Monthly Market Memo
August/September 2026
August Ended Summer on a High Note
After a modest pullback in July, markets moved higher in August. U.S. large-cap stocks gained 2.72%, international stocks rose 2.57%, and U.S. mid and small-cap stocks advanced 1.14%. Bonds and cash were also positive, returning 0.39% and 0.29%, respectively.¹
Those results added to an already strong year for equities. Through August, the S&P 500 was up 13.14%, U.S. mid and small-cap stocks were up 20.88%, and international stocks were up 17.01%. U.S. bonds remained slightly negative for the year, while cash was up 2.45%.¹
Corporate Earnings Remain an Important Foundation
Corporate earnings have been an important part of the market backdrop in 2026. Reported S&P 500 earnings growth for the second quarter reached 52.0%, far above the five-year average of 15.2% and the 10-year average of 11.2%.²
That headline figure deserves context. A portion of the growth reflected one-time realized and unrealized investment gains reported by large companies, including Alphabet and Amazon. After adjusting for those gains, second-quarter earnings growth was approximately 33.8%. That adjusted result was still more than double the five-year average.²
The breadth of results was also strong: 86% of S&P 500 companies reported earnings above estimates, compared with a five-year average of 78% and a 10-year average of 76%.²
Strong Results Were Not Always Rewarded
One caveat is that stock-price reactions were more muted than usual. Companies that exceeded earnings estimates gained an average of about 0.6% on the reporting day, below the five-year average reaction of 1.0%. Companies that missed estimates declined about 2.5%, compared with an average decline of 3.0%.²
The subdued reaction to positive surprises is consistent with a market in which a meaningful amount of good news may already have been reflected in stock prices. Earnings remained strong, but the market response highlights the importance of expectations and valuation, not simply whether a company beats an estimate.
Bond Yields Have Returned to a Higher Range
On the fixed-income side, intermediate-term interest rates have been choppy. Over the last three years, the 10-year Treasury yield moved from near 5% to roughly 3.5%, then climbed back toward 4.7% by the end of August.³ Rising yields generally place downward pressure on existing bond prices, while falling yields generally have the opposite effect.
Despite that rate volatility, the broad U.S. investment-grade bond market generated an annualized total return of approximately 4.54% over the three years ending in August 2026. Its cumulative return was about 14.25%, while the largest drawdown over the period was less than 5%.⁴
Income Has Become a Larger Part of the Bond Story
The recent bond experience reinforces a basic principle: total return combines price movement and income. Three years ago, the starting yield to worst for the Bloomberg U.S. Aggregate Bond Index was approximately 4.96%. The subsequent three-year annualized total return was approximately 4.54%.⁴
That relationship does not guarantee future returns, and bond prices can continue to fluctuate. Still, a starting yield near 5% provides materially more income than the very low-yield environment experienced several years ago. For investors who use bonds for portfolio income and diversification, the higher income component represents a larger portion of potential total return than it did during the very low-yield environment.
Treasury Policy Is Another Variable to Watch
The U.S. Treasury has also announced debt-management measures intended to support liquidity and market functioning in longer-dated government bonds. These measures include additional buybacks of longer-term Treasury securities alongside greater issuance at shorter maturities. The stated approach changes the supply mix across the yield curve, but it does not ensure that long-term yields or mortgage rates will decline.
Long-term rates remain important for consumers and businesses because they influence mortgage costs, housing affordability, and corporate borrowing. As a result, Treasury issuance, Federal Reserve communication, inflation, and economic growth are all relevant inputs for the bond market.
Bottom Line
August delivered broad positive returns and ended the summer on a stronger note. Corporate earnings remained well above recent averages, although subdued post-earnings price reactions suggest that expectations were already elevated in some areas. In fixed income, higher starting yields have restored a more meaningful income component, even as interest rates remain volatile.
The combination reinforces the role of diversification. Stocks and bonds have historically responded differently to economic and market forces, which is one reason diversified portfolios may include both asset classes. Maintaining an allocation aligned with an investor’s goals, time horizon, income needs, and tolerance for risk remains more important than reacting to any single month.
Sources
1. Morningstar Direct market-return data, as of 8/31/2026.
2. FactSet Earnings Insight, including Q2 2026 earnings growth, adjusted earnings growth, earnings-beat rates, and average price reactions.
3. Federal Reserve Economic Data, three-year history of the 10-year U.S. Treasury yield.
4. Morningstar Direct fixed-income data, including three-year cumulative return, drawdown, annualized return, and starting yield to worst.
5. U.S. Treasury debt-management announcements concerning Treasury buybacks and the maturity profile of issuance.
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