Key takeaways
- Rising inflation has dramatically changed expectations for Federal Reserve policy compared with the beginning of 2026.
- Materials, metals and energy are showing strength, while financials are responding to changing expectations for interest rates.
- Technology has experienced a correction, although early relative momentum signals could be pointing toward a turn.
- Historical presidential-cycle data suggests the fourth quarter could prove important for market returns despite September’s reputation for volatility.
The Federal Reserve outlook has changed considerably since the beginning of the year, and inflation could determine whether another major shift is coming.
In the latest Markets in Motion, StoneCastle Investment Management portfolio manager Bruce Campbell examines rising inflation, changing interest-rate expectations and how those forces are affecting different areas of the equity market.
This article is being disseminated on behalf of StoneCastle Investment Management, a third-party issuer, and is intended for informational purposes only.
Campbell says inflation is ticking higher, with rising crude oil prices among the pressures investors should be watching. With fresh inflation data approaching, the result could have implications for the Federal Reserve’s next move.
Earlier in 2026, markets were expecting interest rates to decline. Campbell now points to market pricing implying approximately 1.4 hikes by year-end, representing the probability investors are assigning to future rate increases.
If inflation fails to moderate, Campbell says another rate hike could come into consideration.
Which sectors are responding?
The changing macroeconomic environment is already showing up beneath the surface of the market.
Materials, metals and energy are performing strongly alongside higher commodity prices. Financial stocks are also in focus as investors assess what higher rates could mean for the sector.
Technology, meanwhile, has experienced a correction. Campbell says the change in momentum remains subtle, but he is beginning to see early indications of a possible turn higher.
Gold has already demonstrated considerable strength following its summer low. Its performance has closely tracked the seasonal pattern Campbell follows, with gold topping around February and March, declining into July and then rallying.
The presidential cycle points toward Q4
September itself could still provide some turbulence.
Historically, the latter half of the month has presented challenges before markets enter a stronger seasonal period toward year-end.
Campbell also examines the four-year U.S. presidential cycle. The second year — the midterm election year — has historically been the weakest of the four, while the third year has typically been the strongest.
That doesn’t mean 2026 or 2027 will necessarily repeat the pattern. Campbell stresses that presidential-cycle seasonality should be treated like climate rather than a day-to-day weather forecast.
Perhaps more immediately relevant is the historical difference between the first three quarters and the fourth. The data Campbell presents shows a significant portion of returns occurring during the final quarter of the year.
That leaves investors with several potentially important catalysts in quick succession: fresh inflation data, the next Federal Reserve decision and a historically volatile stretch of September before the traditionally stronger fourth-quarter period begins.
Watch the video above for the full Markets in Motion analysis and share your outlook for the final quarter.