Accounts under management underperformed benchmarks for the three months ended September 30, 2026. Capital market action was dominated by the significant increase in interest rates. The yield on the benchmark 10-year Treasury rose from 4.47% at the end of June to close the quarter at 5.29%. The latter level had not been seen in almost twenty years. Several factors drove this move:
- Crude oil prices rose by 30 to 40% over the quarter as the April ceasefire with Iran broke down and Persian Gulf energy shipments were again interrupted. To risk stating the almost obvious, the inflationary implications of “higher for longer” energy quotes pressured fixed income markets.
- From a supply/demand perspective, renewed concerns regarding an increase in the demand to borrow money. The Federal government’s budget deficit reached $2 trillion for the first eleven months of fiscal year 2026 while borrowing to fund the artificial intelligence build-out does nothing but increase.
- The signaling and subsequent implementation of an increase in the Fed Funds rate.
We believe it futile to delineate which of these factors accounted for what magnitude of the rate move. They all pushed in the same direction.
The negative impact of higher rates and oil was most acutely felt in our Industrials sector holdings. Our aerospace/defense positions were hurt by fear that increased jet fuel costs would force airlines to reduce flight activity leading to lower maintenance/after-market expenditures. Our capital equipment stocks suffered on concerns that rising financing costs would dampen future capital spending. On a pragmatic basis, we reduced exposure to Industrials. Partially offsetting the above, positive stock selection in the Information Technology sector added relative performance for the quarter.
As to the outlook, there is a tug of war between bearish interest rates and bullish earnings growth. Back to basics, higher rates reduce the net present value of corporate cash flows and retard economic growth. Historical analysis suggests that the inverse correlation between 10-year Treasury yields and the stock market increases significantly once the five percent interest rate threshold is crossed
By no means does this automatically end the equity bull market. First of all, interest rates may not significantly increase from today’s level. The recent spike in rates is dramatic and may be the equivalent of an over-bought condition. If so, expect consolidation. Additionally, energy prices may level out or decline from here. It is worth noting that current oil quotes are roughly fifteen percent below the April high despite their third quarter rally. Putting the mid-term elections behind us may be a step needed for geopolitical de-escalation.
Looking at the Fed, the most recent hike may be more of a tweak than the beginning of a major tightening cycle. A second rate hike can be expected but there is a case for two and done. We do not know if any of these scenarios will unfold but our point is that higher rates are not preordained.
There is also precedent for stocks to appreciate during rising interest rate periods. In the most recent quarter, the S&P 500 gained over two percent despite a roughly 0.8%-point increase in 10-year yields and a Fed Funds rate hike. A more powerful example is found in 1999. In that year, the S&P 500 returned over 20% with 10-year Treasury rates increasing by over 1.5%-points and three Fed Fund increases totaling 0.75%-points. We believe that the critical variable in these types of environments is corporate earnings.
Corporate profit growth continues to be a source of upside in this cycle. While we will know much better after upcoming third quarter earnings releases, we see both cyclical and secular drivers persisting. On the cyclical side, the U.S. economy appears close to full employment, labor costs remain contained, and consumer credit quality remains benign. Of course, there are always potential negatives. Rising inflation takes a toll, particularly on lower-end consumers. Higher interest rates are also an issue but the most rate sensitive area, housing, is already at depressed levels of activity. In sum, we see little evidence that the economy’s current uptrend will be interrupted in the near term.
The secular case for corporate profit growth boils down to AI capital spending – from chips to data centers to electricity. This investment wave is well known so we will not rehash details. At this point the debate is duration. Our research concludes that AI spending will be impressive in 2027, and we are gaining conviction for 2028. As such, this remains a thematic concentration in our portfolio.
Our overweight in the AI theme is best illustrated by our semiconductor holdings. Focus includes:
- From the stock market’s lens, GPU providers were the original AI “play”. We believe they continue to have legs. Our exposure includes the leading “off the shelf” provider and custom chip vendors.
- CPU chips are gaining traction as an efficient solution to the increased demand of agentic AI.
- Memory/Storage providers continue to benefit from a tight supply/demand situation created by the upscaling required to meet AI usage.
- Optical suppliers are critical in connecting the components of data centers.
Of course, our exposure is not limited to semis but we hope this deeper dive provides a better sense of our reasoning.
In closing, we hope that you enjoy the foliage, football, and playoff baseball that autumn brings.
Sincerely,
Craig B. Steinberg Matt Ward Bob Ruland
Accounts under management underperformed benchmarks for the three months ended September 30, 2026. Capital market action was dominated by the significant increase in interest rates. The yield on the benchmark 10-year Treasury rose from 4.47% at the end of June to close the quarter at 5.29%. The latter level had not been seen in almost twenty years. Several factors drove this move:
We believe it futile to delineate which of these factors accounted for what magnitude of the rate move. They all pushed in the same direction.
The negative impact of higher rates and oil was most acutely felt in our Industrials sector holdings. Our aerospace/defense positions were hurt by fear that increased jet fuel costs would force airlines to reduce flight activity leading to lower maintenance/after-market expenditures. Our capital equipment stocks suffered on concerns that rising financing costs would dampen future capital spending. On a pragmatic basis, we reduced exposure to Industrials. Partially offsetting the above, positive stock selection in the Information Technology sector added relative performance for the quarter.
As to the outlook, there is a tug of war between bearish interest rates and bullish earnings growth. Back to basics, higher rates reduce the net present value of corporate cash flows and retard economic growth. Historical analysis suggests that the inverse correlation between 10-year Treasury yields and the stock market increases significantly once the five percent interest rate threshold is crossed
By no means does this automatically end the equity bull market. First of all, interest rates may not significantly increase from today’s level. The recent spike in rates is dramatic and may be the equivalent of an over-bought condition. If so, expect consolidation. Additionally, energy prices may level out or decline from here. It is worth noting that current oil quotes are roughly fifteen percent below the April high despite their third quarter rally. Putting the mid-term elections behind us may be a step needed for geopolitical de-escalation.
Looking at the Fed, the most recent hike may be more of a tweak than the beginning of a major tightening cycle. A second rate hike can be expected but there is a case for two and done. We do not know if any of these scenarios will unfold but our point is that higher rates are not preordained.
There is also precedent for stocks to appreciate during rising interest rate periods. In the most recent quarter, the S&P 500 gained over two percent despite a roughly 0.8%-point increase in 10-year yields and a Fed Funds rate hike. A more powerful example is found in 1999. In that year, the S&P 500 returned over 20% with 10-year Treasury rates increasing by over 1.5%-points and three Fed Fund increases totaling 0.75%-points. We believe that the critical variable in these types of environments is corporate earnings.
Corporate profit growth continues to be a source of upside in this cycle. While we will know much better after upcoming third quarter earnings releases, we see both cyclical and secular drivers persisting. On the cyclical side, the U.S. economy appears close to full employment, labor costs remain contained, and consumer credit quality remains benign. Of course, there are always potential negatives. Rising inflation takes a toll, particularly on lower-end consumers. Higher interest rates are also an issue but the most rate sensitive area, housing, is already at depressed levels of activity. In sum, we see little evidence that the economy’s current uptrend will be interrupted in the near term.
The secular case for corporate profit growth boils down to AI capital spending – from chips to data centers to electricity. This investment wave is well known so we will not rehash details. At this point the debate is duration. Our research concludes that AI spending will be impressive in 2027, and we are gaining conviction for 2028. As such, this remains a thematic concentration in our portfolio.
Our overweight in the AI theme is best illustrated by our semiconductor holdings. Focus includes:
Of course, our exposure is not limited to semis but we hope this deeper dive provides a better sense of our reasoning.
In closing, we hope that you enjoy the foliage, football, and playoff baseball that autumn brings.
Sincerely,
Craig B. Steinberg Matt Ward Bob Ruland
The information in this presentation is for discussion purposes only. The material presented herein is compiled from sources thought to be reliable, including in certain instances, from third party sources, but accuracy and completeness cannot be guaranteed. Any opinions expressed herein reflect the judgment of Atalanta Sosnoff as of the date of this presentation, and are subject to change. This presentation does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor, and is not intended to be, nor should it be construed or used as, investment, tax or legal advice.
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Index returns do not reflect taxes, sales, charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indices are unmanaged, hypothetical portfolios of securities that are often used as a benchmark in evaluating the relative performance of a particular investment. An index should only be compared with a mandate that has a similar investment objective. An index is not available for direct investment. Atalanta Sosnoff Capital, LLC (“Atalanta”) is a New York state limited liability company registered with the Securities and Exchange Commissions as an investment advisor. Atalanta is 49% owned, but not controlled by Evercore.