Market Strategy
by Talley Leger, Chief Market Strategist
October 16, 2026
Mixed Banks, Strong Foundations
If you doubt the analysts, listen to the companies. Once again, corporate management teams are signaling their growing optimism this earnings season. According to FactSet, the S&P 500 “guidance gap” continues to widen in a favorable direction, with an incremental 28 firms issuing positive earnings per share (EPS) pre-announcements for 3Q26, the highest net number since 2Q21 (see the chart below).
S&P 500 “Guidance Gap” – The Highest Since 2021!
Sources: FactSet, WCG, 10/14/26. Notes: # = Number. NBER = National Bureau of Economic Research. EPS = Earnings per share. The copper arrow indicates an uptrend in technical analysis.
Technology – The Future Looks Bright
Which sector is leading the charge? In turbulent times like these, we’re thankful for staying committed to high-quality/growth tech-related companies. In other words, tech upgrades and positive pre-announcements are setting the tone for the rest of the market. Specifically, information technology enjoys the highest number of companies issuing optimistic EPS guidance (44), a record for the sector!
At the industry level, software (12) and semiconductors & semiconductor equipment (11) enjoy the greatest number of firms providing positive pre-announcements.
While Taiwan Semiconductor Manufacturing Company Limited (TSM) and ASML Holding N.V. (ASML) aren’t members of the S&P 500, their recent reports bode well for the global semiconductor “ecosystem.” TSM beat analyst estimates for both the top and bottom lines, including revenues that accelerated at a 43% year-over-year (Y/Y) pace to $46.08 billion (B) and “normalized” EPS that grew 58% Y/Y to $4.60. True, ASML missed top-line estimates by less than -1%, but revenues quickened at a 49% Y/Y rate to $13.01B and the company beat bottom-line estimates by 10% with “normalized” EPS soaring over 106% Y/Y to $13.19.
Big Banks – Mixed Results
In my 2Q26 earnings kickoff Flash (July 17, 2026), the dominant narrative was one of uniform strength: At that time, the big banks delivered robust, across-the-board top-line “beats,” outsized EPS growth and textbook operating leverage.
However, the 3Q26 earnings kickoff has shifted from unanimous acceleration to more nuanced results:
- While institutions such as Goldman Sachs (GS), Citigroup (C) and Morgan Stanley (MS) posted strong revenue “beats” and robust revenue growth, other major organizations such as JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) experienced modest top-line consensus “misses.” Moreover, revenue growth rates showed across-the-board deceleration from the heated pace seen in mid-2026 (see the table below).
Top-Line Dispersion & Deceleration
Sources: Seeking Alpha, WCG, 10/14/26. Notes: B = Billions. Y/Y = Year over year.
- Similarly, “normalized” and Generally Accepted Accounting Principles (GAAP) EPS results reflect dispersion. While capital markets and trading units anchored robust profits at Goldman Sachs, Citigroup and Morgan Stanley, rising credit provisions and loss reserves (e.g., JPM credit costs reached $2.7B and Wells Fargo’s provisions rose 51% Y/Y to $1.03B) weighed on bottom-line results from other firms, leading to reported EPS “misses” relative to aggressive analyst consensus. Additionally, select institutions faced isolated legal friction, underscored by the US Treasury’s recent $1.2B penalty against Bank of America for anti-money laundering and sanctions compliance shortcomings (see the table below).
Bottom-Line Pressure, Credit Costs & Penalties
Sources: Seeking Alpha, WCG, 10/14/26. Notes: GAAP = Generally Accepted Accounting Principles.
Financials – When in Doubt, Zoom Out
Overall, financials’ expected earnings growth remains positive at 7.9% Y/Y in 3Q26, reflecting healthy underlying franchise profitability. At that rate, however, the sector would lag the S&P 500’s anticipated earnings pace of 35.8% Y/Y in the same time frame, creating an earnings growth differential of -27.9 percentage points. While financials are growing from a stable, mature earnings base compared to super-cyclical technology titans, their ongoing cash generation and capital return programs continue to anchor institutional portfolios (see the chart below).
Financials Are Growing from a Stable, Mature Earnings Base
Sources: FactSet, WCG, 10/14/26. Notes: T4Q = Trailing four quarter.
Reasons For Optimism
Despite a mixed scorecard for big bank results, at least seven fundamental tailwinds validate our constructive longer-term stance:
- Commercial and Industrial (C&I) loan growth at all US banks has rebounded into double-digit territory (10% Y/Y), supported by a directional easing of domestic lending standards (see the chart below).
Lending Standards Are Improving and C&I Loans Are Growing Double-Digits
Sources: FactSet, WCG, 10/14/26. Notes: *To Large and middle-market firms. C&I = Commercial and industrial.
2. The 2s10s US Treasury “yield curve” – or the difference between 10- and 2-year Treasury yields – has steepened, thereby acting as a vital structural tailwind for bank Net Interest Margins (NIMs) compared to the inverted-curve dynamics of prior years. According to the Federal Deposit Insurance Corporation (FDIC), industry NIMs increased slightly to 3.3% from prior quarters as earning asset yields outpaced funding costs:
a. Yield vs. Funding Cost Dynamics: The slight uptick in aggregate NIMs was driven by the average yield on earning assets increasing by roughly 2.3 basis points (bps), edging out the rise in the cost of funds which rose 1.6 bps.
b. Structural Comparison: While large institutions (> $250B) compress the industry average closer to 3.32% due to wholesale liabilities, smaller community banks maintain wider spreads ranging from 3.4% to over 3.8%, acting as a buffer against funding pressures.
Yield Curve “Normalization” Has Supported Bank Net Interest Margins
Sources: FDIC, WCG, 10/14/26.
3. The recent trajectory of bank balance sheets confirms our thesis on regulatory optimization. Core Capital Ratios (CCR) have fallen to 9.0% while Returns on Assets (ROA) have risen to 1.4% in 2026. As capital and liquidity constraints ease, banks are deploying excess liquidity from low-yielding cash reserves to higher-margin commercial loans (see the chart below).
Regulatory Optimization Drives Bank Returns on Assets
Sources: FDIC, WCG, 10/14/26.
According to the DuPont Identity (ROE = ROA x Equity Multiplier), bank profitability is benefiting from twin tailwinds:
a. Higher Asset Efficiency: ROA expanding to 1.4% provides a strong foundational base.
b. Leverage Optimization: The Assets-to-Equity ratio (Equity Multiplier) has nudged higher to 10.1x as banks safely optimize capital cushions.
Multiplying those two factors yields an aggregate bank Return on Equity (ROE) of 13.8%, one of the strongest readings in recent years. Far from reflecting balance-sheet distress, today’s lower capital ratios represent deliberate capital deployment and equity returns, creating a robust fundamental backdrop for financial sector outperformance (see the chart below).
Regulatory Relief Allows Banks to Optimize Their Capital Stacks and Increase Leverage Safely
Sources: FDIC, WCG, 10/14/26.
4. Systemic risk and liquidity conditions present no major obstacles to financial stocks. The Kansas City Financial Stress Index (KCFSI) remains in relaxed territory, reflecting orderly money market conditions, manageable credit spreads and steady financial market liquidity. Intuitively, financial sector performance has closely tracked systemic financial stability across time. Financial conditions provide a clear runway for financial stocks to re-rate on the back of expanding fundamentals (see the chart below).
The Absence of Stress in the Financial System Clears the Runway for Financial Stocks
Sources: FDIC, WCG, 10/14/26.
5. Seasonal Tailwinds: Historically, the fourth and first quarters of a calendar year provide stiff seasonal tailwinds for equities, which bode well for sustained trading, asset management fee generation and transactional volumes.
6. M&A Consolidation: Banking mergers and acquisitions (M&A) activity continues to display disciplined momentum. Rather than unrestrained mega-deal speculation, buyers are aggressively targeting strategic capability acquisitions – acquiring deposit density, specialized commercial banking teams and digital payment infrastructure. Encouragingly, regulatory review windows have compressed with approval times falling for mid-sized bank transactions, allowing institutions to realize operational synergies faster.
7. IPO Reacceleration: US initial public offering (IPO) activity may maintain its 1H26 momentum. Anchored by secular tailwinds in artificial intelligence (AI) infrastructure, biotech and defense alongside a broadening pipeline of non-tech issuers, sponsor-backed issuance is finding receptive public markets, boosting investment banking pipelines for the remainder of the year.
Bottom Line
While 3Q26 bank earnings present a more disciplined, sober picture than the uniform “beats” of 2Q26, in our view, the foundational health of the banking system remains robust. With loan growth expanding, the yield curve “normalizing” and the S&P 500 “guidance gap” sitting at multi-year highs, we believe the path of least resistance is higher for stocks. Money isn’t leaving the market, it’s just rotating. Don’t fear the transition!
Portfolio Strategy
by Jim Worden, CFA®, CMT®, CAIA®, Chief Investment Officer
October 16, 2026
What can go right?
Investment professionals and those involved with risk management often focus on all of the things that can go wrong. Right now, that list could include things like:
- Tightening financial conditions (e.g., higher rates)
- A weakening consumer
- Inflation, including higher energy prices
- A weaker labor market and weaker wage increases
- Disruption
- Geopolitical conflicts
- Stretched valuations in some areas
- Index concentration
- Market breadth
The list could go on and on. These can be real concerns, and we should always keep an eye on these things. But too often, we may not pay enough attention to the things that can go right. As we cruise into the last quarter of the year, let’s review some things that could go right and could be a boon for investors. As always, there’s no guarantee, and no one has a crystal ball:
- Geopolitical conflicts ease
- Oil prices drop dramatically
- Inflation worries subside
- Longer-term rates drop
- The Federal Reserve becomes more dovish
- Earnings and revenue growth surprise to the upside
- Real GDP growth is neither too hot nor too cold—Goldilocks!
- Sentiment improves and dry powder gets invested
In my opinion, the market has largely grappled with the first list of issues and may not have fully priced in the potential positive developments.
By the way, this isn’t an “all-or-none” proposition. We don’t necessarily need all of the stars to align and everything to go right for us. Even a few of these could reawaken some “animal spirits” and allow the market to climb higher, in my opinion.
October may be rough sailing, but seasonal factors and potentially less uncertainty after the midterm elections could help support markets in November and December. These factors do not assure positive returns.
Definitions
Financial conditions: The availability and cost of financing in the economy, influenced by interest rates, credit availability, asset prices, and other factors.
Inflation: An increase in the general level of prices for goods and services over time.
Valuation: An assessment of an investment’s worth, often expressed relative to earnings, revenue, assets, or other measures. “Stretched valuations” suggests prices are relatively high compared with the measures used.
Index concentration: The extent to which a relatively small number of securities account for a large share of an index’s weight or performance.
Market breadth: The extent to which individual securities participate in a market advance or decline.
Federal Reserve: The central bank of the United States, responsible for monetary policy and other functions.
Dovish: Describes a monetary policy stance favoring easier financial conditions, potentially through lower interest rates, to support employment and economic activity.
Earnings and revenue growth: Increases in company profits and sales, respectively.
Real gross domestic product (GDP): The value of final goods and services produced within an economy, adjusted for inflation.
Goldilocks economy: An informal term describing economic growth that is strong enough to support activity without generating excessive inflation.
Sentiment: Investors’ attitudes and expectations regarding markets or economic conditions.
Dry powder: Cash or other liquid assets available for investment.
Animal spirits: An informal term describing confidence, emotions, and willingness to take risks that influence economic and investment decisions.
Seasonality: Historical patterns associated with particular times of the year. Such patterns may not persist or predict future results.
S&P 500: A stock market index tracking the performance of 500 of the largest publicly traded companies in the United States. It serves as a primary benchmark for the overall health of the U.S. stock market.
Russell 2000: An index that measures the performance of 2,000 of the smaller companies in the United States. Indices are unmanaged and cannot be invested in directly.
Intercontinental Exchange (ICE) Bank of America (BofA) High Yield Index: It tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
The ICE BofA Corporate Index: It tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
10-year US Treasury note: A government debt security issued by the US Department of the Treasury that pays the holder a fixed interest rate every six months and matures in 10 years, at which time the principal amount is returned to the investor.
A 10-year US Treasury Inflation Protected Security (TIPS): A type of US Treasury bond with a 10-year maturity that shields investors from inflation. Unlike conventional Treasury bonds and notes, the principal value of a TIPS adjusts upward with inflation and downward with deflation, based on changes in the Consumer Price Index (CPI).
Inflation Shock Momentum Index (ISMI): It updates data on coordinated directional pressure across the distribution of category-level personal consumption expenditures (PCE) inflation rates. This monthly indicator is intended to track persistent inflationary or disinflationary pressures in real time by identifying sustained directional runs in shocks to monthly inflation. Positive values indicate broad-based upward pressure on inflation, while negative values indicate underlying downward pressure.
NBER Recession: A significant decline in economic activity spread across the economy, lasting more than a few months, as officially designated by the National Bureau of Economic Research. It is determined by analyzing factors like gross domestic product, income and employment.
Disclosures
This material is an opinion piece provided for informational and educational purposes only. It is not individualized investment advice or a recommendation to buy, sell, or hold any security or adopt any investment strategy.
The opinions expressed are those of the author as of October 14, 2026, and are subject to change without notice. The potential developments discussed are possible scenarios, not assurances that these events will occur or produce favorable investment results. Economic developments, monetary policy decisions, geopolitical events, and investor behavior may differ materially from expectations.
Investing involves risk, including the possible loss of principal. Favorable economic developments do not necessarily result in rising security prices. Historical seasonal or election-related patterns do not assure future outcomes. Past performance is not indicative of future results.
The views expressed are for informational and educational purposes only and are subject to change without notice.
This material is not intended as, and should not be interpreted as, individualized investment advice or a recommendation to buy, sell, or hold any security, sector, industry, or investment strategy.
References to specific companies, securities, sectors, or industries are for illustrative purposes only and should not be construed as investment recommendations.
Investing involves risk, including the possible loss of principal. Investments in a specific industry or sector may involve greater risk and volatility than more diversified investments.
Past performance is not indicative of future results. No investment strategy can guarantee a profit or protect against loss.
Forward-looking statements, including views about future demand, pricing, supply, or industry cycles, are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially.
Data and information are believed to be reliable, but accuracy, completeness, and timeliness are not guaranteed. Source documents should be retained for factual claims, third-party research references, and company-specific data.
Portfolio holdings, allocations, and risk budgets are subject to change based on market conditions, client objectives, and investment guidelines.
The author, firm, clients, or related persons may hold positions in securities mentioned and may buy or sell those securities without notice, subject to applicable policies and regulations.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through WCG Wealth Advisors, LLC, an SEC Registered Investment Advisor. WCG Wealth Advisors, LLC and The Wealth Consulting Group are separate entities from LPL Financial. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
All information in this report is believed to be from reliable sources; however, WCG Wealth Advisors, LLC, makes no representation as to its completeness or accuracy.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the companies as well as broad market, economic and political conditions. Stock investing involves risks, including fluctuating prices and loss of principal. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. (135-LPL) International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. (93-LPL)
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors. (122-LPL)
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. (28-LPL)
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. (26-LPL)
Standard deviation is a historical measure of the variability of returns relative to the average annual return. If a portfolio has a high standard deviation, its returns have been volatile. A low standard deviation indicates returns have been less volatile. (131-LPL)
This is for educational / general purposes only, does not constitute investment, tax or legal advice and should not be relied on as such. This is not to be construed as an offer to buy or sell any financial instruments. Any strategies discussed are not intended to be relied upon as the sole factor in making an investment decision for any individual. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. These comments should not be construed as recommendations but as an illustration of broader themes.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations. In addition, forward-looking statements, including index targets or market scenarios, are hypothetical in nature, reflect current views and assumptions and are subject to change based on market and economic conditions and are not guarantees of future performance. This is a hypothetical example and is not representative of any specific investment. Your results may vary. (88-LPL) Scenario outcomes are illustrative and not predictive. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly. (102-LPL)
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Publication Date: October 16, 2026
For Public Use in the US
The Wealth Consulting Group
LPL 1193438