Higher Rates. Higher Returns. – Miller Value Partners

The third quarter of 2026 was a remarkably average one for the market, as the S&P 500 advanced 2.30%, very much in line with oft-cited rates of return for the asset class. The final day of the quarter saw the index close just 1.89% below its prior all-time high from approximately halfway through the quarter. Underneath the hood, though, the past quarter’s poor breadth was particularly notable for an index hitting all-time highs: four stocks – Apple, Microsoft, NVIDIA and Meta – generated 4.23% for the index, or nearly twice the entire index’s gain, while the remaining 496 stocks collectively lost -1.92%. By the end of the quarter, 83% of the index was at least 10% below their 52-week highs, while over 200 of the 500 constituents were at least 20% below their 52-week highs. The broad-based weakness was particularly noticeable in smaller capitalization stocks, with the Russell 2000 losing -7.19% in the quarter. Pundits attributed the declines to a combination of reduced growth expectations, spiking energy prices and the concurrent rise in interest rates.

With the ten-year US note yield starting the quarter at 4.47% and ending it at 5.28%, one of the charts making the rounds on social media lately shows that the correlation between stocks and rates has often flipped once rates reach 5%. The chart’s “obvious” implication is that note yields moving above 5% start to produce a headwind for stocks and could weigh on the market. However, the short-sighted focus on correlations and relative price movements misses a more important point – namely, that the highest interest rates we have seen in decades likely imply higher rates of return for patient bond and equity investors than the myopic rate worrywarts might be expecting. Research from Birinyi looked at all 12-month periods since 1985 after a spike of 1.00% in the ten-year yield over 3 to 7 months and found the S&P 500 to be higher in 9 of the 11 previous instances, with an average return of 11.7%.

Birinyi’s findings notwithstanding, it is understandable to look at the stock market, which is up 15.6x over 17.5 years between the global financial crisis low and last quarter-end, and to question when it might all come to an end. The right answer sits in the common Wall Street adage that “bull markets don’t die of old age.” More specifically, famous financial lore attributed to John Templeton notes that, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

With the exception of AI capex and some big growth names, there are little signs of euphoria out there right now and lots of compelling valuations following the small-cap pullback. Indeed, many of AI’s supposed victims are exhibiting valuations that fall squarely into the “pessimism” bucket, if not worse. We bought shares of a business process outsourcing company in Q3, Concentrix (CNXC), which is still growing and trades at just over 2x earnings at quarter end, and it has strong potential for margin improvement along with an AI unit that has a growing backlog. If the market valued the company at 3x earnings rather than approximately 2x, that would imply a roughly 50% higher share price, assuming unchanged earnings per share.¹

Concentrix is just one example of the pessimism we still see in valuations. The reality is that misperceptions of the implications of hot themes in public markets mean opportunity, not risk. It is a great environment for capital, with more compelling options today than have existed in quite some time. For those who prioritize stability of principal in their portfolios, bonds have rarely offered as compelling risk-adjusted return potential as they do today, despite another past quarter of losses. Five years ago, as responses to COVID shut down the global economy, the market could not get enough safety, driving five-year TIPS yields down to -1.99%, the quintessential example of return-free risk. At the end of the third quarter after years of paltry returns, hold-to-maturity US TIPS investors could lock in a guaranteed real rate of return of 2.70% over five years, a level not seen since the global financial crisis. Financial theory would suggest that the marginal volatility of equities could imply an even better result if managers play their cards right, and we are excited about the prospective returns of our strategies.

As always, we remain the largest investors in our strategies and appreciate your partnership.

Bill Miller IV, CFA, CMT
October 15, 2026
@billfour

¹Concentrix is discussed to illustrate our valuation thesis and is not representative of all Firm recommendations or investment results. Shares were purchased for certain client portfolios during the quarter; holdings vary by account. The earnings multiple is based on [identify earnings measure and period]. The approximately 50% valuation illustration assumes unchanged earnings per share and an increase in the multiple from approximately 2x to 3x; it is not a forecast. Earnings, margins and valuation multiples could decline, and AI could weaken demand for the company’s services. There is no assurance that the thesis will be realized, and the investment may lose value.

This commentary reflects the views of the author as of the date above and is subject to change. There is no guarantee that any forecast, outlook, or opinion will be realized. This material is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any security. Statements containing ‘may,’ ‘could,’ ‘expect,’ ‘likely,’ or similar words are forward-looking and involve risks and uncertainties. Actual outcomes may differ materially. Information from third-party sources is believed to be reliable but is not guaranteed as to accuracy or completeness. References to specific investments are for illustrative purposes only and are not a recommendation to buy or sell any security. Portfolio holdings and positioning are subject to change. It should not be assumed that any investment in the securities referenced was or will be profitable.

Figures cited above should be verified against primary sources (e.g., Federal Reserve releases) and may reflect market estimates. Statements reflect our interpretation of public data; exact figures may vary by source and revisions.

The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice.
The views expressed in this commentary reflect those of the author as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Adviser believes that the content provided by third parties and/or linked content is reasonably reliable and does not contain untrue statements of material fact, or misleading information. This content may be dated and may not have been independently audited by Miller Value Partners.

The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. The 10-year Treasury note yield is the annualized return an investor earns by purchasing a 10-year U.S. government debt note and holding it until it matures. Capital Expenditures (CAPEX) are payments made for goods or services that are recorded on a company’s balance sheet instead of expensed on the income statement. A TIPS yield refers to the “real yield” of a Treasury Inflation-Protected Security (TIPS) issued by the U.S. government.

Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.