Investment Update October 2026
Updated: 18 hours ago
Key Highlights:
The economic backdrop remained shaped by persistent inflation, stronger nominal growth and a move towards a higher-growth, higher-yield environment.
Hard assets such as equities, certain commodities and gold continued to perform better in this environment than debt instruments and fixed income.
Equity performance in the U.S. was mixed, with the S&P 500 down 0.4% in September while the Nasdaq 100 rose 3.2%.
Corporate earnings remained strong in the U.S., with 86% of S&P 500 companies beating market expectations and the index around 13% higher year-to-date.
Treasury yields and interest rates moved higher in the U.S., with the 10-year yield above 5%, inflation rising and the FOMC increasing rates by 0.25%.
In the UK, equities softened while gilt yields rose amid higher government borrowing and fiscal concerns, with interest rates left unchanged.
Across Europe, major indices fell by around 3%, while the ECB raised interest rates for a second time and energy dependency remained a concern.
Japanese equities were mixed, supported by resilient earnings and improving corporate governance, while the Bank of Japan raised rates to 1.25%.
Chinese markets were mixed as export strength and policy support were balanced by weaker domestic demand, deflation and a significant property-related debt overhang.
U.S.-China relations saw the trade truce extended to 10 January 2027, with no tangible progress on artificial intelligence constraints.
At portfolio level, the move towards ultra-short duration contributed positively, while key risks included oil-led inflation, further rate tightening and disorderly government bond markets.
September has been defined by the rising cost of money in the form of higher interest rates and spiking bond yields across the world. Equity markets chopped up/down and sideways looking for a direction and a sustained path. The geopolitical tensions, notably in the Middle East added to the mix as oil and prices for refined products such as diesel hit unhelpful highs with knock-on implications. Against this volatile backdrop, our portfolio construction has served investors, delivering positive performance for the month.
In our various articles which can be read online, we have consistently pointed to the changed economic regime. A regime which delivers outcomes for investors consistent with a world focused on managing debt mountains. Persistent inflation pushes prices higher; currency debasement gnaws away at the value of the pound in one’s pocket. Major economies, led by the United States, seek to fuel economic growth, such that GDP can grow faster than debt servicing costs and over the long run, debt is reduced meaningfully. The strategy proved successful post-World War 2 in America and has arguably played out with some success in Japan during this century. Against this backdrop so-called hard assets typified by equities, certain commodities and gold perform well, whereas debt instruments and fixed income, much less so. With ageing populations, expanding social entitlement costs and the need to rearm and modernise creaking infrastructure, we anticipate the current economic regime remaining in situ for some time.
Artificial Intelligence, or ‘Super Intelligence’, to give it the Trumpian handle, may well push economic growth and notably productivity higher, benefitting all and accelerating economic performance and debt reduction, which is so desperately needed.
Historically, 10-year US Treasury yields have tended to track the rate of nominal GDP growth over the long term, making them a useful gauge of whether fixed income markets appear relatively cheap or expensive. When yields are significantly below nominal GDP growth, bonds can look expensive, while yields above nominal GDP may indicate better long-term value. The long run average for the 10-year Treasury yield is approximately 5% to 6%, which is broadly consistent with historical nominal economic growth. With nominal GDP growth now accelerating and the US economy continuing to demonstrate resilience, there is a reasonable argument that interest rates could move higher from current levels. If economic activity remains strong, businesses may be able to absorb higher borrowing costs without materially slowing growth. The K-shaped economy will make this tougher for households.
The S&P 500 slipped just 0.4% in September, a resilient result given the month's seasonal weakness, even though majority of the sectors ended the month lower. The Nasdaq 100 rose 3.2%, as AI and semiconductor leaders shrugged off higher yields while the broader market struggled. The S&P 500 remains up around 13% year-to-date and trades at just under 19 times forward earnings, its lowest valuation since 2023. Earnings growth for the S&P 500 proved particularly robust with 86% of firms beating market expectations. The forward view is equally upbeat.
The 10-year Treasury yield broke through 5% for the first time since 2007 and longer-dated stock equally saw yields rise and capital values fall. Meanwhile unemployment remained steady at 4.1%. Inflation pushed higher linked with elevated energy costs and the FOMC hiked interest rates 0.25% on 16 September to a 3.75% to 4.00% range, its first increase since July 2023. Markets forecast one more small rise to come. The mid-term elections, now just a few weeks away, point to a Democrat win based on current opinion polls. If this plays out governing will become more difficult for President Trump.
UK markets softened in September after a strong run earlier in the year, with the FTSE 100 giving back some gains as investors reassessed growth expectations and interest rate prospects. Despite the pullback, the index remained well above its level at the start of the year, reflecting continued support from large international businesses, financials, and energy companies. Market attention also focused on the quarterly FTSE index reshuffle, which saw EasyJet and Ithaca Energy promoted to the FTSE 100. Gilt yields rose uncomfortably higher based on a global phenomenon, but the UK was particularly impacted based on government borrowing and a perception of fiscal issues ahead. Interest rates remained on hold, for now. Prime Minister Andy Burnham ruled out a near-term general election and must deal with fiscal concerns and an unruly Gilt market as borrowing continues to rise.
Meanwhile in Europe, the ECB hiked interest rates for a second time. The bloc’s energy dependency makes it vulnerable to geopolitics particularly in the Middle East and Ukraine.
The region's major indices experienced modest declines (around 3%) during the month, with cyclical sectors facing some profit taking after strong gains earlier in the year. Nevertheless, European markets remained supported by steady corporate earnings, particularly from companies with a global footprint.
Japanese equities were mixed in September asinvestors weighed a still accommodative domestic policy backdrop against concerns over export demand and higher energy costs. While some profit taking emerged following strong gains earlier in the year, sentiment remained supported by improving corporate governance, shareholder returns, and resilient earnings. The market continued to attract international investor interest, supported by Japan's economic recovery and the prospect of sustained nominal growth. The Bank of Japan raised rates to 1.25%, a 31-year high.
Chinese equities were mixed in September 2026 as investors assessed the pace of economic recovery, policy support measures, and developments in the property sector. Market sentiment improved at times on expectations of further government stimulus, although concerns over domestic demand and external trade conditions continued to weigh on confidence. China’s phenomenal export drive for autos, green infrastructure and technology continues apace. However, beneath the surface it serves well to remember the property related debt overhang is significant and whilst the West witnesses some inflation, China has deflation. Arguably worse than inflation when debt-to-GDP remains around 120%. President Xi's Washington visit produced only a two-month trade truce extension, to 10 January 2027 and nothing tangible (as expected) around artificial intelligence constraints.
As we head into the 4th quarter 2026, returns and risk management have proven to be reassuring year-to-date. Risks from geopolitics remain ever-present, and an apparent transition to a higher growth, higher yielding environment is beginning. Risks are identified as potential for an oil-led second inflation wave forcing synchronised G7 interest rate tightening, a disorderly government bond market and a midterm election result that reshapes the fiscal path into 2027. To provide balance, economic growth is strong, corporate earnings highly robust accompanied by long hoped for productivity gains and employment remains stable. Our transition to embrace ultra short duration has already paid off at portfolio level. We remain broadly optimistic for prospects into the year end.
As ever, we thank clients and investors and welcome questions and feedback.
Written by the Alpha Beta Partners Investment Team.
All sources Bloomberg unless otherwise stated.
