Q3 Market Commentary

Co-CIOs Stephen Dowds and Charles Armitage reflect on the key market events of the third quarter and their implications for investors.

Market Review

The third quarter of 2026 featured increased geopolitical tension, a return to elevated oil prices, significantly higher interest rates, stubborn inflation, more Trump tariff talk and yet another round of vacillation by investors as to the merits of the so-called “AI Trade”.

Despite all these headwinds, spurred on by generally robust corporate earnings and more positive economic growth indicators, equity markets held up pretty well over the period. Performance varied, of course, but the US, UK and Japanese equity markets produced modest positive returns with Europe, Asia and Emerging Market equities posting small negative returns. Commodities, led by oil and gas, had a strong quarter as the “memorandum of understanding” between Iran and the US quickly became a worthless piece of paper. Partly as a result of this inflationary impulse, sovereign bond yields rose (bond prices fell) to levels not seen for nearly 20 years.

Central to market performance in Q3 2026 was the US-Iran conflict, which drove Brent crude up nearly 45% over the quarter — from $71.57 to $103.53/bbl — the strongest move across all asset classes. Prolonged disruptions to flows through the Strait of Hormuz tightened global energy markets, with European LNG imports running as much as 30% below year-ago levels in early August before recovering partially by late September. By quarter-end, led, somewhat ironically, by the Trump administration, many western governments ordered releases from their strategic oil and petroleum reserves. Brent briefly dipped below $103, though oil remained near $100 at month-end.

As a result, inflation expectations remained elevated with most investors congregating around the view that inflation in most developed economies would remain above the targets of central banks for a while to come. Indeed, a number of central bankers stated that this was their expectation. This more hawkish tone, combined with a flurry of robust economic indicators and surveys, encouraged investors to push market interest rates, particularly for government bonds, significantly higher.

Source: Bloomberg

The 10-year US Treasury, effectively the world’s reference interest rate, rose 81 basis points over the quarter, from 4.48% to 5.29%.

Corporate bonds fared relatively better for most of the period as spreads remained tight. Nonetheless, this has begun to unwind over recent days as the amount of new issuance, particularly from technology companies, has ramped up.

Despite the above headwinds, equity markets held up pretty well. Although AI-related enthusiasm ebbed and flowed during the quarter, investors remained of the view that the huge amount of capital expenditure being undertaken by hyper-scalers such as  Amazon, Alphabet and Microsoft is a massive engine for economic growth and that many companies were increasingly benefitting from supporting this expansion. Additionally, the second quarter reporting season delivered very good earnings growth across a wide range of companies and geographies. The breadth of this pick up in profitability was itself encouraging. It has made markets such as the US which had previously looked stretched in valuation terms, look somewhat less so, as stocks have begun to “grow into their ratings”. Given that European and other markets also saw encouraging earnings growth, they remain significantly less expensive than the US, albeit without necessarily having the same degree of AI-related growth potential.   

Nonetheless, markets ended the quarter on a slightly downbeat note following the US Federal Reserve’s first increase in the Fed Funds Rate since 2023 and commentary that was universally hawkish. Similar moves were made by the European Central Bank (ECB) and the Bank of Japan, each of which increased their policy rates. The Bank of England was more restrained, leaving its base rate unchanged but indicating that it was likely to rise soon.

Outlook

The most significant event on the horizon in the fourth quarter is the US mid-term elections, due to be held on November 3rd. Major changes to voting boundaries (or “re-districting” as the Americans call it) will certainly have helped the Republican Party defend its majority in both the House and Senate. Nonetheless, the success of the incumbent party in mid-term congressional elections has, historically been determined by the popularity of the incumbent President. Thus, with President Trump’s approval rating falling to its lowest level and many voters indicating that he is not doing enough to combat the “affordability” issue (which many believe he has made worse by his actions in Iran), it is now widely expected that the Democrats will capture the House, gaining a small majority of somewhere between ten and twenty seats. The battle for the Senate is a more difficult one to call, the outcome of which will depend on the result in only a handful of states. The Republicans have a majority of three and may lose that number, but it is unlikely that they will lose many more. Thus a 50-50 tie may well be the outcome, leaving Vice President Vance as the casting vote.

Split government is generally something that US markets like as it tends to moderate some of the ambitions of any President. In this case it would also mean that the Democrats would be unlikely to pursue a wasteful impeachment exercise. However, with both sides of the aisle determined to claim some wins in the run-up to the 2028 presidential elections, this could lead to some lengthy delays when it comes to the next big event which is the debate over the debt ceiling. Of course, although politicians talk about it, material spending cuts are unlikely. And with neither party likely to reign in on defence spending and the Democrats pushing for more spending on healthcare it is probable that the US budget deficit will continue to rise.  One should also consider that a President like Trump will seek to push the boundaries of what he can do without the constraints of Congressional approval. Therefore, it would be wise to expect extensive use of Presidential executive orders and a return to his focus on the widespread use of tariffs. The latter may be somewhat curtailed by the Supreme Court’s July ruling that Trump’s initial tariff programme was illegal, but it seems likely that he will try to use other statutes or justifications to introduce them, particularly when he wants to force something out of another country or trade bloc.

Thus, inflationary pressures may intensify — not only from this source, but also from energy prices, which are likely to remain elevated even if the Gulf stand‑off is resolved. This and the reappearance of the so-called bond vigilantes has also made it harder for all governments simply to borrow their way out of trouble. And though it seems likely that many governments, particularly in Europe, will have to spend heavily on defence, choosing to fund this via debt will be very difficult for many, particularly given that few will make serious inroads into reforming welfare spending. All this suggests that rising taxation may well be a feature of the short and medium term, despite its detrimental effect on growth.

Of course, rising productivity and / or supply side changes might allow these economies to become more dynamic and responsive to the growth challenges many countries face. That is, in part, where the AI revolution may help. If it allows for significant improvements in productivity without destroying a significant number of jobs, then growth might receive a jolt the likes of which we have not seen for the past twenty years. While many companies are only at the early stages of implementing AI tools within their core business, it is apparent from the rapid growth in “agentic” AI that the pace of change is, genuinely dramatic. Though recent events have suggested that the control of Agents might be something which needs rapid attention, the enormous acceleration in their ability to perform highly complex tasks is startling. It would seem, therefore that companies will continue to spend on the technology and encourage their employees to use it.

The question for the equity investor will be where along the value chain do the most attractive returns lie?

So far, the answer to this has been at the hyper-scalers and those supplying the tools to allow the infrastructure to be built e.g. semiconductors. That explains why the top ten companies in global equity indices are all technology-related and account for roughly 30% of such indices. Recent growth in earnings has been, as we mentioned above, very strong, but any sign that this might be pausing or that the enormous amounts of capital expenditure might not produce an adequate return will likely see a sharp bout of profit-taking.

Given that equity markets are overdue a correction and that bond markets have suffered, we are inclined to continue rebuilding our fixed income exposure in both Balanced and Growth mandates. It’s not that we expect a calamitous sell-off in equities, but they need a pause to refresh and we would prefer to be adding to weightings when that happens. Fixed income investments, particularly government bonds now seem to be much better value and offer the sort of solid income return that was, historically, their job in a diversified multi-asset portfolio. In that regard at least, the world is a much more “normal” place.

Commentary as of 7th October 2026.

This communication does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. Clients are advised to contact their investment advisor as to the suitability of each recommendation, for their own circumstances, before taking any action. The investor is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other consequences, if necessary, with the help of a professional advisor. The value of securities and the income from them may fall and you may get back less than you invested. No responsibility is taken for any losses, including, without limitation, any consequential loss, which may be incurred by clients acting upon such information and views contained within this report.