Market leadership reversed in the third quarter, reinforcing the value of diversification and patience. Stocks that performed best in the first half of the year have been among the weakest in Q3—and vice versa.

Within the Russell 1000, the 304 stocks that gained more than 20% in the first half are down 6.9% in Q3. Meanwhile, the 144 stocks that fell more than 20% in the first half are up 8.8% in Q3.

Market Leadership Is Broadening

This reversal is a reminder not to chase recent winners—and to remain patient with strong companies that have yet to perform. AI-related companies, data-center infrastructure, and memory stocks led in the first half but may have become overvalued.

Many of those names pulled back in Q3. At the same time, large-cap value, mid-cap, small-cap, and other areas of the market began to catch up.

Year to date, the S&P 500 is up 11.46%, the Dow is up 5.41%, and international markets… iShares MSCI EAFE Index is up 7.15%. It has been a solid year, but inflation and the bond market may be signaling a shift.

Why We Hold More Cash

At Campus, we typically use limited bond exposure. Our traditional model combines individual stocks—good businesses held for the long term—with a larger allocation to cash. Cash can lose purchasing power when it trails inflation, but we hold it for two important reasons:

• Risk management and flexibility. If a portfolio with 70% stocks and 30% cash performs as well as one with 100% stock exposure, it can achieve comparable returns with roughly two-thirds of the risk. When stocks or bonds go on sale, that cash also lets us add positions at attractive prices and pursue additional alpha as they recover.
• Support for life and investment goals. A larger cash allocation gives financial-planning clients flexibility to fund a second home, an outside venture or private investment, a new business, or financial support for their children.

A Turning Point in Bonds

Now to the bond market. The Federal Reserve recently raised interest rates for the first time in many years to slow the economy and fight inflation. The bond market had already begun tightening conditions on its own and has moved much further since that decision.

A global bond-market selloff is pushing government-debt yields to multidecade highs as fiscal deficits expand. Because bond prices move inversely to yields, rising yields have reduced bond values and hurt portfolios with large bond allocations.

The benchmark 10-year yield traded as high as 5.33% this week, near a 24-year high. Rates could rise further and bond prices could fall more. Even so, I believe this may be one of the best debt-buying opportunities in years—especially coming from a portfolio manager who rarely uses much debt.

For the first time in many years, we are adding bonds to many portfolios. The iShares Core U.S. Aggregate Bond Index is down about 6% this year, while its yield has risen to 4.29%. The Nuveen Municipal Value Fund (NUV) is down 9.55% year to date, bringing its tax-free yield to 4.75%. These are only examples; depending on the appropriate asset allocation, investors may also consider Treasuries, individual corporate or municipal bonds, fixed-income ETFs, and other options.

Where We See Opportunity

We still prefer stocks to most asset classes and will continue looking for opportunities during market pullbacks. We also work closely with Kara Murphy at Kestra, and I agree with several areas she has highlighted.

Kara Murphy, CFA has suggested “favoring short-duration Treasuries, diversifying into Europe and Japan, remaining selective in financials, and looking to small- and mid-cap companies for broader AI-driven productivity gains. Strong growth could keep rates and inflation elevated for longer”.

Encouragingly, the recent rise in yields appears to reflect growth rather than inflation fears, which may reduce the negative impact on stocks.

AI Investment: Scale and Risk

In the past, I often discussed the “Magnificent Seven.” Today, it is difficult to discuss the economy or investing without addressing AI. The scale of current spending suggests the beginning of another industrial revolution. The following Wall Street Journal figures illustrate the magnitude of that investment:

“The AI build-out is on track to become the biggest economic bet in U.S. history, dwarfing the investments made to fund other huge U.S. infrastructure projects such as the railroads, the highway system and the plumbing for the internet. Total investment in data centers and related artificial-intelligence infrastructure is projected to total $10.3 trillion from 2025 to 2032, according to new estimates by economist Stijn van Nieuwerburgh published by the Brookings Institution. That is a staggering 3.6% of gross domestic product a year, on average. Never before has the U.S. economy been so dependent on the build-out of a single industry. The investment is transforming every corner of the economy, creating hundreds of thousands of jobs and minting new billionaires. It is also creating significant risk, as much of it is built on debt. An abrupt slowdown could ignite shock waves throughout the U.S. economy.”

—Konrad Putzier and Justin Lahart, The Wall Street Journal, Sept. 23, 2026

For comparison, the previous peak was railroad investment from 1870 to 1890, at 2.24% of GDP.

Staying Focused on Long-Term Goals

This rapid change will keep us focused as financial planners and portfolio managers. Our goal is to help you and your family navigate this evolving environment while staying aligned with your financial and life goals.

As always, please reach out with questions or to schedule a meeting or conversation.

Best,

Bill, Jason, and Julia