ECONOMIC AND MARKET REVIEW AND OUTLOOK, October 2026

“Happiness in intelligent people is the rarest thing I know.” – Ernest HeminwayCartoon image of student raising their hand in class.

Third Quarter Summary

Summer marked a wide variety of returns throughout financial markets.

  • Equities rose higher at a much tamer pace than the previous quarter, with considerable rotation among sectors and stocks.
  • Bonds sold off sharply as Treasury 10-year yields moved from 4.47% to 5.16%. Most global bond indices were similarly weak.
  • Commodities rose with copper and oil spiking. Gold also bounced, following an earlier spring swoon.

The Micro versus the Macro Environment

Ceasefire negotiations between the US and Iran in March disintegrated as major differences remain: The Administration wants to restore access to the Strait of Hormuz, its prewar norm, with free access for all countries. The Iranian Revolutionary Guard Corps (IRGC), which really holds the power in Iran, wants to charge tolls to ships passing through the waterway. Complicating matters further, the conflict has spread to the Arabian peninsula, as Houthi rebels in Yemen continue to disrupt the East-West pipeline and the Saudi economy.

Besides energy prices causing inflation to remain elevated, global government deficits have played a role in increasing bond yields. Most developed countries, including the US, Japan, the UK, France and Italy, have reported worsening fiscal outlooks, with little movement by legislative bodies towards remedying the situation. As a result, new Fed chief Kevin Warsh and voting board members have been forced to raise the short-term Federal Funds rate from 3.75 to 4.00%. More hikes are likely.

The tariff situation has calmed but unfortunately, not gone away. Companies have passed on some of the court-ordered rebates to their customers helping consumer spending. However, margins at many retailers continue to be squeezed by higher costs due to inflation.

Meanwhile, US economic growth is picking up due to AI-related capital spending contributing to pressure bonds. This is really a doubled-edged sword, since S&P earnings growth (excluding investment gains from the largest technology stocks) has increased over 30% in the second quarter and slated for similar levels in the third and fourth quarters. Overall, earnings have proven to be the most important driver of stock returns over time and the major reason why equity returns remain positive despite a falling bond market.

Although earnings growth has been robust, not all stocks are rallying. Narrow market participation has become a concern for many analysts. This phenomenon can last for some time, but at some point, participation must broaden to include more sectors and individual companies. If this doesn’t happen, stocks will be vulnerable to significant correction.

The narrowness of market advance is also due in part to the AI phenomenon, which continues to significantly impact the economy and society. Considerable debate over AI winners and losers has been ongoing, including an emerging doomsday scenario. At this stage, however, it appears to be exaggerated though many agree AI must be monitored carefully.

Additionally, issues such as soaring electricity prices from new data centers being built are factoring into the upcoming mid-term elections. The rate of inflation, especially with respect to gasoline and food prices, may lead to change in party control of the House of Representatives, as well as the US Senate in November.

Fourth Quarter Outlook

  • Volatility in the markets will continue with geopolitical events in the Middle East and mid-term election results factoring heavily.
  • The AI story will have an ongoing impact on the markets, with trends in capital spending and monetization (actual revenue generation) being closely watched by investors.
  • Energy prices will stay elevated, with stopgap measures to lower gasoline and diesel prices helping only at the margin. West Texas Intermediate (WTI) is now seen at $85-100 per barrel, with product prices (gasoline, diesel, jet fuel and heating oil) remaining under pressure due to refining bottlenecks.
  • As a result, inflation will remain sticky, although the employment outlook is stable. With that backdrop, we have changed our outlook and now see the Fed raising short-term rates at least once this year, with one to two 25 basis point (0.25%) increases likely by next spring.
  • Inflation and fiscal policy concerns in most developed economies should keep the 10-year Treasury yield trading between 5.00-5.35%.
  • Real GDP growth has firmed due to capex spending for AI and may trend around 3% for the second half of this year.
  • Corporate profits should continue to be strong, with 25-30% growth forecast through the end of the year.
  • At The Rice Partnership, our outlook remains constructive on equities, though somewhat tempered due to risks stated above. Diversification is key. Bond yields will be faced with headwinds that are well-known, yet they offer an alternative to stocks for the first time in 25 years. International investments away from the familiar AI trade should also provide a good buffer against future market volatility.

ECONOMIC AND MARKET REVIEW AND OUTLOOK, July 2026

“America innovates, China replicates, Europe regulates.” – Greg Ip, The Wall Street Journal

Second Quarter Recap
This past spring delivered the strongest equity returns since the Covid pandemic.

  • Larger capitalization indices (S&P 500, NASDAQ 100) along with their smaller cap brethren (Russell 2000) rose sharply.
  • Foreign market performance varied. Indices featuring heavy semiconductor weighing such as South Korea and Taiwan surged while other markets lagged due to lingering effects of higher oil prices.
  • Bond yields moved higher as oil prices drifted lower after spiking in March during the onset of Persian Gulf hostilities.
  • Commodities continued mixed. Copper rose higher while gold served as a source of funds for countries needing to finance oil purchases.

Major Market Influences: Iran, Surging Earnings and AI

The Iranian war continued to weigh on the market in the second quarter although its impact has waned. The situation remains fluid, however, as deal-breaking events seem to occur almost daily. So far, discussions between the US and Iran have led to a slight narrowing of differences, and a partial reopening of the Strait of Hormuz.

Currently, Iran has become less of a factor as first quarter earnings still contributed significantly to stock market returns. Analysts had been projecting low-teens earnings per share for the S&P 500, versus 8-10% historically. Surprisingly, profits surged about 27%, with AI contributing nearly half the boost, especially in the Information Technology, Communication Services and Industrial sectors.

The separation of winners and losers within the AI trade is becoming more granular. Software stocks which traded lower as a homogeneous group, have now separated into cybersecurity – a new beneficiary of AI – and enterprise software – which continues to lag. Although hardware remains a favorite place, many of these stocks (especially semiconductors) are extremely overbought and are pulling back.

Consumer Spending, the K-Shaped Economy and Tariffs

Consumer spending remained good so far this year despite higher oil and gasoline prices. Most of the increase was due to the upper half of income earners, although normally, they tend to spend more than the lower half especially due to the wealth effect from rising equity prices. Lower income consumers on the other hand, have been helped by refunds from the new tax bill. Tariff rebates from court cases also contributed to some degree.

As 2026 progresses, inflationary effects from tariffs should diminish with the current Average Effective Tariff Rate (AETR) at 11.8% expecting to drift lower to about 9.7%. That rate is still higher than the approximate 3% that prevailed before 2025 but much lower than the 28% rate after Liberation Day in April of last year.

Federal Reserve Policy – for Better or for Warsh

New Fed Chair Kevin Warsh has signaled a return to many of the policies existing before the Great Financial Crisis of 2008 (pre-GFC). These include minimal or no formal Fed guidance (the “dot plot”), fewer speeches by various Fed officials and a smaller Fed balance sheet.

Although the White House has clamored for lower interest rates, Warsh sounded hawkish in his concern for inflation to return to its 2% target. Some economists, however, are saying that the Fed Chair is merely trying to “jawbone” the markets into believing that rates may go higher without actually raising them. This would help establish credibility that the institution is following its mandate regarding price stability. The new inflation reports should shed more light on this matter. Meanwhile employment, the other half of the Fed’s mandate, remains fairly stable with a “no hire, no fire” situation continuing.

Second Half Outlook

  • The Iranian conflict will continue to affect the US economy at the margin. We predict that oil as measured by West Texas Intermediate (WTI) will settle in the $75-$85/barrel range. Our real GDP, inflation and unemployment outlook is largely unchanged at 1.5-2.0%, 3.0-3.5% and 4.1-4.4%, respectively.
  • Due to the inflationary impact of the Iran war, we now forecast no Federal Fund rate cuts this year. We also do not see any rate increases anytime soon. Ten-year Treasury yields should stay between 4.25-4.75%.
  • Remember that mid-term election years can be volatile. Expect a similar situation as elections draw closer.
  • Corporate earnings should continue to shine. Second quarter results will be similar to the first and 2026 profit growth at +20%. This will ultimately be a great support for equities, as we maintain our constructive view on the markets.

The Rice Partnership Named One of America’s Top Financial Advisory Firms of 2026 by Newsweek

FOR IMMEDIATE RELEASE

April 15, 2026

The Rice Partnership Named One of America’s Top Financial Advisory Firms of 2026 by Newsweek

Honolulu, Hawaii — The Rice Partnership, a leading independent financial advisory firm, has been recognized as one of America’s Top Financial Advisory Firms of 2026, a prestigious ranking published by Newsweek in partnership with Plant-A Insights Group. America’s Top Financial Advisory Firms highlights firms across the United States that exemplify excellence in financial advisory services based on rigorous evaluation criteria. Notably The Rice Partnership was the only firm headquartered in Hawaii to be included in the 2026 ranking.

This recognition reflects The Rice Partnership’s commitment to delivering high-quality, objective, and client-centric financial guidance. Firms honored on the list were evaluated on multiple key performance metrics including asset performance, client performance, adviser expertise, breadth of services, and management of conflicts of interest — representing the highest standards of fiduciary professionalism in the industry.

The America’s Top Financial Advisory Firms ranking considers a broad universe of SEC-registered advisory firms and identifies those that demonstrate outstanding performance and client service across a comprehensive set of criteria. The Rice Partnership joins a select group of firms nationwide recognized for their contributions to helping individuals, families, and institutions achieve long-term financial success.

About The Rice Partnership

The Rice Partnership is an independent investment advisory firm with over 30 years of experience serving a diverse client base across Hawaii and California. The firm takes an agile, highly personal approach to wealth management, grounded in deep expertise and collaboration. With offices in Honolulu, Maui, San Luis Obispo, and Paso Robles, The Rice Partnership is committed to helping clients navigate complex financial decisions through tailored strategies that align with their priorities and long-term objectives.

The Rice Partnership is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about The Rice Partnership, including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

Disclosure

The America’s Top Financial Advisory Firms 2026 award is presented by Newsweek in partnership with Plant-A Insights. Advisory firms were considered based on criteria including size, performance, conflicts of interest, services, and expertise. The Rice Partnership did not provide any sort of compensation to be considered for the award or for reprinting.

The Rice Partnership Market Update June 2026


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