Home Stretch

In our 2026 Outlook titled “Mission Impossible,” we outlined the likelihood of the S&P 500 enjoying a fourth consecutive year of positive returns. Powered by outsized earnings growth, we are entering the final three-month home stretch of 2026, with the S&P 500 up 13.2% and well-positioned to deliver on our optimistic thesis.

This year’s advance has been driven by earnings, rather than speculation, which gives us confidence that the market is on healthy footing. To that point, consensus expectations for the S&P 500 earnings growth have roughly doubled over the course of the year, from 15% in January to 32% today. Because earnings have risen faster than prices, the S&P 500’s forward price-to-earnings (P/E) has fallen 18% from its peak in October 2025 to 19.2x, in line with its 10-year average. Market bubbles are generally characterized by prices running well ahead of fundamentals. This year’s rapid earnings growth alongside a contracting multiple is the opposite dynamic, and in our view, puts today’s market outside bubble territory.

Another positive development for the long-term health of the equity market has been the improved breadth; the megacap, technology “Magnificent 7”, that have led the market in recent years, have taken a pause in 2026. Specifically, the “Mag 7” has returned just 8% year-to-date while the other 493 names in the S&P 500 have enjoyed a return of 14%. Because these seven stocks still make up 34% of the S&P 500, a market that no longer depends on a handful of megacaps for its direction is, in our view, a more durable foundation.

Interest rates remain the most important counterweight to the strong earnings outlook. The bond market had already tightened financial conditions before the Fed acted in September, pushing the 10-year Treasury yield 100 basis points higher this year to 5.28%. The Fed then raised rates for the first time in three years, with Chair Kevin Warsh emphasizing a low tolerance for inflation remaining above the Fed’s 2% target and an openness to additional increases.

Higher rates increase borrowing costs and place downward pressure on equity valuations. The market now faces a tug-of-war between the positive impact of strong earnings growth and the pressure of higher interest rates. In our view, the threat of still higher rates represents the greatest risk to equities in the months ahead.

Despite persistent inflation and the resultant rise in interest rates, the economy remains on solid footing and fears of recession remain quite low. One positive development in this regard is, though we have seen the job market slow to a low hiring, low firing environment, beneath the surface the mix shift of job creation has become decidedly more favorable this year as private job creation is now outpacing government job creation.

Finally, with the midterm elections just weeks away, we would like to reiterate that historically, elections are not capital market events. By this, we mean that ultimately tax, regulatory and foreign policies can be impacted by the results of elections. But any changes in the aforementioned policies take years to gain economic traction and would require a significant majority by one party or the other in order to enact any policy of economic significance. While the media will do its usual best to use the election as a lever to stir anxiety and fear, we don’t envision an outcome that would cause us to alter our current asset allocation posture that continues to modestly overweight large-cap, U.S. equities.

All data as of September 29, 2026

Disclosure

The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.

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