You would be forgiven for confusing the current U.S. stock market trends for the movie Groundhog Day. Every week—sometimes every day—seems to bring a variation of the same headlines: negotiations with Iran are on, then off; tariffs are threatened, postponed, revived, or revised; markets fall on the news and then recover when the rhetoric cools. It’s little wonder that many of us are beginning to suffer from headline fatigue.
Despite the noise, there has been an overall upward trend in the equity markets in in 2026, with all sectors posting +10% year-over-year. Quarter three markets posted mixed returns with large-cap company stock gaining 2.3%, mid-cap and small-cap declining 6.4% and 7.2% respectively, and foreign stocks gaining 0.8% for the quarter. Much of the strength in the major U.S. indexes has been concentrated among a relatively small number of very large companies, while smaller and more interest-rate-sensitive businesses have had a much more difficult year. The major indexes make the market look healthier than many investors’ portfolios might suggest. Large-cap stocks have held up reasonably well, while smaller companies and other rate-sensitive investments have struggled. A relatively small group of very large companies continues to exert an outsized influence on headline index returns.
That doesn’t mean a correction is imminent, nor does it mean the companies leading the market are necessarily overvalued, though some believe it does. In Natural Investments’ view, it means that portfolio diversification matters precisely when it feels least rewarding. Markets have a long history of making yesterday’s laggards tomorrow’s leaders—and vice versa.
Bonds haven’t provided much refuge to stock market volatility, posting negative returns of -2.6% for the quarter and -2% for the year. This can in large part be attributed to persistent inflation pressure and rising Treasury yields, during the quarter. The silver lining is that higher yields also mean investors are finally being paid more for owning high-quality fixed income securities — something that was decidedly not the case after the pandemic or for much of the decade following the 2009 financial crisis.
As if investors needed another source of uncertainty, the 2026 midterm election is looming. Republicans currently hold narrow majorities in both chambers of Congress, while history and current polling suggest that control of at least one chamber is very much in play, as the sitting president’s party has almost always lost a significant number of seats in midterm elections. Historically, however, investors have had remarkably little success turning election predictions into investment returns. Markets have performed well and poorly under presidents and Congresses of both parties after elections, and economic growth, corporate earnings, inflation, interest rates and valuations have generally mattered more over time than the during the brief periods when a majority party occupies Washington. While there is a possibility that markets may be reassured by a Democratic check on the president’s power, the fact remains that in its September meeting, the Federal Reserve raised interest rates by 0.25% and is expected to initiate an additional rate hike before the end of the year, decisions that are being made based on economic criteria rather than political influence.
For ESG investors, though, this election may matter more than most. The outcome could shape environmental and energy policy, corporate regulation, labor protections and other issues with direct implications for the companies and industries in which we invest. These are not simply political questions; changes in policy can affect the economics of renewable and traditional energy, regulatory and governance risks, labor practices, and the long-term opportunities facing individual companies and industries.
This administration has relied heavily on tariffs and executive authority to advance its agenda, at times creating uncertainty for businesses making decisions about costs, investment and long-term planning. Its repeated public pressure on the Federal Reserve has also raised concerns about the independence of an institution markets have traditionally expected to operate outside direct political control.
A Democratic victory in either chamber could provide a meaningful check on some administration policies and actions, although it would also increase the likelihood of legislative gridlock. Continued Republican control could give the administration more room to pursue its existing trade, tax, energy and regulatory agenda, even as many of those policies continue to face significant public opposition.
What either outcome means for the broader market is hard to predict. We know that markets generally dislike uncertainty, and right now, there is plenty of that to go around. Perhaps nowhere is that uncertainty more consequential for investors and consumers alike than in the stubborn persistence of inflation.
Since the COVID-19 pandemic, inflation has been a major threat to workers and companies alike. It reached its 9.1% peak in 2022 due to pandemic-era supply shocks, and while it gradually declined through 2024, as of today it still has been unable to reach the Federal Reserve’s 2% target. Tariffs are part of that story. Whatever one’s view of their merits as trade policy, tariffs are ultimately taxes on imported goods, and at least some portion of those costs is typically absorbed by U.S. businesses and consumers. Higher energy prices associated with the conflict with Iran have added another inflationary pressure. As of August, consumer prices were rising at a 3.4% annual rate. For households, the consequences are straightforward: workers’ wages are losing value and downstream companies are paying more in their supply chain; hourly earnings only increased 3.1% in August. For businesses, higher costs for imported materials, energy, labor and financing can squeeze margins unless those costs can be passed along to customers.
The Fed’s September rate hike to 3.75% – 4.00% its effort to slow inflation, reinforces the Fed’s willingness to act independently despite considerable political pressure for lower rates. . This decision is notable not only because borrowing costs moved higher, but for investors, an independent central bank committed to price stability is ultimately more important than whether any particular rate decision makes markets happy on a particular afternoon. Following this rate hike, the stock market dipped but recovered quickly, potentially indicating that investors had already factored it into their decision-making or simply concluded that addressing persistent inflation now is preferable to allowing it to become more deeply entrenched. The next several months promise no shortage of headlines. We have an election, persistent inflation, a Federal Reserve that may not be finished raising rates, ongoing geopolitical tensions and a trade policy that can seemingly change before we’ve finished reading the story announcing the last change.
There are legitimate reasons for concern. There are also legitimate reasons for optimism. Corporate America continues to generate profits, markets have absorbed an extraordinary amount of uncertainty without coming apart, and higher interest rates have created yield opportunities in fixed income that investors haven’t seen for many years. For long-term investors, the challenge is separating developments that actually change the investment landscape from those that merely dominate the news cycle.
That is particularly important for values-oriented investors. We can care deeply about climate risk, corporate governance, workers, communities and the direction of public policy without allowing every political development to become an investment decision. In fact, thoughtful ESG investing requires exactly that distinction: understanding where economic risks and opportunities are changing while maintaining the discipline of a long-term investment strategy.
The headlines may continue to feel like Groundhog Day. Fortunately, a well-diversified portfolio doesn’t need to wake up every morning and start over.