After a strong second quarter, the stock rally slowed in Q3, with the three major indexes ending the quarter mixed.¹

Was Q3 just a pause after a strong run? What could rising rates and midterm elections mean for markets?

Let's look at what happened last quarter and what could shape the final months of 2026.

Stocks had a mixed third quarter after their strong spring rebound, even as the Fed raised rates and oil prices climbed.^1,2

While stocks have posted strong gains this year, bumps ahead would be normal.

Why did the Fed raise rates?

Inflation has proved more persistent than expected, and the Fed decided to act.²

The challenge is that a significant part of today's inflation comes from supply shocks, like the squeeze on global oil and fuel supplies.⁴

Prices usually rise for two reasons: people are buying more, or there's less to buy. Interest rate hikes can help with the first by making borrowing more expensive, which cools spending. They can't do much about the second, like a shortage of oil or fuel.⁴

To bring inflation down, the Fed has to cool demand enough to offset tight supply. That's one reason some economists think bringing inflation down may take longer, or require more of a slowdown, than the Fed hopes.⁴

Will the rate hikes hurt the economy?

The economy seems to be holding up this year. Growth was 2.1% over the past year as of the second quarter, and so far higher energy costs and rising interest rates haven't significantly slowed it.⁷ Fed officials also see the job market as near full employment.⁴

However, much of that economic strength has come from business spending on AI and from households feeling wealthier after stock market gains.⁷

Whether the economy will continue to show strength is one of the big open questions heading into 2027. Some economists think growth could cool somewhat if AI investment slows and higher prices and interest rates weigh on household spending.⁷

Is this 2022 all over again?

For many investors, the words "rate hike" bring back memories of 2022, when the Fed delivered its steepest rate increases since the 1980s.⁴ Markets had a very rough year.

Today, inflation is high enough to concern the Fed, but well below the levels that drove that 2022 rate cycle.⁴ Back then, some economists warned that unemployment might need to climb into double digits to bring inflation down. Instead, inflation and unemployment both fell.⁴

While the past can’t predict the future, the comparison is a helpful reminder that rate hikes don't automatically lead to a downturn.

What could the final months of 2026 bring?

Fed officials project one more rate hike this year, and the midterm elections may add uncertainty.^2,3

Either could spark bouts of volatility, and oil prices and the Middle East remain wildcards.¹

Pullbacks are a normal part of investing, even in years that end well.

Our approach: chart a steady path through the noise.

Higher rates and election seasons are part of long-term investing, and we designed your strategy with conditions like these in mind.

As the midterm cycle plays out, political headlines will get louder. We'll follow the results closely, but we don't let elections drive portfolio decisions.

We're watching the data, including energy prices and the Fed's next moves, and staying focused on your long-term goals. We'll keep you updated as Q4 unfolds.

Questions about what higher rates or the election could mean for your portfolio? Let's talk.

The S&P 500 is a stock index considered to be representative of the U.S. stock market in general. The NASDAQ Composite Index is an unmanaged composite index of over 2,500 common equities listed on the NASDAQ stock exchange. The Dow Jones Industrial Average is a price-weighted index that tracks 30 large, publicly traded American companies.

All index returns exclude reinvested dividends and interest. Indices are unmanaged and cannot be invested into directly.