INSIGHTS

On October 26, 2026

AAM Viewpoints — Dividend Investing in a Disruptive World

THIRD QUARTER MARKET RECAP

The S&P 500 gained roughly 2% in the third quarter. While value and defensive stocks generally performed well, investors favored more cyclical, higher-beta areas of the market. Technology was a notable driver, while utilities and other interest-rate-sensitive sectors faced greater pressure. 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 higher betas, or offer little to no dividend growth. As a result, many dividend-oriented stocks, particularly steady cash flow-producing businesses, were out of favor during the quarter.

In the final month of the quarter, investor focus shifted toward inflation and interest rates. On September 16th, 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, technology stocks gained 4.4% in September and communication services rose 4.3%, while the S&P 500 slipped 0.5%. Interest-rate-sensitive sectors that have traditionally been a source of income for dividend investors fell more sharply: consumer staples declined 3.5%, utilities 6.1%, real estate 6.7% and financials 7.3%. Despite recent pressure on utilities, rising electricity demand from AI data centers could support earnings and dividend growth for well-positioned companies, even in a higher-rate environment.

Chart 1
S&P 500 September Sector Returns 

Source: FactSet. S&P 500 sector index returns for September 2026. Past performance does not guarantee future results.

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 underperforming constituent holdings against the very index they populate. Historically, when breakdown in correlations shown on Chart 2 (right), between the two extremes of high beta and low volatility, tended to precede reversions in the segment that captured returns.

Chart 2

Source: Brentview | Past performance is not indicative of future results.

ECONOMIC BACKDROP

The economy remains resilient, led by investment in AI (artificial intelligence) 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.

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." Past performance does not guarantee future results.

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 & 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.

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 barrels per day (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 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, 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 possibly keep raising their dividends.

Consumers are cautious with inflation still elevated, and housing-related stocks have been particularly weak. Software companies 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 were 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 both reduced their dividends by 36% & 50%. Quick serve & fast-food restaurants have also had to adapt to declining sales by changing menu items focusing on protein and reducing portion sizes.

Taken together, these three disruptions argue for underwriting dividend durability, company by company, rather than by sector. We anticipate the lasting payers will be businesses whose cash flows hold up against commodity shocks, technological substitution, and changing consumer behavior.

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 should 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)

CRN: 2026-1002-13836 R

The opinions and views of this commentary are those of Brentview Investment Management as of October 14, 2026 and are not necessarily that of Advisors Asset Management.