3Q26 Letter: Resilience, Rates, and a Growing Telos

Dear Clients and Friends,

The third quarter brought another important milestone for Telos Partners.

Just a few months after bringing Evolve Investing and Forrest Financial Partners together to form Telos, we are excited to welcome Brandon Cabaniss, CFP® as a Private Wealth Partner.

Brandon has spent the last twenty years building an advisory practice centered on thoughtful, personal financial planning. Her approach fits naturally with what we are building at Telos. Like us, Brandon views investment management as one part of a much broader relationship, one that incorporates retirement and distribution planning, taxes, estate planning, charitable giving, liquidity decisions, and the many other choices that come with increasingly complex financial lives.

Brandon also brings a perspective shaped by her work outside traditional wealth management. Through The 3W Project, which she founded independently, Brandon has created a community focused on helping women build greater confidence, connection, and agency around wealth and the decisions that accompany it. That work reflects many of the same ideas that drew us together at Telos: that money is ultimately a tool, and that good financial advice should help people use it with greater clarity and intention.

One of our goals in forming Telos was to build a firm where experienced advisors could bring different perspectives and areas of expertise to the table while maintaining close, personal relationships with clients. Brandon adds particular depth in retirement, distribution, and liquidity planning, complementing our existing experience across portfolio management, founder transitions, estate planning, alternatives, and tax planning.

For Brandon's clients who choose to join her at Telos, the relationship with their advisor remains central. What changes is the team around her. Brandon can now draw on Peter and Chris for additional investment and planning expertise, while Nick Stecklein, CFP®, EA brings tax expertise directly into the conversation. We believe that combination allows us to address more of a client's financial life in a coordinated way.

We're thrilled to have Brandon join us and excited about what her addition means for the future of Telos.

Markets Remain Resilient

The third quarter provided another reminder that markets and the economy can be remarkably resilient, even when the headlines suggest otherwise.

The S&P 500 gained 2.3% during the quarter despite another sharp rise in interest rates and energy prices. The 10-year Treasury yield climbed above 5.3%, its highest level in more than two decades, while Brent crude rose more than 40% during the quarter. Global equities also held up surprisingly well, ending the quarter up more than 12% for the year.

Much of that resilience continues to come from fundamentals.

Corporate earnings have remained strong, particularly among companies benefiting from the extraordinary investment taking place around artificial intelligence. Importantly, earnings strength has also broadened beyond the largest technology companies. The research we reviewed entering the quarter showed improving profit margins and earnings expectations across a wider range of companies, including smaller U.S. businesses.

Valuations have also become somewhat less demanding. The S&P 500 ended the quarter trading at approximately 19.0 times forward earnings, down from 20.4 times at the end of June. That compares with a five-year average of 19.8 times and a ten-year average of 19.1 times. In other words, despite the market's continued advance, valuations are now roughly in line with longer-term averages because earnings expectations have continued to rise.

There is no shortage of reasons to worry about markets today. Interest rates have moved higher, energy prices remain a source of inflationary pressure, and geopolitical uncertainty persists. Yet those risks need to be weighed against an economy that has continued to grow and businesses that, in aggregate, continue to generate strong profits.

We have written before that valuation is a poor market-timing tool. Expensive markets can remain expensive for long periods, particularly when earnings continue to grow. Conversely, strong fundamentals don't eliminate the possibility of corrections. They simply provide useful context for understanding what is driving markets.

Today, we see reasons for both optimism and discipline.

AI Enters Its Next Phase

Artificial intelligence remains at the center of both the economy and financial markets.

The scale of investment is difficult to overstate. Technology companies continue spending enormous amounts on semiconductors, data centers, power generation, networking equipment and other infrastructure. That spending has supported economic growth and produced exceptional earnings for many of the companies supplying the AI buildout. Recent research describes the global economy entering the final part of 2026 on firmer footing than expected, with AI capital spending among the forces offsetting higher borrowing and energy costs.

But the conversation is beginning to change.

The first stage of the AI investment cycle largely rewarded the companies supplying the infrastructure. Increasingly, investors are asking a more important question: What return will companies ultimately earn on all of this spending?

We think that's a healthy question.

The strongest AI-related businesses are beginning to demonstrate that investment can translate into accelerating revenue and operating leverage. At the same time, simply announcing a larger capital expenditure budget is no longer enough. Investors are becoming more discriminating about who is spending the money, who is receiving it, and who will ultimately earn an attractive return on it.

That evolution is consistent with our view from last quarter. AI may prove every bit as transformative as its strongest proponents believe while still producing poor investments along the way. Revolutionary technologies and investment excess have frequently existed at the same time.

The appropriate response, in our view, isn't to decide that AI is either a bubble or a once-in-a-generation opportunity and position an entire portfolio accordingly. It is to remain focused on the underlying economics of the businesses we own: durable competitive advantages, strong free cash flow, healthy balance sheets, disciplined capital allocation, and the ability to translate investment into sustainable earnings.

As expectations rise, those distinctions matter more, not less.

Higher Rates Change the Math

The more significant change during the third quarter occurred in the bond market.

The 10-year Treasury yield rose above 5.3% during the quarter as investors grappled with persistent inflation, higher energy prices, significant borrowing needs and continued demand for capital from the AI buildout.

In September, the Federal Reserve responded to persistent inflation by raising its target rate by 0.25 percentage points to 3.75-4.00%, its first increase since 2023. The vote was unanimous.

Higher rates create a more challenging environment for parts of the economy. Mortgages, auto loans and corporate financing become more expensive. Higher discount rates also raise the hurdle for equity valuations, particularly for companies whose expected profits lie far in the future.

But higher yields also create opportunity.

For much of the decade following the financial crisis, investors accepted very little income from high-quality bonds. That is no longer the case. Fixed-income yields are now much closer to, or above, their long-term norms, meaning investors can earn meaningful income without necessarily taking substantial credit risk.

We find that particularly attractive for clients who need income or portfolio stability.

We are more cautious about reaching too far for yield. Credit spreads remain tight by historical standards, meaning investors receive relatively little additional compensation for lending to lower-quality borrowers. In our view, this continues to favor quality over simply maximizing headline yield.

For tax-sensitive investors, municipal bonds remain particularly interesting, while Treasuries and high-quality corporate bonds now offer income levels that would have been difficult to imagine only a few years ago.

A More Concentrated Market

Another development deserves attention.

The headline stock indexes continue to obscure an increasingly wide gap underneath the surface.

In September, nearly 80% of S&P 500 companies declined even as the index itself remained relatively close to its highs. The equal-weighted S&P 500 performed considerably worse than the capitalization-weighted index, reflecting the outsized influence of a relatively small group of technology and AI-related companies.

Concentration by itself doesn't tell us that the market is about to fall. Some of today's largest companies are also among the most profitable businesses ever created. Their weight in the indexes partly reflects genuine earnings growth.

But concentration does matter for portfolio construction.

AI exposure now appears in more places than investors might realize. It extends beyond large technology companies into semiconductors, utilities, industrials, emerging markets and increasingly even corporate credit. The same economic theme can therefore show up repeatedly across what appear on the surface to be different investments.

That makes true diversification more important.

Diversification does not mean avoiding the companies or themes that are working. Nor does it mean mechanically selling successful investments simply because they have appreciated. It means understanding where risks are accumulating and ensuring that a portfolio's success does not depend on a single economic outcome.

Back to Portfolio Basics

Periods like this can make investing feel more complicated than it needs to be.

Should investors reduce stocks because valuations are elevated? Buy technology because AI investment continues accelerating? Avoid bonds because rates may rise further? Hold more cash until geopolitical uncertainty subsides?

There will always be a compelling argument for doing something.

Our approach remains much less dependent on predicting the next headline.

We continue to believe strategic asset allocation is one of the most important decisions an investor can make. Equities provide long-term growth. High-quality fixed income now provides meaningful income and can help stabilize portfolios. International markets offer exposure to different economies, valuations and sources of earnings growth. Alternatives and real assets can provide additional diversification for appropriate clients.

And cash remains useful for near-term spending needs and optionality, but less compelling as a long-term investment strategy.

The goal isn't to construct a portfolio that performs best in one particular environment. It is to build one capable of compounding through many environments without requiring us to correctly predict which comes next.

That principle becomes especially important when markets present seemingly contradictory signals: strong earnings alongside high valuations, resilient growth alongside rising rates, and extraordinary technological progress alongside increasing concentration.

Those aren't necessarily reasons to retreat. They're reasons to remain disciplined.

Looking Ahead

As we enter the final quarter of 2026, the economic backdrop remains stronger than many would have expected earlier this year.

Corporate earnings remain healthy. AI investment continues to support economic activity. Consumer spending has remained resilient. At the same time, inflation remains above the Federal Reserve's target, energy prices have complicated the disinflationary path, and higher interest rates are beginning to exert more pressure on parts of the economy.

We don't think those competing forces require a dramatic portfolio call.

Instead, they reinforce the principles that have guided our investment approach for years: stay invested, diversify thoughtfully, pay attention to valuation without attempting to time markets, favor quality, manage taxes, and align portfolios with each family's actual goals and liquidity needs.

We are applying much the same philosophy to Telos.

When we launched the firm earlier this year, our goal wasn't simply to become larger. It was to build a deeper organization around the work we already do for clients. Bringing Brandon onto the team is another step in that direction. She adds experience, perspective and capabilities that make the entire firm stronger, while sharing the same belief that the best financial advice begins with understanding what wealth is ultimately meant to accomplish.

We remain incredibly grateful for your trust and excited about what we're building together.

As always, please reach out if you'd like to discuss your portfolio, financial plan, or any of the themes above.

Best,

Peter Hughes, CFA, CPWA®
Founding Partner

Chris Stevenson, CFA
Founding Partner