September 2026 Market Update: Higher Rates, Record Highs, and a Fed Hike

The third quarter pulled investors in two directions. The 10-year Treasury yield climbed to its highest level since 2002, and bond prices fell. At the same time, strong corporate earnings helped keep stocks moving higher. Along the way, Brent crude rose back above $100 a barrel, the Federal Reserve raised rates for the first time in three years, and questions about artificial intelligence grew louder ahead of the November midterm elections.

Even so, the major U.S. stock indices finished the quarter not far from their all-time highs, and the gains came from more than one place. Energy stocks, developed international stocks, and commodities all added to returns. Bonds had a hard quarter, but their yields are now higher than they have been in a long time. A quarter like this shows how differently stocks, bonds, and commodities can respond to the same backdrop. Below, I walk through what drove it and what to keep in mind as the year ends.

Investors Are Adjusting to Higher Interest Rates

The biggest story of the quarter was the steady rise in interest rates to levels last seen in the early 2000s. This matters for long-term investors. For years after the 2008 financial crisis, very low rates shaped almost every portfolio decision. That is no longer the case. Bonds can now pay more income than they could for much of the last 15 years, and that changes how they fit into an overall mix.

Some history helps here. From their peak in the early 1980s until 2020, rates drifted lower for about 40 years, with ups and downs along the way. That long decline is often called a 40-year bull market in bonds. When rates fall, existing bonds become more valuable. That helped support portfolios and the broader economy for a long time.

Higher rates have a cost, too. When rates rise, the price of existing bonds falls, and longer-term bonds tend to fall the most. That is what happened this quarter. Investors who own bonds today are accepting some price risk in exchange for more income going forward.

Rates also reach well beyond the bond market. According to Freddie Mac, the average 30-year fixed mortgage rate is back above 7%, after drifting toward 6% early in the year. Homeowners who locked in a low rate years ago have less reason to sell and take on a new, more expensive loan. Economists call this the lock-in effect, and it has been one factor limiting home sales.

Rates are hard to predict, and oil prices and the job market could move them in either direction. For now, longer-term Treasury yields sit near multi-decade highs, and that is worth considering in a long-term plan.

Earnings and AI Spending Lifted More Than One Part of the Market

Despite plenty of short-term worry, U.S. stocks finished the quarter close to record levels. One factor has been strong corporate earnings. A solid economy and heavy spending on AI infrastructure, such as data centers and chips, have supported corporate profits.

Analysts’ consensus estimates still call for strong earnings growth over the next year. Estimates like these change often, and they can miss in either direction.

The strength this year has not been limited to large U.S. companies. Many parts of the global stock market have benefited from the same AI trend, including chipmakers in Asia. That has helped emerging market stocks over the year, even though they dipped slightly in the third quarter.

Commodities added to returns for different reasons. Conflict in the Middle East contributed to Brent crude rising from about $70 a barrel in early July to more than $100 in September. Copper reached a record high, helped by tight mine supply and demand from AI infrastructure. Diesel also hit a record, helped by limited global refining capacity.

When gains come from several directions at once, it is a reminder that different investments can respond very differently to the same conditions. That remains relevant heading into the fourth quarter, with the Fed, Treasury yields, and oil prices all still in focus.

The Fed Raised Rates for the First Time in Three Years

At its September meeting, the Fed raised its policy rate by a quarter of a percentage point, to a range of 3.75% to 4.00%. It was the first increase in three years, and it followed a stretch of rate cuts that ran from September 2024 through December 2025.

Futures markets had priced in better than a 90% chance of the move before the meeting, according to CME FedWatch. Stocks swung a bit after the announcement but took the decision in stride overall.

The increase came as inflation remained above the Fed’s 2% target and geopolitical developments added uncertainty to the outlook. Higher energy prices have been part of that inflation pressure. Economists call this cost-push inflation, where supply disruptions raise prices even without unusually strong demand. Interest rates cannot repair an energy supply disruption. Monetary policy can, however, affect broader demand and expectations for future inflation.

The median September projection from Fed officials implied one more quarter-point increase by year-end, no change in the median rate during 2027, and gradual declines after that. These projections can change quickly as the data changes, so they are best treated as a rough guide.

It is natural to see higher rates as bad news for markets. In practice, it depends on why the Fed is raising them. Historically, stocks and rates have often risen together, especially later in an economic cycle when growth, earnings, and business investment are strong. The third quarter is one example, with stock indices near their highs even as rates climbed. That pattern does not always hold, and monetary policy is only one of the forces likely to shape the months ahead. The political calendar is another.

The Midterm Elections and Policy Uncertainty

Elections matter. They shape policy on taxes, entitlement programs, and the federal debt, and they reflect what voters value. When it comes to investing, though, making portfolio decisions based on an expected election outcome adds another form of timing risk.

This November’s midterms come against a busy backdrop of tariffs, geopolitical conflict, inflation, and questions about AI. Economic policy uncertainty has been high at times during the past two years and has coincided with bouts of short-term market volatility. Markets have also recovered from periods of political and economic uncertainty in the past. Past performance does not guarantee future results, but history does argue against overreacting to political headlines.

It is easy to assume politics drives the stock market, or that election years are more volatile by nature. History does not support that as a rule. According to Clearnomics research using Standard & Poor’s data, the S&P 500 has averaged an annual total return of 8.6% in midterm election years since 1933. That is an average, and individual midterm years have ranged widely, including some losing years. Market returns have also varied widely under different combinations of party control. It is common for the president’s party to lose ground in Congress at the midterms, and that has happened several times in recent decades.

Some political uncertainty goes beyond who controls Washington. Many investors worry about the national debt and the budget deficit. Total federal debt recently passed $40 trillion for the first time. The Congressional Budget Office estimates the federal deficit for fiscal year 2026 at about $2.1 trillion. Over time, these trends could push up the government’s borrowing costs and the interest it must pay each year.

These are real issues. The useful step is to separate what you can control from what you cannot. A portfolio designed around your goals and tolerance for risk does not have to depend on one election outcome or one year’s deficit.

AI, Productivity, and Market Concentration

AI and other technology trends have been major forces in the market for the past decade. They have been an important driver of returns for several of the largest technology companies, often grouped under the Magnificent 7 label. They have also driven real differences in earnings, with the technology sector’s profits growing faster than those of the rest of the S&P 500.

That has raised concerns about concentration, meaning that a small number of stocks now drive a large share of the market’s results. It is a fair concern. It is also true that other sectors have contributed this past year, and several are growing their earnings at above-average rates. Energy is one example. Helped by higher oil prices, it has been the best-performing sector this year, up 37.4% through the third quarter.

Much of the AI boom so far has been about building infrastructure, such as data centers. The bigger question is whether AI will make companies more productive across the economy. That was the main payoff of the internet era. Since late 2019, U.S. nonfarm business productivity has grown at about a 2.1% annual rate, compared with 1.5% during the previous business cycle, according to the Bureau of Labor Statistics. Whether AI adds to that is still an open question, and the answer could affect markets and the economy for years.

A longer view helps here. Today’s largest technology companies took decades to get where they are, even though enthusiasm ran high in the 1990s. Understanding how these trends interact with higher rates and changing Fed policy can help put short-term market moves in context.

What This Means for Your Portfolio

A quarter like this one tests patience. Bonds fell, oil spiked, and the Fed changed direction, all while stocks held near their highs. It would be easy to react to any one of those headlines. A plan gives you something steadier to lean on.

Higher yields are a good example. They have hurt bond prices this year, but they also mean newly issued bonds and reinvested proceeds can generate more income than they could when yields were lower. If you are approaching or in retirement, that is worth reviewing as part of your retirement planning, especially how withdrawals, cash reserves, and income sources fit together. Higher mortgage and borrowing costs may also change the math on a home purchase, a refinance, or a business decision.

None of this calls for predicting the next move in rates, oil, or the election. It calls for a mix of investments that fits your goals, your timeline, and the income you need, and for checking that mix as conditions change. Tax awareness and attention to concentrated positions matter as much in a quarter like this as the headline returns do. That ongoing work is the heart of thoughtful investment management.

Frequently Asked Questions

Why did the Fed raise rates in September 2026?

The Fed raised its policy rate to a range of 3.75% to 4.00%, its first increase in three years. The increase came while inflation remained above the Fed’s 2% target and geopolitical developments were adding uncertainty to the economic outlook. Higher energy prices contributed to that inflation pressure, with Brent crude climbing above $100 a barrel during the quarter amid conflict in the Middle East. Interest rates cannot fix a supply disruption. What monetary policy can try to do is keep higher energy costs from spreading into broader inflation.

Why did bonds lose value last quarter if yields are so attractive?

Bond prices and interest rates move in opposite directions. When the 10-year Treasury yield climbed to 5.29%, the price of bonds that were already issued at lower rates fell, which is why the Bloomberg U.S. Aggregate Bond Index lost 3.5% in the quarter. Longer-term bonds tend to feel this the most. The other side of the trade-off is that new bonds now pay more income than they did for much of the past 15 years. Bonds still carry interest rate and credit risk, and the right amount to hold depends on your goals and timeline.

Could the November midterm elections hurt the stock market?

Election news can cause short-term swings, but history does not show that midterm years are bad for stocks as a rule. Since 1933, the S&P 500 has averaged an annual total return of 8.6% in midterm election years. That is an average, and individual years have varied widely, including some losing years. Market returns have also varied widely under different combinations of party control. Past performance does not guarantee future results, so historical averages do not provide a reliable basis for predicting how markets will respond to a particular election.

Is the stock market too dependent on AI and technology stocks right now?

A small group of large technology companies drives a large share of index returns, and that is a real risk if they stumble. This year, though, gains have come from other places too. Energy was the best-performing sector, up 37.4% through September, and commodities rose 15.1% in the third quarter alone. Diversifying across sectors, company sizes, and regions can reduce a portfolio’s dependence on any one group. It does not prevent losses, but it can make a portfolio less dependent on a single story.

What do higher rates mean for people near retirement?

Higher yields can make it easier to generate income from bonds and cash, which may help retirees who depend on their portfolio. They also lower the value of bonds you already own, especially longer-term bonds. Borrowing costs are higher too, which can affect plans such as buying a second home or refinancing. The useful step is to look at how income needs, withdrawal timing, and cash reserves fit together under today’s rates. That work is a core part of retirement planning.