Q3 2026 Market Recap: Energy Up, Utilities Crushed, and Software Flipped | The Weekly Wrap

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Steve Eisman (0:56)

There are some signs of economic stress emerging. Mortgage rates have reached 7.5 percent. Deeply distressed, leveraged loans have reached the highest levels since the pandemic. I want to take the time to do a deep dive into what sectors and stocks as well, which did not and why. So we have to admit that investing in the S&P no longer provides diversification. It's mostly all one trade, AI.

And to be perfectly frank, that makes me nervous. I want to review a bunch of questions I have received about what to do to diversify away from AI. Answering this question is more difficult than it first appears. Let me lay out the nature of the problem. Now, let's dig deeper.

Hi, this is Steve Eisman, and this is another edition of The Weekly Wrap. This is for the week ending Friday, October 9th, but recorded Thursday night, October 8th. I just want to repeat an announcement about a change we made this week. Monday and Friday episodes are available to premium substack subscribers earlier. The Monday interviews are released for those subscribers at 12 p.m. Eastern Standard Time every Sunday, and The Friday Wrap is released at 12 p.m. Eastern Standard Time every Friday. The Monday and Friday episodes will be available on YouTube and all audio channels at the usual times, Monday at noon and Friday at 4:15 p.m. On this week's wrap, we will discuss the warner on interest rates and oil prices, a snapshot of the economy today with key weaknesses perhaps emerging, an analysis in depth of the third quarter, why I covered FICO and sold my long position in Glass House Brands, and one mail bag. There wasn't any significant war news this week, but what is clear is that the only two variables for the market that matter on a day-to-day basis are movements in oil prices and the 10-year yield. On days when oil and rates are up, the market goes down and vice versa. Take, for example, Thursday. There were headlines that President Trump is no longer interested in a deal with Iran and is planning to resume bombing. As a result, oil prices climbed, the 10-year yield rose, and the market declined. I take this threat seriously, and I assume that if bombing does resume, it will occur right after the midterms. As I literally wrote this last sentence, President Trump stated that he would not start bombing Iran until after the midterms. We're going to spend most of this wrap talking about the third quarter, but first, a few points. There are some signs of economic stress emerging. Mortgage rates have reached 7.5%, the highest level since 2023

Second, deeply distressed, leveraged loans have reached the highest level since the pandemic. For example, the value of loans trading below 60 cents on the dollar rose to 65 billion from 40 billion a year ago. Loans trading below 80 cents reached 140 billion, a jump of 90% versus a year ago. The biggest concentration of distressed loans is in the technology sector at 39%, with software, of course, being a big chunk of that. Moving on. France seems to be in trouble, and I'm not referring to the riots that are currently taking place. In the sovereign debt world, France was viewed as a safe haven. No longer. French debt to GDP has reached 120%, a dangerous level, and French rates are marching higher. There is zero consensus on what to do.

Maria Le Pen, for example, the candidate for president, wants to reduce the retirement age to 60, and that certainly won't help. By contrast, US debt to GDP is at 125%.

Now, the reason why France is in trouble and the US is not, at least not yet, is twofold. First, the US is the reserve currency of the world, and second, the entire global financial system functions on treasuries. The repo market only uses treasuries. When large institutions want to park money, they buy, you guessed it, treasuries. Until there is a serious alternative to treasuries, the US has the luxury of time. France does not. No one needs to own French sovereign debt. So the third quarter is over, and I want to take the time this week to do a deep dive into what sectors and stocks did well, which did not, and why. Now, the big news for the quarter was, of course, continued war news, higher oil prices, much higher interest rates, the Fed raised rates, and, of course, a continuing barrage of AI news. For the market, the most important news was probably the change in the 10-year yield, which during the quarter marched from 4.5% to 5.25%.