August Market Compass: Monthly Talking Points

August 2026 Talking Points

Equity markets moved higher in August, supported by another strong earnings season. Second-quarter results continued to come in ahead of expectations, leading to further upgrades to earnings forecasts. There is also growing evidence that companies are now beginning to realise returns from their AI-related investments. Economic data remained broadly resilient, while momentum and semiconductor stocks, which had come under some profit-taking pressure in July, began to stabilise. In bond markets, yields rose as oil prices remained elevated amid limited progress towards a resolution of the conflict in Iran. Higher oil prices have contributed to sticky inflation and added to pressure on central banks, at a time when concerns around fiscal deficits remain elevated.

Although war-related uncertainty remains an important risk, the broader growth backdrop is still firm. European activity and sentiment indicators are showing signs of improvement, while US growth remains robust, despite some recent softness in the labour market and consumer spending. Our base case is that an agreement will eventually be reached to reopen the Strait of Hormuz, allowing oil flows to resume and helping to ease concerns around both growth and inflation. However, the longer it takes to reach a resolution, the greater the risk that oil inventory buffers are depleted and prices rise further. Such a scenario could create renewed pressure for both equity and bond markets.

The earnings backdrop remains supportive. Earnings for global corporates are now forecast to rise by 33% in 2026, an increase of 19% compared with expectations at the start of the year, followed by growth of 15% in 2027. These are levels more commonly associated with a post-recession recovery than a typical mid-cycle environment.

Despite the year-to-date rise in markets, valuations now appear more reasonable. They have fallen by around three points from their October highs, largely because of the strength of the earnings backdrop. This adjustment, together with solid fundamentals, has created a more attractive opportunity for investors. Positioning has recovered from the March lows but does not yet appear stretched, suggesting there is still room for investors to increase exposure if the supportive environment continues.

We believe equities have the potential to deliver double-digit gains over the next twelve months, with the ongoing AI theme providing an additional source of support. That said, volatility is likely to remain part of the investment landscape. A prolonged conflict in the Middle East, failure to reopen the Strait of Hormuz, uncertainty around inflation, growth and central bank policy, and questions over the pace and scale of AI monetisation could all lead to periods of profit-taking and short-term market setbacks. A sharp and sustained rise in bond yields could also limit the upside for equity markets.

In fixed income, we expect bond yields to move lower over a twelve-month horizon. A resolution of the conflict with Iran would likely reduce oil prices, ease inflation concerns and encourage markets to price in a less hawkish path for central bank policy, supporting a decline in yields. However, the firmer growth backdrop and the likelihood that inflation remains above pre-war levels may limit the scale of any fall. In corporate credit markets, spreads versus sovereign bonds remain low by historical standards, suggesting limited scope for further compression. Overall, fixed income continues to look attractive from an income perspective and should provide useful protection in a risk-off environment or if growth disappoints.