Quarterly Investor Letter Q3 2026
This letter is intended for institutional investor audiences. Wespath is a general agency of The United Methodist Church, a 501(c)(3) tax-exempt organization. Wespath administers benefit plans, and its affiliates, UMC Benefit Board, Inc. (“UMCBB”) and Wespath Institutional Investments LLC (“WII”), provide investment management services. UMCBB provides investment management services to funds made available to benefit plan participants and beneficiaries, plan sponsors and other institutions controlled by, associated with, or related to The United Methodist Church. WII provides investment management services to funds made available to institutional investors controlled by, associated with, or related to The United Methodist Church. WII may also provide direct investment advisory services to those investors. WII and UMCBB utilize certain shared personnel, including investment professionals. Unless otherwise noted, the firm referenced herein is defined to include Wespath, UMCBB and WII.
Quarterly Investor Letter Q3 2026 FROM THE CHIEF INVESTMENT OFFICER Over the past few months, one question keeps coming up in my conversations with clients. With bond yields this high, should we be adding more fixed income? Some ask the mirror image, too. With bond prices moving lower, should I be buying more stocks? Both are fair questions, and I understand why people ask them after a quarter like this one. The answer, to me, always comes back to asset allocation. Most of our institutional investment clients rely on their investment portfolio to directly support their mission work, whether that means funding grants and scholarships, supporting an annual budget, or putting money to work in their communities. That work doesn’t happen in the span of just one quarter. Your portfolio has to cover what you spend today, keep pace with inflation, and still be there 10 or 20 years from now. That’s why each version of the question above has a trade-off. Shifting toward bonds lowers your risk, but it may not earn the returns your mission needs over the long haul. Leaning further into stocks adds return potential, but it only makes sense for those who can stomach more risk for longer. And getting to this level of understanding about your organization’s needs and risk tolerances is best achieved through asset allocation studies, scenario analyses and deep collaboration, not in reaction to a single quarter. This is also a big reason why we've focused on giving you more choice. For example, here at Wespath, the third quarter was highlighted by the continued evolution of our public equity platform. We recently brought in several new asset managers and a broader mix of strategies into our International Equity Fund, and our team will walk through the thinking behind those changes in our October content and our meetings with clients in the coming weeks. In the pages that follow, we are focusing on what moved markets this quarter (including a deep dive into the bond markets in our “Bonds Take Center Stage” story). As you read, I’d encourage you to keep your own organization in mind. The headlines change every quarter, but the questions that matter most for your portfolio almost always come back to what you really need your money to do. If anything here sparks a question about your portfolio, let's talk. Those are my favorite conversations. Thank you, Johara Farhadieh Chief Investment Officer & WII Chief Executive Officer
2 | Quarterly Investor Letter | Wespath
Key Takeaways from the Quarter • GDP: U.S. GDP in the second quarter grew at an annualized rate of 2.2%, supported by resilient consumer spending. Capital expenditures, productivity gains and strong corporate profits also contributed to economic growth, even as elevated interest rates weighed on housing and other sectors. Outside the U.S., Europe and Japan proved more resilient than expected, while China's economy remained uneven, with strong manufacturing and trade activity offset by weak consumer spending and rising unemployment. • Inflation: Prices, as measured by the PCE Index, rose 3.4% year over year in August, as inflationary pressures extended beyond energy into other parts of the economy. While disruptions tied to the conflict in Iran continued to contribute to higher prices, inflation also increased across areas such as health care, utilities and financial services. The broader nature of these price increases reinforced the challenge facing policymakers as they work to bring inflation back toward normal levels. • Jobs: The U.S. labor market steadied during the quarter, with unemployment remaining near historic lows at 4.2%. The economy added an average of 50,000 jobs per month in 2026, compared to 10,000 per month in 2025. However, depressed hiring rates and declining job openings reinforced the “low hire, low fire” environment that has characterized the labor market in recent years. • The Fed: The U.S. Federal Reserve (Fed) raised its policy rate during the quarter, bringing the target range to 3.75% to 4.00%. Persistent inflation, a strong labor market and continued economic growth supported the Fed’s more restrictive policy stance. Market expectations shifted from anticipated rate cuts toward a higher-for-longer outlook, with an increased probability of additional tightening. • Stocks: The Russell 3000 Index gained 1.4% during the quarter, with value stocks outperforming growth stocks. Performance also varied across sectors, as technology and health care advanced, while smaller companies lost ground amid higher interest rates. Emerging market stocks remained strong for the year, but gains were heavily concentrated among AI-linked companies in Taiwan and South Korea. • Bonds: The Bloomberg U.S. Aggregate Bond Index fell 3.5% as bond yields moved higher during the quarter. Long-term yields rose sharply across developed markets. Persistent inflation, resilient growth and heavy government borrowing led to a sell-off in long-term government debt. Credit spreads, while generally remaining low throughout the quarter, began widening toward the end of Q3, with widening being most prominent among the lowest-rated borrowers. Bloomberg U.S. High Yield
0.1
-1.82
Bloomberg U.S. Aggregate
-3.51
-2.91
MSCI ACWI ex-U.S.
14.22
0.48
Russell 2000
13.71
-7.23
S&P 500
12.75
2.3
Russell 3000
12.42
1.41 -10
-5
0 YTD (%)
5 3 Months (%)
3 | Quarterly Investor Letter | Wespath
10
15
20
Beyond the Headlines Bonds Take Center Stage Bond yields climbed around the world this quarter, and they didn't climb quietly. Long-end yields in the U.S., U.K., Japan and several other major economies hit their highest levels in two to three decades, sparking conversation about whether yields had finally returned to a “normalcy” not felt since the Great Recession. In the U.S., for example, the 10-year Treasury yield ended September at 5.29%, up from 4.16% a year earlier. The 30-year finished at 5.64%. Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity, Quoted on an Investment Basis
(Source: Board of Governors of the Federal Reserve System [U.S.] via FRED®)
The rise in yields created headwinds for fixed income returns during the quarter. Bond prices move in the opposite direction of yields, so as yields pushed higher in Q3, prices fell. And the losses were steepest for bonds with the longest maturities: The Bloomberg U.S. Aggregate Index lost 3.5% for the quarter, while the Bloomberg Long Gov/Credit Index gave back 7.8%. So, what drove yields this high? Several forces hit at the same time: • Inflation that won't quite cool off: Inflation has stayed well above the Fed’s 2% target, and price increases have spread beyond energy into areas like health care, utilities and financial services. Long-term inflation expectations, however, have remained steady. That tells us the jump in yields reflects more than inflation fears alone. • An economy that keeps beating forecasts: Economic growth has outpaced expectations again and again, with consumer spending, business investment and record corporate profits doing most of the work. The Atlanta Fed’s GDPNow estimate, for instance, is calling for a healthy 3.7% growth rate for Q3. • A long line of borrowers: Governments around the world keep borrowing heavily, and companies have been borrowing heavily including record borrowing tied to AI. More specifically, a lot of that debt has gone into building out AI infrastructure like data centers, semiconductors and the power to run them. 4 | Quarterly Investor Letter | Wespath
Bonds Take Center Stage (Continued) Put all those factors together, and you get more demand chasing the same pool of capital, which pushes the price of that capital higher. Central banks moved, too. The Fed raised its policy rate by a quarter point to a range of 3.75% to 4.00%, and Fed officials have already signaled that more hikes may be needed. The European Central Bank and the Bank of Japan both raised rates as well. As a reminder, markets started the year with expectations for rate cuts. Now, we are ending Q3 with a growing probability for more hikes. The bigger question is whether this is a passing spike or something that lasts. Economists tend to frame that conversation around the “neutral rate,” or the level at which policy neither stimulates nor restrains growth. Heavy government borrowing and huge investment in AI both point to that neutral level moving higher. And if those AI investments pay off in stronger productivity, the upward pressure only builds. Now, there are definitely still some big “ifs” baked into that equation, but those dynamics are why higher rates have started looking less like a detour and more like the road ahead for a while. But perhaps the even bigger question is this: What does it actually mean for investors? Well, for those with a long-term horizon, higher rates cut both ways. This quarter's price declines stung, but longerterm bonds now start from yields well above where they stood a year ago, and that income is a big part of what bonds do for your portfolio. There’s also the need to consider the impacts of higher yields beyond just bond market returns. For example, housing starts in Q3 fell from a year earlier, and rate-sensitive areas like real estate and smaller companies are still adjusting to higher for longer. Those corners of the market actually held up reasonably well this quarter, but the longer rates stay elevated, the harder it gets for businesses that rely on cheap borrowing to keep pace.
Energy Shocks and Sector Rotations Borrowing wasn't the only thing that got more expensive this quarter. The war in Iran spread across multiple fronts and choke points, and the fighting across the Arabian Peninsula restricted oil shipments out of the Gulf and damaged refining capacity and infrastructure in the region. Before the conflict, the Gulf states exported about 17 million barrels of oil a day. At the end of September, that number was close to 13 million. The effects reached well past the gas pump. Higher oil prices fed into supply chain disruptions, which in turn impacted things like agriculture and the cost of fertilizers. We also saw geopolitical repercussions. In import-reliant countries, protesters have taken to the streets over soaring fuel prices and rolling blackouts. Still, stock markets took all of this in stride, at least on the surface. The Russell 3000 Index gained 1.4% for the quarter, and the S&P 500 Index finished just 1.9% below the all-time high it set on August 13. Underneath, though, there was some sharp rotation: • Leaders: Energy (+15.9%), technology (+6.8%) and health care (+6.3%) • Laggards: Utilities (−11.9%), industrials (−10.7%) and real estate (−5.9%) A quarter like this shows why diversification matters. The broad market barely moved. But depending on where you were invested, your experience could look very different, with a gap of close to 28 percentage points between the best and worst sectors. 5 | Quarterly Investor Letter | Wespath
Beyond the Headlines
Paying Attention to the Fine Print The gap between sectors was part of a bigger pattern this quarter. In both stocks and bonds, the headline trends looked healthy, but almost every one came with a bit of a catch once you looked closer. Let’s start with stocks. One of the more encouraging stories of 2026 has been leadership spreading beyond a handful of giant technology companies, with value stocks, industrials, communication services and smaller companies all taking part. Value has beaten growth by a wide margin so far this year, as the Russell 3000 Value Index has gained 19.2% compared to the Russell 3000 Growth Index’s 6.4% return. Smaller companies have had a strong year as well, with the Russell 2000 Index up 13.7% year to date, a bit ahead of the large-company Russell 1000 Index at 12.3%. Now the fine print. Smaller companies gave back a meaningful share of those gains this quarter as markets adjusted to higher rates. The Russell 2000 Index fell 7.2% in the third quarter and mid caps slipped 3.0%, which shrank what had been a much wider lead over large companies. Smaller businesses tend to depend more on borrowing, so they feel the cost of higher rates sooner. And even with more of the market participating, the earnings and revenue behind the AI boom still come from a small group of companies, both in the U.S. and in emerging markets. Trailing 12 Month Revenue Growth (As of June 30, 2026)
160%
145%
140% 120% 100% 80%
71% 57%
60% 40% 20% 0%
16%
14%
Amazon
Apple
20%
18%
Google Microsoft
31%
28%
Meta
Nvidia
Samsung SK Hynix TSMC
(Source: FactSet)
9%
5%
S&P 500
MSCI Emerging Markets Index
Bonds told a similar story. Governments and companies borrowed heavily this year, including record borrowing tied to AI, and yet credit spreads stayed low. Spreads are the extra yield investors demand for taking on default risk, so low spreads mean lenders still feel fairly comfortable. That calm, though, wasn't distributed evenly. Bonds rated CCC and below, the riskiest part of the high yield market, saw spreads widen from 885 basis points at the start of the year to 1,179 by late September. Over the same stretch, spreads on higher quality BB bonds rose just 25 basis points. Considered together, this quarter’s “fine print” provides a powerful reminder about the value of knowing what you own, and why you own it. Said differently, selectivity and research are critical in these types of environments. 6 | Quarterly Investor Letter | Wespath
From Buildout to Payback: The Latest on AI The AI theme drew the line between "looks good" and "holds up" more sharply than anything else this quarter. It's still the market's center of gravity, but the questions being asked have started to change. Investors have stopped asking only who is building AI and how fast and started asking what all that spending will earn and whether today's prices already reflect it. So far, it’s been the AI suppliers who have cashed in (see Nvidia’s revenue significantly outpacing the S&P 500 Index average in the previous chart). Yet chipmakers have shown the new investor skepticism most clearly. Since January 1, the semiconductor industry has seen the market's largest upward earnings revisions, at nearly 97%. And its valuation multiple fell more than 29%, the second largest drop of any industry: Semiconductor earnings revisions have surged while valuations compressed 120% 100%
96.8%
80% 60% 40% 20% 0% -20% -40%
-29.4% 2nd largest multiple contraction
Largest EPS revision
(Source: Baird Strategas, as of September 8, 2026)
In other words, investors expect these companies to earn far more but are now paying less for each dollar of it. That pull between rising earnings and falling multiples shows how much the AI conversation has matured this year, and it's a big reason AI-driven opportunities and risks remain at the top of the themes we're watching.
Wespath Highlight: Myth-Busting Quantitative Investing In this recent blog, Andrew Steedman, Public Equities Associate, explores three common myths surrounding quantitative investing and explains how data, technology and investment expertise work together within a disciplined investment process. The article also provides additional context on Wespath's use of systematic Read Now investment approaches, including recent enhancements to the International Equity Fund I Series, and how these strategies can complement a diversified portfolio.
7 | Quarterly Investor Letter | Wespath
Looking Ahead As we head into the final three months of the year, let’s take another look at the six “Themes to Watch in 2026” that we have explored in previous investor letters: 1. AI-Driven Market Opportunities & Risks: As noted, the AI story continued to evolve this quarter, with investors more closely scrutinizing capex and valuations. Demand for data centers, semiconductors and memory remained strong, and growth continued to be increasingly concentrated among a select group of companies in the U.S., Taiwan and South Korea. As investment and expectations continue to rise, determining where AI-related spending translates into sustainable earnings will remain a key focus.
2. Geopolitical Tensions & Shifts: The conflict in Iran spread through the Gulf region and continued to impact markets, energy shipments and global supply chains. Reduced oil exports from the Gulf states contributed to higher crude prices, while shortages of semiconductor components added pressure and pricing power to the AI supply chain. This quarter again reinforced how quickly geopolitical developments can become broader drivers of inflation and market conditions.
3. Global Deficit Spending & Accommodative Financial Conditions: Heavy government borrowing and substantial investment in AI infrastructure intensified competition for capital during the quarter. These forces helped push long-term bond yields toward multi-decade highs and raised questions about whether the neutral rate is moving higher. Although credit spreads remained subdued throughout the quarter, we observed widening towards the end of the quarter with stress impacting the lowest-rated borrowers the most. This suggests that financing conditions were becoming less uniform.
4. Interest Rate Crosscurrents & Central Bank Policy: Persistent inflation, resilient growth and a stable labor market kept pressure on central banks during this past quarter. The Fed raised its policy rate by 25 bps, while market expectations shifted away from anticipated cuts and toward a higher for longer outlook. With elevated rates weighing more on housing, smaller companies and more, the path of inflation and central bank policy will remain an important driver of growth and market performance.
5. Market Concentration & Active vs. Passive Dynamics: Beneath the surface of positive market returns, leadership continued to shift across sectors, styles and regions. Emerging market gains were particularly concentrated among a small number of AI-linked companies in Taiwan and South Korea, contributing to elevated volatility. When a few companies account for so much of an index's return, passive investors end up holding more of that concentration, while active managers can decide how much of it to own. That mix of broader participation and persistent concentration is why it pays to understand and purposefully diversify the sources of return in your portfolio.
6. Opportunities & Challenges in Private Markets: IPO and venture activity remained concentrated among the largest companies. Elevated interest rates and constrained capital weighed on broader fundraising and deal activity, while secondaries and continuation vehicles continued to provide liquidity. This environment reinforces the importance of selectivity, as company size, financing needs and manager relationships can lead to meaningfully different outcomes.
Bottom Line: From our perspective, the biggest lesson from this quarter isn't about where rates, oil or AI go next. It's that markets are getting more selective. There is more detail in the fine print. The distinction between strong and weak businesses, strong and weak borrowers, and durable earnings versus future expectations is becoming more important than broad market exposure alone. That's why we combine complementary managers and approaches and pair efficient market exposure with active strategies where research can add value. For long-term investors, this kind of market favors steady discipline over trying to time each turn. We'll keep watching all six themes closely and sharing what we see. 8 | Quarterly Investor Letter | Wespath