HUGHES INVESTMENT ADVISORY SERVICES LLC
Quarterly Market Letter
October 1, 2026
Dear Clients and Investors,
I hope this update finds you well.
The Big Picture
Inflation remains elevated and well above the Fed’s 2% target. The Street consensus is that at
least one more hike to the bench-mark short-term interest rate seems likely before years-end.
Third quarter earnings season is at hand. This should provide another indication that the US
economy is expanding at a solid pace. Current GDP Now estimates are that GDP Growth is
running at a solid 3.6%. The consensus forecast is that profit growth for S&P 500 companies is
averaging nearly 30% over the last quarter. This would mark the third straight quarter of plus
25% profit growth for the index.
Meanwhile, artificial intelligence or AI remains both a catalyst and a potential risk for the
economy and stock market. The astronomical spending on AI infrastructure has been a big boost to the nations GDP in recent years. However, if those investments don’t produce the desired tangible revenue results quickly enough, or if difficulties in sustaining the rapid pace of data center buildout force the AI buildout to slow, either development could have a detrimental effect on GDP and on the AI driven stock market.
I continue to monitor and measure the threat of the extraordinary growth of US government debt – now 41 trillion and climbing faster than ever. As I’ve been warning in recent quarters, the debt problem is now having important negative implications for the entire bond market both corporate and Government issued debt. The interest rate on the 20-year treasury bond is now 5.6 % and continues to climb, recently reaching a 23-year high yield with negative implications for bond and interest rate sensitive investments and for GDP growth. It also is opening opportunities to invest back into yield sensitive investments such as bond, Preferred, REITS, Utilities etc. We will be monitoring interest rates and their effects on the broader equity markets as the final quarter unfolds.
With this backdrop in mind, let’s turn to what happened in the third quarter.
Major Asset Class Performance
Asset Class Q3 YTD
Fidelity Balanced Fund Index (Stock/Bond Mix) +1.8% +10.5%
IVV – S&P 500 Equity Index +2.8% +12.4%
RSP – S&P 500 Equal Weight Index +.6% +10.4%
EFA – Europe, Australasia & Far East Equity Markets +3.0% +8.9.%
AGG – iShares U.S. Investment Grade Bond Index -1.7% -2.8%
GLD – Gold +.3% -3.4%
FBTC – Fidelity Bitcoin ETF - +27.0% -4.0%
Updated 2026 Outlook
Forecast Original Revised
GDP Growth 3.5% 3.0%
S&P 500 Earnings $310 $375
Core PCE Inflation 3.2% 3.5%
S&P 500 Return 12% 12%
Federal Funds Rate 2.5% 3.75%
Q3 2026
Equities in general struggled throughout the quarter as interest rates rose – a traditional headwind for equities. Semiconductor manufacturers, memory companies, and businesses directly tied to artificial intelligence infrastructure accounted for a disproportionate share of market gains. Strong earnings growth from these companies surprised even optimistic analysts and drove much of the advance. At the close of Q3 2026 the divergence between the S&P 500 index and its individual stocks was stark. For example: 83% of S&P 500 stocks were at least 10% below their 52-week highs aka, a correction. 42% of S&P 500 stocks were in Bear market territory, defined as being at least 20% below their highs.
Meanwhile, the S&P500 overall finished September approximately 2% below its 50-week peak! This illustrates how a small handful of large cap stocks can support a capitalization-weighted index even as most individual stocks experience substantial drawdowns. So why not just invest in the SPY (S&P 500 Index) and call it a day? Because of the dynamic around the AI buildout and concentration of risk associated with this buildout. There are strong arguments, of which I am in alignment, that the AI buildout is going too fast and that there will be many losers despite my belief in the technology itself. Remember in 1999 and the hype built up around the internet itself, though the technology proved to be useful beyond expectations, there were many more losers than winners from the dot-com buildout era. Some parallels exist today to that time.
Our portfolios participated less in this rally because several of our long-held positions,
particularly in the defense, utility and commodity-related companies, experienced temporary
weakness. While that is never comfortable in the short run, maintaining valuation discipline is, in
my view, preferable to chasing the strongest performers late in a cycle. Our responsibility is not to own whatever is working now, but to build portfolios capable of producing attractive long-term returns while preserving capital across changing environments. The current trend chasing environment resembles gambling rather than investing.
So where do we stand as we enter Q4?
That first “mini” Black Swan event of the year—the conflict involving Iran—has occurred and is
ongoing. My initial fears of an energy related shock were early, but we are now experiencing the effects with higher diesel and general commodity related inflation.
Looking Ahead
The U.S. now carries approximately $41 trillion of federal debt, and the cost of servicing that debt continues to rise dramatically. Why? Primarily because Treasury Secretary Bessent’s 3 Arrow’s Plan is not working. To review: 1. Grow the economy, or GDP, by 3% - despite the Iran war this is mostly on track as we’re experiencing strong GDP growth mostly due to the Tax Bill passed in year one of the Trump Administration and the AI buildout. 2. Increase oil production by 3 million barrels a day- this has not occurred, as US oil production has been stable to marginally higher during the Trump term to date. 3.Reduce the budget deficit to GDP from 6% to 3% - this has not occurred with the debt to GDP still running at 6% despite record GDP and record tax receipts.
There are reasons I remain cautiously optimistic as we move into the last quarter of 2026:
1. Corporate earnings continue to exceed expectations
2. The labor market remains resilient
3. Unemployment remains historically low
4. Geopolitical conditions in the Middle East have stabilized relative to earlier concerns
5. The long-term trend toward reshoring U.S. manufacturing continues
Portfolio Positioning
Our investment philosophy has not changed.
We continue to favor high-quality, large-cap, dividend-paying U.S.-based multinational
companies with durable competitive advantages, strong balance sheets, consistent free cash flow, globally recognized brands, and long histories of increasing dividends.
We continue to believe that over the long run, the risk/reward profile favors equities over traditional fixed income however opportunities in fixed income are increasing as interest rates rise overall. Gold and selected commodities remain important portfolio diversifiers. Treasury Bills and Notes, MLPs, selected real estate investments, and specialized income strategies continue to offer attractive opportunities for income-oriented investors. Cash now holds an important position in most portfolios as we’re expecting opportunities to arise in the coming quarter(s).
Our objective is to compound wealth over full market cycles while assuming less risk than a traditional balanced portfolio whenever possible. In my experience, patience, valuation discipline, and prudent risk management remain among the most reliable drivers of long-term
wealth creation.
We believe our portfolios remain well positioned for the years ahead. We will continue to remain disciplined, stay flexible, and invest with a long-term perspective grounded in the principles that have guided us through multiple market cycles.
As always, thank you for your continued confidence and trust. It is a privilege to manage your investments. Please do not hesitate to call if you would like to discuss your portfolio or any of the ideas in this letter.
Sincerely,
J. Britt Hughes
Investment Advisor Representative
Bay Colony Advisors
britthughes@hiasllc.com
www.hiasllc.com
203-209-4797
Investment advisory services offered by Bay Colony Advisors, a registered investment advisor, doing business as Hughes Investment Advisory Services LLC. No Advice may be rendered by Bay Colony Advisors d/b/a Hughes Investment Advisory Services LLC unless a client service agreement is in place. Bay Colony Advisors does not provide accounting, tax, or legal advice. No part of this newsletter should be considered investment advice. If your financial circumstances have changed,
you should contact your investment advisor representative. Principal Office: 86 Baker Avenue Extension, Suite 310, Concord, MA 01742. Phone: 978-369-7200.