Market & Strategy Update - Q3 2026
- 1 day ago
- 4 min read
In the latest edition of our Quarterly Market & Strategy Update:
Executive summary
Economy
The progressive normalisation of energy flows has dramatically reduced the risks to growth and inflation for the global economy. The most affected countries are therefore expected to join the US in seeing improving growth in the coming months, albeit at a slower pace. The US economy remains on the strongest footing, but the foundation of its growth has become increasingly reliant on the continuation of the AI boom. The sharp rise in inflation forced a repricing of interest rate expectations, with certain central banks hiking rates. Now that the energy-driven inflationary impulse is likely to fade, central banks will be able to adopt a more dovish stance, while governments continue running elevated fiscal deficits.
Equities
The environment of improving growth and a fading inflationary impulse remains favourable to corporate profits and equities. This is of course reflected in valuations, particularly in the US, where expectations are reaching historic extremes. While the initial phase of the rebound was largely tech-driven, confirmation of economic resilience has started to broaden market participation. The final speculative phase of the AI thematic could extend in the short term, but signs of exuberance and heavy equity issuance raise the prospect of sharp corrections. Investors should be looking to increase exposure to cyclical sectors and international equities, where more reasonable valuations and improving growth prospects should lead to outperformance.
Bonds
The acceleration in inflation has led to a significant repricing of interest rates in Q2. With the inflationary impulse expected to fade following the correction in energy prices, further tightening has become unlikely, which should exert downward pressure on yields. US yields could remain sticky for longer given uncertainty around the new Fed Chair and stronger economic growth, but lower short-term yields will eventually materialise in Q3. Investors can therefore extend duration further toward 4 years. The risk-reward for longer-term duration remains unappealing given a structurally high inflation environment and elevated deficits which have made bonds lose their diversification benefits in traditional portfolios. Emerging market debt in local currency remains attractive.
Currencies
Relative US economic strength and rate differentials are likely to keep supporting the USD in the short term, but we expect this strength to fade later in Q3.
Commodities
Energy prices have retraced their Q2 rally and are again looking attractive given the underlying growth dynamics, depleted inventories and rising incentives to hold strategic reserves. Other specific commodities may also offer compelling opportunities given AI-related demand drivers.
Precious metals
Gold remains in a multi-month consolidation, weighed down by the challenge to the debasement thematic and repricing of interest rate expectations. We are likely close to the end of this correction; investors should patiently wait for signs of capitulation.
To read our complete Market & Strategy Update for this quarter
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