Presenters: Lowell Pratt, CFA, Andy Pratt, CFA, CAIA, and Adam Newman, CFA, CFP®, MT, RICP®, CEPA
Here is the webinar recording from October 14, 2026. You can browse the topics discussed and main takeaways using the sections and time stamps below:
Introduction
- Q3 was quiet at the index level and busy underneath. US stocks gained 1.41% in a quarter that brought the Fed's first rate hike since 2023, renewed US-Iran conflict, and $ 100-a-barrel oil.
- Each quarter this year has had its own headline: the start of the Iran war in Q1, the tech earnings boom in Q2, and interest rates and the bond market in Q3. The team expects Q4 to be about the US midterms.
Q3 Market Performance Overview
- US stocks rose 1.41%, and international developed stocks rose 0.89%, both below their average quarter. Emerging markets slipped 0.37%.
- Bonds were the weak spot. The 10-year Treasury yield jumped 85 basis points to 5.29%, and the US bond market fell 3.51%.
- Earnings remain the main support for stocks. S&P 500 earnings grew 52% year over year in Q2, and analysts expect close to 30% growth in Q3, which would be the third straight quarter above 25%.
- Energy, tech, and health care were among the few sectors to finish higher. Rate-sensitive sectors like utilities, industrials, and real estate lagged because safer assets now pay much more than they did.
- Market concentration is extreme. As of October 9, Nvidia, Apple, Alphabet, Microsoft, and Amazon were worth a combined $21.6 trillion, the same as the bottom 434 companies in the S&P 500 put together. These companies are highly profitable and big for a reason, but the headline index can hide what is happening below the surface.
Long-Term Market Summary
- It was a strong year for stocks everywhere. Over the past 12 months, emerging markets returned 29.22%, international developed stocks 15.89%, and US stocks 15.13%.
- Over longer windows, US stocks have been outstanding and overseas markets are still catching up.
- Bonds have struggled. The US bond market lost 1.84% over the past year and 0.64% a year over the past five years.
The Fed's First Rate Hike Since 2023
- On September 16, in a unanimous 12-0 vote under its new chair, Kevin Warsh, the Fed raised its benchmark rate by a quarter point to a range of 3.75%-4.00%
- The Fed framed the hike as removing support rather than tightening. It essentially reverses the three rate cuts at the end of 2025, when inflation looked contained before the Iran war began in early 2026.
- The Fed sees this as a response to an energy shock, not a broad inflation problem or an overheating economy like 2022.
- The Fed meets again at the end of October. The team expects the next hike is more likely in December than before the US midterms.
- Stocks have barely reacted, unlike in 2022, because earnings growth has been so strong.
- Economic growth is solid. The team expects it to cool toward a more sustainable 2%-2.5% by the end of 2027, a normal slowdown rather than slamming on the brakes.
Where We Are in the Bull Market
- Clients keep asking how far along this bull market is. Since 1949, the average bull market has gained 192%.
- The current bull market, which began in October 2022, is up 118%, a little below the historical average. But no one can predict how high it will go or when it will end.
- Bull markets don't usually end from old age. The team watches earnings, economic conditions, and valuations, and right now low market-wide volatility and strong earnings momentum continue to support stocks despite the headlines.
What Rate Hikes Have Meant for Stocks
- Since 1958, the S&P 500 has averaged a 1.4% return in the 12 months after the start of a rate-hiking cycle.
- Results have varied widely, from an 18.3% gain after the 1958 cycle began to a 10.7% loss after the 2022 cycle began.
- Rate hikes are one of many forces that move stocks. The start of a hiking cycle has not been a reliable signal of where the market goes in the short run.
- This cycle also looks different from many earlier ones. It reverses the late-2025 cuts rather than responding to an overheating economy and runaway inflation.
Midterm Elections and Fourth-Quarter Returns
- Q3 of midterm years has often been weak, but not this year.
- Since 1950, the S&P 500 has averaged a 6.6% return in the fourth quarter of midterm years, the strongest of the four-year presidential cycle. That compares with 3.7% in a president's first year, 3.9% in the pre-election year, and 2.5% in election years.
- The pattern often comes in waves: some weakness through October, then a relief rally once the results are in.
- Markets have historically done better under a split Congress than under one party's control. With only 13 data points, that history isn't a basis for investment decisions, but markets do tend to welcome the certainty that comes with gridlock.
Higher Bond Yields, Better Forward Returns
- Rising rates have hurt bondholders. Over the past five years, the US bond market has returned slightly less than zero per year, well behind inflation.
- The upside is that bond math is fairly simple. Since 1999, the starting 10-year Treasury yield has closely tracked the annualized return investors actually earned over the following decade.
- That makes today's yields, around 5%, a much better starting point. 10 to 15 years ago, bonds yielded close to zero and served only as a safety net. Now they offer a real chance to beat inflation.
- The team is not buying 20- or 30-year bonds. Portfolios stay in short- and intermediate-maturity bonds, so they come due sooner and can be reinvested at prevailing rates.
Beyond Plain Vanilla Bonds
- Clients fall into two broad groups. Clients with 80-90% of their portfolio in stocks and clients who need 20-40% of their portfolio to be invested outside of stocks.
- Clients with 80-90% in stocks tend to hold a small bond allocation as a spending and liquidity bucket, and bonds continue to do that job well.
- Clients who need 20-40% of their portfolio outside stocks need more than bonds alone. For them, the team also uses two other asset classes.
- Liquid alternatives include market-neutral and managed futures strategies. These strategies can hold currencies and commodities, go long and short, and follow trends that don't depend on interest rates.
- Private credit means floating-rate loans to private companies, whose income rises with rates. Private companies are a growing share of the economy.
- Both behave differently from stocks and bonds and carry their own risks. Clients who want more diversification, want to step down in risk, or hold other assets that are mostly fixed income should talk with their advisor about options.
US Equity Strategy: Size and Style Performance
- Large growth won again. It gained 3.4% for the quarter, large value gained 0.9%, and every mid- and small-cap style category fell.
- Small-caps gave back their Q2 rally. Small growth fell 10.0%, and the Russell 2000 dropped 7.2%.
- Last quarter, the team said it needed more momentum before calling a true small-cap rally. Q3 showed that caution was warranted.
- Low market breadth is often framed as a negative. The team's view is that a manager's job is to respond to what the market is rewarding, not to what it wants to see.
- Targets are unchanged from July 1: 80% large-cap and 60% growth, across the firm's individual stock strategies and ETFs.
Growth vs. Value and Large vs. Small
- Over the long run, research points to a small-cap premium and a value premium. Both can disappear for long stretches, and this is one of them.
- The value-to-growth ratio sits near the low end of its range since 2003. The pro-value uptick flagged in July faded, and the line fell back below its 50-day and 200-day moving averages, so the growth tilt stays.
- The team does lean into value when the trend turns. 2022 was the most recent time, and that tilt paid off.
- Today's growth edge is mostly a large-cap story, driven by the biggest companies. In practice, that means leaning toward the Magnificent 7.
- Large-caps lead small and mid caps by 7.8% over the past three years. The gap narrowed mid-year, then widened again. The team wants a sustained move toward zero before shifting toward smaller companies.
Market Breadth Stalled
- There are two versions of the S&P 500. In the familiar cap-weighted version, the top 10 stocks make up about 40% of the index. In the equal-weight version, the same 10 stocks make up 2%.
- Over the long run, the equal-weight version has usually done better, because companies that reach the top 10 have tended to lag afterward. Today those same giants are growing fastest.
- In Q2, the average stock started catching up. In Q3, it fell behind again, and the equal-weight ratio is back near its lows. A sustained move above its 200-day moving average would signal that broadening is real.
- Only 25% of S&P 1500 stocks beat the index in September, down from 72% in June. If you had picked stocks at random, three out of four would have trailed the market.
- A market this narrow is a tough one for stock selection. Leaning into large growth has helped offset some of that.
Momentum and the Risk-On Rating
- Stock ratings drive the firm's stock selection. A second input is momentum, the tendency of stocks that are doing well to keep doing well and stocks that are doing poorly to keep doing poorly.
- From January 1, 2024 through June 30, 2026, momentum was a powerful driver of returns. In July, it reversed sharply, as stocks that had led for about two years turned around.
- Momentum rebounded in September and is back above its 200-day moving average, so this year's winners are leading again.
- After big market sell-offs, the stocks that lead the recovery look different: more price momentum, weaker profitability, and higher valuations. The firm runs a separate Risk On rating for those periods. It worked well after 2020, after the 2022 bear market, and after the Liberation Day tariff shock in April 2025.
- That model usually stays effective for 18 months to two years after a sell-off, and the rating is at the end of that window. As observed in September, Risk On buy-rated stocks lagged the market.
- The change: the team is de-emphasizing and turning off the Risk On rating. This may mark a shift back to a more normal market, where companies with attractive valuations, strong growth, and high profitability are rewarded.
Our Long-Short Strategy
- A long-short portfolio stays 100% net long the stock market. On a $1 million portfolio, the firm uses margin to buy an extra $300,000 of stocks it rates well and sells short $300,000 of stocks it rates poorly. The two offset, so overall market exposure doesn't rise.
- As of September 16, Schwab requires $10 million, up from $1 million, to open a new long-short account. Existing accounts are not affected.
- Schwab isn't the firm's only custodian. Through Interactive Brokers, which specializes in long-short strategies, the firm can run them for accounts as small as $250,000.
- The first reason to use one is the chance for additional return. The typical stock is 0.1% of the market or less, so a long-only portfolio can barely underweight a stock it dislikes. Shorting lets the team act on bearish views directly.
- The second reason is taxes. Short positions tend to generate capital losses, which can offset gains from a pending business sale, a concentrated stock position like Nvidia or SpaceX, appreciated real estate, or tax-inefficient strategies outside the firm's management.
- The strategy applies only to taxable accounts. The firm has run long-short strategies since 2017.
- Short selling and margin involve additional risks, including losses that can exceed the amount invested, and tax benefits depend on individual circumstances. Clients interested in the strategy should talk with their advisor to see if it is a fit for them.
Q&A
Questions addressed in the Q&A session included:
- If the US midterms produce a divided government, how will that affect the markets?
- With more candidates holding extreme views on both sides, could that affect the economy and the stock market?
- Are there any tax or legislative changes we should be watching?
- Will the ongoing war with Iran, and the inflation that has come with it, affect the market?
- What are your thoughts on long-term Treasury yields above 5%, good and bad?
- Do higher yields change how investors should think about investing for income?
- Is investing in AI another dot-com bubble?
- Stocks are near all-time highs while gas and diesel prices and inflation are up. Should we be panicking about the markets?
For a deeper look at the election, Andy and Adam cover it in an upcoming episode of the Long Story Short podcast.
If you have questions like these or wish to discuss your financial planning needs, Schedule a Meeting with us.
Past performance is not a guarantee of future results. Indices are not available for direct investment. This presentation is for informational purposes only and does not constitute investment advice.
130/30 Disclosures:
The primary risks associated with this strategy include the following:
-Unlimited risk of loss from short selling. Unlike long positions, where losses are limited to the initial investment, the price of a stock sold short can rise indefinitely, potentially causing rapid and unlimited losses. The Burney Company employs various measures to reduce this risk, but losses can still occur.
- Leverage and margin risk. Long-short strategies use margin to boost exposure, increasing both potential gains and losses. A decline in stock value can trigger margin calls.
- Tracking error and portfolio risk. Tracking error can arise from the performance of our stock selection model. Success depends on the portfolio manager’s ability to choose both winning longs and losing shorts. Poor timing or incorrect analysis can lead to losses on either side. Additionally, in volatile market conditions, the assumed hedge between long and short positions may break down, leaving the portfolio vulnerable to broad market downturns.
- Costs and tax implications. This portfolio incurs additional expenses, including margin charges, as detailed in the margin agreement. Additionally, closing out positions can lead to significant short-term capital gains tax liabilities that may not be fully offset.
- Liquidity risks. Some short positions may become difficult to borrow or cover, particularly in volatile markets, making unwinding difficult.
The strategy is intended for sophisticated investors with aggressive or moderately aggressive risk tolerances who understand the strategy's complexity and the unlimited loss potential of short selling.