The U.S. economy navigated a volatile third quarter marked by global tensions, elevated inflation pressures, and a moderating labor market. While economic activity remained positive, growth continued at a restrained pace as households and businesses adjusted to higher prices, trade uncertainty, and the economic effects of the Persian Gulf conflict. Preliminary estimates suggest that real (inflation-adjusted) Gross Domestic Product (GDP) expanded at an annualized rate of approximately 1.5% during the third quarter, reflecting a slight slowing from the second quarter but steady growth nonetheless.
Labor market conditions softened further during the quarter, although widespread deterioration was avoided. Nonfarm payroll employment increased by 29,000 jobs in September, substantially below expectations and indicative of slower hiring activity across many sectors. The unemployment rose slightly to 4.2%. Long-term unemployment, those actively seeking employment for more than 26 weeks, continued to trend higher, reinforcing evidence that significant structural shifts are underway in the labor market. The labor force participation rate rose slightly to 61.8%, but significantly below levels seen in prior years. This reflects the ongoing demographic shifts taking place in the United States, most notable the retirement of the Baby Boomer generation. Average hourly earnings increased 3.0% year-over-year, suggesting that wages remained strong, but slowed to their lowest annual gain since mid-2021.
Inflation reasserted its position as a central concern during the third quarter. Rising energy costs associated with the Persian Gulf conflict pushed consumer prices higher through much of the summer. As a result, the Consumer Price Index jumped to 3.7% year-over-year in September. Although core inflation (ex-food and energy) showed underlying resilience, 2.6% year-over-year, price increases still remain well above the Federal Reserve’s stated 2% objective. Consequently, the Federal Open Market Committee, under its new chair, Kevin Warsh, implemented its first interest rate hike in three years during its September meeting, raising the benchmark federal funds rate by 25 basis points to a target range of approximately 3.75%-4.00% in their effort to achieve their price stability mandate. Updated Federal Reserve projections and meeting minutes reflected expectations that further interest rate increases may be likely before the end of the year amid continued inflation concerns.
Consumer confidence remained surprisingly subdued throughout the third quarter. Main indices hovered near notable lows, heavily impacted by rising energy prices and the ongoing conflict in the Persian Gulf. Household expectations remained fragile, sitting significantly below the threshold typically associated with robust economic expansion. Consumers continued to express concerns regarding inflation, employment prospects, geopolitical instability, political acrimony, and future interest rates. As a result, household sentiment remained cautious despite actual economic data that remains objectively healthy.
Global economic conditions remained uneven and highly dependent on global conflict developments. The most significant event during the quarter was the escalation of military conflict in the Middle East, which generated disruptions in energy markets and renewed concerns regarding global supply chains. The International Monetary Fund noted that rising energy prices and high interest rates have become a meaningful headwind to global expansion, though global growth managed to reach a 3% quarter-on-quarter annualized pace. At the same time, continued investment in artificial intelligence, technology infrastructure, and digital transformation provided an important source of support for economic activity in the United States and several Asian economies. The question being as to whether or not these significant capital expenditures will realize the lofty projected returns that are expected.
Looking ahead to the remainder of 2026, the U.S. economy faces a challenging balance between moderating growth and persistent inflationary pressures. The Federal Reserve is expected to proceed cautiously as it evaluates whether recent inflation spikes prove to be temporary or require further monetary tightening. Ongoing global conflict risks, labor market cooling, elevated public debt levels, political discord, and uncertainty surrounding global trade conditions remain important downside risks. Nevertheless, continued business investment, particularly in technology and artificial intelligence, may help support growth. Under these conditions, investors should remain attentive to evolving economic data, maintain diversification across asset classes and regions, and stay disciplined amid what is likely to remain an environment of elevated economic and market volatility.
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The third quarter began with continued market volatility, carrying over from the previous quarter. By the end of July, momentum had improved, led by the S&P 500 Index and the S&P International 700 Index. Both indexes performed well in August before trading mostly flat in September. In contrast, the S&P Mid Cap 400 and the S&P Small Cap 600 struggled in August and declined sharply throughout September. Ongoing hostilities in Iran, the lack of a clear path toward resolution, and the Federal Reserve’s decision to raise interest rates weighed on the markets, with small- and mid-cap stocks experiencing the greatest declines. For the first time this year, the S&P 600 Small Cap Index and the S&P 400 Mid Cap Index lagged the broader market, posting quarterly returns of -7.93% and -6.36%, respectively. Meanwhile, the S&P 500 Index and the S&P International 700 Index finished the quarter with modest positive returns of 2.30% and 0.64%, respectively.
Over the past 12 months, the major equity indexes generally moved higher despite periods of volatility caused by inflation concerns, changing expectations for interest-rate direction, and uncertainty surrounding the conflict in Iran. International markets, represented by the S&P International 700 Index, delivered the strongest performance, with a total return of 23.34%. The S&P Small Cap 600 Index and the S&P Mid Cap 400 Index also posted solid total returns of 16.08% and 11.67%, respectively, while the S&P 500 Index gained 15.72%. Overall, market sentiment remained positive even as inflation declined more slowly than investors had hoped, interest rates stayed higher than many analysts expected, and uncertainty continued over the economic and market effects of the war in Iran. Although we believe the current bull market is still in its early stages, a market correction of -10% or more remains possible in the coming months as investors assess the strong gains of the past year and consider the longer-term effects of higher energy prices, Federal Reserve policy, and global instability. Even with these risks, we recommend that investors remain invested and focused on the long-term opportunities available through a well-diversified global portfolio, as the outlook for positive returns over the next 12 to 24 months remains favorable.
Source: Bloomberg
Inflation came in at 0.10% (month-over-month) in July, meeting expectations, which fell from the peak in March of 0.90%. August numbers also came in line with expectations, with a monthly spike to 0.40%. The expectation for inflation to increase to 0.60% in September came in as expected at 0.60%. We will likely see month-over-month numbers come down in the next few months if the conflict with Iran gets resolved after the midterm elections. Core inflation, which strips out volatile food and energy, ended the quarter at 2.6%, exceeding the expectation of 2.5%.
The initial estimate for second-quarter GDP, released in July, showed annualized growth of 1.5%, below the 2.0% forecast. The second estimate, released in August, remained at 1.5% and was slightly below the 1.6% expectation. The third estimate, published on September 30, exceeded the unchanged 1.6% forecast and was revised upward to 2.2%. During the quarter, economists and market commentators debated whether the war in Iran and higher inflation would lead the Federal Reserve to raise interest rates more than once before year-end. At present, expectations favor another rate increase before Christmas.
Although the yield curve is no longer inverted, recession concerns remain. Key risks include a slowing labor market, weaker consumer spending, and uncertainty about how the war in Iran and rising oil prices may affect U.S. consumers and the broader economy.
The unemployment rate remained steady at 4.1% in July and August, due to a resilient economy in the face of the uncertainty of the ramifications of the Iran war. A surprise number came in September when the unemployment rate popped to 4.2%, when the expectation was for it to remain at 4.1%. Although we are still above the 4% level, it’s possible we could see the unemployment rate begin a downward path if the economy remains resilient in the last quarter of 2026.
Nonfarm Payrolls had a sporadic showing during the past three months, with July coming in at -23k jobs, which was well below the estimate of 88k. Then, in August, 162k jobs were created when only 56k new jobs were expected. The new job numbers reversed course in September, with new job expectations of 89k, but we actually only saw jobs grow by 29k.
The Federal Open Market Committee finally made a move on interest rates, and that move was up. After leaving rates unchanged in June and July, the Fed increased the target rate by 25bps during the most recent meeting in September. Based on the recent comments of Chairman Warsh, we should not be surprised if there is another rate increase before the end of the year, as he stated that “inflation has been too high for too long”. The current expectation is for the federal funds rate to increase toward the 4.00% to 4.25% range. While a cooling labor market would typically justify rate cuts, concerns about inflation remaining too high have made the Fed more hawkish while waiting for more data on both inflation and broader economic conditions.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
The Inspire Capital Appreciation ETF (NYSE: RISN) returned -2.63% for the quarter, bringing its annualized performance to 6.42% since inception on July 15, 2020. RISN underperformed its benchmark this quarter, as the S&P Target Risk Moderate TR Index returned -1.45%.
RISN maintained an 80% equity allocation throughout the quarter. Our equity strategy targets U.S. companies that score highly on the Inspire Impact Score, biblically aligned businesses that are primarily mid- to large-cap with strong fundamentals: consistent revenue and profit growth, low debt, and attractive valuations.
The remaining 20% sits in short-term U.S. government bonds, providing a defensive buffer. We removed the floating-rate component last quarter in anticipation of potential rate cuts, but unfortunately, interest rates went the other direction.
We're also watching gold. Current prices have fallen dramatically from the peak in March, but we are still evaluating an appropriate and compelling entry point for this sleeve.
Our allocation remains 80% equities/20% fixed income, but we're actively evaluating a shift back to 70/30 if markets become overpriced. Our long-term objective is unchanged: preserve principal, grow capital over time, and stay aligned with biblical values.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Certain statements may include forward-looking information based on current beliefs, expectations, and assumptions. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Inspire undertakes no obligation to update or revise any forward-looking statements.
Yields rose across the curve before the FOMC decided to raise the Federal Funds Target Range by 25 bps at its most recent meeting, as markets reassessed the path of future rates amid rising inflation concerns and slower growth risks tied to the Iran war and disruption of oil traffic through the Strait of Hormuz.
As of the end of the third quarter, the 3-month T-Bill yield rose 30 bps from 3.817% to 4.115% vs. the 10-year U.S. Treasury, which rose by 82 bps from 4.466% to 5.287%.
The 2-year U.S. Treasury yield climbed from 4.175% to 4.889% for an increase of 71 bps as the 5-year yield increased from 4.227% to 5.087% (a rise of over 86 bps) and the 30-year Treasury yield rose from 4.953% to finish the quarter at 5.63% (an increase of almost 68 bps).
The probability of a recession has increased slightly since last quarter, as the economy has slowed down and the same geopolitical issue that dominated every economic conversation on the street and on the business networks at the end of the last quarter is still front and center this quarter - IRAN. Even though the employment numbers show some weakening, a recession may be avoidable if this war with Iran is resolved soon, shipping traffic out of the Persian Gulf returns to normal, and the Mid-term election noise will be behind us.
Inspire Investing, LLC serves as the investment adviser to certain proprietary ETFs used in Inspire portfolios. Inspire receives management fees from these ETFs, creating a potential conflict of interest. Inspire seeks to mitigate this conflict through policies and procedures that ensure recommendations are made in clients' best interests and consistent with their unique goals and risk profiles. Additional details can be found in Inspire's Form ADV Part 2A. Past performance is not indicative of future results. All performance figures referenced herein are historical and may not reflect current or future market conditions. Actual investor outcomes may vary. There is no assurance that any investment strategy will achieve its objectives or avoid losses.
Inflation and Federal Reserve policy will remain central concerns in the fourth quarter. The Federal Reserve raised its target range by 25 basis points in September, and its latest projections show that inflation is expected to remain above the 2% objective through year-end. Recent surveys also indicate that consumers’ short- and medium-term inflation expectations have increased, reflecting continued concerns about energy, food, housing, and other household costs. Although forecasts differ on the timing, another rate increase before year-end remains possible, with the October 28 and December 9 FOMC meetings likely to depend heavily on incoming inflation and labor-market data. Investors should therefore be prepared for interest rates to remain higher for longer and for financial markets to react quickly to changes in inflation readings or Federal Reserve guidance.
The U.S. economy enters the fourth quarter with more resilience than many expected, but the outlook remains uneven. Current forecasts generally call for full-year real GDP growth of approximately 2.2% to 2.4%, supported by consumer spending, business investment, and productivity gains. The labor market has shifted into a low-hiring, low-layoff environment: the unemployment rate rose to 4.2% in September, while monthly payroll growth remained volatile and slowed to 29,000. The yield curve is no longer inverted, but longer-term borrowing costs remain elevated as investors account for persistent inflation, heavy government borrowing, and geopolitical uncertainty. Consumer spending has held up, although higher energy costs, borrowing rates, and uneven confidence could place greater pressure on households during the final months of the year. Taken together, the data suggest slower and less consistent growth rather than an immediate recession, although weakening employment or a renewed inflation shock could increase downside risk.
Geopolitical developments remain an important source of market uncertainty heading into the fourth quarter. The conflict involving Iran and continued restrictions on shipping through the Strait of Hormuz keep oil and natural-gas supplies, freight costs, and inflation risks in focus. A prolonged disruption could place additional pressure on consumers and businesses, slow global trade, and complicate the Federal Reserve’s policy decisions. The Russia-Ukraine war also continues to affect European security, defense spending, energy markets, and investor confidence. In addition, trade tensions and supply-chain disruptions could intensify quickly in an already fragile global environment. These risks may contribute to continued volatility in both stock and bond markets, particularly if energy prices rise further or global growth expectations weaken. We will continue to monitor these developments closely and evaluate their potential effects on our investment strategies.
Certain statements may include forward-looking information based on current beliefs, expectations, and assumptions. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Inspire undertakes no obligation to update or revise any forward-looking statements.
We believe that we are still in the early innings of the bull market even though we experienced disappointing results from our ETFs in the past quarter. Global instability weighed on performance this quarter, but we remain focused on long-term investment opportunities. The good news is that our God is still on the throne and in control. With the strong market performance over the past year, we would not be surprised to see a correction of -10% or more in the next 6 to 12 months as investors look to take profits or rebalance their portfolios in light of all that is going on in the world. However, we still expect the broader large-cap market, as well as the small and mid-cap markets, to show upside potential in the next 12 to 24 months. We will always face headwinds, but the market almost always ‘climbs a wall of worry’, so we need to remain patient and stay focused on long-term opportunities.
We remain thankful for the provision, protection, and blessings that we receive from our Heavenly Father and are looking expectantly to what God has in store for the remainder of 2026 and into 2027.
We are thankful for each of you for bringing Glory and Honor to our Heavenly Father and our Savior Jesus Christ as you serve your clients through Biblically Responsible Investing.
Inspire Investing, LLC serves as the investment adviser to the Inspire ETFs mentioned in this document. As such, Inspire receives management fees from these funds. This creates a conflict of interest as the firm has a financial incentive to promote its proprietary funds. Inspire seeks to mitigate this conflict through disclosure and a fiduciary duty to recommend investments suitable for clients.
Certain statements contained in this document may be forward-looking in nature and based on current expectations, estimates, and projections. Such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual outcomes may differ materially.
This content is provided for educational and informational purposes only and should not be considered personalized investment advice. Inspire does not provide legal, tax, or accounting advice. Please consult your own advisor regarding your specific situation.
Prepared by Darrell W. Jayroe, CFA, CFP®, CKA®
SENIOR PORTFOLIO MANAGER
for financial professional use only - not for use with the general public