Zacks favors semiconductors, utilities, energy in volatile Q4

Zacks Investment Research recommends that investors prioritize technology infrastructure, semiconductors, utilities, and select energy companies for the fourth quarter of 2026. The firm advises this strategy because rising Treasury yields and persistent inflation have complicated the investment landscape, making earnings-backed opportunities more critical than indiscriminate risk-taking.

Wall Street entered the final quarter with substantial gains, although market breadth has weakened. During the first nine months of 2026, the S&P 500 advanced 11.5%, the Nasdaq Composite surged 15.6%, and the Dow gained 17.8%. However, September exposed vulnerabilities as the Russell 2000 fell around 5% due to pressure on small-cap stocks from rising borrowing costs. On Oct. 8, the S&P 500 declined 0.5% amid oil-price volatility and elevated bond yields.

The Federal Reserve raised interest rates to 3.75%-4% in September and projects 3.7% PCE inflation for 2026. The Congressional Budget Office estimates the fiscal 2026 deficit near $2 trillion, reinforcing concerns over Treasury financing costs. FactSet projects 29.5% year-over-year S&P 500 earnings growth for the third quarter and 27.6% for the fourth, providing a fundamental support for selective buying.

Within the semiconductor sector, Zacks highlights NVIDIA (NVDA), which reported fiscal second-quarter 2027 revenues of $96.2 billion, up 106% year over year, and guided for $108 billion in fiscal third-quarter revenues. Semtech (SMTC) holds a Zacks Rank #1 (Strong Buy) supported by AI data-center networking demand. Taiwan Semiconductor Manufacturing (TSM) holds a Zacks Rank #2 (Buy), with July and August revenues rising 44.7% and 53.3% year over year, respectively.

In the energy sector, Zacks points to HF Sinclair's DINO, which carries a Zacks Rank #1. Estimates for DINO's 2026 EPS rose $6.02 to $18.15 in the past 60 days. Reuters reported that Brent crude dropped to $103.53 per barrel in early trading on Oct. 9, reversing a gain of over 4% seen the day before.

The utilities sector offers another opportunity through predictable regulated earnings. Entergy (ETR) carries a Zacks Rank #2 and plans $67 billion in investment during 2026-2029. While AI data centers support long-term electricity demand, higher interest rates increase financing costs for capital-intensive projects.

Investors should remain selective with highly leveraged small-cap companies and unprofitable businesses dependent on cheap financing, as rising yields can compress valuations.