Global Market Strategist
The third quarter was marked by heightened geopolitical and macroeconomic tensions: the war in the Middle East pushed Brent crude back above USD 100 per barrel and European gas prices above EUR 70 per megawatt-hour for most of September; more than 80% of developed-market central banks raised policy rates; and the US administration announced a new wave of trade tariffs.
Despite these headwinds, the global economy proved resilient. September flash composite purchasing managers’ indices (PMIs) rose to their highest levels since mid-2021 in the US and since early 2023 in the euro area. The US remained the main engine of developed-market growth, supported by robust business investment, artificial intelligence (AI)-related capital expenditure and an improving labour market. Consumer spending also held up, partly supported by households drawing on savings as real personal income softened.
This resilience, combined with a buoyant earnings backdrop, helped global equities reach several record highs during the quarter and absorb the rise in bond yields. Positive revisions to 2026 earnings estimates, particularly in the US and emerging markets, meant that profits generally rose faster than share prices, allowing valuations to compress across most regions even as markets advanced.
Meanwhile, global bond markets faced a challenging quarter. Renewed pressure on energy prices, persistent inflation and further policy tightening pushed yields higher, while heavy sovereign issuance and borrowing by US hyperscalers intensified competition for capital.
Commodities had a very strong quarter, with the Bloomberg Commodity Index up 16%. After declining in June on expectations of a memorandum of understanding (MoU) between the US and Iran, oil and gas prices rallied as negotiations lost momentum and concerns over disruptions to Middle Eastern energy supplies resurfaced, rebuilding the geopolitical risk premium.
Equities
Equities delivered positive returns as a resilient macroeconomic backdrop and buoyant earnings growth outweighed concerns about geopolitics and central bank policy. An earnings supercycle in technology, energy and, to a lesser extent, banking supported indices with a favourable sector mix. 2026 earnings per share (EPS) estimates continued to be revised higher, particularly in the US and emerging markets. Earnings expectations rose faster than prices, meaning that valuations compressed in almost every region. The S&P 500 currently trades at 19 times 12-month forward earnings, four multiple points lower than a year ago and in line with its long-run average.
Developed markets outperformed, led by Japanese equities, where strong earnings growth, accelerating share buybacks and ongoing corporate-governance reforms all remained supportive. In the US, the S&P 500 reached several record highs over the summer. The rotation from semiconductors towards hyperscalers and software companies contributed to US equities’ outperformance relative to emerging markets, given the sector composition of the respective indices. After significantly outperforming in the first half of the year, emerging-market equities were dragged marginally lower by the global semiconductor sell-off in July.
European equities lagged global peers as investors questioned whether the region could match the earnings momentum seen elsewhere and worried about the rate-hiking cycle of the European Central Bank (ECB) and the effect of rising yields on growth and equity valuations. Although the improving growth outlook and increased fiscal spending plans remained supportive, particularly for defence and infrastructure, markets focused on near-term profit growth and AI-related investment opportunities, areas in which Europe offers less direct exposure than the US and parts of Asia. By contrast, UK equities held up better, benefiting from their greater exposure to financials, energy and commodity-related sectors, as well as more attractive valuations and stronger dividend support.
Style performance was shaped by interest rates. As bond yields rose sharply, value outperformed growth, while small caps (which tend to have a greater proportion of floating-rate debt) and real estate investment trusts (REITs) underperformed.
Fixed income
Bonds faced a challenging quarter as resilient economic activity and persistent inflation led investors to reassess the outlook for policy rates. Competition for capital also intensified amid growing fiscal deficits and corporate debt issuance to finance the AI buildout.
Longer-dated government bonds underperformed bonds with shorter maturities in several developed markets. At 5.6%, the US 30-year yield is at its highest level since 2002, while UK and Japanese 30-year yields stand around their highest levels since the late 1990s. The rise in US yields was driven by real rates, which tracked government bond supply. Corporate issuance is also pushing government bond yields higher, with US hyperscalers now having issued more than USD 200 billion in long-term bonds to finance the AI buildout in 2026. Debt management offices responded by shifting issuance towards shorter maturities in the UK and buying longer maturities in the US. These measures flattened yield curves but failed to stem the overall rise in yields.
Short maturities were not spared either, and yields moved in lockstep with rising energy prices. While core inflation remained contained, headline inflation was pushed higher by oil prices above USD 100 per barrel and European gas prices above EUR 70 per megawatt-hour for most of September following renewed tensions in the Middle East. This led the Federal Reserve (Fed), the ECB and the BoJ to raise policy rates and signal further tightening. Markets now expect the Fed, the ECB and the Bank of England each to raise policy rates a further three to four times by June 2027, which seems excessive to us.
European duration underperformed the Global Aggregate index as the ECB embarked on a more aggressive hiking cycle and investors focused on German fiscal spending and sovereign-debt concerns, particularly in France. French government bonds (Obligations assimilables du Trésor, or OATS) declined by more than 5%, while the OAT–Bund spread reached 119 basis points, its highest level since the euro-area sovereign-debt crisis.
Investment grade credit markets also delivered negative returns, hurt by rising yields and wider spreads. Spreads widened only modestly, given strong corporate fundamentals and steady demand for floating-rate instruments. High yield performed better, benefiting from high starting yields, shorter duration, anchored default rates and improving fundamentals.
Conclusion
The third quarter of 2026 underscored how resilient growth and strong corporate earnings can support risk assets even as inflation, geopolitics and fiscal pressures keep interest rates elevated.
The AI investment cycle remains a powerful source of activity and profit growth, but its benefits are unevenly distributed. Companies involved in the AI buildout and generating record profits, including emerging-market semiconductor producers, should benefit in the near term. Further ahead, we expect investors to increasingly reward AI users rather than AI creators, potentially benefiting Europe.
While we expect fixed income to deliver lower returns than equities, higher starting yields provide attractive carry and have improved prospective returns. Fiscal supply, inflation sensitivity and refinancing needs are likely to create greater dispersion across sovereign and corporate issuers, favouring active strategies.
Overall, the environment remains supportive for risk assets, but portfolios should remain diversified: government bonds can provide protection in an AI downturn, while alternative assets can help hedge inflation shocks.
See our Mid-Year Investment Outlook 2026.