Q3 2026 Portfolio Commentary

Market Recap

The S&P 500 gained roughly 2% in the third quarter and Brentview, like many dividend strategies, trailed the index for the period. While performance in the quarter was below our expectations, factors outside our strategy generally performed. Although value and defensive stocks generally performed well during the quarter, the primary drivers of underperformance were our stock selection combined with the portfolio's technology underweight along with overweights to utilities and industrials. The strategy's lower beta profile also limited participation as investors favored more cyclical, higher-beta areas of the market. These same market dynamics are also impacting our year-to-date results, where 50% of 2026 underperformance is derived from not owning three technology stocks in the S&P 500 index. More recently, investors appear to be moving down the supply chains for both AI and Energy, focusing on areas of perceived shortages. Many of these subsectors tend to be cyclical, have high betas, or offer little to no dividend growth. For these reasons, as a category, most dividend strategies tend to own less of the recent performers, favoring steady cashflow-producing businesses that were out of favor this quarter. In the final month of the quarter, investor focus turned towards inflation and interest rates. On September 16^th, the Federal Reserve raised its policy rate by a quarter point, to a range of 3.75% to 4.00%. It was the Fed's first increase since July 2023.

As shown in Chart 1, during the month of September, technology stocks gained 4.4% and communication services 4.3%, while the S&P 500 slipped 0.5%. Interest-rate-sensitive sectors that are a common source of income for dividend investors fell much further: consumer staples declined 3.5%, utilities 6.1%, real estate 6.7% and financials 7.3% in September alone. Our overweight in utilities weighed on results in September. We continue to hold these positions because rising electricity demand from AI data centers is supporting earnings and dividend growth for well-positioned utilities, even as rates rise.

Chart 1

Source: FactSet. S&P 500 sector index returns for September 2026.

The S&P 500 index performance appears very favorable at surface level, but when digging deeper, the percentage of constituents outperforming the index and constituent correlations underscore a different story. First, as shown in Chart 2 (left), the narrowness of the market has led to a significant number of constituent holdings underperforming the very index they populate. Historically, breakdowns in correlations between the two extremes of high beta and low volatility, shown in Chart 2 (right), tended to precede reversions in the segment that captured returns.

Chart 2

Economic Backdrop

The economy remains resilient, led by investment in AI infrastructure. The Atlanta Fed's GDPNow model recently estimated third-quarter growth of roughly 5% annualized. However, inflation remains a concern; it has now run above the Fed's 2% target for five years. The job market remains a "low hire, low fire" environment, and the unemployment rate has stayed below 5% for its longest stretch since the late 1960s. The stock market, like the economy, has proven resilient, shrugging off 10- and 30-year Treasury yields above 5%, the highest in roughly two decades. The S&P 500 trades at 19.0 times forward 12-month earnings, lower than at the start of the year and below its five-year average of 19.8. Strong earnings growth is supporting that valuation. Third-quarter earnings are expected to grow 29.5%, which would mark the third straight quarter above 25%, on revenue growth of about 12%. Corporate outlooks are also improving. A record 72 S&P 500 companies issued positive earnings guidance for the quarter, the most since FactSet began tracking the metric in 2006. Energy has seen the largest upward revisions to earnings estimates, followed by Technology and Financials.

History offers some encouragement as well. As shown in Chart 3, since 1946, the S&P 500 has posted a positive return in the 12 months following every midterm election, with an average gain of 14.4%. Past patterns do not guarantee future results, but the record suggests the period ahead has historically been a constructive one for stocks. We remain focused on high-quality companies with the pricing power to keep growing their dividends through a full rate cycle.

Chart 3

Source: S&P 500 total returns following U.S. midterm elections since 1946. Data compiled by Truist Advisory Services and cited by Yahoo Finance, October 2026.

Portfolio Positioning in a Disruptive World

Investors in 2026 needed to consider three separate disruptions, each hitting a different part of the market. The first is energy. The second came from AI and technological innovation moving from a tailwind to a potential threat against established business models. The third shock is quieter but may last longer: GLP-1 medications are reshaping consumer demand. Considering these cross currents that are impacting company-specific fundamentals, Brentview Dividend Growth is overweight in areas where we see greater clarity, such as industrials, energy and utilities. We are more targeted by company-specific fundamentals elsewhere. Our primary focus remains on finding companies with greater consistency and pricing power to support future dividend growth.

Before the conflict that began in late February, the Strait of Hormuz carried about one-fifth of the world's oil. The World Bank described the closure that followed as the largest oil market disruption in history.¹ The EIA estimates Hormuz flows averaged 4.9 million b/d in the second quarter, down from 21.6 million b/d in late 2025. Given this backdrop, Energy, notably, has seen the largest upward earnings revisions of any sector this quarter. While the Energy and Industrials sectors gave back some of their gains in September, we see the recent weakness as noise rather than a change in fundamentals. Energy is expected to post the strongest earnings growth of any sector this quarter, more than doubling from a year ago on higher oil prices and much wider profit margins, yet it trades at just 13 times forward earnings, the cheapest valuation of any sector in the S&P 500. The energy sector also offers a natural hedge against inflation, which is now driving Fed policy. In the industrials segment, we favor companies supplying power equipment, electrical systems and construction behind the AI build-out, as well as those benefiting from grid investment and reshoring. These businesses have long order backlogs and the pricing power to keep raising their dividends. Industrials were among the leading contributors to dividend increases this quarter.

We reduced one of our consumer discretionary holdings during the quarter. Consumers are cautious with inflation still elevated, and housing-related stocks have been particularly weak. We also sold one of our communication services holdings during the quarter. The timing of our sale preceded news that SpaceX was making significant investments towards disrupting the wireless telecom industry via Starlink's direct satellite-to-cellphone business model. This technological innovation might have significant repercussions for the telecom industry, which is frequently owned in traditional yield-focused dividend strategies. Overall, Brentview's information technology exposure leans more toward hardware versus software. Along those lines, we recently took a contrarian position in a software company after the group collectively sold off on fears of AI disruption, nicknamed the "SaaSpocalypse." Early in the year, nearly $1 trillion of market cap from software and services stocks was erased as investors questioned whether these businesses could survive AI.² The market is now sorting companies by whether they become stronger in an AI-native economy or were only protected by the limits of the old one.

A recent Gallup poll revealed that 11% of U.S. adults, roughly 28 million people, take GLP-1 for weight loss, up from 3% in 2024.³ Oral versions of the drugs are likely to expand the user base even further. The ramifications could be significant for traditional dividend sectors. Consumer staples and restaurants have long been core holdings in dividend portfolios because their demand was assumed to be stable. More recently, two notable packaged food brands reduced their dividends by 36% and 50%. Quick-service and fast-food restaurants have also had to adapt to declining sales by changing menu items to focus on protein and reducing portion sizes. Brentview has navigated these cross currents by focusing on the underlying fundamentals driving these businesses, considering the mega trends at hand. Taken together, these three disruptions argue for underwriting dividend durability company by company, rather than by sector. The lasting payers will be businesses whose cash flows hold up against commodity shocks, technological substitution, and changing consumer behavior.

Dividend Scorecard

In the third quarter, 51 companies in the S&P 500 announced dividend increases averaging 9%, with hikes spread across all 11 GICS sectors. Financials and Industrials accounted for more than half of the increases. Financials were helped by the large banks, which typically raise their dividends after the Federal Reserve's annual stress test. Through 3Q, 29 of our 35 holdings (83%) announced dividend increases, averaging 10.8%. For the quarter, 7 companies in our strategy had dividend increase announcements, which averaged 9%. The month of September saw the most activity, with 4 companies announcing increases during the month; those announcements averaged nearly 11%. We will go into greater detail about the dividend payer landscape in the forthcoming Brentview Dividend Digest.

Table 1

Source: Public company filings

Outlook

The Fed's latest projections point to an additional rate increase this year. We expect the Fed to pause at its October meeting, just ahead of the November midterm elections, with further increases likely after that. Higher rates may keep pressure on income-oriented sectors in the near term, but the foundation for dividend growth remains healthy: earnings are strong, guidance is improving and companies continue to raise their payouts. Selection in the dividend-paying segment will remain important.

Sources:

¹ World Bank, "Strait of Hormuz Disruption Sends Oil Prices Surging," Data Blog, April 2026
² Reuters, "Selloff Wipes Out Nearly $1 Trillion from Software and Services Stocks as Investors Debate AI's Existential Threat," February 5, 2026
³ Gallup, "In U.S., GLP-1 Usage Reaches New High," July 7, 2026

This commentary reflects the views of Brentview Investment Management and is subject to change as market and other conditions warrant. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, sector, or index. The commentary should not be seen as a solicitation or offer to buy or sell any securities. The advisor (Brentview Investment Management, LLC), and their employees and clients, may hold or trade the securities mentioned in this commentary. Diversification does not guarantee a profit or eliminate the risk of a loss. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.

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