Third Quarter 2026 Quarterly Market Recap

The first half of 2026 tested investors with an unusual sequence of shocks, including a war in the Middle East, a sharp spike in energy prices, re-accelerating inflation, and a leadership change at the Federal Reserve. Even still, U.S. equities finished the period higher. After a weaker first quarter, the S&P 500 rebounded to close the six months up roughly 10% on a total-return basis. The advance was concentrated in the second quarter, when the S&P 500 rose about 14.9%, its strongest quarter since 2020. In our view, the key point is not that risk has receded, but that corporate earnings and artificial-intelligence (AI) investment have, so far, been strong enough to absorb it. The defining macro event of the half was the war in Iran, which began in late February and disrupted shipping through the Strait of Hormuz. Roughly one-fifth of the world’s seaborne oil and liquefied natural gas moves through the Straight of Hormuz. This led to a period of pronounced commodity volatility throughout the quarter. Beyond the immediate price swings, the episode has reinforced a longer-term focus on energy security and supply-chain resilience. The energy spike fed directly into consumer prices throughout much of the first half of 2026. According to the Bureau of Labor Statistics, headline CPI rose 4.2% year over year in May (fastest pace since April 2023), driven largely by a 23.5% annual jump in energy costs. More reassuring was that core inflation, which excludes food and energy, was more contained at 2.9%, and June’s report showed headline inflation easing to 3.5% as energy prices fell. Against this backdrop, Kevin Warsh took over as Federal Reserve chair, succeeding Jerome Powell. At the June Federal Reserve meeting, the Fed held its policy rate at 3.50% to 3.75% but dropped its easing bias and struck a distinctly hawkish tone. For example, half of policymakers projected at least one rate increase before year-end, a reversal from the three cuts delivered late in 2025. Markets have re-priced accordingly, and the path of policy now looks like a two-sided risk rather than a steady easing cycle. The economic backdrop held up through most of the half, though signs of cooling emerged. Hiring was strong in the spring where May added 172,000 jobs, but June slowed to 57,000, and the prior two months were revised down by a combined 74,000. The unemployment rate stayed in a narrow 4.2% to 4.3% range. Consumer spending remained firm, but sentiment surveys weakened, with households citing worries about prices and job availability. On balance, the data describes an economy that is slowing gradually rather than stalling, which is a picture consistent with the Fed’s more cautious stance. Outlook:  The view for the remainder of 2026 is that the U.S. economy stays on firm footing. Growth continues to be underpinned by a powerful AI and infrastructure investment cycle, resilient consumer spending, and corporate earnings still expanding at a solid pace. This has been a combination that has allowed markets to endure a significant amount of shocks. We also acknowledge that there are a few key areas to watch. On the macro side, inflation has proven stickier than expected, driven largely by energy, and an unresolved Middle East conflict leaves the growth-inflation trade-off exposed to renewed supply concerns. On rates, a more hawkish Federal Reserve has shifted the policy path from steady easing toward a two-sided risk—with hikes now a possibility—while sizable fiscal deficits and heavy Treasury issuance keep upward pressure on long-term yields. Elsewhere, elevated equity valuations and heavy index concentration in a handful of AI-linked names leave less margin for disappointment. At Oliver Luxxe, our “Private Equity in the Public Marketplace ” investment philosophy is driven by identifying businesses with durable balance sheets, consistent cash flow generation, and attractive opportunities to reinvest capital for long-term growth. Across our equity strategies, we view market volatility as an opportunity rather than a risk. Periods of uncertainty allow us to upgrade portfolio quality and add to high-conviction positions at more attractive valuations.

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“Those who have knowledge don’t predict. Those who predict don’t have knowledge.” - Lao Tzu The first quarter of 2026 proved to be a turbulent period for financial markets. What began as a muted but broadly resilient market environment was upended in late February by the launch of Operation “Epic Fury”. The resulting energy supply shock and repricing of Federal Reserve rate expectations both led to meaningful cross-asset volatility. Major U.S. equity indices finished the quarter mostly lower. Prior to the outbreak of conflict with Iran on February 28th, markets were broadly positive, as the Russell 2000 was up +6.20%, the S&P 500 had gained +0.67%, and the Nasdaq was down -1.33%. The subsequent escalation reversed those moves and weighed on returns through quarter-end, with the S&P 500 finishing down -4.63%, the Dow down -3.58%, and the Nasdaq declining -7.11%. The notable exception was the Small-Cap Russell 2000, which edged higher by +0.58%. The Federal Reserve entered 2026 with a policy rate in the range of 3.50% to 3.75%, having cut rates a cumulative 175 basis points since September 2024. As recently as late February, bond markets were still pricing in more than 50 basis points of additional easing before year-end 2026. That expectation was reduced by quarter’s end, driven by a combination of potentially higher inflation, a geopolitically induced energy shock, and growing concern that the Fed’s hands were tied by competing pressures on its dual mandate.

The fourth quarter of 2025 capped off a resilient year for U.S. equities, with major indices posting positive returns amid moderating economic growth, persistent inflation pressures, and a cautious Federal Reserve. The S&P 500 advanced approximately 2.7% in Q4, contributing to a full-year gain of around 18%, driven largely by technology, AI, and communication services sectors. This represents the third consecutive year of double-digit gains. Despite headwinds from policy uncertainty and a projected economic slowdown, markets climbed a "wall of worry," with investors rebalancing portfolios and corporate optimism supporting rallies. Key risks heading into 2026 include potential policy shifts, below-trend GDP growth, and inflation drifting above the Fed's target. As we enter 2026, we believe the global economy should transition to a period of improved economic stability as the path of global trade become clearer. We believe the US equity market should experience measured progress amid a resilient yet evolving economic landscape. In 2026, US equity returns should be driven by fundamentals, particularly earnings growth, rather than further valuation multiple expansion, as current multiples are already above long-term averages. Importantly, corporate profit margins are set to improve in 2026, as companies benefit from operational efficiencies, AI productivity gains (albeit on low adoption rates), and moderating input costs. Additionally, financial conditions are expected to become easier than in early 2025 (see charts below).

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Get Comfortable Being Uncomfortable The second quarter of 2025 was a volatile period for global equity markets, reflecting significant uncertainty driven by the implementation of “Liberation Day” tariffs, mixed economic data, and weakening consumer sentiment. The S&P 500 ended the quarter with a modest positive YTD gain, recovering from the -18.9% decline from its February peak, triggered by the introduction of tariffs in April. Despite the market recovering from steep sell-offs, key economic data the Federal Reserve tracks have started to slow. The US labor market has remained resilient, as April’s jobs report added 177,000 nonfarm payrolls, surpassing estimates of 150,000. The unemployment rate moved up to 4.2% from 4.1% in March and wage growth moderated to +3.8% Y/Y growth, aligning with the Federal Reserve’s target of stable inflation. The labor market data has shown that companies have cut back on hiring but are not laying off workers at a material rate. As illustrated below, the monthly Job Openings and Labor Turnover Survey (JOLTS) has shown openings slowing and it has become harder for unemployed workers to find a new job .

Looking for Mispriced Opportunities in a Chaotic Market The global equity markets have recently experienced a significant period of volatility, shaped by a mix of macroeconomic developments and policy shifts. The sell-off in the S&P 500 was driven mostly by tariff-related concerns, though it managed a partial recovery toward the end of the quarter. Concerns around economic growth intensified, fueled by softer economic data and uncertainty surrounding the broader “Trump 2.0” policy framework. Survey data reflected this caution, as the March Michigan Consumer Sentiment Index fell to its lowest since November 2022, with one-year inflation expectations rising to 5% and five-year expectations hitting a 32-year high of 4.1%. The March Consumer Confidence Index also dropped to its lowest since January 2021, with the expectation component reaching a 12-year low. Manufacturing PMI swung back into contraction, with cost pressure rising at the sharpest pace in 23 months. All in, the S&P 500 declined -4.59% in 1Q25, which marked its weakest performance since 3Q22. The best-performing sectors were Energy (+9.30%), Healthcare (+6.08%) and Consumer Staples. Conversely, sectors that underperformed were Industrials (0.53%), Communication Services (-6.41%), and Technology (-12.79%). High single-stock concentration levels in the S&P 500 Index, Deep Seek Artificial Intelligence developments, and elevated valuation multiples resulted in the Magnificent Seven stocks underperforming the broader market. In fact, the Magnificent Seven collectively fell into bear market territory, as the group declined -15% during 1Q25 and is now down -20% since the peak in December 2024.

White Paper: The Importance of Reinvestment Opportunities in Driving Intrinsic Value Executive Summary At Oliver Luxxe, we believe that the intrinsic value of an asset stems from its ability to generate sustainable cash flows over time, discounted at an appropriate required rate of return. Central to this valuation framework are three key drivers: return on invested capital (ROIC) , reinvestment opportunities , and the quality and sustainability of earnings . Through our proprietary quantitative screening process and rigorous fundamental analysis, we seek to identify companies with these characteristics. Our "Private Equity in the Public Marketplace" approach integrates detailed financial modeling and competitive positioning analysis to uncover businesses with compelling reinvestment opportunities. This white paper explores the critical role of reinvestment opportunities in value creation, the metrics that illuminate a firm’s capacity to reinvest effectively, and how sustainable free cash flow acts as a catalyst for long-term growth. The Foundations of Intrinsic Value We believe the value of any asset is fundamentally tied to the present value of its future cash flow, discounted by a rate that reflects the risk and opportunity cost of capital. For equity investors, this translates into a focus on three interconnected pillars: Return on Invested Capital (ROIC): A measure of how efficiently a company allocates its capital to generate profits. Reinvestment Opportunities: The ability of a firm to deploy excess cash into high-return projects, whether through organic growth or inorganic strategies like mergers and acquisitions (M&A). Quality and Sustainability of Earnings: The reliability and resilience of a company’s earnings across economic cycles, providing the fuel for reinvestment. While our proprietary quantitative analysis helps us to systematically identify companies exhibiting these traits, the cornerstone of our process at Oliver Luxxe is detailed fundamental due diligence. This includes constructing discounted cash flow (DCF) models, performing comparable company analyses, and evaluating a firm’s competitive moat. By adopting a “private equity” mindset within the public markets, we aim to uncover businesses that not only generate strong returns but also possess the capacity to reinvest those returns at above-market rates. Reinvestment Opportunities: Organic and Inorganic Growth Reinvestment opportunities define a company’s ability to compound value over time. These opportunities fall into two categories: Organic Spending: Investments in existing operations, such as expanding production capacity, increasing R&D investments, enhancing product lines, or improving efficiency. Inorganic Spending: Accretive M&A that strengthens market position, diversifies revenue streams, or unlocks synergies. The success of reinvestment hinges on the availability of excess cash and management’s ability to deploy it at attractive rates of return. Consider a hypothetical example: A company generates $10.00 in revenue and $5.00 in net income (a 50% net margin). It converts 100% of its net income into free cash flow (FCF), yielding $5.00. Management reinvests $2.50 (a 50% reinvestment rate) at a ROIC of 30%, well above its WACC of 10%. This $2.50 grows to $3.00 in value, while the remaining $2.50 of FCF remains available for other uses, such as dividends, debt reduction, or further reinvestment. This "flywheel" effect, where high ROIC compounds through disciplined reinvestment, distinguishes exceptional businesses from average ones. However, the flywheel only spins if earnings are both high-quality and sustainable. The Oliver Luxxe Principles Our "Private Equity in the Public Marketplace" philosophy sets us apart by blending the rigor of private equity analysis with the liquidity and diversity of public markets. We prioritize companies with: High and sustainable ROIC relative to WACC. Robust reinvestment opportunities that may signal above-market returns. Durable earnings and free cash flow to fund those opportunities. By combining quantitative analysis with deep fundamental research, we seek to uncover undervalued businesses poised for long-term value creation. Our financial models project cash flows over multi-year horizons, while our competitive analysis seeks to ensure that reinvestment opportunities are defensible against industry rivals. Conclusion We believe reinvestment opportunities are a critical yet often overlooked driver of intrinsic value. Companies that can generate high returns on invested capital and are able to reinvest those returns at attractive rates can compound wealth beyond their peers. At Oliver Luxxe, our disciplined process seeks to identify these opportunities, leveraging both data-driven insights and hands-on analysis. In a market where short-term noise often overshadows long-term fundamentals, our focus on sustainable cash flows and reinvestment potential positions us—and our investors—for long-term success. Disclosures: All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio. This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.