The Economy and Market from Here at Hills Q3 2026 Market Update and Q4 Outlook

Markets Continue to Advance

Global equity markets posted positive results during the quarter, though leadership continued to shift across regions and sectors. U.S. stocks experienced periods of volatility as investors adjusted expectations regarding interest rates and inflation. International markets benefited from improving economic activity in some regions and increased investor focus on opportunities outside the United States. 
 

Interest Rates Move Higher Around the World

One of the most significant developments of 2026 has been the increase in government bond yields across many developed economies. U.S. Treasury yields moved higher during the quarter as inflation remained somewhat persistent and economic activity proved more resilient than many forecasters expected. Similar trends occurred across Europe, Japan, and other major markets. There are three primary reasons why bond yields, particularly mid/longer dated Treasurys are moving higher:

1. The U.S. fiscal situation. Our national debt now tops $40 trillion and annual interest on that debt has surpassed $1 trillion, which now ranks 3rd in federal budget obligations.
2. Artificial Intelligence (AI). Hyper-scalers issuing a large amount of new bonds are competing with U.S. Treasurys for buyers, putting downward pressure on bond prices.
3. Economic growth estimates are being revised upward. At the same time, short-term energy price pressures have renewed concerns that inflation could remain elevated.

Energy Markets Impacted by Ongoing Conflict

Geopolitical tensions remained elevated throughout the quarter, particularly as conflict involving Iran continued to affect energy markets. Investors closely monitored developments across the Middle East, where concerns regarding supply disruptions contributed to higher oil prices and increased market volatility. Energy supply issues domestically are less of a concern relative to refining capacity. Plenty of fossil fuels are being extracted domestically, however, limited refining capacity limits gasoline/diesel supply getting to consumers. The last refinery built in the USA dates back to the mid-1970s. 

Inflation Progress Continues, But Slowly

Inflation has moderated significantly from peak levels, though progress remains uneven. Housing, labor, and service-related costs continue to create upward pressure on prices, while higher energy costs have complicated the path back toward central bank inflation targets.

Artificial Intelligence Moves Into Its Next Phase

Artificial intelligence remains one of the most transformative investment themes of our time. Significant capital continues flowing toward data centers, cloud computing capacity, power generation, and the broader technology ecosystem needed to support AI adoption. At the same time, investors, regulators, and industry leaders increasingly recognize concerns surrounding safety, privacy, cybersecurity, and workforce disruption. Earnings estimates for hyper-scalers continue to be revised upwards and are likely to continue through 2027. 

Looking Forward

As we enter the fourth quarter, investors continue to navigate a landscape shaped by higher interest rates, evolving inflation dynamics, geopolitical uncertainty, and rapid technological innovation. Hills Bank’s Investment Committee views the bond market opportunistically as income from higher yields relative to 2020 are very attractive. 

Hills Bank’s investment philosophy remains unchanged. We focus on helping clients build and maintain well-diversified portfolios designed to participate in long-term growth while managing risk through changing market conditions. 

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