Economic & Market Perspective: October 2026

U.S. economic growth remains resilient, but higher interest rates, persistent inflation and concentrated AI-led earnings growth are creating a more uneven and uncertain market outlook.

• The economy expanded in the third quarter from a 2.2% annual rate in the second quarter, while the ISM Manufacturing Index stayed in expansionary territory for the ninth consecutive month at 54.5% in September.
• AI investment is a major growth driver: capital spending by major U.S. technology companies is expected to reach $884 billion in 2026, up from $464 billion in 2025, and approximately $1.3 trillion in 2027.
• The labor market is cooling, with September non-farm payrolls increasing by 29,000 and unemployment rising to 4.2%; labor-force participation increased to 61.8% from 61.4% in July but remained below its pre-pandemic level above 63%.
• Inflation remains above the Federal Reserve’s 2% target, while the federal funds target was raised to 3.75%–4.00% in September; the 10-year Treasury yield rose more than 80 basis points in the third quarter, its largest quarterly increase since 1994.
• The S&P 500 gained 2.3% in the third quarter and 12.7% year to date, while the Russell 2000 fell 7.2% and the Bloomberg U.S. Aggregate declined 3.5%; expected third-quarter S&P 500 earnings growth is approximately 27%, with AI infrastructure companies accounting for more than half of the increase.

Takeaway: Market resilience depends on continued corporate earnings growth and improving inflation, while investors should watch energy prices, fiscal deficits, Treasury issuance and the concentration of earnings growth in AI-related companies.