How Did Stocks Finish the Quarter?
U.S. stocks, as measured by the Morningstar US Market Index, rose 1.69% in Q3, bringing the year-to-date return to 12.56%. Beneath that number, results diverged widely. Large companies, led by those most tied to the AI buildout, outpaced small ones by a wide margin, while rising rates weighed on heavily indebted smaller companies, whose debt is often floating rate. Energy led all sectors on higher oil prices, while utilities fared worst, in part because higher bond yields made their dividends look less compelling by comparison.
Why Did Bonds Have a Tough Quarter?
Stubbornly high inflation drove the Fed’s September rate hike, and yields climbed across the board. Because bond prices move opposite to yields, the Morningstar US Core Bond Index fell 3.44% for the quarter. There is an upside: higher yields mean new bonds now pay noticeably more income than those bought when rates were lower.
What’s Keeping Inflation Elevated?
Oil remains the central thread. The conflict with Iran had stretched into its eighth month by quarter-end, and oil prices had risen more than 50% for the year, adding to inflation. Economic growth has slowed from its pace of recent years, though industrial production kept growing into the summer. Looking further out, Morningstar expects inflation to resume falling after 2026 as the effects of oil and tariffs fade, noting that wage growth has already returned to levels consistent with the Fed’s inflation target.
What Does the 2027 COLA Mean for You?
Social Security announced a 3.6% cost-of-living adjustment for 2027, the largest since 2023. For the average beneficiary, that’s about $75 more per month starting in January. The net raise is likely to be smaller for retirees on Medicare, since Part B premiums are typically deducted from benefits and are projected to rise next year. The final premium figure is due later this fall. For high earners still working, the maximum earnings subject to Social Security payroll tax rises to $192,300 in 2027, up from $184,500.
What Does This Mean for Your Plan?
Through this year’s oil shock and rising rates, U.S. stocks still ended the quarter solidly higher for the year. Even so, quarters like this one are a reminder that a market average can hide very different results underneath.
The 10 largest companies made up more than a third of the broad U.S. market index at quarter-end, so even index funds that track the broad market lean heavily on a handful of names. If much of your net worth is also tied to employer stock or a few large technology names, it’s worth asking how much of your future rests on a single company or theme.
Markets entered the fourth quarter expecting one more Fed rate hike before year-end, so if you’re drawing retirement income, it’s a good time to revisit how your bonds and cash are positioned to cover near-term spending. And with bond prices down this year, some bond holdings in taxable accounts may offer tax-loss harvesting opportunities before December 31.
If this quarter has raised questions about your financial plan, we invite you to reach out so we can review it together.
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