October Market Update
September was a month of competing forces. Investment in technology continued to support expectations for growth, but conflict in the Middle East kept energy prices high and revived concerns about inflation. Governments faced rising borrowing costs, central banks faced difficult decisions, and share markets responded very differently across the world.
The most significant pressure came through bonds. Investors demanded higher returns for lending over longer periods, making borrowing more expensive for governments and businesses. Yet that did not translate into a uniform fall in equities: US and Japanese shares gained in sterling terms during September, while the UK and continental Europe declined.
Understanding that contrast helps connect the financial headlines to the news we see every day. Markets are weighing both the costs of today’s problems and the profits companies might generate in the future.
Better growth, but a difficult Budget ahead for the UK
The UK economy proved more resilient than many had expected. Figures published at the end of September revised growth in the second quarter up from 0.4% to 0.5%, following growth of 0.6% in the first quarter. Services, which account for most of the economy, continued to expand. These are backward-looking figures, but they provide a stronger starting point than earlier estimates suggested.
That improvement has not removed the pressure on households and businesses. Annual consumer-price inflation rose to 3.1% in August, and higher fuel and energy costs threaten to push it up further. Meanwhile, a softer labour market means the Bank of England has to balance the risk of persistent inflation against the risk of weakening spending and employment.
The Bank held its interest rate at 3.75% in September. However, three of the nine policymakers voted for an increase, showing how finely balanced the decision had become. The concern is that a prolonged energy shock could spread into other prices and wage demands. Raising rates cannot create more oil or gas, but it can restrain spending and help prevent an initial price shock becoming embedded across the economy.
The other major issue is the public finances. Data released in September showed that the UK borrowed £18.3 billion in August, £3.5 billion more than the official forecast. Borrowing over the financial year so far was below the previous year's level, but still above expectations. Public debt remained close to £3 trillion.
Against that backdrop, rising gilt yields — the returns investors require on UK government bonds — make the Budget on 28 October more difficult. The 30-year gilt yield briefly moved above 6% on 1 October before easing. Higher yields increase the cost of new borrowing and refinancing over time, leaving less room for public services, investment or tax reductions. They do not immediately reprice every pound of existing government debt.
Labour's conference also reopened longer-term debates about devolution, public ownership, social care and Britain's relationship with Europe. Andy Burnham's proposed reform of the state pension triple lock from 2030 attracted particular attention. These remain proposals: September's announcements have not changed the current uprating arrangements. For markets, the immediate question is how the government's ambitions will be funded and whether its plans can deliver stronger growth.
UK shares fell 1.88% during September. It would be too simplistic to attribute that result to any single political announcement. Many large UK-listed companies earn much of their income overseas, while domestically focused firms are more directly exposed to household spending and financing costs. Better economic growth can help, but it does not automatically produce an immediate rise in share prices.
The US - strong investment alongside signs of strain
The US Federal Reserve raised its interest-rate range by a quarter of a percentage point to 3.75%-4% on 16 September. Its message was that domestic spending and capital investment remained resilient, while inflation was still too high. The decision marked a return to rate increases after several years without one.
Growth figures revised at the end of September showed the US economy expanding at an annualised rate of 2.2% in the second quarter, up from the previous estimate of 1.5%. Consumer spending and investment helped underpin that result. The annualised US convention differs from the quarter-on-quarter UK figures above, so the percentages are not directly comparable.
However, the American economy is moving at different speeds. AI infrastructure and defence investment have remained strong, while housing, car buying and businesses serving less affluent consumers have been more constrained by higher borrowing costs. This distinction helps explain why a buoyant stock market need not reflect the experience of the average household or smaller business.
The data arriving at the end of September and start of October complicated the case for further increases. The Federal Reserve's preferred inflation measure showed annual price growth of 3.4% in August. The underlying measure, excluding food and energy, was 3.0%, lower than expected. Part of the improvement reflected changes in measurement and revisions to earlier data, so it should not be read as evidence that inflation pressures had suddenly disappeared.
The September employment report, released on 2 October, then showed just 29,000 additional jobs, with earlier estimates revised down and unemployment edging up to 4.2%. One month's report cannot settle the outlook, but it weakened the argument that the labour market was becoming significantly tighter.
Together, these developments reduced expectations of another immediate rate rise. A pause in October became more plausible, although a further increase later in the year remained possible. With the November midterm elections approaching, inflation and the cost of living also remained politically sensitive. For investors, the important issue is whether monetary policy can contain inflation without putting excessive pressure on the parts of the economy already struggling.
US equities gained 1.68% in sterling terms in September. Expectations for corporate earnings and technology investment provided support, but the monthly result conceals periods of volatility. Higher bond yields remain a challenge: they increase financing costs and give investors an alternative return against which to judge share prices. Companies need to deliver earnings that justify the prices investors are paying.
Middle East oil supply improved, but the risks remain
The conflict involving Iran continued to be the most immediate geopolitical influence on inflation and bond markets. Renewed fighting and uncertainty over the Strait of Hormuz, a crucial route for Gulf energy exports, kept oil prices volatile. By mid-September, Brent crude had reached $106 a barrel.
There was some improvement beneath the headlines. Gulf exporters increased shipments during September, using a combination of alternative routes, protective measures and adapted shipping arrangements. However, President Trump rejected an Iranian proposal on 26 September that would have reopened the Strait for seven days. The recovery in exports therefore took place alongside unresolved diplomatic and military risks.
Markets care about whether supplies can be sustained, as well as the number of barrels delivered today. A route that is operating but remains vulnerable to attack still carries risk. Refining constraints also mean that diesel and other finished fuels can become particularly expensive even when crude supplies improve.
For households, the effect is visible at the pump and in energy bills. For businesses, it reaches transport, farming, manufacturing and the cost of delivering goods. Companies may absorb those increases through lower profit margins or pass them on to customers. Either outcome can be uncomfortable for investors: weaker profits weigh on equities, while renewed inflation can keep interest rates and bond yields higher.
That is also why shares and bonds can fall together during an energy shock. Government bonds may help cushion a portfolio when weaker demand reduces inflation and interest rates. They can provide less protection when the problem is disrupted supply that raises prices while damaging growth.
Europe, Ukraine and China - different pressures on trade and security
Europe faced a similar energy dilemma. The initial estimate for euro-area inflation rose to 3.8% in September, from 3.2% in August, with energy an important contributor. That increases the difficulty of supporting growth while bringing inflation under control. European shares excluding the UK fell 2.92% in sterling terms over the month.
Public finances were also under scrutiny, particularly in France, where political uncertainty and the challenge of agreeing a credible Budget added to concerns about government debt. Investors demanded a larger yield premium over German bonds. This reflects a higher price for lending to France relative to Germany, rather than proof that France cannot meet its obligations.
Russia's war in Ukraine continued to impose severe human and economic costs. Recent attacks on energy infrastructure sharpened concerns ahead of winter, while Ukraine sought further funding for its defence needs. For European governments, supporting Ukraine and strengthening their own security add to spending pressures at a time when borrowing is already expensive.
These conflicts also reinforce the case for more resilient energy supplies. Investment in power generation, grids, storage and domestic production increasingly serves national security as well as climate goals. That can create opportunities for suppliers, but major infrastructure projects require substantial funding and are sensitive to interest rates.
There was a more constructive development in US–China relations. Following September's summit, the two governments published product lists under a framework intended to offer lower tariffs on around $30 billion of goods in each direction. These were recommendations for consideration under domestic processes, rather than an immediate removal of all the relevant tariffs. The initiative offered a sign of stabilisation, while leaving wider competition over technology and security unresolved.
For businesses, a more predictable trading relationship can support investment and supply-chain planning. However, a limited agreement should not be mistaken for the end of the trade dispute, or treated as the sole explanation for Asian market returns.
AI - a source of growth and a growing financing question
Artificial intelligence remained central to the equity-market debate. Spending on data centres, chips and electricity infrastructure supports demand across a much wider range of businesses than the best-known technology companies. A selected group of Indian AI infrastructure beneficiaries had gained around 60% in 2026 to 22 September, despite a decline of more than 10% in the broader Nifty 50. Those figures describe a particular basket over the year, rather than September's Indian market return.
September also brought calls from leading AI developers for a slower pace of development and stronger safeguards. For investors, delays matter because valuations depend partly on how quickly new technology can be deployed and generate revenue. A technology can be valuable for society while still delivering disappointing returns to companies that paid too much to build it.
The financing has become more significant too. Global AI-related debt issuance was estimated at around $450 billion by early September, more than double the total for 2025. This broadens the exposure to AI beyond shareholders to lenders and bond investors. If future revenues disappoint, borrowers still have to service their debts.
The key question is therefore how much profitable demand this investment will create. Strong earnings can support shares despite higher interest rates; a reassessment of those earnings can put pressure on both equity values and the debt used to finance expansion.
What the bond market means for investors
A bond usually promises a series of payments and repayment at a specified date. If investors can obtain a higher return from newly available bonds, the price of an existing fixed-rate bond generally falls to remain competitive. Bonds with longer repayment dates are usually more sensitive to this change.
Central banks set short-term policy rates, but longer-term bond yields also reflect inflation expectations, government borrowing and the compensation investors require for uncertainty. That helps explain why the softer US data brought only temporary relief to Treasury markets. The possibility of a pause by the Federal Reserve did not remove concerns about energy costs or public debt. The US 10-year Treasury yield reached around 5.3% at the end of September, illustrating how sharply the cost of longer-term borrowing had risen.
Higher yields can improve the income available on bonds purchased today, and that income can help absorb future price fluctuations. However, further yield increases can still produce losses. Corporate bonds also carry the risk that the issuer cannot pay, with lower-quality borrowers generally more vulnerable to economic weakness.
Bond holdings therefore need to be judged by their purpose, credit quality and sensitivity to interest rates, alongside the time available to invest. They can help manage overall portfolio risk without moving in the opposite direction to shares every month.
Looking ahead
October’s inflation releases and company results will help show whether higher energy and financing costs are being absorbed or passed on. Developments in Gulf shipping will remain important, while the UK Budget will test how the government balances its ambitions with the cost of funding them.
For long-term investors, recent events reinforce the value of diversification across regions, companies and asset classes. The world economy is facing real challenges, while businesses continue to invest and adapt.
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.