Markets held up reasonably well in the third quarter, but the environment became tougher. Economic growth remained solid, and company earnings remained supportive, which helped stocks. At the same time, inflation remained stubborn, and interest rates rose, which hurt bonds. The result was a fairly flat quarter for a diversified global 60/40 portfolio, even as different parts of the market moved in very different directions.

U.S. stocks gained 2.3% during the quarter, but the gains became much more concentrated. A relatively small group of large technology companies tied to AI helped keep the S&P 500 positive, while the average stock struggled. The equal-weighted S&P 500 fell 1.7%, growth stocks outperformed value, and small-cap stocks fell 7.9%. Higher rates made it harder for many companies to keep pace, while strong earnings and continued AI spending supported the market’s largest technology leaders. Sector performance also pointed to a rates story. Energy led the quarter, while utilities — typically a defensive area when growth concerns rise —fell 12.4%. That suggests investors were more worried about higher rates than a weakening economy, at least for now.

International markets were quieter during the quarter, but emerging markets are still having a strong year. They slipped slightly in Q3, yet remain up 23.7% year-to-date, ahead of both U.S. and developed international stocks. Much of that strength has come from Asian markets tied to semiconductors and AI spending.

Bonds had a difficult quarter as interest rates moved higher. U.S. bonds fell 3.5%, investment-grade corporate bonds fell 3.9%, and high yield declined 1.8%. The main issue was the sharp increase in interest rates, not a broad rise in company defaults.

Commodities helped in a quarter when bonds were struggling. Broad commodities gained 16.2%, led by higher energy prices, while gold rose 3.2% as concerns about war, inflation, and rising government deficits pushed the metal higher.

The main message from Q3 is that stronger growth was both good and bad for markets. It helped support company earnings and stocks, but it also kept interest rates high and put pressure on bonds. With different parts of the market continuing to move in different directions, diversification remains important heading into the final quarter of the year.