LaSalle St. Monthly Mile Markers – October 2026

At a glance: The S&P 500 gained 2.25% in the third quarter and set a new all-time high, though leadership narrowed as the quarter progressed. Only four of the eleven S&P 500 sectors outperformed the broad index. Energy led all sectors, up 17.13%, as oil prices rebounded, followed by Technology, up 9.06%, Health Care, up 5.48%, and Communication Services, up 0.84%. Utilities led to the downside, down 11.23%, followed by Industrials, down 8.94%, and Real Estate, down 6.58%.

Bonds declined as Treasury yields rose at every maturity. Investment-grade corporate bonds returned -3.33% and high-yield bonds returned -1.83%, with losses driven mainly by rising interest rates rather than concerns about corporate credit.

International equities finished the quarter roughly flat. Both developed and emerging markets remain higher year to date and ahead of the S&P 500 over the past 12 months.

Key Takeaways:

• Oil and the Fed: Oil prices swung sharply through 2026, including a 22% rise in July, and the Federal Reserve raised its policy rate by 0.25% in September, its first increase since 2023. The rate outlook now depends on how oil prices, inflation, and growth develop into early 2027.

• Fundamentals: S&P 500 earnings grew nearly 30% over the past 12 months, and private-sector demand grew at a 4.6% annualized pace in the second quarter.

• Markets: The S&P 500 set a new all-time high, but leadership narrowed and bonds declined as Treasury yields rose. The first signs of strain appeared among the lowest-rated borrowers.

• Artificial intelligence (AI): In our view, AI is no longer a narrow technology theme. It now shapes business investment, the makeup of the S&P 500, and corporate bond issuance.

• Earnings quality: Accounting choices can allow reported AI-related profits to run ahead of the cash these investments generate. We focus on cash flow and concentration when evaluating the space.

• Fixed income: Treasury yields are near their highest levels in roughly two decades. Higher starting yields provide more cushion if rates rise and stronger total return potential if they fall, although heavy borrowing by the Treasury and the largest AI companies could keep pressure on yields, create downward pressure on bond prices.

• Outlook: Our near-term view has become more cautious. With weaker market breadth, wider credit spreads, and tighter financial conditions, the next three months may bring higher volatility and greater downside risk for equities.

Q3 in Review: Oil, Rates, and the Growing Weight of AI

Strong fundamentals helped markets absorb a volatile third quarter, while the AI buildout reached a scale that now touches the broader economy. This month’s Mile Marker reviews the forces that shaped the quarter, examines the AI buildout’s growing reach and the quality of the earnings it supports, considers what today’s higher yields mean for bond investors, and explains why our near-term outlook has become more cautious.

Oil and the Fed

Oil was a major driver of markets in the third quarter. Prices surged early in the year, fell sharply in May and June, then reversed higher, rising 22% in July alone. The larger story is how often the direction changed, driven largely by shifting expectations for Middle East supply and uncertainty around the Strait of Hormuz.

Oil matters well beyond the energy sector because it feeds into gasoline prices, transportation costs, and overall inflation. As prices rebounded in the third quarter and inflation remained above the Fed’s 2% target, the conversation shifted from how much the Fed could cut rates to whether it would need to raise them. After lowering its policy rate by a cumulative 1.75% beginning in September 2024 and then holding steady for nine months, the Fed raised rates by 0.25% in September. Markets currently expect further increases, although those expectations have shifted frequently this year.

Fundamentals Provided Support

Beneath the volatility, the economy held up. S&P 500 earnings grew nearly 30% over the past 12 months, one of the strongest stretches outside the recoveries that followed the 2008 financial crisis and the 2020 pandemic, and well above the single-digit growth of 2023 and 2024.

Underlying demand was also healthy. Headline GDP grew at a 2.2% annualized rate in the second quarter, down from 2.5% in the first. Final sales to private purchasers, a measure that excludes the more volatile trade, inventory, and government components of GDP to focus on consumer spending and business investment, grew at a 4.6% annualized rate, its strongest reading since early 2023. Households and businesses kept spending, which helped markets absorb higher oil prices, persistent inflation, and rising rates.

Equity Markets: A New High, Narrower Leadership

The S&P 500 gained 2.3% in the third quarter and set a new all-time high, though the path was uneven. Stocks rebounded in August, when the Russell 2000 (an index of smaller U.S. companies), the Dow Jones Industrial Average, and the equal-weight S&P 500 (which gives each company the same weight regardless of size) each reached new highs. Leadership then narrowed as Treasury yields climbed. For the quarter, the Nasdaq 100 gained 0.6%, the Dow fell 1.5%, and the Russell 2000 fell 6.9%, consistent with smaller companies’ greater sensitivity to borrowing costs.

Energy’s 17.2% gain reflected oil’s climb from about $70 a barrel in early July to more than $100 by mid-September, reversing the sector’s last-place finish in the second quarter. Several sectors that tend to be more sensitive to interest rates, including Utilities and Real Estate, lagged as yields rose. Developed and emerging international stocks finished the quarter roughly flat, but both remain higher year to date and ahead of the S&P 500 over the past 12 months.

Credit Markets: Rates, Not Credit, Drove Losses

Treasury yields rose at every maturity during the quarter. The 5-, 7-, and 10-year yields each rose more than 0.80%, and the 30-year yield rose about 0.65%. Longer-maturity bonds declined the most because their prices are more sensitive to changes in interest rates.

Corporate bonds also declined, though the losses reflected rising rates more than concerns about corporate credit. Investment-grade bonds, issued by companies with stronger credit ratings, returned -3.7%, while high-yield bonds, issued by companies with lower credit ratings, returned -1.8%. The difference largely reflects investment grade’s longer average maturity, which makes it more sensitive to rate changes. Credit spreads, the extra yield investors demand over Treasuries to hold corporate bonds, remained relatively tight for most of the quarter, a sign that investors remained comfortable with corporate fundamentals.

The clearest caution appeared among CCC-rated bonds, the lowest-quality tier of the high-yield market, where spreads widened while spreads on higher-quality bonds held steady. Broader high-yield spreads began to widen in late September. Higher financing costs tend to be felt first by the most vulnerable borrowers. That pattern is relevant to the feature below: an AI buildout increasingly funded with debt becomes more expensive as yields rise, and its weakest borrowers are likely to feel it first.

Profits on Paper Versus Cash in Hand

The AI buildout is now large enough to shape the broader economy and markets in three ways:

-Business investment. Spending on data center construction and computer equipment, a proxy for AI infrastructure, has risen from roughly $180 billion at the end of 2023 to nearly $470 billion today (SAAR).

-The stock market. Technology now represents nearly 40% of the S&P 500, up from about 34% at the end of 2025 and above its 2000 peak of about 33%. That makes the index more sensitive to AI-related results.

-Financing. The largest technology companies remain highly profitable, but the scale of their AI programs has driven a sharp increase in bond issuance after years in which new borrowing and repayments were roughly balanced.

Taken together, these trends mean AI capital spending is no longer a story confined to a few hyperscalers (the largest cloud computing providers, such as Microsoft, Amazon, Alphabet, and Meta). Relative to the size of the economy, the scale of the buildout, and the growing share funded with debt, now carry broader economic weight.

Profits on Paper Versus Cash in Hand

With S&P 500 earnings growing nearly 30%, the quality of those earnings deserves attention. When a company buys equipment, the cash leaves immediately. The cost reaches the income statement gradually through depreciation, spread over the equipment’s assumed useful life. During a rapid buildout, that timing gap allows reported earnings to run well ahead of free cash flow, the cash left over after capital spending. Distillate Capital estimates that hyperscaler depreciation ran at around 80% of capital spending for most of the past decade and is now below 40%.

The assumed useful life is a management estimate, and it affects reported profits:

• Microsoft depreciates its servers, which are mostly GPUs, over six years.
• Meta extended its server lives to five and a half years in 2025, reducing that year’s depreciation expense by about $2.9 billion.
• Amazon moved in the opposite direction, shortening the life of some servers to five years and citing the faster pace of AI development.

Investor Michael Burry has estimated that the largest buyers could understate depreciation by roughly $176 billion from 2026 through 2028 if their chips lose economic value within two to three years.3 Some analysts point out that older GPUs are still renting profitably, so the answer may fall between the two views.

Several other features can widen the gap. Facilities under construction are not depreciated until they go into service. Interest on construction debt can be added to the cost of the asset rather than expensed. Leased or jointly owned data centers may not appear in reported capital spending or debt at all.

None of these choices changes how much cash a company actually spends. They change when that cost appears in reported earnings, and they can delay recognition until a large write-down arrives.

Fixed Income: A Potentially Stronger Starting Point for Bond Investors

For investors who rely on bonds for income and stability, today’s starting point looks very different from much of the past two decades. As of September 30, the 10-year Treasury yielded 5.29% and the 30-year Treasury 5.64%, up from 4.18% and 4.84% at the end of 2025 and near their highest levels in roughly two decades (Figure 5). The broad U.S. investment-grade bond market, represented by the Bloomberg U.S. Aggregate Index, yielded 5.56%, and investment-grade corporate bonds yielded 6.04%.

As we discussed in our September Market Mile Markers, these levels largely reflect supply and demand in the Treasury market. The government must issue a heavy and growing volume of bills, notes, and bonds, and investors are demanding more compensation to hold long-dated debt. Policymakers have taken steps that lean against long-term yields. The Treasury has expanded its buybacks of longer-dated securities and has drawn on its cash balance at the Federal Reserve to help fund them, while the Fed has resumed buying short-term Treasury bills to rebuild bank reserves, supporting demand for Treasuries across the banking system. As we noted in September, these programs are small relative to total issuance and, on their own, are not large enough to change the underlying supply and demand balance.

The Trade-Off Between Income and Price Risk

What makes today’s levels notable is the balance between income and price risk. When yields are higher, the income a bond pays provides a larger cushion against price declines if rates rise further. Figure 5 illustrates this using J.P. Morgan’s estimates of one year total returns under three rate scenarios, assuming yields at every maturity move by the same amount. Of course these are simply estimates, however, the chart illustrates how the bond math works today – not a prediction.

-If yields fall 1%: the 10-year Treasury projected/estimate return would be about 13.1%, investment-grade corporate bonds about 12.4%, the U.S. Aggregate about 11.3%, and the 30-year Treasury about 20.3%.

-If yields are unchanged: most bond sector would earn roughly their projected/estimate starting yield, about 5% to 6%.

-If yields rise 1%: the projected/estimate U.S. Aggregate would return about -0.2% and the 10-year Treasury about -2.5%, while the 30-year Treasury, the most rate-sensitive, would decline about 9.0%.

For core bonds and the above estimates, the income earned at today’s yields could offset most of the price impact of a further 1% rise in rates, while a 1% decline could produce double-digit total returns. In our view, that asymmetry is considerably more favorable than it was when yields were near historic lows earlier in the decade.

The Trade-Off Between Income and Price Risk

Structurally, the supply pressures described above suggest yields could move higher still. However, there is historical precedent for policymakers capping long-term rates when government borrowing needs are large. From 1942 to 1951, during and after World War II, the Federal Reserve held long-term Treasury yields at or below 2.5% to help finance the government’s borrowing, a policy now known as yield curve control. The arrangement ended with the Treasury-Fed Accord of 1951, which restored the Fed’s independence in setting interest rates.

We are not predicting a return to yield curve control, and such a policy would carry its own risks, including the potential for higher inflation over time, which erodes the purchasing power of fixed bond payments. But if policymakers were to move further toward limiting long-term yields, investors who had secured today’s higher starting yields could stand to benefit on a total return basis, although inflation risks may still offset this benefit overtime.

How Bonds Compare with Stocks

The comparison with equities is also relevant. As described earlier, market breadth has weakened beneath the S&P 500’s record high. The Russell 2000, which fell 6.9% in the third quarter, ended September with only 48% of its constituents above their 200-day moving average, a widely followed measure of a market’s longer-term trend that averages closing prices over roughly the past 10 months of trading. An index trading below that level often reflects weakening momentum. With high-quality bonds yielding roughly 5% to 6% and equity leadership narrowing, the balance of risk and reward between the two asset classes has shifted toward bonds compared with much of the past decade, although this isn’t without risk as described below.

A Reason for Caution: Competition for Capital

Caution is still warranted. The largest AI companies, often called hyperscalers, are competing with the Treasury for investors’ capital, raising money not only in equity markets but increasingly in the bond market. J.P. Morgan estimates that hyperscaler borrowing in the investment-grade bond market rose from roughly $15 billion to $35 billion a year in 2021 through 2024 to nearly $95 billion in 2025, and forecasts about $200 billion in 2026 and more than $230 billion in 2027. By J.P. Morgan’s measure, that would lift these companies’ weight in the investment-grade index from 3.5% in 2025 to a projected 7.8% in 2027.

By traditional measures, these companies remain conservatively financed. Their net debt, total debt minus cash and investments, is close to zero relative to EBITDA, a measure of operating earnings before interest, taxes, depreciation, and amortization, compared with a median of 2.7 times for U.S. investment-grade companies. Including lease obligations, both leases already on the balance sheet and leases committed but not yet started, the ratio rises to about 1.3 times. That is still roughly half the investment-grade median, but it shows how much of the buildout’s financing sits in leases rather than in reported debt.

For bond investors, the implication cuts both ways. Heavy new supply from both the Treasury and AI-related borrowers could keep upward pressure on yields, particularly at longer maturities and in corporate credit, and a growing weight in a small group of issuers raises concentration within investment-grade indexes. That same supply is also part of the reason starting yields are as high as they are today.

Bonds are not without risk. Heavier-than-expected issuance, a renewed rise in inflation, or concerns about government finances could push yields higher, and longer-maturity bonds would feel that most. The scenario returns in Figure 5 are estimates that assume an even shift across the yield curve over one year, and actual results will differ. The relationship between stock and bond returns has also been less reliable in recent years, so bonds may not always offset equity declines.

Outlook

Near Term (Next 3 Months)

The S&P 500 remains near its all-time high, but conditions have deteriorated beneath the surface. Market breadth, the share of stocks participating in the market’s gains, has weakened. High-yield spreads have widened, and financial conditions, the overall ease of borrowing and access to capital, are tightening. Long-term Treasury yields sit near their highest levels in roughly two decades, and following the Fed’s September rate increase, its first since 2023, markets expect additional tightening. Offsetting this, AI and large-cap technology stocks continue to support the headline index, helping it remain resilient despite weakness elsewhere.

Taken together, these conditions point to a less favorable environment for risk assets. That does not mean the market will sell off immediately, and strong AI demand could continue to support the major indexes in the near term. However, with tighter financial conditions, weaker breadth, wider credit spreads, and the midterm elections approaching, our near-term view has become more cautious. Markets may be entering a more challenging period over the next three months, with higher volatility and greater downside risk for equities.

Longer Term (Next 12 Months)

Visibility beyond the next quarter is limited given how quickly conditions have shifted this year. Investor sentiment has moved rapidly in response to changing expectations for economic growth, inflation, Federal Reserve policy, and geopolitical developments. Despite those swings, major equity indexes remain near record highs.

Many wall street forecasters still expect a soft landing, meaning a slowdown in growth that avoids a recession, reflecting the economy’s resilience despite a global oil supply disruption. The more optimistic case increasingly rests on corporate earnings rather than expectations for lower interest rates, with AI-related investment the dominant driver of earnings expectations. In our view, the growth, inflation, monetary policy, fiscal policy, and liquidity cycles are expected to generally remain tailwinds through the second half of 2027. However, elevated valuations, unresolved tensions in the Middle East, and rising Treasury yields present downside risks. The next 12 months will likely depend on whether earnings growth meets expectations and whether inflation, energy prices, and yields remain contained.

Important Disclosures

Securities are offered through LaSalle St. Securities, LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors, LLC, a Registered Investment Advisor affiliated with LSS. This material has been prepared by LaSalle St. Securities, LLC and/or its affiliated registered investment adviser. As such, the firm and its affiliates have a financial interest in providing investment advisory and brokerage services. This creates a conflict of interest, as the firm or its affiliates may benefit financially if a reader chooses to engage their services. The views expressed may reflect the interests of the firm and its affiliates and should not be viewed or relied upon as independent or impartial research or analysis. This material is intended for a broad audience and does not consider the specific investment objectives, financial situation, or needs of any individual.

LaSalle St. Capital Management is a trade name of LaSalle St. Investment Advisors, LLC, a Registered Investment Advisor registered with the SEC. Advisory services are provided by LaSalle St. Investment Advisors, LLC

This document has been prepared solely for informational purposes only and is neither an offer to sell or solicitation to buy any security, nor should any content provided herein be construed as any type of recommendation or personalized investment advice for any security or investment strategy. The information published and opinions expressed are subject to change without notice. All opinions and estimates constitute the author’s judgment as of the date of this report, and do not represent the opinions of LaSalle St. Securities, management, employees, or financial advisors. While the information comes from sources believed to be reliable LaSalle St. Securities does not guarantee nor make any representation, either expressed or implied, that the information and opinions expressed are timely, accurate, complete or up to date. Nothing contained constitutes financial, legal, tax, or other advice, nor should any business, financial, investment or any other decisions be made solely based on content. Any investment strategy discussed herein may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Reliance upon any such information or opinion is at your own risk. LaSalle St. Securities’ clients are advised to consult with their financial advisor or registered representative prior to investing. With the exception of specified certificates of deposit, investments are NOT guaranteed by the FDIC.

The information and opinions provided herein are provided as general market commentary only and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the particular investments and circumstances of the recipient.

Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.

Performance information and source.

Past performance does not guarantee future results. The performance information shown herein is based on total returns with dividends reinvested and does not reflect the deduction of advisory and/or other fees normally incurred in the management of a portfolio.

Stock performance and fundamental data is based on the following instruments: SPDR S&P 500 ETF (SPY), SPDR Dow Jones ETF (DIA), iShares Russell 2000 ETF (IWM), iShares Russell 1000 Growth ETF (IWF), iShares Russell 1000 Value ETF (IWD), iShares MSCI EAFE ETF (EFA), iShares MSCI Emerging Markets ETF (EEM), Invesco QQQ Trust (QQQ).

Fixed Income performance is based on the following instruments: iShares Core U.S. Aggregate Bond ETF (AGG), iShares Investment Grade Corporate ETF (LQD), iShares National Muni Bond ETF (MUB), iShares High Yield Corporate ETF (HYG).

Fixed Income yields and key rates are based on the following instruments: Bloomberg US Aggregate, ICE BofA US Corporate, ICE BofA US Municipal Securities, ICE BofA US High Yield, 2 Year US Benchmark Bond, 10 Year US Benchmark Bond, 30 Year US Benchmark Bond, 30 Year US Fixed Mortgage Rate, US Prime Rate.

Commodity prices are based on the following instruments: Crude Oil WTI (NYM $/bbl), Gasoline Regular U.S. Gulf Coast ($/gal), Natural Gas (NYM $/mmbtu), Propane (NYM $/gal), Ethanol (CRB $/gallon), Gold (NYM $/ozt), Silver (NYM $/ozt), Copper NYMEX ($/lb), U.S. Midwest Domestic Hot-Rolled Coil Steel (NYM $/st), Corn (CBT $/bu), Soybeans (Chicago $/bu).

U.S. Style performance is based on the following instruments: iShares Russell 1000 Value ETF (IWD), SPDR S&P 500 ETF Trust (SPY), iShares Russell 1000 Growth ETF (IWF), iShares Russell Mid-Cap Value ETF (IWS), iShares Russell Midcap ETF (IWR), iShares Russell Mid-Cap Growth ETF (IWP), iShares Russell 2000 Value ETF (IWN), iShares Russell 2000 ETF (IWM), iShares Russell 2000 Growth ETF (IWO).

U.S. Sector performance is based on the following instruments: Consumer Discretionary Sector SPDR ETF (XLY), Consumer Staples Sector SPDR ETF (XLP), Energy Sector SPDR ETF (XLE), Financial Sector SPDR ETF (XLF), Health Care Sector SPDR ETF (XLV), Industrial Sector SPDR ETF (XLI), Materials Sector SPDR ETF (XLB), Technology Sector SPDR ETF (XLK), Communication Services Sector SPDR ETF (XLC), Utilities Sector SPDR ETF (XLU), Real Estate Sector SPDR ETF (XLRE).

This commentary reflects the author’s views as of October 2026, which are subject to change without notice. References to specific companies are for illustration only, and client portfolios may or may not hold the securities mentioned. Forecasts and estimates cited are those of third parties, are based on assumptions, and may not be realized.

Bond prices generally fall when interest rates rise, and lower-rated bonds carry greater credit risk. All investing involves risk, including the possible loss of principal. Private credit and other alternative investments involve additional risks, including illiquidity, limited transparency, and the use of leverage.

Sources

1. Q3 market, sector, and index return data: as of September 30, 2026.
2. Company disclosures: Microsoft fiscal second-quarter 2026 earnings call (January 2026); Meta Platforms and Amazon.com 2025 filings.
3. Michael Burry, November 2025, as reported by Yahoo Finance.
4. J.P. Morgan Asset Management, Guide to the Markets, U.S., “Fixed income market dynamics” (page 34) and “Hyperscalers in credit markets” (page 37), data as of September 30, 2026.
5. Federal Reserve History, “The Treasury-Fed Accord,” Federal Reserve Bank of Richmond.
   

The information herein was obtained from sources which LaSalle St. believes to be reliable, but we do not guarantee its accuracy. Neither the information, nor any opinions expressed, constitute a solicitation of the purchase or sale of any securities or related instruments.