By Matthew Haraburda, CFP® & CFA®
As we wrap up the third quarter, we wanted to reach out and share our outlook for the remainder of the year. The question on a lot of people’s minds right now is straightforward: how has the market remained so resilient in the face of so much uncertainty? From oil price volatility over the last nine months since the conflict started, to the Federal Reserve embarking on a hiking cycle for the first time since mid-2023, to a plethora of other political issues that are playing out, the list of headwinds has been real. And yet the market has continued to trade strongly. We wanted to share a couple of the charts we typically use in our investment presentations, because we think they tell most of the story.
Corporate Profitability
The first chart shows S&P 500 earnings per share growth on the left and profit margins on the right. Together they explain a lot about why the market has continued to trade the way it has.
Since 2025, and really accelerating through 2026, corporate profitability has continued to increase in a way that is fairly remarkable. Going from profit margins of around 14% to just over 17%, approaching 18%, is only three percentage points in absolute terms. But when you consider that covers the entire S&P 500, that is a meaningful shift.¹ Earnings per share for the full year 2026 are estimated to come in approximately 32% higher than 2025. To put that in context, the only other times we have seen that kind of earnings growth have been coming out of recessions, after the great financial crisis, after COVID.
We believe what is driving this goes back to one of the major themes shaping how we have been investing. Every vertical and every sector within the economy is figuring out how to implement AI and technology, and you are now seeing that flow through to margin expansion and corporate profits. This is not just the Magnificent Seven or everything directly touching AI. The dispersion trade, meaning companies outside the obvious AI names that are finding real efficiency gains, is what we believe has supported this earnings environment.
That said, we do not believe this is sustainable indefinitely at the current pace. We are recommending that clients pare back and take some profits on that trade, which we will be executing in an upcoming rebalance for qualified accounts we manage.
The Federal Reserve
The second thing we have been keeping a close eye on is the Federal Reserve. Kevin Warsh came in and made it clear from his first press conference that the Fed’s top priority was that they would not tolerate higher inflation. Coming into May of this year, futures markets were pricing in approximately a 0% chance of a Fed rate hike in 2026. On September 16th, we saw the first 25 basis point hike, the first since July of 2023.
We find it notable that this hiking cycle looks quite different from the last one. In the prior cycle, the Fed was playing catch-up to inflation that had already run well above their target. This time, both core and headline inflation are actually running below the Fed funds rate, which now sits at approximately 3.75% to 4%. Core inflation, which strips out volatile energy prices, is below that level as well. The Fed appears to be trying to stamp out inflation and get it down closer to the 2% target before it becomes a larger problem, rather than chasing it after the fact.
We believe this is not going to be a prolonged hiking cycle. We are advocating for clients to start extending out and locking in some of these higher yields for the first time in a while. Ten-year Treasuries around 4.8% to 5%, with 20 and 30-year yields at 5.2% and 5.3% respectively, represent a very different opportunity than buying Treasuries when they were sitting at 1.5% or 2%.¹ Corporates and high yield are offering mid to high single digits in some cases, which we view as attractive. We are not making dramatic changes, but we do think starting to capture these yields now makes sense.
Looking Ahead
Those are the two themes we will continue to monitor through the remainder of the year: the durability of corporate profitability and margin expansion, and the path the Fed takes from here. If you have any questions, please reach out. We would be happy to discuss with everyone.
Sources
¹ J.P. Morgan Asset Management, Guide to the Markets, Q3 2026 — S&P 500 EPS growth, profit margins, and U.S. Treasury yield curve data. Source data within charts: FactSet, Bloomberg, Standard and Poor’s, J.P. Morgan Asset Management. For informational purposes only.
² Board of Governors of the Federal Reserve System, Federal Open Market Committee, press release, September 16, 2026. ttps://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
³ U.S. Bureau of Labor Statistics, Consumer Price Index, September 2026. https://www.bls.gov/cpi/