Jeff Branstad: Hi, everyone. Thanks for joining us today for Thrivent Asset Management's Fourth Quarter Market Outlook. In today's webinar, we'll take a closer look at key market themes, discuss what's driving performance and what that could mean for portfolio positioning in the final quarter of 2026.

I'm Jeff Branstad, Model Portfolio Strategist, and with me today is Kent White, Head of Fixed Income Investments, Jim Tinucci, Head of Equity Investments and David Spangler, Head of Model and Mixed Asset Investments. It has been a very active year in terms of the economic market, AI, and geopolitical landscapes. Let's talk briefly about what each of you are most focused on. Kent, why don't you start?

Kent White: Sure. So, we saw the Fed raise rates for the first time since 2023 last week. So, we'll be paying a lot of attention to what this hiking cycle might look like going forward. Also, given the impact of AI and AI cap-ex on the broader economy, In the capital markets, that's still a primary focus for us. And then obviously we're paying a lot of attention to developments in the Mideast and their impact on commodity prices and inflation.

Branstad: Jim, how about you?

Jim Tinucci: From the fundamental equity side, we've been focused on stock picking. Information technology sector, health care, consumer discretionary sectors, those have been large areas of focus. And we're really looking for solid companies that are attractively priced with a really long runway. ahead of them for that growth in sales, earnings and ultimately cash flow.

Branstad: David, how about you? What are you most focused on?

David Spangler: For me, at a higher level, it's very similar to what Kent was just saying, which is inflation, inflation expectations, how that flows into rates, especially the 10- to 30-year, oil prices, as we know, there's been a very strong correlation. Oil prices up, and the stock market hasn't done as well. And then diesel and how that flows through in terms of costs and good costs. And AI spending, right? It's been very robust. It's been a strong engine to the overall marketing economy, but at the same time too, it can be a little bit concentrated. And so that's something we really need to keep our eye on.

Branstad: Great summaries. Clearly lots to discuss today. Let's start first with the economy. Kent, what are you paying close attention to there?

White: Well, despite a number of shocks to the economy this year, the economy has looked and remained pretty solid. The primary drivers of that strength have been resilient consumer spending and capital spending on AI infrastructure. The strength of the consumer has honestly been a little bit surprising, especially given the level of prices and surging gasoline prices in particular. The consumer is very important to keep an eye on, even more so now with rates moving higher. And we've seen savings rates come down a little bit, which sometimes is a harbinger of future declines in consumer spending. So that's definitely keeping an eye on the consumer.

On AI spending, we've been seeing more concerns about AI in general and some pushback on the AI buildout. So, a combination of these could possibly slow down some of the spending in this area and have possibly some impact on the economy.

Branstad: David, what about you? What are you kind of looking at in the economy?

Spangler: Well, there's been some very strong parts of the economy. Improving manufacturing, capital spending, new orders have been strong this year, and that's really helped to support the markets.

Corporate profits have been very robust at historic levels. Resilient retail sales, stable employment—which is to say that it's low unemployment claims, low layoffs, stable hiring plans from companies, large, mid, and small. Retail sales were quite strong in August. Some can say that that's a rebound from the prior month, which was less strong or disappointing. In the near term, it can be lumpy. But if you look at a little bit longer term, let's say out to three years, almost all areas of retail spending have been strong and actually historically strong.

There's a large credit card company that recently said that their year-over-year sales were up on the cards, or spending on cards was up about 4.5%. Importantly, though, it wasn't because their customers had to spend, but because they wanted to spend.

And what's also important is that it's not just the more affluent or wealthy, but it's across all income strata have been spending. It's because they have jobs and the economy's been relatively well supported.

On the other hand, we just had, we have higher interest rates and the Fed just raised rates. So, interest rates, sensitive parts of the economy are not doing as well. Housing is quite weak. We have very low consumer confidence. Real wages have been a little slow as well and have lagged. But I think it's really important to look at what the consumer is doing and not what the consumer is saying. And the consumer has been well supported and the economy's been well supported.

Branstad: Inflation has been a major topic for several years now. And while we're no longer at the extremes we first saw post-COVID, supply disruptions and higher energy prices from the Iran conflict have pushed inflation higher again, as has solid growth in the AI spending that's been mentioned. Kent, what are your expectations for inflation going forward?

White: We remain cautious on the inflation outlook, and that's almost entirely due to the situation in Iran. Until there's a durable solution there, we're gonna be living with these supply constraints and higher prices.

We've been seeing key commodity prices continue to rise, especially energy and diesel prices. but also fertilizer and other costs. So, the longer these stay elevated, it increases the risk of a pass-through into core inflation by raising the cost of transportation and food costs, which could then leak into longer-run inflation expectations. And that is something that the Fed monitors very closely.

We've seen some progress on inflation in other areas. but not fast enough really to return the primary measure of inflation, which is the personal consumption expenditures price index or the core PCE. That's the one that the Fed targets and it's still pretty far away from the Fed's target.

We might begin to see some relief at the beginning of next year, but I don't think we're going to see inflation moving quickly towards their target, implying that the Fed likely still has a little bit more work to do and will probably keep rates at these higher levels for longer.

Branstad: David, how about from your point of view? Do you see inflation receding or staying elevated?

Spangler: No, I think it's likely to stay sticky and a little bit elevated. There are areas that have been improved. Shelter has improved, goods have improved, insurance and wage growth. Productivity can also be a support to inflation, which is to say that if we're more productive, then that can help bring down prices as well. On the other hand, we do have some tariffs that are still causing prices to be a little bit elevated, although the tariff costs have come down some. They're still there.

And the energy costs. And I think that's really the main issue at this point is to what extent do the energy issues continue to bleed through to goods costs and impinge on consumers' ability to spend. So there's push and pull. I think in general, it will remain elevated and sticky.

Branstad: We have a new Fed chair, Kevin Warsh, and he's actually sounded quite hawkish lately on inflation. So, Kent, what's your take on that? And how has the bond market reacted to the recent decision to hike rates?

White: Yeah, Chairman Warsh and the Open Market Committee decided to raise rates a quarter point at the September meeting. The hike was pretty widely expected, but Warsh did sound a bit more hawkish. And it wasn't just the chairman. but the entire committee that sounded more hawkish. So the vote was unanimous to raise rates, which was a little bit of a surprise. And 16 of the 18 participants also projected at least one more hike this year. So definitely a much more hawkish Fed.

The bond market responded to this hawkish tilt by flattening the yield curve. Yields in the front end of the curve, which are more responsive to Fed expectations, went up, while yields in the long end, the 30-year maturities, went down, as the market got some comfort that the Fed was more serious about addressing inflation concerns in the market.

Branstad: David, Jim, what did you guys see on the equity markets? How did they react?

Spangler: Well, at a top level, the reaction was literally one day of negative, right? So, when the Fed raised a quarter basis point, or 25 basis points, 1/4 of a point, it was a negative for that day, and then literally in the last couple of few days here, it's been positive. The markets are up a couple percent from where they finished on the Fed announcement day.

And that's actually kind of typical, although this is a little accelerated, which is that over the last six rate hiking cycles, you would get initial weakness, and the initial weakness has been anywhere from 6% to 15%. But over the course of the cycle, it's been positive for the markets.

Now, this is the case if it's not aggressive like it was in 2022. But if it's what we expect, which is generally relatively well anticipated by the markets, relatively gradual and not very accelerated, then I think that there's a lot of supports to the economy. And generally speaking, the markets can tolerate it and likely can be positive over the course of the cycle.

Tinucci: If we dive deeper into the markets, roughly 15% of companies outperformed by more than 5% last week, and roughly 15% underperformed by more than 5%. So, the impact from the hikes is really felt differently when you dive a layer deeper.

Branstad: Kent, the market appears to be pricing in additional rate hikes from the Fed. What are your expectations?

White: We think the Fed signaled pretty strongly that this was not a one and done hike. I think we're likely to see at least one more hike in 2026. It's possible the Fed tries to avoid hiking in October before the midterms, and if they do so, we'll probably see the next hike then come in December.

The question is what sort of tightening cycle is the Fed embarking on? Dave just mentioned that some of the more aggressive hiking cycles can really impact the equity markets negatively. We don't think that's the case this time. We think this will be a mild hiking cycle. characterized by a few front-loaded hikes rather than a more prolonged cycle.

So, whether they hike again in 2027 depends a lot on developments around the Strait of Hormuz and if oil and other commodities are beginning to flow more freely and also obviously on incoming inflation data and other economic data.

But the Fed did also signal that they will be on hold at these higher rates for most of next year, 2027, and even into 2028. So, we're not expecting a prolonged aggressive hiking cycle.

Branstad: Generally speaking, bond yields have increased pretty dramatically over the past few months, even prior to the Fed hike. What's been behind that move?

White: Oil fueled the initial rate sell-off as it traded significantly higher as the U.S.-Iran conflict intensified. And rates have been very, very correlated with oil prices. So, if you can get your oil call right, you can get your duration call right, which is kind of tricky. So, anyway, we've also seen stronger than expected growth, higher than expected inflation readings, and more hawkish Fed get priced into the rates market. So, all of those have contributed to higher rates.

Branstad: Let's shift gears some and talk about equities. which they've actually held up quite well despite all the volatility from the conflict in Iran. Jim, what are some of the key factors that have been benefiting equities?

Tinucci: Yeah, the AI-investment driven boom has continued to fuel growth. Second quarter earnings exceeded expectations that that's providing strong support for the equities as a whole.

Branstad: Yeah, David, you got something to share?

Spangler: Yeah, you know, some of the things we've already talked about, which is robust consumer spending, positive wealth effects. But I also think the job market's important for us to keep our eye on. Now, we all know that the participation rate has been lower. It's been lower for some time now. But that's an aggregate, right?

Particularly though, the prime age workers, which is 25- to 54-year olds, that's been rising and it's really not quite at, but almost at all-time highs. And as long as people have jobs, as long as the job market is stable, we have low layoffs, companies are telling us that they have reasonable expectations for hiring, then I think that can be supportive to the overall markets.

Fiscal remains supportive. We know that the tax cuts have been helpful. There's been deregulation. While we won't get a second wave of tax refunds next year, that was supportive earlier this year. Withholding rates are a little bit lower, and then accumulated depreciation for small businesses and otherwise, all businesses, but it's been, small businesses have benefited quite a bit as well. And that again also supports hiring and growth plans for businesses.

So, I think in general, these are the reasons why the markets have been holding up relatively well, even despite the fact that we had a bump in February through March with the conflict with Iran. But overall, the animal spirits have been relatively strong for most of the year.

Tinucci: And we're seeing elevated cap-ex, R&D spending, and it's broad across the economy. We're really seeing corporate America continue to invest, which is a good sign for kind of some strength in equities.

If we, I think David mentioned some of the headwinds, right? And I think why is the market kind of looked through some of them? The economic growth, our healthy labor markets, the positive wealth effects and fiscal policies, and just really what I started with, the strong earnings, AI-related investment trends are really, I think, outweighing the concerns that people might have.

Branstad: Jim, you just mentioned the strong earnings and that that's been one of the equity market supports. Do you see earnings continuing to grow at the pace that they've been on?

Tinucci: I think evidence is pointing to potential continued earnings growth. We have both the current results and the forward-looking indicators are remaining exceptionally strong.

Spangler: Earnings have been at a historic level, right? So, the thing is that while they may not be as strong on a forward basis, they're still going to be strong and strong relative to history, and that's a support to the markets. And as long as business plans are relatively strong and you look at survey data from large-, mid-, and small-companies, they say that they're relatively strong on their growth plans and on the economy on a forward basis. That supports jobs. And if the jobs are supported, I think that the consumer spending is supported and consumer spending is supported, then the earnings are supported. Even with rate hikes, you can get some PE contraction in the market, but the earnings are robust and can overwhelm any PE contraction we get from higher rates.

Tinucci: I think we're seeing growth broadening. So, the earnings strength is no longer concentrated solely in the AI companies. It's almost every sector is exceeding expectations. Profitability continues to improve. We've seen operating margins reach record highs in the second quarter, really driven by efficiency gains and operating leverage.

White: It'll be interesting to see how things look in the coming earnings reporting season with whether we see some of these cost inflation pressures flow through to corporate earnings. We saw last week that there's some pressure on some of the trucking companies and they're the first ones that feel the effect of higher diesel prices. and they'll be passing those increased costs on to everybody else that ships goods around the country. So, something to keep an eye on there if that's going to pressure earnings as well.

Tinucci: Yeah, and as we look to forward indicators, management teams remain confident they're increasing their revenue guidances again. Out-year earnings expectations are rising. We're seeing 2027 EPS estimates increase roughly 10% since the start of the second quarter. And the revenue durability that really supports the outlook because continued sales growth can reduce the reliance on really further margin expansion to drive that earnings growth.

Branstad: All right. Let's move on to answer some of the equity-related questions that we received with the registrations. Unsurprisingly, a lot of them centered around market volatility and AI. Jim, how are you thinking about AI now? Do you still feel it's a good place to invest?

Tinucci: Yes, we still think AI is a good place to invest, but it's become a stock picking and valuation discipline story rather than a simple thematic trade. One way we think about AI's impact is to bucket it into three phases: build, deploy, and monetize. So build is your chips, memory, networking, servers, the power, construction for that, deploy your cloud, databases, cybersecurity type of things. Monetize is really then enterprise applications, advertising, productivity, the use of it. And the market is shifting from asking who supplies AI, the build component, to who earns an attractive return on that AI investment?

Branstad: David, what's your thoughts on AI?

Spangler: Yeah, so AI is obviously extremely important to the entire market and the economy from large-, mid-, and small-caps. we had a market bottom on March 30th. From March 30th through almost the end of June, it was very thematic. And this is getting a little bit back to Jim's point here about needing to be more discerning on a forward basis. But from the market bottom through June 30th, it was very thematic. So, it was very low quality, very, very high momentum. Everything was very much a risk-on type of an environment. And in that case, it didn't really matter. You just bought the entire theme, if you will, and rode the momentum.

But as we got into the end of June, it was becoming a little bit more, we saw a get back into momentum, and a lot of the areas that were high momentum, the semiconductors, memory, those areas, they sold off, and it becomes a little bit more defensive, if you will, now.

So, now that's where the quality of the companies and the earnings become more important on a forward basis.

So, I think that, yes, the AI definitely continues to be a strong driver of the markets and a place to be invested. But you have to be more discerning now as you have to think a little bit more about quality on a forward basis.

Branstad: We've also been hearing a lot of pushback on data center construction. and more talk about needing increased regulation in the AI space. How is that gonna impact the market there?

Spangler: Well, again, as we talk about the concentration, that is one of the bigger risks, right? So, one of the things that is, bipartisan at this point, which is push back on data centers, push back on energy costs and regulation. And if we see regulation coming, it can be supportive if it's done well or right, if you will, but can also be very burdensome and it can really constrain the story. So that's what we have to keep our eye on is as we get regulation, which I would expect, what type of regulation do we get? How does that affect the companies? How does that that affects spending plans and so forth. And then the pushback on data centers and energy and all of that can also be a headwind to the overall theme and the market as a whole as a result.

Branstad: What about from the fixed income perspective, Kent? Has there been any letup in the massive AI cap-ex funding in the credit markets? And how has that, what kind of impact have these types of companies had on that market?

White: There's definitely not been a letup in our markets. Let's see, the first two phases in AI investing that Jim just mentioned were build and deploy. You can't do either one of those without finding a way to finance them. And most of that is currently being done in the debt markets.

So, to your point, there's definitely not been any let up in funding levels. And we're expecting this issuance to increase even further in 2027 and remain at elevated levels for a number of years beyond that as well.

So, there has been some impact on the investment grade credit market and even the high yield market because of the supply surge. We've seen debt from the hyperscalers in particular underperform the broader credit indices. These were companies that rarely tapped our market. They generated so much free cash flow that they didn't need to. Now they're needing to issue to fund the AI build out.

So, we're seeing some pressure on their spreads, credit spreads. But so far it's been contained to these tech companies. Going forward, we're a little concerned about how much capacity there is in the credit markets to keep funding at these levels before companies begin to hit issuer limits. But it's likely that we see the hyperscalers become the largest issuers in our market over the next two years. Typically, the large banks are our largest issuers. and we're likely going to see some of these big hyperscalers surpass them.

Branstad: See a genuine shift there?

White: Yeah, definitely.

Branstad: Credit looks pretty rich compared to recent history too. Is that another area that concerns you?

White: It is, but it's been one that we've been dealing with for the past few years. We've been at historically tight credit spreads across virtually every fixed income asset class. So, we don't love credit. as you're really not getting compensated for it at these levels. But it remains a yield story. Investment grade credit is yielding about 5 3/4 percent, and high yield credit is around 7 3/4 percent. So those yield levels, the absolute yield levels, do remain attractive historically.

Branstad: Digging into some of the other questions that we received prior to today, We're less than two months away from midterm elections. David, what kind of impacts might that have on markets?

Spangler: Well, state the obvious that we all know markets, don't like uncertainty and elections present uncertainty. As we come into midterm elections, we can look at a little bit of history here, but then I'll circle back to how I think that will flow through.

History says that midterm typically are your weakest years overall, but the year subsequent, in other words, after the midterms and then before the general, so year three, is typically your best years within the markets. And that's looking back at long history, back to 1930, 1928.

We're also sort of fighting a little bit seasonality. September, October typically is your worst months. But then you get into more positive seasonals.

So, as we get through the midterms, that could create some uncertainty. We get into some more positive seasonals and we get into a year three, which is typically historically a better, some of your best years. I think one of the other things is that we don't know how the elections are going to work out, but if we do have divided government, generally speaking, the markets do like divided government a bit more than they like not-divided government, if you will.

But from a campaign long ago, there was a phrase, is the economy stupid, right? And so really come back to that. We have a well-supported economy. We have strong growth. We have very strong earnings. We have a resilient consumer. And so I think that regardless of how the elections go, the economy is well supported, and I think that supports the markets.

Branstad: Let's close things out today with a quick review of our outlook and positioning. David, from a total portfolio perspective, how are you positioned going into the fourth quarter?

Spangler: Well, given everything we talked about, it may not be surprising that we're overweight risk assets, we're overweight equity, and we're reasonably well overweight equity within our asset allocation funds. We've held that position all the way through the whole year, and we continue to hold it.

Within equity, we're overweight domestic, within domestic, large caps, within large caps, growth. We're also overweight mid caps. We're underweight public small caps, but within our products, we also have private equity. So, on net, small caps are about neutral.

International is underweight. Within international, it's developed, and it's generally Europe. And generally, the growth prospects in Europe are not great. And there are issues that, for example, Germany, which has always been one of the growth engines in Europe, has with their manufacturing, with China being a strong competitor.

So, we're underweight international, we're underweight Europe, we're equal weight EM in emerging markets. And one of the reasons for that is the fact that we've seen weakness out of China and India, but then we've had a lot of strength through South Korea and Taiwan. But in South Korea and Taiwan has really been a couple of few companies, a couple of few companies on the theme of, let's say, semiconductors and memory. So, that's a bit of concentration risk. But we are overweight those areas domestically. And domestically, we can be a lot more diversified in how we are overweight to those themes as opposed to being overweight on the EM side.

Branstad: Jim, kind of looking under the hood of the equity markets, what are our portfolio managers and analysts most excited about right now?

Tinucci: I think they're most excited about the thing they're always excited about, finding new opportunities to invest. I think they're seeing attractive new ideas in health care and information technology sectors. both hardware and software within that. We're really seeing this rapid innovation that's creating new opportunities to learn and both invest in those sectors.

Branstad: Excellent. Kent, how about in fixed income?

White: In fixed income, starting with duration and the curve, I think right now it's really hard to have a high conviction call to be long duration, just given all the things that we've talked about. Strong economy, the Fed's hiking, energy prices. And oil prices are probably the single biggest risk to being long duration right now.

So, the other side of that is that rates have already moved a lot. The Fed should be done in three to four months. And typically around that time, you see rates begin to move the other direction. So, we might be nearing a top in terms of rates, but it's hard to make a really strong convicted call with everything going on in the Middle East right now.

So, we remain positioned for a somewhat flatter curve to expecting short rates to be somewhat anchored here and longer data yields to begin to move a little bit lower. We also think the market may have gotten a little bit ahead of itself, again, pricing in more than three additional cuts that the Fed has signaled. And in terms of credit, we're still, like we talked about, its valuation levels just aren't compelling there. So, we still have an up in quality bias across most of our mutual funds that we've had in place for a number of years. We try really hard not to give up too much spread there and offset it with things like good security selection.

Branstad: Excellent. David, Jim, Kent, thank you each for sharing your views with us today. And on behalf of all of us at Thrivent Asset Management, thank you for joining us too. As always, if you have any additional questions, please do not hesitate to reach out to your regional sales consultant. We look forward to seeing you again for our 2027 outlook webinar in December.