Q3 Market Recap: Headwinds vs Tailwinds
Anyone who has ever sailed a boat, flown a plane, or even ridden a bicycle knows about headwinds and tailwinds. The former is a wind that blows against you and slows you down. The latter blows in the same direction you are going, speeding you up or letting you expend less energy.
This same phenomenon exists in the markets, too.
Every quarter, investors contend with headwinds that push against stocks. Some headwinds are economic, some purely psychological. At the same time, investors must position themselves to take advantage of tailwinds — factors that stimulate growth, stoke enthusiasm, and push stocks higher. When one type of wind outnumbers or out-pushes the other, we experience a positive or a negative quarter. When both are approximately equal, the quarter will end roughly flat.
Q3 was a quarter with a couple of significant tailwinds, but an increasing number of headwinds, too. As a result, the S&P 500 reached new all-time highs, but also rose only 2%.1 So, in this message, we want to briefly recap a few of the most important headwinds and tailwinds we experienced last quarter so we can better understand how they might impact Q4. Let’s start with…
Tailwind: Corporate Earnings Growth. Corporate earnings, a company’s profits after operating expenses and taxes, have been a major tailwind all year. While we won’t know Q3’s earnings growth until later in the month, it’s expected to be quite high again…following on the heels of Q2’s spectacular 53.7% growth rate.1
Corporate earnings are the main way that companies return value to shareholders. So, if investors believe earnings will keep rising, that expectation can drive the market forward despite fierce headwinds. Headwinds like:
Headwind: Inflation. Rising consumer prices remain an issue. While the inflation rate has cooled somewhat from Q2, prices remain elevated. The most recent Consumer Price Index report showed prices ticking up 0.4% in August from 0.1% in July, largely due to higher energy costs and ongoing tariffs.2
Inflation on its own is usually only a weak headwind for the markets. But it matters because it contributes to a more important one: Interest rates. More on this in a moment.
Tailwind: AI. AI has been the ultimate tailwind over the past few years, with a handful of “hyperscaler” companies like NVIDIA, Microsoft, and Google leading the way. AI infrastructure companies, like semiconductor makers, have also been major contributors. That tailwind continued in Q3, but with less power: Some of the big AI players saw large gains, while others were flat or even down for the quarter. Why did this happen? There are two potential reasons. One is that AI mostly made headlines for the wrong reasons, with calls to regulate the industry more or slow the pace of development because of potential safety concerns. The other is that few AI companies are profitable, and most spend hundreds of billions each year while racking up tens of billions in debt to finance it.3 That’s especially important right now due to the next headwind.
Headwind: Rising debt and interest rates. AI companies aren’t the only things in debt: Our nation is, too. In fact, our national debt hit the $40 trillion mark in August.4 This, combined with inflation, drove Treasury bond yields to twenty-year highs in September, which in turn has caused interest rates to spike. (The Federal Reserve has also recently hiked interest rates to combat rising inflation.)
Higher interest rates can be a headwind for stocks because they make it harder for companies and investors to access or repay financing. That, in turn, requires them to be more careful with capital, which can slow down growth. Keep an eye on this storyline, because it’s likely to be one of the most important in Q4.
Tailwind: Post-Midterms. Speaking of Q4, let’s look ahead to a possible tailwind: Midterms. Midterm election results don’t typically have a significant impact on markets, but putting the elections in the rearview mirror often does. In fact, between 1980 and 2025, the U.S. stock market has averaged a return of 8.7% in the twelve months before a midterm election…and 17.5% in the twelve months after.5 That’s because the midterms themselves bring all sorts of uncertainty regarding which party will be in power and what policies they’ll employ. Uncertainty is the ultimate headwind, so once it’s removed, it can feel like a tailwind for investors.
Headwind: Market Concentration. We mentioned earlier that corporate earnings growth has been high in 2026. That’s true, but it’s also a little simplistic. While some companies have grown tremendously in recent quarters, many have not. As of the end of September, 44% of the stocks in the S&P 500 are “down at least 20% from their 52-week highs.”6 In other words, nearly half of the S&P is in bear market territory. That’s a major drag on the markets. With over half of the S&P 500 now made up of AI or AI-related companies, the market’s growth, while impressive on the surface, may have very shallow roots.
So, there you have it. A quarter when markets were buffeted by both headwinds and tailwinds. It’s impossible to know which way the wind will blow in Q4, but by preparing for all directions, we can cruise when we can and tack when we have to. In the meantime, have a great quarter, and a happy holiday season!
1 “If a bruising third quarter can’t halt Wall Street, what can?” www.reuters.com/commentary/reuters-open-interest/global-markets-q3-roi-column-pix-graphics-2026-10-01/
2 “Consumer Price Index, August 2026,” www.bls.gov/news.release/cpi.nr0.htm
3 “The AI buildout rests on hidden debt,” www.gisreportsonline.com/r/ai-buildout-hidden-debt/
4 “What is the national debt?”https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
5 “How midterm elections affect the stock market,” www.usbank.com/investing/financial-perspectives/market-news/stock-market-performance-after-midterm-elections.html
6 “You might be shocked by how many stocks are in a bear market right now,” www.morningstar.com/news/marketwatch/2026092973/you-might-be-shocked-by-how-many-stocks-are-in-a-bear-market-right-now