September Market Compass: Monthly Talking Points

September 2026 Talking Points

Equity markets declined modestly in September as bond yields rose to multi-year highs. The increase in yields reflected persistently elevated oil prices, further monetary tightening by global central banks, expectations of additional interest-rate increases and resilient economic data. Together, these factors reinforced the prospect of interest rates remaining higher for longer. Proposals to slow the development of artificial intelligence (AI) also briefly weighed on technology and AI-related stocks. However, the impact was short-lived, as new product launches and encouraging updates from leading companies renewed confidence in the theme’s long-term growth potential.

Although higher bond yields have weighed on equities, the strong earnings outlook continues to provide meaningful support and offset the associated pressure on valuations. Ahead of the third-quarter earnings season, forecasts are still being revised upwards as evidence grows that companies are beginning to generate returns from AI-related investment and adoption. Global earnings are now forecast to increase by 35% in 2026 and 16% in 2027—growth rates more commonly associated with a post-recession recovery than a mid-cycle environment. This robust outlook has made equity valuations more reasonable despite year-to-date market gains. Global equities now trade at 16.3 times 12-month forward earnings, in line with their long-term average, while US equities trade at 19.0 times. These multiples have fallen by 3.7 and 4.1 points, respectively, from their levels 12 months ago.

Economic data have remained resilient, leading to further modest upgrades to growth forecasts. Activity and sentiment have proved more resistant to higher oil prices than anticipated, supported by AI-related investment, fiscal stimulus and strong consumer balance sheets. These factors have also strengthened the outlook for corporate earnings. 

Against this supportive fundamental backdrop—characterised by resilient growth, strong earnings, reasonable valuations and investor positioning that is not excessively stretched—we believe equities could deliver double-digit gains over the next 12 months. The AI theme should provide further support and is unlikely to be derailed by the forthcoming US midterm elections or the increased likelihood of a Democratic sweep of Congress. Significant changes to AI regulation under a Democrat-controlled Congress also appear unlikely, given President Trump’s veto power and his stated aim of maintaining US leadership in AI.

Nevertheless, risks remain and market volatility is likely to persist. The most significant near-term challenge is the recent rise in bond yields. Although yields are at their highest levels in 15 to 20 years, we believe they remain below the threshold at which they would materially constrain further equity-market gains. The strength of the earnings outlook should help offset the effect of higher yields. In addition, a resolution to the conflict in the Middle East could materially reduce oil-price and inflationary pressures, leading markets to price in less monetary tightening.

The conflict in Iran has continued for longer than expected, and the resulting uncertainty has weighed on both equity and bond markets. Our base case remains that an agreement will ultimately be reached, as a resolution is in the interests of both parties and the economic costs are becoming increasingly apparent on all sides. A full reopening of the Strait of Hormuz would ease concerns about growth and inflation, providing relief to both asset classes. However, the longer negotiations continue, the greater the risk that oil inventories are depleted and prices rise further, placing renewed pressure on equity and bond markets.

In bond markets, yields have risen as oil prices remained elevated amid limited progress towards resolving the conflict in Iran. Higher energy costs have added to persistent inflationary pressures and complicated the outlook for central banks at a time when concerns about fiscal deficits remain elevated. There is room for bond yields to decline from current levels in the event of a resolution to the conflict with Iran which would probably reduce oil prices, ease inflation concerns and lead markets to price in a less restrictive path for central bank policy, supporting lower yields. However, resilient economic growth, the likelihood that inflation remains above pre-war levels and ongoing fiscal issues may limit the extent of any decline. In corporate credit markets, spreads over sovereign bonds remain low by historical standards, leaving limited scope for further compression. Overall, fixed income continues to offer attractive income and should provide valuable portfolio protection in a risk-off environment or if economic growth disappoints.