Investments
Q3 2026: Market Commentary and Outlook
Anthony O'Brien, Head of Market Strategy, shares his market commentary and outlook for the third quarter of 2026.
What happens when bonds take the lead?
The third quarter of 2026 reminded investors that markets rarely move in straight lines. As conflict in the Middle East drove energy prices higher, reviving inflation concerns, central banks adopted an increasingly hawkish tone. Government bond yields rose sharply, yet equity markets remained surprisingly resilient. The result was a quarter that raised an uncomfortable question: are higher global bond yields merely a headwind for equities, or could they eventually become a storm?
This contrast between equity and fixed income performance was one of the defining features of the three months. While corporate earnings, growth and AI investment helped sustain risk appetite, inflation and policy risks dominated sentiment in bond markets.
At a glance
- Bond markets take centre stage as investors adjust to the prospect of structurally higher interest rates.
- Strong headline equity returns mask growing pressures beneath the surface.
- Energy, inflation and AI investment are increasingly linked through growth, policy and competition for capital.
Market Commentary
The policy-rate story rolls on
Of all the developments in the third quarter, the most significant took place in bond markets, with yields on government bonds soaring to multi-year highs across major economies. Higher energy prices left markets grappling with increased inflationary pressures, while resilient economic and labour-market data raised the prospect of further policy tightening. Bond investors were left wondering where rates might finally settle.
Energy prices sparked many of the market movements in the third quarter. But other factors, including persistent inflation, heavy government borrowing, considerable bond issuance and quantitative tightening all had a role to play too.
This pattern wasn’t confined to the UK and US; it was in evidence across global government bond markets, where prices fell and yields climbed higher. Government bond indices delivered negative returns across most major regions, reflecting one of the most challenging quarters for fixed income investors in recent years. Corporate credit, meanwhile, held up a bit better, with spreads supported by healthy company finances and continued economic growth. Total bond market returns were dominated by rising government yields, however. The question we’re left asking is whether the third quarter represented an overshoot or a segue to a world where higher yields are the norm.
Client conversations
Bond markets faced a challenging quarter as government yields climbed higher. This may create an opportunity to revisit the role of fixed income, diversification and longer-term investment objectives.
Beneath the surface: searching for the new normal
Investors spent most of the 2010s getting accustomed to a world of exceptionally low interest rates, quantitative easing, and in some cases, bond yields slipping into negative territory. But events of recent months are beginning to make that period look more like the exception than the rule.
The contrasts between then and now are quite vivid: central bank rate hikes have replaced cuts, quantitative tightening has replaced quantitative easing, government borrowing’s risen sharply and inflation refuses to fade into the background. Add in continued economic growth and fierce competition for capital and it’s easy to see why investors are reassessing where bond yields ought to be.
Importantly, that doesn’t mean they can only move higher. A slowdown in growth, easing inflationary pressures, or a resolution to the conflict in the Middle East could still bring them down. For now, though, it seems markets think it’s a distinct possibility that the low-rate halcyon days of the 2010s might not be coming back any time soon.
Client conversations
The low-rate environment of the 2010s may not return any time soon. For some clients, this may be a useful moment to review long-term goals and whether portfolios remain aligned to a different investment backdrop.
Fresh questions for the equity rally
Putting aside the turbulence in bond markets, equity investors had a relatively positive quarter. In the US, the S&P 500 Index rose 2.3% in dollar, total return terms, while the UK’s FTSE All-Share and Japan’s TOPIX also produced positive returns. Returns in other regions were more subdued, however, as share prices in the eurozone slipped slightly and emerging markets produced a marginally negative return. The latter were particularly influenced by the environment of rising yields, higher energy prices and policy uncertainty.
Yet the headline index returns tell only part of the story. Some of the market’s strongest performers from earlier in the year, especially those in North Asia, struggled. This came largely as result of investors reconsidering AI-related valuations and the outlook for hyperscaler spending. Later in the quarter, technology shares bounced back, but sector leadership was narrower and, increasingly, higher yields tested market assumptions.
Client conversations
Market leadership continued to shift during the quarter. That may prompt a broader conversation about diversification and exposure across markets and sectors.
Oil turns up the heat in other markets
Commodities were among the standout performers over the three months, largely due to renewed strength in energy markets. Along with escalating tensions in the Middle East came supply-chain disruptions and concerns about oil infrastructure, which helped to drive prices higher. Prices for agricultural commodities also benefited from supply worries. More significant than the gains themselves, however, was the effect they had on inflation expectations. So in many respects, the third quarter’s commodity story was the bond market story, too.
Market outlook
Higher for longer – then maybe higher still?
As we enter the final three months of 2026, investors are contending with the same question that dominated the third quarter: where do interest rates ultimately settle? If inflation’s recent climb proves more persistent than expected, there’s a chance that both the US Federal Reserve and the Bank of England will conclude they need to further tighten monetary policy. Markets may have already significantly adjusted, but policy risks still seem skewed towards higher-for-longer rates.
Much of the uncertainty has its roots in energy markets. Any or all of a sustained fall in oil prices, easing inflation or a clear slowdown in economic growth could help relieve pressure on central banks. For now, though, resilient activity and labour markets are leaving policymakers with a bit of room to prioritise price stability.
Even resilience has its limits
One thing we learned in the third quarter is that higher yields don’t automatically derail equity markets. Strong corporate earnings, healthy household spending and continued investment in artificial intelligence have all helped to support sentiment.
But the higher yields climb, the tougher the balancing act. Higher borrowing costs, discount rates and more attractive bond yields all have the potential to challenge equity valuations. This means the key questions we need to ask are how much tightening has already been absorbed and how much is still to come.
Credit markets are up against a similar test. While business conditions look supportive, a more aggressive approach from central banks or a material deterioration in growth could place increasing pressure on spreads.
Beneath the surface: the other side of the AI boom
Since its rise to prominence, AI has become one of the most important components of global growth. It’s helping to drive spending, earnings, investment and capital requirements across a widening part of the economy.
There’s another side to the story, though. Competition for capital is increasing, bolstered by the vast sums flowing into AI infrastructure at a time when governments are borrowing heavily and central banks reducing liquidity. In other words, you could say the same investment boom that’s supporting growth may also be contributing to the higher-rate environment that markets are faced with.
For the moment, there’s little sign that hyperscaler spending is meaningfully slowing. AI is becoming increasingly important to equity valuations, economic growth and credit conditions, though. And this means investors could find themselves paying attention not just to who benefits from that spending, but to the sustainability of the spending itself.
A narrower margin for error
Perhaps the biggest difference between now and this time last year is that markets seem to have less room for surprises. Energy prices, inflation, policy expectations and long-term bond yields are becoming ever-more intertwined, while at the same time, governments are discovering that higher borrowing costs can quickly restrict policy choices.
That does not necessarily point to a weaker outlook. Economic growth remains resilient and many businesses remain in good financial health. What it does suggest is that investors may need to become more accustomed to a world where capital carries a higher price than it did for much of the previous decade.
The information in this article should not be regarded as financial advice and is based on our understanding in October 2026.
Money invested is at risk.
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