September Market Update

August was a positive month for global equities, but it did not feel especially comfortable.

Share prices were supported by resilient economic activity, strong corporate earnings and renewed enthusiasm for artificial intelligence. Bond markets were less relaxed. Longer-term yields remained elevated as investors confronted persistent inflation, heavy government borrowing and the possibility that interest rates may stay higher for longer.

This divergence matters. Equity investors appear confident that profits can continue to grow despite a demanding economic backdrop. Bond investors are asking for more compensation to finance governments—and, increasingly, the enormous investment programmes of the world’s largest technology companies.

Equities regain their confidence

Global equities advanced during August, with the MSCI World Index gaining approximately 2.6% in US-dollar terms. The S&P 500 rose 2.7%, reaching new highs during the month, while Japan’s TOPIX gained 3.9% and emerging Asian equities advanced by around 3.4%.

Technology returned to the forefront after a more unsettled July. Another strong set of results from Nvidia helped reinforce confidence in spending on AI infrastructure, but market leadership was not confined to semiconductor companies. Software shares performed well, while smaller US companies also participated in the rally.

That broader participation is encouraging. A market driven by earnings across several industries is generally healthier than one dependent on a handful of very large companies. Growth and value stocks both gained approximately 2.6% during August, suggesting that investors were responding to the overall resilience of corporate profits rather than following a single theme.

The question surrounding AI is nevertheless changing. Investors are no longer asking only how much companies will spend. They are beginning to ask when that spending will produce an adequate return.

The largest technology groups are building data centres, securing energy supplies and investing in computing capacity on an extraordinary scale. Some are increasingly turning to bond markets to help fund those ambitions. That creates an unusual connection between the equity and fixed-income stories: the AI boom may support corporate earnings, but it is also adding to the global demand for capital.

Europe’s quiet earnings recovery

European equities continued to lag the strongest US and Asian markets during August, but the underlying corporate picture was more impressive than the headlines suggested.

Goldman Sachs estimates that earnings per share among STOXX Europe 600 companies increased by approximately 14% during the first half of 2026. It subsequently raised its forecast for full-year earnings growth to 15%.

Energy companies benefited from higher prices, but the improvement was not limited to commodities. Financials, industrial companies and selected technology businesses also produced better results. This challenges the familiar view of Europe as a structurally low-growth equity market.

Europe’s economy and its stock market are not the same thing. Many of its largest listed businesses earn substantial revenues outside their home countries, while banks and energy companies can benefit from conditions that are uncomfortable for households.

This does not remove the region’s structural problems. Energy remains expensive, Chinese competition is intense and political uncertainty has contributed to higher borrowing costs in countries including France. Nevertheless, reasonable valuations and improving profits have given investors more than one reason to look beyond the US.

Bonds confront a new competition for capital

Government bonds produced mixed returns. The Bloomberg Global Aggregate Index gained approximately 0.5% in US-dollar terms, helped by corporate and emerging-market debt, but longer-dated sovereign bonds remained under pressure.

The US 10-year Treasury yield ended August around 4.75%, while the 30-year yield briefly reached its highest level since 2007. German Bund yields rose towards levels last seen in 2011, and the 10-year Japanese government bond yield approached 3%—a level not seen since 1996.

Several forces are converging.

Inflation remains above central-bank targets, with energy prices presenting a renewed risk. Governments need to borrow heavily to finance existing commitments, defence, infrastructure and the energy transition. At the same time, companies are raising capital for AI, data centres and the reshoring of supply chains.

Governments are therefore no longer borrowing in a world of abundant, almost costless capital. They are competing with some of the world’s most profitable businesses for investors’ money.

The US national debt passing $40 trillion gave that debate a particularly visible milestone. The Congressional Budget Office projects gross federal debt of $64 trillion by 2036, with annual net interest expenditure potentially rising from around $1 trillion today to $2.1 trillion.

The US Treasury’s decision to increase its purchases of longer-dated bonds provided some relief during August. Buybacks can improve liquidity and influence the balance of supply across maturities, but they do not reduce the underlying deficit. Bond investors are likely to continue demanding a higher return unless inflation falls convincingly or fiscal policy becomes more restrained.

Higher yields are not purely negative: they have restored meaningful income to fixed income. But they also bring greater price volatility, particularly for bonds with long maturities.

There is no longer one global interest-rate cycle

The outlook for interest rates became less uniform during August.

At Jackson Hole, Federal Reserve Chair Kevin Warsh emphasised that the Fed’s 2% inflation target remained firm. Markets interpreted his remarks as leaving the door open to higher rates if inflation failed to improve.

There are economists who take a different view, expecting softer underlying inflation and slower consumer spending to keep the Federal Reserve on hold during the remainder of 2026. This difference of opinion captures the current uncertainty: some of today’s inflation reflects temporary tariffs and energy disruption, but policymakers cannot be certain that those pressures will fade without affecting wages and broader prices.

The picture elsewhere is equally complicated. The Bank of England held Bank Rate at 3.75% in July, although three members voted for an increase. It expects higher energy costs to lift inflation later this year. The European Central Bank also faces renewed price pressure, while the Bank of Japan is moving in the opposite direction from much of its recent history as domestic inflation encourages further policy normalisation.

The idea of a single, synchronised global rate cycle is therefore becoming less useful. The US, UK, eurozone and Japan face different combinations of growth, inflation, currencies and fiscal policy. That divergence should create opportunities, but it may also produce more volatility across bonds and foreign-exchange markets.

Geopolitics moves from the background to the price mechanism

Investors have become accustomed to absorbing unsettling geopolitical news. What makes the current environment different is the number of ways in which international relations now feed directly into inflation and capital markets.

The conflict between the US and Iran continued to threaten shipping through the Strait of Hormuz, keeping Brent crude around $90 a barrel during August. Refined fuel and European natural-gas prices proved particularly sensitive as governments and businesses competed for constrained supplies.

The economic consequences extend beyond energy companies. Higher fuel costs affect transport, manufacturing, household spending and central-bank decisions. Europe is especially exposed because of its reliance on imported energy.

Trade policy is another transmission mechanism. The late-August escalation between the US and Canada demonstrated that even long-standing alliances are vulnerable to tariffs. Relations between the US and China remain fragile, particularly around technology and critical materials.

China itself presents a divided picture. Its export industries—especially those associated with semiconductors, electric vehicles and green technology—remain highly competitive. Domestic activity is much weaker, however, with manufacturing still marginally in contraction and the property sector continuing to weigh on confidence.

Meanwhile, the war in Ukraine continues to influence European defence spending, agricultural markets and the continent’s approach to energy security. These developments may not move equity indices every day, but they are reshaping where governments and companies invest for the next decade.

What are markets assuming?

The central tension is straightforward.

Equity markets are assuming that earnings growth, AI investment and economic resilience can overcome higher financing costs. Bond markets are signalling that inflation, deficits and capital scarcity have not been resolved.

Both views can be correct for a while. Strong nominal growth can support revenues and profits even as it keeps yields elevated. The difficulty arises if bond yields rise far enough to challenge equity valuations—or if the anticipated returns from today’s enormous investment programmes fail to arrive.

This is not necessarily an argument for retreating from markets. It is an argument for selectivity. With cash and bonds once again offering meaningful yields, equities face genuine competition for capital. Companies with reliable cash flows, manageable debt and the ability to convert investment into profits should be better placed than businesses whose valuations depend largely on distant expectations.

August rewarded optimism. The months ahead may require that optimism to be supported by evidence.

Disclaimer: Any information contained within this article is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Journey accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.