The CAISSA Quarter 4 Overview, September 30 2026

Welcome to CAISSA’s fourth quarter macro and Markets Updates. Today, we’re going to look at the economic backdrop, what’s happening beneath the surface of equity markets, the opportunities and risks in fixed income, and a few considerations as we look into year-end and 2027.

We will try to separate out what’s happening today from what it might mean for long-term investors. And the objective is not to really forecast every move in the market, but to provide some context for thoughtful portfolio decisions.

We’ll start with the economy. We have some growth, inflation, interest rates, employment, and federal debt that we’re going to talk about, and then we’re going to turn to equity markets, where corporate earnings remain really strong, and some important changes are taking place beneath the surface, though. From there, we’re going to examine bonds, where rising yields have created a near-term pressure on prices, but also improving prospective income, so that’s good.

And then finally, we’re going to close out with some… a little bit of an election backdrop and a few practical, portfolio considerations. So, we’re going to jump right in here.

Let’s start by laying some of the groundwork. We sit right now at a moment where the economic activity has remained pretty resilient, and corporate earnings growth has been really robust. Inflation, however, has been more and more persistent than many would prefer, and the Federal Reserve faces a more complicated set of decisions As a result of that. So on the surface, economy looks reasonably healthy. Underneath of that, though, there are nuances worth understanding, particularly in the labor market and some of the drivers of that inflation. So we’ll take a look at this.

Okay, so focusing first on growth, which is measured by GDP, and inflation measured by CPI. Here, on this side of the chart, we’re looking at real GDP growth, and then consumer inflation on this side of the chart.

On the growth side, the economy has held up pretty well.

There’s been a meaningful portion of investment that’s connected to AI build-out, but when companies commit extraordinary amounts of capital to data centers, technology infrastructure, the energy systems need to support all those, the spending flows into the… that really does flow into our real economy.

We see it in construction; we see it in equipment, utilities, and eventually it does hit corporate earnings. So the consensus forecasts on that… on this slide really still point to continued growth and future growth that we’re… we’re thinking we’re going to see.

And, but, you know, none of that is really guaranteed. On the flip side of that, inflation is now presenting the other side of the story. So consumer prices have been increasing faster than the reserve’s long-run 2% objectives. And that target serves as a really important anchor of expectations.

So while activity has remained, you know, really positive over here, price stability is not yet where the policymakers would like it to be, so both of these realities are becoming true at the same time.

Now we’ll go into and talk about some of the Fed funds and interest rate. This chart really does show the Fed funds rate and what markets are pricing in as of September, anyways.

The important distinction is that the market expectations is not promises from the Federal Reserve. So, market is in this gold… the expectations is this gold little, upward hook right here.

At this point, though, the markets… we’ve been anticipating an additional rate increase in 2027, but the policymakers maintain a firmer stance, even as inflation reflects some supply-related forces, that they may, may not be doing that. Part of the answer for them is that they have a dual mandate.

They have price stability as one mandate, and maximum employment as another mandate.

If employment remains relatively firm while inflation stays above the target, they have less of a reason to move quickly towards that easier policy.

At the same time, higher rates cannot create new energy supply or resolve disruption in shipping, so policymakers have to weigh both sides. For investors, though, that implication is pretty direct. Short-term rates? influence the income available on cash and short-term maturity bonds. And then the longer-term bond yields respond to a broader mix of inflation, growth, supply, and investor expectations. So, we should not assume that all of those rates move in tandem or move together.

They are actually moving quite differently.

So then we get into the payroll, and when we talked about labor markets and unemployment. So let’s pull back another layer of the onion and look at employment. The unemployment rate alone does not tell the full story.

Payroll growth has slowed, as you can see, the changes in payroll here, and hiring has become much more concentrated in just a few industries. The recent 3-month average, on this slide anyways, was $51,000 per month.

Which is more of a striking in comparison on the right side, in the end of 2024. Healthcare, which is this dark blue line here, and social assistance added more than a million jobs, while the employment in the rest of the economy. this light blue, has significantly declined. And that’s a very different picture from the broad-based hiring across nearly every sector. Some of this may reflect demographic changes, including an aging population and slower-growing labor force, but there’s also a great deal of discussion about how AI might change hiring and professional administration roles. It’s really too early to attribute every hiring trend to AI, but the larger point is that the headline employment can look very stable, while the underlying mix becomes very, very… much more narrower. That is something the Fed and investors should… we should be watching this very, very carefully, is that dichotomy there.

Switching over to a little bit more about inflation and what the drivers are in changing the inflation. And I will note out this before I start commentating about it, it’s like, this dark blue area is energy, and the, portion of the entire inflation that energy is driving inflation. It’s one of the central conversations that we’re having when we talk about bond markets, and it’s central for a really good reason. It affects purchasing power and can materially influence the direction of interest rates. So, this really does separate inflation into its major contributors, food. Energy. Core goods, core services.

And you can see energy has been an important driver of the recent increase, and it matters because an energy-driven inflation shock is much different from broad, persistent price increases across the entire economy. If you think about diesel.

It’s not just a fuel price on a sign. It’s a cost embedded in transport… transporting merchandise, transporting food, supplies, etc. So higher transportation costs can eventually reach consumers. But if we look at other components, the story is a little bit less uniform. Some good categories have contributed relatively little.

While some services remain a significant part of the overall picture. And that, distinction really does matter, so these core services in this light yellow. We don’t really want to look at one headline number and assume every corner of the economy has experienced identical price pressure.

the composition of the inflation will help shape those expectations going forward for monetary policy and then bond yields. So we’re taking a look at that and watching that closely.

Okay, federal debt, we get a lot of questions about… about the federal debt and how it is just now Across the $40 trillion mark.

So, if we think about moving into the longer-term picture, the U.S. now has passed $40 trillion in outstanding public debt during August.

It is a staggering number, and the federal debt is, relative to the size of the economy, also deserves attention. So that is, the light blue here.

But a large part of our debt figure does not automatically translate into an immediate market event. It is better understood as maybe a longer-running constraint. and a source of potential pressure on Treasury issuance and borrowing costs. So, broadly, if we think about it, a country can improve its debt burden through faster economic growth.

through greater productivity, through fiscal changes affecting spending or revenue, and in a less desirable way, we can use higher inflation to erode the real value of your obligations. So, growth and productivity are the more constructive paths to reducing this debt.

And if we think about it, AI-related investment could contribute to that productivity, although the benefits and the timing, that really does remain pretty uncertain.

But the key is to avoid treating this as a prediction and an imminent crisis, while also recognizing that its persistence deficits can really influence what the capital markets are going to be doing over time. And so we do have to keep an eye on it, but again, not have it be a screaming, imminent threat.

If we think about interest rates, and where we are right now in August of 2026, sitting right here on 10-year Treasury yields, it does bring us back to talking about bonds, and higher inflation really does usually coincide with higher nominal interest rates, although that relationship is far from perfect, usually. This chart does look at the historical relationship, again, between inflation.

And, the 10-year treasury… treasury yield, excuse me.

Over many of these decades, and it’s been since 1964 in this particular chart, a given inflation rate has been associated with a fairly wide range of yields. And so, because of growth expectations, the central bank policy term premiums, some investor demand, they all also matter. So the recent observation here, in August of 2026, it appears much less unusual when it’s placed in the larger, longer historical context of all the other factors, and I think it’s an important reset to think about, because investors often describe yields as an exceptionally high, because they compare them with what the unusually low-rate world they’ve experienced after the global financial crisis in the last, let’s say, decade. A wider historical lens, as we’re showing you here, leads you to To see a bit of a different conclusion.

more on Treasury yields and how it’s kind of popped up right here on the short end. So, if you look a little bit longer, and we’re going to have a longer-term lens, 1962 to 2022, The 10-year Treasury yield over the several decades that started after 2008, and I tried to put a line right here where I thought 2008 was coming in, it does stand out for how low rates were.

Not necessarily because today’s rates are unprecedented, but ultra-low policy rates over the last, you know, couple of decades in some markets overseas, they have negative yields, and they’ve created an unusual environment for the rest of the world.

So this chart just shows how the current yield, compares with its longer-term medium, which is about 5. We’re just bumping up on that.

So the fact that yields are closer to a historical median or middle, it doesn’t mean that they can’t move materially in either direction, but it’s just that interest rates rarely remain fixed at their average. It’s useful for investments to distinguish that, though, because the rate does feel high relative to memory, is one that unusually does have a high rate to history.

And that distinction helps us evaluate bonds and their current income and risks, rather than a comparison to a very unusual prior decade. So, that distinction just has to be there, because if you go and do your analysis based on what we feel this past decade is, instead of looking forward to doing the correct analysis, you could get tripped up a little bit.

So, in summary, if we go… if we’re talking about summarizing the economy, we have resilience with an uneven foundation.

So, before we move into stocks too fast, let’s summarize this economic activity. It remains positive. Consumer spending, corporate profitability, they’ve been high, and they’ve helped support good growth, and significant investment in technology infrastructure continues to be a contributor The challenges, though, are they’re also very real. Hiring, less abroad than… or, excuse me, hiring is less abroad the unemployment rate alone suggests. Inflation has remained above its target. The long-term fiscal picture is very complicated. So none of those points by itself means that the economy is about to take a turn, but if you take them all together, though, they argue for paying attention to what is really happening beneath all of the headline data. So, that is the bridge into our discussion about equity markets, and where we’re going to find a similar contrast between strong results and growing differences among companies.

So we’re going to transition to the stock market here. As we turn to that, the theme is really that there’s a difference between the enthusiasm of fundamentals There is an undeniably a great deal of enthusiasm supporting AI, and everything connected to building the infrastructure to support that.

That spending has a real economic effect that can create genuine business opportunities, and at the same time, enthusiasm can push expectance way ahead of what companies ultimately can deliver.

We’re not going to declare today that the market is… is or isn’t in a bubble, but such judgments, we should really… they’re easier to be had in hindsight rather than in real time.

So instead, what we want to do is examine the underlying earnings, the underlying balance sheets, financing requirements, and understand how concentrated some of the market’s drivers have actually really become.

So if we look at equity returns, in the third quarter, they really, really diverged. Throughout much of the year, which third quarter’s in the purple much of the year, or the rest of the year is in the light blue, equity performance has been really strong, domestically and internationally. The weaker dollar has supported returns on international investments, for the U.S. investors, and enthusiasm for AI extended markets into, With significant technology exposure.

But the third quarter, the purple areas, have also showed how different returns can be beneath the surface.

Large cap stocks, they’ve out performed many of our smaller companies, and the market cap weighted S&P 500 outpaced its equal weight counterparts. So that’s interesting to know, because that market weight is the S&P 500 is the one that has the MAG7 all in market… excuse me, market cap weighted, so that they are more of a contributor to the S&P 500.

Its equal weight counterpart is every one of those stocks have an equal weight in the S&P 500.

Now, smaller companies here, down 8% in the quarter, often carry greater sensitivity to borrowing costs. So when Treasury yields rise and financing becomes more expensive, that can… that can be a very meaningful headwind, and that’s what happened in this last quarter.

Now, this doesn’t explain every move in small and met caps, but it does illustrate why interest rates matter beyond the bond market. So, again, diversification, like we always talk about, it’s meaning owning businesses with different economic exposures.

Even when their short-term returns do not move together. And that is why we always preach about asset allocation and being exposed in very different places.

Corporate leverage. We’re going to be talking about this quite a bit, and that means companies taking on debt to fund their ongoing expenses. So one of the encouraging features of the large cap market is the condition of corporate balance sheets.

This slide looks at, really, net debt, so debt relative to EBITDA, which is kind of a net income, if you will, and it’s a common measure to compare borrowing with a proxy for operating earnings. So, in more simple terms, it helps us assess how much financial leverage companies are carrying relative to their earning power.

If the historical series here, it’s an aggregate leverage for the S&P 500, and it’s really Kind of quite low if you look back into history. So… Part of the reason that it’s low is there’s been a disciplined balance sheet management, and part of the other one is significant earnings and cash generation of these large businesses.

So, of course, the average doesn’t really describe every company, so smaller businesses that are… and really more leveraged industries can face a very different cost of capital environment, and it’s something to be aware of, so we’ve… you’ve really got to lift the hood and look Start to look at some of those ratios, because they all aren’t, aren’t all the same.

Profit margins. You’re going to hear us talk a lot about profit margins getting… having this really nice bump up. You know, if you look at price over earnings or price… profit margins, they’re… they rose about 13.5%, so we have another source of strength here. The S&P 500 profit margins have really moved to, historically, some elevated levels, and it’s been supported by scale, technology, earnings power of the largest companies.

Here’s where we need to take a bit of caution, though, and that high margin tells us where profitability is today.

But it doesn’t necessarily mean that’s where it’s going to be tomorrow. So, prior periods of elevated margins have sometimes been followed by some compression, so some reduced margins.

So a high reading by itself is not a reliable signal that the reversal is imminent, but we need to watch the change, and so we always… we talk a lot about the change in trajectory, not so much where the number is today.

And we need to watch whether companies can maintain their pricing power, whether they can manage their wages and the other costs. that earn adequate returns on their new investments. Strong profitability deserves the recognition that it’s gotten. So does the uncertainty about how sustainable, that profitability can be over time.

I think this one is really interesting, this slide here. We’re going to talk about some of these hyperscalers, Meta, Oracle, Google, Microsoft, Amazon. and where their free cash flow is. So, I think this is a really interesting development, because AI spending has changed cash flows. The change in cash flow profile of the largest technology companies that I just mentioned, they’ve generated enormous earnings and cash flow.

Increasingly, though, they are committing extraordinary amounts of money to data centers, computer equipment, computing equipment, and related infrastructures. So their free cash flow is really what remains after their capital spending, and their forward estimates on this slide suggest that those cash flows are becoming more and more pressured for several of these hyperscalers. In other words. Some companies have historically required very little capital to expand and are becoming more capital intensive.

That’s not automatically a negative development, but… you know, major investments can lead to very valuable future growth. The open question is, is whether future returns will justify the current level of spending. It is just one reason we think that investors should look beyond the handful of companies that dominate the headline index. And so, really, when we think about the cash flows crossing over And on the next slide, we’re going to talk about it. They don’t have the cash flow to keep funding these capital expenditures, so what are they going to have to do? They’re going to have to find some financing.

And so, the scale of that investment, that AI investment, is really difficult, to overstate.

The estimates here suggest that AI-related capital requirements for about 2030 could run to several trillion dollars, substantially more than the cash flow available to fund them internally. So, you know, and again, those are projections. They’re not committed expenditures, but the figures, they will evolve, and we’ll get… we’ll know more as it happens, but still. they illustrate the fundamental change in financing needs. So, some capital may have to come from internally generated cash, some is gonna have to come from equity, you know, issuing equity or other financing structures.

But some, and you know, I think a lot of what’s gonna have to happen is that the AI built-out cannot just be an equity market story. You’re going to have to have a corporate bond issuance supply of securities for investors that they’re going to be asked to absorb. And the cost of funding, that is going to be across the market. As we build these portfolios, we want to consider that both companies making these investments, and that many of these businesses, they might benefit from them, depending on what kind of capital structure they’re going to take on. So, if you go back in that slide prior, these people that ran out of cash, they’re probably going to have to start issuing a ton of, investment-grade bonds To keep that capital expenditure going forward.

Okay, so the bond markets. We gotta shift there to some interest rate bond markets and what’s happening there. They have faced another difficult stretch as interest rates have risen. Inflation, again, we keep talking about it, remains very persistent. And investors are considering both government borrowing and new corporate financing needs. And you can, as per the last slide, there’s going to be a lot of corporate influx and supply.

The basic relationship for bonds is really important. When yields rise, the price of existing fixed-income bonds generally fall. And we have to remember that as we look at what’s happening in the market, and that creates a really disappointing short-term statement. your income statements for bond investors. But there’s also another side that has the same equation.

Higher yields improve the income available on newly purchased bonds. and on the proceeds that can be reinvested. So the question is how to weigh the near-term price volatility, which usually the value has gone down, against the improved prospective income, while keeping duration and credit risk aligned.

So that is the… that’s the tricky part to managing a bond portfolio, is… are those… those few things.

If we look at this bond market performance table.

The recent pressure is pretty clear. So, this is the investment grade munis, U.S. Ag investment grade corporate tips, high-yield munis, and high-yield corporates here, illustrated.

The, there are a lot of fixed-income sectors that are posting negative returns during the third quarter. Third quarter is the darker blue columns, the year-to-date is the lighter blue columns, and they… it happened in municipal markets, which, as well, were… they were all pretty, particularly weak. If you think about the municipal market, it had to absorb a significant amount of new issuance, and that really increased the competition for investors’ capital. So when supply rises, issuers may need to offer high yields, higher yields.

And existing bond prices adjust downward during that particular time. So municipal bonds are also exposed to many of the same interest rate factors affecting taxable bonds. For investors in those high tax brackets, however, the municipal bond stated yield is one part of the evaluation. Its tax equivalent yield is much more considerably… much more higher, depending on the investor’s actual, you know, federal and state circumstances, but that’s a higher, thing to assess.

Across bond sectors.

Current yields, they look, you know, a lot more competitive than they did at the lower rating period, but we really need to balance that newer higher income opportunity against the maturity, what is the credit quality, the liquidity and tax consequences and considerations that we need to think about.

So, after we’ve had really 3 positive years in the bond market, we are back in the red a little bit here due to the third quarter, when interest rates went up, bond values went down, we lost. we lost some… some, value there, and it kind of brings back those memories really quickly of 2022, when we… bonds precipitously, interest rates went up precipitously, and bonds fell real quick. But again, it’s helpful to step back and look at a much longer context of history and the bond market returns, because when the coupon income was higher.

It provided much more of a substantial cushion against price movements. During the unusually low yield years, you know, circling around in this area. That cushion was a lot thinner, so the annual return history on this slide reminds us that negative years do occur, but it also illustrates why starting yield matters so much to long-term outcomes. We can’t promise that bonds are going to produce positive returns over a particular period, ever, but we can say that higher income changes It changes the arithmetic for the investors who do hold through market fluctuations and match their investments their liquidity needs. And that’s a goal of ours here at CAISSA, too.

So… what… what does this feel about? If you’re thinking that it feels like a repeat of 22, we would say that, no, it more rhymes with it, but it doesn’t feel like a repeat. of 22, because it’s tempting to describe that sharply raising yields as another 22, but really, the starting conditions are very different. In 2022, which is the gold line, by the way, the rates rose pretty dramatically from an exceptionally low base. That left a lot of bond portfolios with substantial interest rate sensitivity and very, very little Coupon to absorb that shock, if you remember that last slide.

This year, which is the blue line.

It has also seen some higher yields and negative price effects. However, the magnitude of that aggregate bond market drawdown, which is this. Right here. On this slide, it has been considerably smaller than 2022, and the message is not that the bond market is free of risk, but that it is… that its seemingly similar events can produce very different outcomes depending on the starting yields, duration, your portfolio composition.

And the income available today, which is higher, provides an important distinction from the environment the investors experienced several years ago when the income was a lot lower, and again, that cushion was a lot thinner.

All right.

If we think about how we’re comparing our bonds and selective… selecting them.

The Bloomberg aggregate is a very common index that we compare all of our fixed income to.

And it’s good to know what it really comprises of, like, pre-2008 versus post-2008. And one line to note is these… this is the U.S. Treasury. It composed about 21% of the index back in 2008, and has risen almost doubled, or more than doubled, to it today. And so.

They become a much larger share of that benchmark, and it’s a signal of federal borrowing that is expanding. So, this has meaningful implications, though, for investors who just assume that a broad index is neutral representation of every fixed income opportunity, because it’s not.

The index weights reflect debt issuance, not necessarily a mix of risks and the income sources that best suits an investor. So corporate bonds, mortgage-backed securities, so this is corporates, MBSs, mortgage-backed security, and treasuries. and other securitized sectors, they have very distinct interest rate and credit characteristics. So, passive approaches, like a bond ag. can be very useful and cost-efficient, but this is an area where we also evaluate whether selective active management can really help balance that risk income and diversification. We are definitely active in our fixed income here at CAISSA, so that choice is very deliberate. Rather than driven by, by the benchmark.

Again, we talked about starting yields become very, very important. The yield is never a promise of total return, and it doesn’t remove any credit risk, but it’s a meaningful component of the return investors may receive over time. So when you start at 5.56, and you buy into that, it really does help.

So, in summary, before we get to the political part here in a little bit, but where does this all leave us? The economy is really resilient right now, but the foundation is getting a little bit uneven. Corporate profits are strong, enthusiasm for AI is bringing a major new wave of capital spending and finance… financing.

Bond prices, they’ve been really, really pressured, yet yields are more attracted than they’ve ever been for the recent past. Each of those developments contains both opportunity and as well as risk. So, as we look for the remainder of the year, another factor that’s going to capture our attention Here we are, we’re in midterm elections, so our aim is to, to very much say that political uncertainty is in context, and we don’t want to let headlines ever dictate long-term investment decisions here, but we can give a little bit of context around this as well.

Midterm elections, historical patterns. Historically, the president’s party has often lost congressional seats in a midterm election, and this slide really does illustrate that tendency across all sorts of administrations, along with the notable exceptions.

So, it’s really useful in context over history. Not a rule for forecasting or any individual election, but campaigns inevitably focus on issues that also matter for markets. We got inflation, affordability, unemployment, fiscal policies, and the outlook for any business investment. So, what makes… what we would really discourage is turning election probabilities into a portfolio strategy.

Markets reflect many influences beyond politics, and the political expectations can change very, very quickly. So a well-diversified investment approach should be robust enough to navigate different policy outcomes, rather than depend on, you know, any one particular winner.

If we want to summarize the congressional outlook here, we… there are a lot of things going on. The figures represent snapshots of expectations, not actual election results. I just have to say, these are consensus forecasts of what might be happening in the House and in the Senate. They can change as new information emerges and stuff like that, but we really do want to recognize the possibility with volatility.

Keep perspective on the limited predictive value of election forecasts, and return our attention to economic fundamentals and portfolio construction, because we have a lot of seats that are up for re-election.

And we have a really tight, tight seating in the Senate and tight seating in the House, so it’s going to be interesting.

So if we sum that up for some portfolio considerations, okay, let’s finish with three, decently connected observations. First, the economic growth has held up. However, labor market breadth and persistent inflation deserve a lot of attention.

Second, corporate balance sheets and profit margin remain really, really supportive, even as AI investment begins to change cash flow and funding needs for some of the largest companies.

Third, what we’re looking at is higher bond yields creating income opportunities. We have to be careful of our attention to duration and credit quality.

Then we really want to watch the index concentration. Those are all really important things.

And from a portfolio standpoint, we keep coming back to fundamentals.

We need to know what… need your… you need to know what your liquidity needs are. You may… you… we may need to sell something in the next 12 months, 12 to 24 months, and we want to understand where concentration is, and we don’t want to have to be backed into a corner on that, so… We want to also, as our portfolios are growing beyond the largest U.S. stops, we want to examine international, some small cap exposure.

And being very, very intentional and active about our fixed income.

None of that requires predicting, and none of that requires predicting either the Fed meetings or an election outcome, so those are things that we just don’t take into our consensus here. But it does require a very disciplined process that a long-term view, and a portfolio that connects each of your individual investor scopes. So that, in summary, is where we are on our quarterly considerations today, and we appreciate you taking some time to spend with us. Thank you for joining CAISSA for our fourth quarter. It’s our macro and markets update.