October Market Compass: Monthly Talking Points

October 2026 Talking Points

Equity markets declined in October, led by technology and AI-related stocks as investors questioned funding availability, investment spending and future returns. Stronger defensive sectors limited headline index losses, suggesting investors remained comfortable holding equities despite reducing AI exposure. Higher oil prices, reflecting concerns about renewed Middle East escalation after the US midterm elections, also weighed on sentiment. However, US third-quarter earnings exceeded forecasts by 3%, with further upward revisions providing support. Bond yields retreated from multi-year highs as major central banks left rates unchanged in October, although Federal Reserve and ECB increases are expected in December. Bonds also provided protection as investors reduced AI exposure and found yields increasingly attractive.

Despite renewed concerns, leading AI companies’ third-quarter results generally showed improving monetisation, accelerating cloud revenue growth and greater confidence in future opportunities. Some legacy businesses disappointed, but AI demand remained strong. Funding the necessary investment remains a concern, particularly for smaller companies. Hyperscalers made few changes to spending forecasts for the coming year, while highlighting substantial ongoing investment and additional financing needs. Nevertheless, successful funding transactions by Meta and Microsoft, alongside enthusiasm for Anthropic’s forthcoming IPO, demonstrated continued investor appetite. The AI outlook remains positive, although sentiment is likely to remain volatile.

Strong earnings continue to support equities. European third-quarter results are approximately 7% ahead of estimates, while global forecasts continue to rise. Resilient growth is supporting operating leverage, alongside emerging returns from AI investment and adoption. Global earnings are forecast to grow by 37% in 2026, 17% in 2027 and 15% in 2028, rates more typically associated with a post-recession recovery. This outlook has moderated valuations despite year-to-date gains. Global equities trade at 15.5 times forward 12-month earnings, below their long-term average of 16.3, while US equities trade at 18.3 times. These multiples are respectively 4.2 and 4.8 points below their levels a year ago.

Economic data remain resilient, prompting modest growth forecast upgrades. Activity and sentiment have withstood higher oil prices better than expected, supported by AI investment, fiscal stimulus and strong consumer balance sheets. These factors also underpin corporate earnings.

Together, resilient growth, strong earnings, reasonable valuations and investor positioning that is not excessively stretched create a supportive backdrop. We believe equities could deliver double-digit gains over the next 12 months, notwithstanding periods of volatility.

Geopolitical risks remain significant. The US midterm elections could prove pivotal, with President Trump threatening escalation in the Middle East shortly after the vote, while also leaving scope for an agreement. The Iran conflict has lasted longer than expected, weighing on equities and bonds. Our base case remains an eventual agreement, given the shared interest in resolution and mounting economic costs. Fully reopening the Strait of Hormuz would ease growth and inflation concerns, supporting both asset classes. Conversely, renewed military escalation could raise oil prices, increase stagflation risks and prolong uncertainty, with negative implications for equities and bonds.

The elections may also influence AI sentiment. A potential Democratic sweep of Congress could increase pressure for regulation. However, substantial legislative changes appear unlikely given President Trump’s veto power and stated commitment to maintaining US leadership in AI. Consequently, the election outcome is unlikely to significantly disrupt AI development or deployment.

Lower bond yields have eased pressure on equities. We believe yields remain below levels that would materially constrain further gains, particularly given the strength of earnings forecasts. However, widening French sovereign spreads highlight vulnerabilities within fixed income. A sustained narrowing appears unlikely until the fiscal outlook becomes clearer after next year’s French Presidential election in April and May.

Bond yields remain higher year to date, reflecting elevated oil prices, limited progress towards resolving the Iran conflict, persistent inflation and more restrictive central bank expectations while large fiscal deficits also add pressure. A resolution in Iran could allow yields to decline modestly by lowering oil prices, easing inflation concerns and reducing expected monetary tightening. Nevertheless, resilient growth, inflation remaining above pre-war levels and fiscal challenges could limit that decline. Corporate credit spreads remain historically low despite recent widening, leaving limited scope for further compression. Overall, fixed income offers attractive income and should provide useful portfolio protection during periods of risk aversion or weaker economic growth.