Economic and Market Outlook Dashboard
4th Quarter 2026
The Economy
The Markets
Interest Rate Outlook
Asset Allocation Outlook
The U.S. economy grew at an annualized rate of 2.2% in the second quarter of 2026, driven by accelerating consumer spending and continued business investment. Net exports and residential investments have been modest drags on the economy.
After a potentially strong third quarter with the Bloomberg consensus survey predicting growth of 2.5%, we expect economic growth to slow but remain positive for the fourth quarter and into 2027. Interest rates have increased due to inflation remaining above the 2% target and the Federal Reserve tightening monetary policy. This could weigh on consumer spending and business investment going forward.
The labor market added 133,000 jobs in August and 29,000 in September, led by hiring in healthcare, social assistance, and construction. The unemployment rate currently sits at 4.2%. In line with expectations of slower economic growth ahead, we expect hiring to slow in the year ahead. Shifts in immigration policy and an aging population are placing limits on workforce growth.
Earnings growth is expected to increase by at least 30% this year, driven primarily by the ongoing artificial intelligence (AI) investment cycle. While higher interest rates could create challenges for some sectors, AI seems to be somewhat insulated from it.
The S&P 500 index gained 2.3% during the third quarter despite a choppy September, supported by strong corporate earnings and continued enthusiasm surrounding AI‐related companies. Energy was the best-performing sector given the rise in energy prices.
Developed international markets (MSCI EAFE) gained approximately 1.0% during the third quarter. International equities benefited from Japan’s continued strength while Europe lagged, particularly Germany and France.
Emerging markets (MSCI EM) lost 0.8% in the third quarter. AI enthusiasm cooled after a very strong first half of the year, while higher oil prices, higher global yields, and a stronger dollar also created a less favorable environment for emerging markets.
At its September meeting, the Federal Reserve raised rates by 0.25% to a range of 3.75%‐4.00%. The median interest rate outlook calls for one additional quarter-point rate hike by the end of 2026 if inflation continues to stay elevated.
Headline year-over-year inflation held steady at 3.4% in August, driven by a reacceleration in energy prices. While we don’t see a broad‐based acceleration in price pressures, we expect inflation to remain above the Fed’s 2% target for a couple of quarters, even after a resolution to the conflict with Iran.
Bond yields have moved higher this year, with the 10‐year Treasury yielding 5.3%. This is due to the recent inflation shock, resilient economic growth, concerns about the fiscal outlook, and a more restrictive Fed. Catalysts for yields to fall would be ceasefires in Ukraine and Iran, greater Fed clarity, and better-than-expected inflation data to help ease inflation concerns.
We expect geopolitical tensions to continue to cause market volatility.
We continue to be constructive on U.S. equities based on solid fundamentals. Our focus remains on high‐quality companies with strong balance sheets and sustainable earnings.
Fiscal stimulus, dollar weakness, attractive valuations, and regional catalysts support our allocation to both developed and emerging international equities.
Bonds offer attractive levels of income, as well as protection against an economic downturn. High‐quality core fixed income with attractive yields continues to be our focus.
We believe our investments in alternative assets such as real estate and infrastructure may offer diversification to portfolios as part of a long‐term strategy.
We continue to invest for the long term and to advocate for diversified portfolios to help manage market volatility.
This newsletter contains general information that is not suitable for everyone and should not be construed as personalized investment advice. The views expressed herein are those of the firm as of the date indicated and are subject to change based on market and other conditions. Any references to asset allocation, investment strategies, or marketing positioning are for informational purposes only and should not be construed as a recommendation to buy or sell any security or adopt any particular investment strategy. Past performance is no guarantee of future results. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. In preparing this presentation, we have relied upon information provided by third parties, including J.P. Morgan Asset Management, FactSet, Bloomberg, Federal Reserve, MSCI, Standard & Poor’s, BLS, and BEA. While we believe these sources to be reliable, the accuracy and completeness of the information is not guaranteed. We have provided performance results of certain indices for comparison purposes only. The historical performance results of each index do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. Additionally, certain statements contained herein that indicate future possibilities are forward-looking statements. Due to known and unknown risks, actual results may vary materially than those portrayed in such forward-looking statements. There is no guarantee that the views and opinions expressed herein will come to pass. For additional information about Arbor Trust, including fees and services, send for our disclosure statement as set forth on Form ADV from Arbor Trust using the contact information herein. Please read the disclosure statement carefully before you invest or send money.