High Treasury Yields, Weak Consumer Confidence, and a Narrowing Market Shape October's Outlook

High Treasury Yields, Weak Consumer Confidence, and a Narrowing Market Shape October’s Outlook

October began with a mixed economic picture. Corporate earnings expectations remain elevated, yet consumer confidence has fallen to its lowest level in 12 years (Source: AAII). Despite positive economic indicators, consumers do not appear to be feeling the same optimism reflected in corporate earnings.

Third quarter earnings growth expectations for the S&P 500 are running above 25%, a historically rare occurrence seen only six times over the past 32 years (Source: FactSet, S&P Earnings by qt). Four of those six instances came as the economy and markets were emerging from a recession or a severe market decline, including the 1990s, 2003, 2009 and 2021 (Source: NBER, FRBSF, ). The two exceptions are 1999 and the present, two periods marked by significant investment in transformative technology (Source: FRBSF, 2026 AI infrastructure).

The economic backdrop helps explain the earnings outlook. Inflation readings have cooled, with the August Consumer Price Index inching lower and the August Personal Consumption Expenditures Price Index flat, while wage growth has risen from 3.6% to 3.9%, leaving more income available to spend (Source: Atlanta Fed). Yet, consumer confidence has fallen to a 12-year low (Source: CNBC). Concerns about job security in the age of AI, higher oil prices tied to the Iran conflict this year, and pushback against data center construction all appear to be weighing on sentiment.

At the same time, increased borrowing demand from the federal government and major technology companies has contributed to upward pressure on interest rates (Source: CNBC, Reuters). As Treasury yields rise, bond prices fall. While falling prices can be unsettling for bond investors, a bond has a finite life. When it matures or is called, the holder is repaid assuming the issuer meets its obligations and can reinvest at the prevailing rates. History since 1991 suggests that when yields move above 5%, nervous investors have tended to sell bonds, potentially contributing to gains in the stock market (Source: FINRA, Investor.gov, Hartford Funds, using Morningstar data). Selling bonds that are down to buy stocks that are up means selling low and buying high, the opposite of the familiar mantra, “buy low, sell high.”

Market leadership, meanwhile, is narrowing again. As of October 6, 2026, the Nasdaq hit a new high, yet most of its stocks traded below their 50-day moving averages, and more were making new lows for the year than new highs (Source: Yahoo Finance). The S&P 500 declined about 0.4 % in September, while many individual stocks fell by considerably more, and the equal-weighted S&P 500, which led earlier in the year, now trails by roughly 3% (Source: TradingView). This narrowing market leadership suggests that a relatively small selection of large tech stock stocks is carrying much of the index’s performance.

Looking ahead, the midterm elections are approaching, and some market volatility could be on the horizon. Since 1928, the fourth quarter of midterm election years has been positive roughly 83% of the time, with an average return of about 5.6% (Source: MFS). The earnings outlook and historical market patterns support a constructive view of the fourth quarter, although past performance does not guarantee future results. Diversification across asset classes, company sizes and regions remains the foundation of a steady approach, one that seeks consistent results rather than home runs.

Important Disclosures:

This commentary is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security.
Forward-looking statements are based on current market conditions and are subject to risks and uncertainties. Actual results may differ materially.
Past performance does not guarantee future results. All investments involve risk, including possible loss of principal.