflation expectations anchored. The Bloomberg U.S. Treasury Index fell 3.0% and the Bloomberg Long Treasury Index lost 8.0%. In France, the 10-year spread over German Bunds widened to 124 basis points, a level last seen during the Eurozone sovereign debt crisis.
Energy markets were driven by Middle East conflict. Spot WTI crude rose above $100 per barrel, up 28.1% for the quarter, amid escalation in the U.S.-Iran conflict. Diesel crack spreads reached record highs on limited global refining capacity, and U.S. Strategic Petroleum Reserves sit at 40-year lows.
NEPC recommends investors rebalance to strategic targets, use the full portfolio risk budget, and maintain a U.S. equity overweight, citing the supportive macro backdrop and broad-based U.S. earnings strength. The firm also views current yields as an opportunity to secure adequate safe-haven exposure. Data as of 9/30/2026, sourced from S&P, Russell, MSCI, JPM, Bloomberg and FactSet.
Fixed income faced a difficult quarter. The Federal Open Market Committee unanimously raised rates by 25 basis points to 3.75%-4.00%, describing the move as having "removed a dose of accommodation." Market-implied Fed expectations shifted toward tighter policy, with markets pricing roughly 100 basis points of additional tightening through the end of 2027. U.S. Treasury yields rose across the curve, with the 10- and 30-year yields ending at 5.27% and 5.62%. NEPC notes that the real-rate-driven move leaves long-term inflation expectations anchored. The Bloomberg U.S. Treasury Index fell 3.0% and the Bloomberg Long Treasury Index lost 8.0%. In France, the 10-year spread over German Bunds widened to 124 basis points, a level last seen during the Eurozone sovereign debt crisis.
Energy markets were driven by Middle East conflict. Spot WTI crude rose above $100 per barrel, up 28.1% for the quarter, amid escalation in the U.S.-Iran conflict. Diesel crack spreads reached record highs on limited global refining capacity, and U.S. Strategic Petroleum Reserves sit at 40-year lows.
NEPC recommends investors rebalance to strategic targets, use the full portfolio risk budget, and maintain a U.S. equity overweight, citing the supportive macro backdrop and broad-based U.S. earnings strength. The firm also views current yields as an opportunity to secure adequate safe-haven exposure. Data as of 9/30/2026, sourced from S&P, Russell, MSCI, JPM, Bloomberg and FactSet.
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