4th Quarter 2026 Market Outlook
This quarter's market analysis will cover a few more facets than normal, resulting in a slightly longer summary. We believe this added length is appropriate given the growing complexity of the geopolitical landscape, the energy markets, the ongoing (although not often talked about) tariff situation, seasonal volatility, and the upcoming midterm elections. As you read through this outlook, you'll notice that almost all of our topics lead back to the same place — energy.
Complex Geopolitical Landscape
As you're probably aware, there is growing complexity in the world's geopolitical landscape. Since Q1 of this year we have emphasized that Trump is unwilling to allow any prolonged downturn in the markets. This is important because betting on a market downturn would mean betting against the U.S. President — arguably the most powerful man in the world.
Although betting against Trump has historically been unwise, we question whether he may be biting off more than he can chew this time. Whether you like him or not, he has historically been able to negotiate himself out of many situations, but now things seem to be getting out of hand. Since 2022, powers the Western world assumed to be strong may in fact be weaker, and powers assumed to be weak may be stronger than we thought. For example, Russia's offensive in Ukraine has turned into much more of a slow burn than anyone predicted. Just as importantly, Trump estimated the war with Iran would only take a few weeks, yet multiple months later we're still at war.
This war has, in certain ways, been a boost for the economy. That may seem counterintuitive, but when the government justifies more wartime spending (even if it won't officially call it a war) it stimulates the economy. However, while increased government spending is boosting the economy, the higher oil prices caused by the war are putting stress on everyone — both producers and consumers. This is where we see, again, everything tying back to energy and oil.
The Federal Reserve
Despite the geopolitical turmoil, the U.S. economy remains strong — in part because of increased wartime government spending. Regardless of the reason, employment data is coming in hot, and so is inflation. This has caused the Fed to raise interest rates, and they're forecasting at least one more hike this year. Typically, if the Fed is on schedule, they raise rates when the economy is strong and begin lowering them as it weakens. This implies the Fed sees the economy as strong. Further, when Trump was pushing for a new Fed chair, he lobbied for lower rates to boost the economy — which suggests the Fed's current conviction is high.
Beyond seeing strength in the economy, the Fed also cited hot inflation data as part of its decision. This, again, comes back to energy and specifically oil. One of the top drivers of inflation is rising oil prices, since oil touches nearly every part of the economy — the food in grocery stores is shipped using it, and anything plastic is made from it.
Midterms
The midterms are another major question mark for the markets. Historically, neither party has had a clear edge on market performance — it's difficult to tell who's in office based on market data alone. What the economy dislikes is uncertainty, and a turnover in the midterms could cause temporary turmoil, though things will likely settle in the long run.
On another note, Trump is floating $5,000 payouts to every taxpayer if Republicans win the election. This could give the market a short-term boost, but is likely to add to inflation over the long run. The COVID stimulus under both Trump and Biden helped the market briefly, but quickly gave way to unbearable inflation.
Also central to the midterms is the war with Iran and rising oil prices. Neither party wants the blame for higher prices, and Republicans in particular will push hard to bring prices down to protect their party's standing.
Seasonal Volatility
Another factor is the seasonal Q4 pattern. As a general rule, the fourth quarter tends to be good for stocks, as holiday spending picks up and helps prices along. This trend is relatively recession-proof; however, if oil prices keep climbing, we could see a smaller Santa Claus rally than expected — or even a downturn heading into year-end.
Technical Analysis
The S&P has come down to retest its 50-day moving average (the blue line), which is acting as support — but if it breaks below that line, it could easily slide to the 200-day moving average (red line). The S&P still looks bullish overall, but the small-cap, mid-cap, and Dow Jones charts show some potential weakness ahead that we'll be watching closely.
Conclusion
As we wrap up, it's important to note the significant uncertainty ahead in the coming months. If some of these issues resolve favorably, we could see the market rip higher; if not, we could see the slow decline we've experienced over the past few months continue. We believe we're well-positioned for the current environment. At the start of the year we were slightly overweight equities, which served us well through the Q1 and Q2 rally; last quarter we brought that back to our normal bands and intend to stay there for Q4. Our aim with this moderate approach is to participate in the upside without getting crushed if the slow bleed continues.
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