2026 Q4
October 1st 2026
Our quarterly S&P 500 forecast for 2026 Q4 (average price returns) is a 2.4 percent growth over the third quarter of 2026. Our monthly forecast for October is also higher than September’s average.
Volatility concerning frequent changes in tariff rates and timings, and geopolitical conflicts, cannot be captured in a forecast model. Thus, any uncertainty concerning these issues makes the 95 % confidence interval around the point forecast rather wide.
Market rally lost steam in Q3
Following a 4.81 % drop in 2026 Q1 due to geopolitical tensions and rising oil prices, the S&P 500 had a big turnaround in Q2. After the US and Iran signed an interim framework agreement for a 60-day ceasefire, the S&P 500 index ended Q2 14.9% higher than the end of Q1. This was the best quarterly performance since 2020 Q2.
As Q3 began, the fragile peace in the Middle East ended with renewed hostilities. Traffic in the Straight of Hormuz is severely impeded. Consequently, oil prices have been rising again. The stock markets gave back some of the Q2 gains. The S&P 500 index ended Q3 at 7652, up 2.3% over the end of Q2. The index is up 11.6% YTD.
Cautious mood continues
The US economy and labor market remain resilient despite a significantly higher inflation rate than the Fed’s 2% target. The Fed Chairman, Kevin Warsh, continues his hawkish stance after abandoning the Fed’s ‘forward guidance’ policy, i.e., hints of future interest rate changes. Our own analysis agrees that the new Fed Chairman Kevin Warsh’s decision to scrap the ‘forward guidance’ policy is the right decision. It reduces the Fed’s flexibility in reacting to changes in market conditions.
Despite the strong earnings results of Q2, investors remain in a cautious mood as we enter Q4. The ongoing Middle East conflict, sticky inflation, unease about rising Treasury yields, and the debt burden reduce the likelihood of further market rallies this year. Given the big tech’s massive capital expenditure commitments for AI infrastructure, investors are showing more scrutiny and caution in viewing earnings expectations.
U.S. Q2 GDP growth was stronger than expected
US 2026 Q2 gross domestic product (GDP) grew at an annualised rate of 2.2 per cent, down from upwardly revised 2.5 per cent in the first quarter. This was the third and final estimate for Q2, upwardly revised from the second estimate of 1.5%. The reading was above economists’ expectations of 1.5% (Source: Bureau of Economic Analysis (BEA)). The stronger estimate reflected upward revisions to investment, consumer spending, exports, and government spending.
Although US economic growth and consumer spending appear strong, deteriorating inflation prospects stemming from the war threaten household budgets.
Consumer spending is related to job creation. The U.S. economy added 162,000 nonfarm payroll jobs in August 2026, beating the 56,000 consensus forecast. This was in contrast to the previous month, when nonfarm payroll jobs fell.
The unemployment rate was steady at 4.1% in August, unchanged from the previous month. The low unemployment rate is associated with the low participation rate (61.4%). The latest increase in payrolls was mainly due to the recovery in the leisure and hospitality sectors.
Retail and home sales slightly edge up
Starting with the economic data, retail sales increased in August. Home sales had a slight increase.
The advance estimate of U.S. retail and food services sales was up 1.2% in August and up 6 percent from August 2025.
The National Association of Realtors’ index of pending home sales ticked up 0.3% in August after falling 2.3% in July (m-o-m). The Pending Home Sales Index typically lags existing home sales by one to two months. Higher inflation is likely to keep mortgage rates elevated for some. The latest data show that the US housing market is still sluggish, with contract signings below last year. With no sign of rate cuts any time soon, the recovery in the housing market is expected to be slow.
The labor market remains resilient
In the week ending September 19, the advance figure for seasonally adjusted initial claims was 197,000, a decrease of 1,000 from the previous week’s revised level. The 4-week moving average was 202,250, a decrease of 1,750 from the previous week’s revised average. The advance seasonally adjusted insured unemployment rate was 1.1 percent for the week ending September 12, unchanged from the previous week’s unrevised rate (Source: US Department of Labor).
Initial jobless claims fell below the 200,000 mark, extending the labor market’s resilience. The expression ‘low-hire, low-fire’ describes a market where companies are reluctant to lay off workers despite labor-saving AI technology. As the latest job creation numbers appear strong, it is too soon to interpret confirm the validity of that argument.
So far, the data support the Fed Chair, Kevin Warsh’s statement of the US economy being at full employment. Such resilience of the US labor market gives the Fed the power to fight inflation with another rate hike before the end of the year.
PMI jumps above 50, but consumer confidence deteriorates
The Chicago Purchasing Managers’ Index (PMI) jumped to 58.8 in September from 47.1 in August 2026. This was well above the market forecast of 51.2. The latest data pointed to a renewed expansion in business activity. After last month’s significant contraction, the latest expansion in business activity has been the strongest pace since May. The expansion was due to increases in production, new orders, and supplier deliveries.
The Conference Board’s consumer confidence index fell by 6.7 points to 81.9 (1985=100) in September, down from 88.6 in August. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—retreated by 7.9 points to 109.3. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell by 5.9 points to 63.6. This was a third consecutive monthly decline. The survey period for this month’s preliminary results was September 1-23.
Already in June, US consumers were feeling pessimistic about the prospects of getting a job. This was when the US-Iran ceasefire was in place. The ceasefire violation and the restart of the conflict contributed to the deterioration in consumer sentiment. Consumer appraisals of current business conditions became negative for the first time since September 2024.
Inflation remains steady at 3.4%
The annual inflation rate in the US stood at 3.4% in August, unchanged from the previous month, and below the market expectations of 3.7%. The ongoing Middle East conflict and elevated energy prices since August keep inflation sticky. Fuel oil prices increased 52% (y-o-y) in August, compared with 39.1% in July.
Personal consumption expenditures (PCE), a key barometer of inflation and consumer spending, rose 3.4% on an annual basis in August, unchanged from downwardly revised July, and 0.3 percentage points below the Dow Jones consensus estimate. Core PCE, which excludes the more volatile food and energy categories, was 3% in August also steady from the downwardly revised July, below the market forecasts.
Being above the target inflation rate (2%) for five years has been a concern for the Fed. The renewed atrocities in the Middle East and rising energy prices raise concern that inflation data for September would not be any better. At the end of September, crude oil benchmarks closed higher, driven by persistent Middle East supply-disruption risks and tight inventory conditions (Brent Crude: $98 per barrel, and WTI Crude: $90.45 per barrel). Despite the slight rate increase in September, we expect the inflation picture not to improve dramatically in Q4.
Another rate hike in December or sooner?
Since the rate cut in December 2025, the federal funds rate’s range was 3.5% to 3.75% until the 25bp rate hike on September 16. Given the sticky inflation, the resilient labor market, and the economy at full employment, the Fed’s action was not surprising. Markets have been expecting tightening of US monetary policy.
Fed Chairman Kevin Warsh’s commitment to lowering inflation to the central bank’s 2% target would have lost its credibility if the Fed had held the rates unchanged in September. Warsh’s hawkish tone and persistent underlying PCE inflation may indicate another rate increase before the end of 2026. We believe another 25 bp rate hike may be in the cards in the next Fed meeting on October 27-28. Although a rate hike may come later in December, Warsh may choose to be more hawkish. After all, the previous Fed Chairman Jerome Powell’s delayed monetary tightening in the past, was blamed for the sticky inflation.
A sharp rise in US Treasury yields
US Treasury yields have been rising since June (see Graph below). Following President Donald Trump’s threat of additional attacks on Iran, rising oil prices caused a sell-off in the Treasury bond market, raising yields. At the end of August, the 10 Year Treasury yield was 4.73%. Strong economic data, resilient labor markets on one side, and stubbornly rising energy prices pushed the yields above 5 % at the end of September. The last time the Treasury yields were this high was before the global financial crisis, back in June 2007.
Fed Chairman Warsh argues that the sharp rise in U.S. Treasury yields delivers some monetary tightening, typically associated with higher interest rates. However, soaring Treasury yields raise concern for the government’s $40 trillion debt. US consumers also hold nearly $19 trillion in total debt. From mortgages to credit card debt, consumers are expected to suffer from increasing borrowing costs.
When the 10 Year Treasury yield increases, the cost of capital rises across the bond market spectrum. Currently, tech companies are using the bond market to fund investment in data centers, power infrastructure, and hardware. The magnitude of this spending is about $7.6 trillion over the next 5 years. There has been a massive long-dated bond issuance by companies such as Amazon, Meta, Alphabet, and Microsoft. As the timing of higher spreads corresponds to widening spreads in corporate bonds due to increased supply, risks to the financial system are also increasing. If these AI companies cannot convert their tremendous investments into even higher earnings, the systemic risk may require the US state to take stakes in these companies.
Q2 corporate earnings were very strong
US corporate earnings with inventory valuation and capital consumption adjustments (domestic industries) were up 9.9 percent in 2026 Q2 from the previous quarter. Earnings were up a whopping 22.7 percent over 2025 Q2. The AI boom is the main driver of this jump, followed by companies in Consumer Discretionary sectors such as Autos, which benefited from tariff refunds and improving supply chains. In addition, US consumer spending is strong by historical standards.
Our consumer sentiment indicators are based on our ‘keyword’ algorithm related to ‘Google Trends’. Accordingly, these indicators are among the explanatory variables that predict US corporate profits. In 2026 Q3, we expect the company’s earnings to be 11.5% higher than in 2026 Q2 and 32.1% higher than in 2025 Q3. US corporate earnings encompass a broader range of companies than the S&P 500. That said, lately the AI boom has made the earnings impact of the ‘Magnificent 7’ more dominant. This inevitably blurs the more representative picture of the health of the US economy. That said, the productivity gains from AI have been giving a cost-saving boost to a wider range of sectors such as Business Services.
The historical data from September 30th 2025
The S&P 500 is close to fair value
According to FactSet Insights from September 25, the forward 12-month P/E ratio for the S&P 500 is 19.2. This P/E ratio is below the 5-year average (19.8) but above the 10-year average (19.0).
For Q3 2026, the estimated (year-over-year) earnings growth rate for the S&P 500 is 29.1%. If 29.1% is the actual growth rate for the quarter, it will mark the third straight quarter of earnings growth above 25%. Overall, the index is close to fair valuation, owing to high earnings forecasts, driven by the AI boom.
It remains to be seen if higher inflation, a strengthening dollar, and rising Treasury yields will challenge the earnings of these companies and push their forward P/E ratios into overvalued territory.