Q3 2026 Market commentary

The year’s third quarter was characterised by a striking divergence between relatively resilient equity markets and a broader sell-off in government bonds. Positive returns across equities were driven by strong macroeconomic data and solid earnings growth, which counterbalanced broader concerns about ongoing geopolitical tensions, higher energy prices, and central banks' responses to rising inflationary pressures. The renewed inflation shock was a shared theme across the wider US, UK and Eurozone economies, where base rate hikes and the suggestion of further balancing measures forced investors to reassess the likely duration of restrictive monetary policy. The ever-increasing scale of AI development demonstrated how a boom for equities could translate to a blow for bonds: major investments in AI development and infrastructure by tech sector “hyperscalers” supported growth in equity and labour markets, but increased borrowing in the sector intensified the competition for capital, exacerbating bond market pressures.

Oil and gas led a major commodities rally in Q3 after negotiations related to the Memorandum of Understanding between the US and Iran broke down and the threat of disruption to Middle Eastern energy exports resurfaced. Brent crude again surpassed $100 per barrel, and gas prices in the Eurozone breached €70 MWh as the quarter ended. However, much of the oil-and-gas contribution to a strong quarter for commodities was driven by higher prices, supply shortages, producer incentives and productivity gains rather than an increase in global consumption, with the International Energy Agency’s September (IEA) Oil Market Report indicating that global demand in 2026 was set to decline by 2.5 million barrels per day, with projected recovery in 2027 only marginally offsetting this year’s losses.

In the US, the S&P 500 recorded successive closing highs over Q3 with AI and mega-cap tech companies leading the charge. Strong earnings reports and raised revenue forecasts from hyperscalers like software company Palantir helped to reinforce investor confidence that heavy spending in AI development was translating into concrete business growth. JP Morgan estimated that US earnings growth was on track to reach 38% year-over-year – the largest rise since the Covid pandemic. While the increase was predominantly driven by AI and oil, strong support came from defence, aerospace, medical equipment and luxury apparel sectors. Stress in the US bond market saw the Treasury’s 10-year yield surpass 5.3% by the end of Q3, its largest quarterly increase since 2022. Contributory factors included renewed energy price inflation, strong domestic economic activity, shifting expectations regarding monetary policy, and substantial government and corporate issuance – it’s estimated that US hyperscalers have issued over $200 billion in long-term bonds to support AI development projects in 2026.

Entering Q3 with considerable momentum, US GDP was forecast to grow by 2.2% with investment and consumer spending supporting strong overall economic activity. However, inflation remained problematic with rates rising to 3.4% in August, still some way above the Federal Reserve’s longstanding 2% benchmark. Against this backdrop, Fed chair Kevin Warsh announced the central bank’s first-rate hike since 2023, raising the base rate of interest to 3.75%-4% with a unanimous vote. Following Warsh’s announcement, President Trump reiterated his insistence that the Fed target a base rate of 1% “or less”.

In the UK, the FTSE 100 extended its run of quarterly gains driven by the index’s large exposure to multinationals, energy, and the financial and defensive sectors. However, positive returns through July and August were partially offset by higher oil prices, rising gilt yields and renewed domestic inflation concerns during September. As with the US, UK government bonds experienced significant headwinds. The 10-year yield was around 5.4% by the end of Q3, compared to roughly 4.8% at the same point in 2025, and long-dated 20- and 30-year yields reached their highest levels for decades. At the end of September, the Bank of England issued a warning report about the parallel risks of unrestricted AI lending and rising sovereign yields throughout advanced economies. The report reflected increasing anxiety over how traditional financial systems will accommodate emerging technology debt and how markets could reassess risk premiums. 

UK GDP forecasts bucked a pessimistic trend when better-than-expected growth data from Q1 and Q2 suggested that the domestic economy entered Q3 on a surer footing. Higher petrol and diesel prices, however, saw UK inflation rise to 3.1% in August. Aiming to support growth without risking prolonged inflationary pressure, the central bank elected to hold the base rate of interest at 3.75% in July. It nevertheless warned that a continuation of the US-Iran conflict and the effects on global oil markets over which the Bank has “no control” could lead to a near-future rate hike.

Eurozone and broader European equities lagged the US and UK over Q3. Most of the weakness occurred in September when it looked likely that the region wouldn’t keep pace with the earnings momentum experienced elsewhere, and rising energy prices and the central bank’s decision to raise all three of its base rates weighed on investor sentiment. Eurozone equities are especially sensitive to global energy shocks due to the region’s heightened exposure to volatile import costs. European sovereign bonds suffered a similar fate to their US and UK counterparts but there was significant divergence across member states: by September, France’s 10-year yield rose by 119 basis points, its largest quarterly spike since 1987. The broader Eurozone economy entered Q3 stronger than expected. Solid employment data and recovering real incomes across member states continued to support rising consumer confidence and service spending, as evidenced during Q2. Regional exports recovered as international demand strengthened, and momentum was further driven by AI investment and increased government spending on public infrastructure and defence contracts. 

“Godzilla” El Niño threatens millions with increased food insecurity

Predictive modelling for this year’s El Niño climate cycle – nicknamed “Godzilla” by climatologists – indicated that an abnormally intense climate shift exacerbated by elevated ocean surface heat could raise overall global temperatures by up to 3.6C. Experts believe that the resulting climate disruption could be the most impactful since the 1997 El Niño cycle, which triggered widespread droughts and wildfires throughout southern Asia, devastating rainfall across the Americas, and increased coral bleaching worldwide.

Even accounting for forecasting adjustments, the UN’s World Food Programme (WFP) warned that the rapidly evolving weather system could increase the number of people in acute food insecurity by over a fifth – current WFP estimates place that at 225 million people in 45 countries. In WFP assessments, acute food insecurity refers to hunger that falls below the level of famine. Exposure is highest in southern and eastern Africa, where important farming and pastoral areas face significant agricultural drought risks. El Niño cycles expose lingering vulnerabilities and often trigger failed harvests, livestock losses, rising household debt, and migration in search of new sources of food and water. This time out, the risks to areas with limited coping capacity are compounded by a demonstrably warmer planet and the combined effects of increased geopolitical tensions and global economic stress.

Comprehensive study urges “forever chemicals” pollution must be stopped at source

Per- and polyfluoroalkyl substances (PFAS) are a large group of synthetic chemicals used in a wide range of industrial processes and consumer products for their long-term resistance to heat, water and oil. Their strong carbon-fluorine bonds make them highly durable but also extremely persistent in the environment and the human body, leading to their description as “forever chemicals”. Their widespread presence and durability generate long-term environmental risks to ecosystems and wildlife. The risk of PFAS transfer to humans through the food chain is considerable, as they accumulate in animals much faster than they can be metabolised. Alongside contaminated food, water and air, human exposure to PFAS can be exacerbated by chemically treated products such as non-stick cookware, clothing, carpets, and cosmetics. People working in professions such as chemical manufacturing, electronics production, and firefighting also face increased occupational exposure.

A study published by the Royal Society of Chemistry assessed the potential costs and impacts of limiting PFAS exposure and pollution across Europe against two remediation scenarios: a “legacy” option targeting the cleanup of existing environmental PFAS, and a preventative option targeting scaled reductions in future PFAS emissions. In the legacy scenario, the study estimated that removing environmental PFAS from the current cycle of production and use would cost between €52 billion and €200 billion per year. However, it predicted that even the most aggressive remediation methods would remove less than 2% of existing environmental PFAS. With “unprecedented” spending on the legacy scenario unlikely to significantly reduce existing environmental PFAS, the study maintained that increasing investment in prevention, innovation and reduced emissions would be more effective. It further argued that an annual investment of €50 billion through the “polluter pays” and Extended Producer Responsibility principles would help to offset minimum health and remediation costs, but that full remediation of environmental PFAS was “financially unachievable”.