Investment Perspectives: Third Quarter 2026

Midway through the year, the questions we hear most often have a familiar shape. Equity markets are near their highs; does that mean they are expensive? Inflation has come down but not gone away; does that mean rates stay where they are? The answers matter less than the way one arrives at them, and this letter is mostly about the way. Our views as of this writing follow, with the frameworks behind them.

The long view

Headlines are written on a daily cycle. Financial plans are built on a multi-decade one. The mismatch is the source of most of the anxiety we encounter, and the reason we anchor on two things when the news is loud: the length of the horizon and the breadth of the portfolio.

A long horizon changes what counts as risk. Over a few months, the main risk is that prices fall. Over twenty years, the main risk is that a portfolio fails to grow enough to fund the life it was built for, and the surest way to court that outcome is to hold too little of the assets that grow. Time does not eliminate the possibility of loss, but it changes the character of the risk.

Diversification is the second anchor. It exists because no one reliably knows in advance which asset class will lead in a given year. A diversified portfolio always contains something that is lagging, which is uncomfortable, and something that is working, which is the point. We think of it less as a way to win and more as a way to stay invested long enough for compounding to do its work.

Rates, inflation, and patience

We do not forecast the path of policy rates, and we are skeptical of anyone who claims to do so consistently. Instead we think about rates through three lenses.

The first is the real rate: the nominal policy rate less expected inflation. The real rate determines whether policy is restrictive or accommodative, and a nominal rate that looks high can be neutral if inflation is also high. The second is the term structure: where long-term yields sit relative to short-term ones, and what that implies about expectations for growth and inflation. The third is the transmission lag: policy changes take time to reach the real economy, and effects still in the pipeline can matter more than the most recent decision.

Inflation gets a similar treatment. We distinguish headline from core, monthly momentum from annual rates, and the categories that respond to policy from those that respond to weather and geopolitics. Progress on inflation has historically been uneven, with stretches of improvement interrupted by months that run hot. Patience here means allowing the trend time to reveal itself rather than reacting to each print as though it were the last word.

Equity markets near highs: what history does and does not tell us

Major U.S. equity indexes are near their highs as of this writing, and a natural instinct is to treat that as a warning. History offers less support for the instinct than one might expect. Markets spend a good deal of their time at or near record levels, because rising over time is what a market built on compounding earnings does. A new high, on its own, has not historically been a reliable signal of what comes next.

Two features of the current market deserve more attention than the level itself. The first is concentration. When a small number of very large companies account for an outsized share of an index's value and returns, the index becomes more dependent on their fortunes than its name suggests, and the diversification it provides can be thinner than it appears. We monitor concentration when we assess how much equity risk a portfolio carries.

The second is valuation. Measures such as the price investors pay for a dollar of earnings have historically said a great deal about returns over the following decade and very little about the following year. Elevated valuations are best understood as a reason to moderate long-run expectations, not as a timing tool. Markets can remain expensive for years, and cheap for years, and investors who wait for a valuation signal have often waited through the returns they hoped to capture.

None of this argues that highs are irrelevant. It argues that the right response is to check whether a portfolio still matches its owner's plan, not to react to the level.

Scenario thinking

We find it more useful to think in scenarios than in point forecasts. Three seem plausible enough to describe, with no prediction attached.

In the first, growth continues at a moderate pace, inflation drifts lower, and policy eases gradually. Diversified portfolios in this kind of environment have tended to benefit across equities and bonds, and the main challenge has been complacency.

In the second, growth slows more sharply than expected, the labor market weakens, and central banks respond. Equities have tended to struggle for a period in this kind of environment, while high-quality bonds have tended to provide ballast, which is why they are held.

In the third, inflation proves stickier than hoped, policy stays firmer for longer, and stocks and bonds face pressure at the same time. This is the most uncomfortable scenario for a traditional portfolio, and the one that argues most for diversification beyond the two main asset classes and for flexible spending plans.

We do not assign probabilities in a client letter. We build portfolios that can be lived with in all three.

Discipline over prediction

Because we do not know which scenario will unfold, our process leans on what works regardless.

Rebalancing is the first. Each allocation has a target and a band around it. When market moves push an allocation outside its band, we bring it back toward target; when they do not, we do nothing. The rule is deliberately mechanical: it reduces what has grown beyond its weight and restores what has fallen below it, without requiring a view on whether either move will continue.

Tax-aware coordination is the second. Where a portfolio spans accounts with different tax treatment, the location of assets, the timing of realizations, and the use of losses to offset gains can affect what a client keeps without changing the risk taken. We coordinate these decisions with clients' tax advisers rather than treating them as afterthoughts.

Cash-flow planning is the third. Knowing which dollars are needed in the next few years, and holding them in assets suited to that horizon, allows the rest of the portfolio to stay invested through a difficult quarter. Most decisions that damage long-term outcomes are made under the pressure of a near-term need. Planning for that need in advance removes the pressure.

Questions worth asking your advisor

• How much of my equity exposure sits in a small number of very large companies, and is that intentional?
• Which of the three scenarios would be hardest on my plan, and what in the portfolio addresses it?
• When was my portfolio last rebalanced, and what would trigger the next one?
• How many years of planned spending are held in assets that do not depend on equity markets?