Third Quarter Market Update 2026- The Market Dichotomy: The Bull vs. Bear Case

Despite a poor showing in September (particularly in small-cap stocks, Emerging Markets, and Bonds), the market has performed exceptionally well in 2026. 

If the year ended right now, this would be the 4th year in a row with double-digit S&P 500 growth, which is truly exceptional. But I don’t want to spend a lot of time talking about what has happened. Instead, I want to discuss what “might” happen and why.

Some argue we're long overdue for a correction and that well-deserved market gains are the best route forward. I’ll make that argument in a minute.

First, I want to argue that this bull still has horns. In other words, we could see this market keep surging, and sitting on the sidelines could be a poor strategy, reminiscent of the old market-timing fallacy.

THE BULL CASE

1. We’re not in any sort of market bubble compared to any historical bubbles. For example, according to a July article by Fidelity, stocks are priced at an extremely fair value. “The S&P 500 Index trades at roughly 20 times projected 2026 earnings, while the equal-weighted S&P 500 trades around 18 times earnings. By comparison, at the peak of the late dot-com era, the largest technology firms in the S&P 500 traded at more than 125 times their estimated earnings. Even valuations on the shares of the mega-cap “Magnificent 7” technology leaders appear reasonable given the group’s substantial earnings growth.” 1
   
   
2. The economy and corporate earnings have been strong enough to brush off interest rate hikes. Normally, rising interest rates push down economic growth and corporate earnings; however, the Federal Reserve noted in September, “Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little. 2
   
   
3. Productivity increases from AI investments can continue to drive corporate earnings. At the end of the day, earnings drive stock prices. AI investment has been considerable over the past several years. The payoff from those investments is just now beginning to reveal itself. This could increase the profitability of a whole slew of companies and drive stock prices higher.

THE BEAR CASE

    This scenario is significantly less fun to write.

1. The trade and geopolitical disruption argument. The Iran conflict is still ongoing. We’ve got trade tensions and tariff talk with essentially the whole world. China could decide to take over Taiwan on a whim, disrupting the semiconductor market and, by extension, the world economy. Not to mention, we are a few short weeks away from a major mid-term election that could see a complete turnover of Congress. 
   
   
2. Rising interest rates to fight inflation could result in a gut punch to corporate earnings. Rising borrowing costs for consumers are obvious; we pay more for mortgages, auto loans, and personal debt. What might not be as obvious to the general public is that nearly every corporation borrows money. As those loans (aka bonds) mature, corporations typically sell new bonds at the going rate. If the old bonds carried the low interest rates of 2020 (3%) and the new bonds need to carry the current interest rate (5-8%), then that increased interest expense has a direct effect on profitability. As we have already established, profitability drives stock prices. If profitability goes down, so do stocks!
   
   
3. Ballooning U.S. debt could shake confidence in the dollar. The entire global economy essentially runs on the dollar and the premise that the U.S. Treasury always pays its bills. Now that our government debt has surpassed $40 TRILLION!!! If there were any hiccup in the Treasury market, we could face an economic collapse of unprecedented proportions. This is a bit of a stretch, but I admit I don’t like thinking about what would happen if the U.S. couldn't service its debt obligations and the rest of the global economic complex decided the dollar was no longer safe.

Our investment teams wrestle with these bull vs. bear exercises daily, not only with the market as a whole but with different asset classes and individual stocks.

If you’ve read this far, you might still be wondering which side of the bull vs. bear case FSG lands on. At this point, we are holding our current market position, which is generally neutral stocks, slightly underweight bonds, and overweight alternatives. We continue to watch market valuations and are always considering the best and worst-case scenarios for our clients. 

It wouldn't surprise me if we shifted our portfolio to be slightly more defensive in the coming months. Still, as new data becomes available, we will evaluate and make changes as needed.

Written by: Brice Carter

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