Key Takeaways
A client recently told me his kids vetoed going out for pizza.
Not because they weren’t hungry.
Because pizza had gotten too expensive.
Kids. Turning down pizza. Because of valuation.
Apparently, even they are doing capital allocation now.
That may be the clearest inflation indicator I have heard all year.
It also describes what began happening across financial markets during the third quarter.
Stocks barely moved. Bond prices fell. Interest rates rose.
Yet corporate earnings kept growing.
The businesses did not suddenly become worse. Investors simply became less willing to pay any price for them.
Last quarter, we asked:
In Q3, markets started asking the same question.
Earnings Up. Valuations Down.
After a powerful first half, global equity markets largely treaded water during Q3.
The S&P 500 returned 2.3%. Developed international stocks rose approximately 0.9%, emerging markets declined 0.4%, and U.S. small-cap stocks fell 7.2% as higher rates weighed more heavily on smaller businesses. Broad U.S. bonds also struggled, falling approximately 3.4%.[1]
Corporate results remained strong. S&P 500 earnings grew strongly in Q2, and as of mid-October, FactSet estimates third-quarter S&P 500 earnings growth near 29% year over year.
But the larger point matters more than any one statistic:
Earnings grew much faster than stock prices.
The S&P 500’s forward price-to-earnings ratio ended the quarter at approximately 19 times earnings - below its five-year average and almost exactly in line with its 10-year average.[2]
That does not make the market cheap. But it does make valuations more reasonable.
A great business can still be a poor investment if its price assumes everything goes right. A less exciting business can become attractive when enough pessimism is already reflected in the price.
Price matters in both directions.
Capital Has Competition Again
The biggest market development of the quarter may not have happened in stocks at all.
The 10-year U.S. Treasury yield rose from 4.44% at the end of June to 5.29% at the end of September.[3]
Judging by some of the reaction, you might think a 5% Treasury yield is a new financial phenomenon.
It isn’t.
The long-term annual average since 1962 is approximately 5.8% - still above the quarter-end level. What was unusual was the decade-plus following the financial crisis, when investors became accustomed to extremely low rates and safe assets offered very little return.[3][4]
That changed how capital was allocated.
When cash paid almost nothing and high-quality bonds offered little income, investors were pushed toward greater risk.
Today, a Treasury yielding around 5% creates a legitimate alternative.
Stocks, real estate, private investments, and businesses contemplating major projects all have to compete with that return.
Five percent is not a crisis. It is a reminder that money has a price again.
Still, the direction of rates deserves attention.
Part of the rise reflects resilience. The U.S. economy grew at a 2.2% annualized rate in Q2, and the Atlanta Fed’s GDPNow model estimated Q3 growth at 3.5% as of October 20. Corporate earnings also remained strong.[5][6]
But higher yields are not only a growth story.
Renewed inflation pressures, large government borrowing needs, and extraordinary demand for AI infrastructure are all competing for capital. J.P. Morgan estimates that the five largest U.S. technology and cloud companies will spend approximately $697 billion in 2026.[7]
The Treasury needs capital. Technology companies need capital. Data centers and utilities need capital. Businesses and homebuyers need capital.
When everyone wants more capital at the same time, its price can rise.
That does not make this 2008. The companies leading the AI buildout are generally highly profitable, and the global banking system remains broadly resilient.[8]
But money is not free.
AI investment is becoming more capital intensive and increasingly dependent on outside financing. The larger the investment, the more important the eventual return becomes.[7][8]
AI Can Work. The Investment Still Has to Work.
A client recently asked whether growing concerns around AI infrastructure meant we might be approaching a cliff - and whether it was time to change strategy.
It was a fair question.
We have been structurally underweight technology for more than a year. We have also repeatedly questioned whether every dollar being poured into AI will ultimately earn an acceptable return.
But recognizing a risk does not automatically tell you what to do next.
Over the past year, valuations across several large technology businesses have fallen while earnings continued growing. The concerns investors are discussing today are also far better understood - and more widely reflected in market prices - than they were a year ago.
That does not mean the risk disappeared. It means some of it may already be priced in.
So the question is not simply:
What could go wrong?
It is also:
How much of it is already priced in?
That distinction matters even more for investors still accumulating wealth, which describes many of the high-earning professionals we serve.
A market pullback is not automatically bad news when you are still adding money. Lower prices allow future savings to purchase more.
Creating wealth has far more to do with savings, behavior, and discipline than perfectly predicting the next correction.
Which is why, after answering the client’s AI question, my more practical question back was:
When is the next contribution going in?
What We Changed
Higher rates and improving valuations changed the opportunity set.
We adjusted accordingly.
In portfolios that own fixed income, we closed our roughly 2%-3% underweight and added to both shorter- and longer-duration bonds.
Bond prices fell as yields rose. But the other side of lower prices is higher prospective income from new purchases.
Fixed income earned a larger place in the lineup.
Within equities, we reduced developed international exposure by approximately three percentage points across portfolios, primarily through the elimination of a developed-market small-cap strategy.
Europe still contains many excellent businesses. But the European Central Bank projects only 0.9% euro-area growth in 2026, while the International Monetary Fund continues to identify weak productivity and structural constraints as obstacles to stronger medium-term growth.[9][10]
We also reduced approximately two percentage points from U.S. small caps.
Higher financing costs tend to matter more for smaller companies, which generally have less access to capital and less flexibility than their larger counterparts.
Importantly, we did not sell the small-cap strategy that lagged more than expected earlier in the year.
We met with the manager. We reviewed what went wrong. They acknowledged mistakes. And we concluded that the underlying process remained intact.
Scrutiny does not always lead to selling.
Sometimes it confirms why an investment still belongs.
We redirected capital toward broad U.S. large- and mid-cap equities, where valuations had become more attractive.
That increased technology exposure modestly - approximately one percentage point - but portfolios remain meaningfully underweight technology relative to broad market indexes.
That is not a reversal of our concerns.
It is an acknowledgment that price matters in both directions.
We also added approximately 2%-3% to broad emerging-market exposure after recent weakness. Semiconductor and memory-related companies represent meaningful weights in emerging-market indexes, and their recent pullbacks improved the prospective risk-reward, in our view.[11]
Our consumer discretionary overweight remains approximately 4%-5% above the global benchmark. The rationale remains similar to last quarter: many underlying businesses continue to look reasonably valued despite consumer caution.
We are not waiting for every headline to improve.
By then, prices may already reflect it.
Actual client allocations vary based on individual objectives, risk tolerance, tax considerations, financial circumstances, and other factors.
Cautious Is Not Necessarily Bad
Investor sentiment cooled during the quarter.
At quarter-end, bearish investors in the AAII Investor Sentiment Survey outnumbered bullish investors by approximately 12 percentage points. Historically, bullish investors have outnumbered bearish investors by roughly 6.5 points.[12]
That puts the current bull-bear spread approximately 18 percentage points below its historical norm.
That does not tell us where markets go next, and I would never make a portfolio decision based on one sentiment survey.
But it certainly does not suggest widespread euphoria.
Investors are worried about interest rates, inflation, AI spending, geopolitics, and the consumer.
Those risks are real. They are also widely discussed.
From a contrarian perspective, we view current sentiment as neutral to modestly positive - not a reason to retreat.
What We Are Watching
As we move through the fourth quarter, three things deserve particular attention.
First, interest rates. A strong economy can support higher rates. A continued rapid increase driven by inflation or concerns about government borrowing would be more problematic.
Second, earnings and AI returns. Companies are producing impressive earnings growth today. The question is whether cash flow and productivity can eventually justify the enormous amount of capital being invested in AI.
Third, the consumer. Higher borrowing costs and continued inflation do not affect everyone equally. We are watching employment, spending, credit conditions, and whether more consumers decide that even pizza costs too much.
Make Your Money Earn Its Place
Which brings me to the World Series.
Using Spotrac’s total-payroll measure, the Milwaukee Brewers ranked 19th in Major League Baseball. The Tampa Bay Rays ranked 28th. They are the last two teams standing.[13][14]
Meanwhile, my Mets had baseball’s highest payroll and watched October from home.[14]
Again.
More money helps.
Knowing what to do with it matters more.
The biggest name. The hottest trend. The shiny object everyone is chasing.
None automatically deserves your next dollar.
Every investment should answer a few questions:
What am I paying?
What could go right?
What could go wrong?
Is there a better use for this money?
That is capital allocation.
You can spend a fortune assembling impressive pieces that do not work well together.
Or you can build a lineup where every player - and every dollar - has a job.
That is what higher interest rates are forcing investors to do again.
Fixed income. Technology. Small caps. International stocks. Emerging markets.
Every dollar has to compete for its place in the portfolio.
Shiny objects get the headlines.
Make your money earn its place in the lineup.
Building Wealth - and a World Series team - is By Choice, Not Chance.
If this quarter made you question whether every dollar is earning its proper place in your lineup, that is a conversation worth having.
Truly Yours,
Jason Blumstein, CFA
CEO & Founder
Julius Wealth Advisors, LLC
Disclosures:
This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. Past performance does not guarantee any future results. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.Sources
Numbered references correspond to the superscript citations in the commentary. Source titles below are clickable links.
[1] LPL Research, Market Insight Quarterly | Q3 2026 Quarterly total-return data through September 30, 2026.
[2] FactSet, Earnings Insight - October 16, 2026 Q3 earnings-growth estimate and forward P/E comparisons.
[3] Federal Reserve Bank of St. Louis, FRED - 10-Year Treasury Constant Maturity Rate Daily 10-year U.S. Treasury yield data.
[4] YCharts - 10-Year Treasury Rate by Year Historical annual Treasury-yield data.
[5] U.S. Bureau of Economic Analysis - GDP, Second Quarter 2026, Third Estimate Official Q2 2026 U.S. GDP release.
[6] Federal Reserve Bank of Atlanta - GDPNow Current and Past Commentaries Q3 2026 GDPNow estimate as of October 20, 2026.
[7] J.P. Morgan - Financing AI Infrastructure and U.S. Data Centers Hyperscaler capital-spending estimate and AI financing structures.
[8] International Monetary Fund - Global Financial Stability Report, October 2026 Banking-system resilience and financial-stability risks related to AI, leverage, and private credit.
[9] European Central Bank - September 2026 Euro-Area Macroeconomic Projections Euro-area 2026 growth projection.
[10] International Monetary Fund - Regional Economic Outlook for Europe, October 2026 Europe’s productivity and structural growth constraints.
[11] MSCI - Emerging Markets Index Factsheet, September 30, 2026 Index composition and leading semiconductor and memory-company weights.
[12] AAII - Investor Sentiment Survey, October 1, 2026 Bullish, neutral, bearish, and historical sentiment readings.
[13] MLB - 2026 Playoff and World Series Schedule 2026 World Series matchup and schedule.
[14] Spotrac - 2026 MLB Team Payroll Tracker Team total-payroll rankings, including the Brewers, Rays, and Mets.