- William Shakespeare, The Tempest
Investors often look to history for clues about what may come next. That tendency has been especially apparent lately.
Higher oil prices and inflation concerns have invited comparisons to the 1970s. The extraordinary investment surrounding artificial intelligence has raised memories of the late-1990s Internet bubble. And with midterm elections approaching in November, another familiar set of historical charts has begun making the rounds.
There is value in these comparisons. But as Shakespeare reminds us, “what’s past is prologue.” History provides context, not the script.
Stocks Move Higher Despite a Big Move in Rates
Judged only by the closing numbers, the third quarter was hardly a page-turner. The S&P 500 produced a total return of approximately 2.3% during the quarter, about half a percent less than the index’s average quarterly return of 2.8% over the past thirty years.¹
The story behind the quarter’s modest return, however, was anything but dull.
The yield on the 10-year U.S. Treasury rose from 4.44% on June 30 to 5.28% on September 30, an increase of 84 basis points in three months.² Higher energy prices related to the conflict with Iran, persistent inflation, federal borrowing and expectations for tighter monetary policy all contributed to the move.
Rising rates generally create a headwind for stocks. They increase borrowing costs, make bonds more attractive and tend to reduce the value placed on expected future corporate profits.
Yet stocks have absorbed that pressure surprisingly well.
The primary reason has been earnings. Corporate profits have remained strong, while some analysts have continued to revise earnings expectations higher. At the same time, the S&P 500’s forward price-to-earnings ratio has fallen from roughly 22 times earnings at the beginning of the year to about 19 times today.³
In other words, stocks have continued to advance even as valuations have become somewhat more reasonable. Stronger earnings, rather than investors simply paying more for those earnings, have helped drive the market higher.
Is This the 1970s Again?
The combination of war in the Middle East, higher energy prices, elevated inflation and rising interest rates naturally recalls the 1970s.
There are similarities worth respecting. Sustained increases in oil prices can flow through to transportation, manufacturing and consumer prices, potentially keeping inflation above the Federal Reserve’s target longer than investors would prefer.
But the differences are equally important.
The U.S. economy is dramatically less dependent on oil than it was 50 years ago. According to the Federal Reserve Bank of Boston, the economy consumed nearly one barrel of oil for every $1,000 of real economic output through much of the 1970s. Today, oil reliance is less than one-third of that level. Domestic production has also increased substantially, and by 2019 the United States had become a net exporter of oil and petroleum products.⁴
None of that makes higher energy prices harmless. Oil shocks can still create meaningful inflationary pressure, but today’s economy is better positioned to absorb them than it was during the era of gas lines, wage-price spirals and double-digit inflation.⁴
Further escalation in the Middle East could keep upward pressure on energy prices, inflation and rates. Conversely, renewed diplomacy or a recovery in regional oil exports could relieve some of that pressure.
The lesson from the 1970s is not that history will repeat itself. It is that inflation deserves to be taken seriously while recognizing how much the underlying economy has changed.
Or, Is It a 1990s Flashback?
Another popular comparison is between today’s artificial intelligence (AI) boom and the Internet bubble of the late 1990s. Here too, the comparison is useful but incomplete.
One important difference is the financial strength of many companies making the largest AI investments. Microsoft, Alphabet, Amazon and other large technology companies are established, highly profitable businesses capable of funding enormous investments from their own operations. One recent comparison found that five major AI hyperscalers generated $177 billion of free cash flow last year, while a group of major Internet backbone providers in 2000 collectively generated negative free cash flow.⁵
That is a meaningful distinction, but not an all-clear signal.
Not every company participating in the AI boom is profitable or generating positive cash flow. Extraordinary amounts of capital are being committed based on expectations that future demand will justify today’s investment, with financing needs continuing to grow alongside that spending. Even some of AI’s strongest advocates have acknowledged that companies may build too much infrastructure too quickly, even if their long-term view of the technology proves correct.
That sounds familiar.
The enduring lesson of the Internet bubble was not that investors were wrong about the Internet. The Internet ultimately transformed commerce, communications and much of the economy. But being right about the technology was not the same as being right about the investment. Investors could pay too much, back the wrong company or simply expect the future to arrive faster than it did.
We continue to believe AI has tremendous potential to improve productivity, reshape businesses and support economic growth over the coming decade and beyond. But that potential does not remove the need for discipline around valuations, profitability and capital spending.
A transformative technology can still attract too much capital, and a very good company can still be a poor investment if too much future success is already reflected in its price.
That is not a red flag for AI. But we believe it is at least a yellow one, and it is an area we are watching closely as valuations, capital spending and financing continue to evolve.
Higher Rates Have Also Created Opportunity
The rise in interest rates has created challenges for the economy and financial markets. For bond investors, however, it has also created opportunity.
As we’ve noted several times in recent quarterly letters, Evermay has positioned our fixed income allocations toward the shorter end of the intermediate-term bond maturity spectrum. That positioning made our bond portfolios somewhat less sensitive to rising rates and helped reduce volatility as Treasury yields moved higher.
More recently, the math has begun to change.
With the 10-year Treasury yield at multi-year highs at the end of September, investors are now receiving more income for accepting some additional interest-rate risk. While rates can certainly move higher, our longer-term expectation is that they are less likely to move significantly higher than they are today.
As a result, we have modestly extended the average duration of our client bond portfolios. Duration is a measure of a bond portfolio’s sensitivity to changes in interest rates, influenced in part by maturity and cash flows.
This is not an attempt to predict the exact peak in rates. Rather, it reflects a change in the balance between risk and potential reward. Today’s higher yields provide more income, and if rates eventually decline, somewhat longer-duration bonds would generally have greater potential to appreciate in price.
Though we are still positioned somewhat defensively in our bond holdings, we believe the current environment warrants taking this modest step toward opportunity.
One More Look Back: Midterm Elections
History will receive plenty of attention between now and the November midterm elections.
Markets can become more volatile as elections approach, particularly while the outcome and potential policy changes remain uncertain. Historically, however, that uncertainty has often begun to fade before Election Day.
Since 1970, the stock market has begun to rally on average about 22 trading days before a midterm election and has generated an average return of 14.1% during the six months following the election.⁶ Of course, averages describe history, not what will happen this November.
The more useful lesson may be the danger of allowing political views to dictate investment decisions.
Elections and political shifts do matter. Tax, spending, regulatory and trade policies can affect particular businesses and industries. But over longer periods, corporate profits, economic growth, interest rates and valuations have generally mattered far more to investment results than which political party controls Washington.
History as Context, Not a Script
That brings us back to The Tempest.
Shakespeare opens the play with a ship caught in a violent storm, apparently headed for disaster. To the characters in the middle of it, the tempest feels like the whole story. In fact, it is only the beginning. The storm scatters the characters across the island and sets the stage for everything that follows.
Markets can feel much the same way. A sharp rise in rates, an oil shock, an election or excitement surrounding a new technology can dominate investors’ attention. But the event making the most noise today is rarely the entire investment story.
That is why we look to history for perspective rather than prediction. The past can help us understand the risks in front of us, but the investment outcomes will depend on what happens next and how businesses, the economy and markets adapt.
For investors, that argues for remaining attentive without becoming reactive, making thoughtful adjustments as risks and opportunities change while keeping long-term portfolios anchored to long-term goals.
As always, if recent market developments or changes in your personal circumstances have raised questions about your portfolio or financial plan, we encourage you to speak with your Evermay Wealth Advisor.
And if you have a friend, family member or colleague who could benefit from the advice and perspective you receive from Evermay, we would be grateful for the introduction.
With best wishes for the remainder of the year,
Mitch Schlesinger, CFA
Chief Investment Strategist
[1] Evermay Wealth Management, LLC, calculations for 3rd quarter 2026 and historical quarterly returns using data from FactSet
[2] FactSet, US Treasury Yield Curve as of 6/30/2026 and 9/30/2026
[3] Reuters, “Investors wary of slowdown in U.S. corporate profit boom,” October 1, 2026.
[4] Federal Reserve Bank of Boston, “Reassessing the U.S. Economy’s Vulnerability to Oil Shocks,” 2026.
[5] Fred Alger & Company, “AI vs. the Internet Bubble,” 2026. AI hyperscalers in 2025 include Microsoft, Amazon, Meta, Alphabet, and Oracle. Internet Backbone Providers in 2000 include Global Crossing Ltd., Sprint Corporation, AT&T Corp., WorldCom Inc., and Verizon Communications Inc. Free Cash Flow represents the cash generated by a company after accounting for operational and capital expenses.
[6] BlackRock, “2026 Midterm Elections and Market Performance.” Historical S&P 500 performance surrounding midterm elections since 1970.
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Past performance is no guarantee of future results. All investments involve risk, including loss of the principal amount invested. Diversification and asset allocation strategies do not ensure a profit and do not protect against a loss, especially during periods of market downturns.
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