02 Oct 2026
Investors began 2026 expecting interest rates to fall. By September, stronger-than-expected growth and persistent inflation had forced central banks to rethink the path ahead. Renewed expectations of rate hikes caused bond yields to rise sharply, which put pressure on bond prices (when yields rise the price of existing bonds fall) particularly in the US, where bond yields rose most noticeably.
Monthly Market Outlook
Monthly Market Outlook
Investors began 2026 expecting interest rates to fall. By September, stronger-than-expected growth and persistent inflation had forced central banks to rethink the path ahead. Renewed expectations of rate hikes caused bond yields to rise sharply, which put pressure on bond prices (when yields rise the price of existing bonds fall) particularly in the US, where bond yields rose most noticeably.
Global equities, however, remained resilient, supported by strong earnings expectations and continued optimism around artificial intelligence, although performance varied considerably across sectors and regions.
So why have expectations changed, and what does it mean for your investments?
Markets move from expecting cuts to anticipating further increases
A stronger economy sounds like good news, and in many ways it is. When consumers keep spending and businesses keep investing, companies have more opportunity to grow their profits. But strong demand can also keep prices rising, making it harder for central banks to bring inflation under control.
At the start of the year, investors expected the Federal Reserve (“the Fed”) to cut interest rates two or three times. Instead, September brought a rate increase, its first in more than three years. Fed Chair Kevin Warsh’s speech at the Jackson Hole symposium helped signal the change, putting inflation risks firmly back in the spotlight.
The US economy has remained resilient. Businesses are spending heavily on AI infrastructure, government spending continues to support activity, and consumers have kept buying. The jobs market, previously seen as a potential weak spot, has also held up relatively well. Together, these forces have given the economy momentum, but most importantly inflation has been persistently stubborn.
The conflict in the Middle East and its effect on energy prices has added to the inflation challenge. There remains considerable uncertainty around how the conflict will develop, but oil exports from the Gulf have begun to recover. Weaker demand from major importers such as China, combined with increased production elsewhere, is helping the global market absorb much of the lost supply. However, the risk of higher oil prices has not gone away. A further escalation that causes a large and sustained increase in oil prices would place additional pressure on consumers and businesses, while making central banks more concerned about inflation. For now, however, oil prices have remained below their earlier highs, and markets expect them to decline gradually over time.
The shift in the expected path of interest rates has not been confined to the US, as a similar change has occurred closer to home. The European Central Bank has increased rates twice this year, despite markets beginning 2026 expecting no change. Here in the UK, markets have moved from expecting one or two cuts to anticipating four Bank of England rate increases over the coming year.
There is an important difference, however. The UK and eurozone face more challenging growth outlooks than the US. This raises the question of whether their economies will ultimately require all the interest rate increases currently expected by markets.
Bond markets adjust to higher interest rates
The change in policy rate expectations pushed government bond yields higher during September. US Treasury yields moved more than the UK, with the US 10-year yield rising by around half a percentage point. Because bond prices fall when yields rise, this created a difficult month for government bond investors.
UK gilt yields also rose materially, reflecting the Bank of England’s increasing focus on inflation, despite a minority of policymakers voting to raise rates at its September meeting. The UK economy faces weaker growth, a softer labour market and less supportive consumer conditions than the US. Therefore, if inflation pressures ease, we believe the Bank of England is likely to keep rates lower than markets expect, leading to stronger returns for UK government bonds. We therefore continue to see gilts as attractive relative to several other major government bond markets. See the chart below which shows change in US and UK bond yields over the last year:
Attention is now turning to the Autumn Budget. We expect the Government to reaffirm its commitment to the fiscal rules and maintain meaningful fiscal headroom, limiting the risk of lasting volatility in gilts or sterling. However, the detail will matter. If near-term spending rises without corresponding tax increases or a credible funding plan, investors are likely to demand higher returns for lending to the Government – implying higher government bond yields, placing renewed pressure on gilt prices and sterling.
Equities prove resilient despite rising yields
Historically, a large increase in bond yields would be expected to create a significant headwind for equities. At the headline level, however, global equities weathered this increase well. Beneath the surface, there were considerable differences. Several sectors struggled with higher borrowing costs and energy prices, while technology and communication services companies performed more strongly.
Continued investment in AI remained an important source of support. Companies are still committing significant sums to data centres, semiconductors, and computing capacity, while expectations for technology-sector profits remain strong.
This does not mean higher interest rates are unimportant. Fast-growing companies often derive much of their value from profits investors expect them to generate many years from now. Their share prices can therefore be particularly sensitive to changes in interest rates and growth expectations.
For now, continued investment and strong earnings expectations have provided an important counterweight. Outside the US, equity returns were generally weaker, reflecting less exposure to the AI investment theme and, in parts of Europe, greater sensitivity to energy prices. Even so, losses remained relatively contained given the difficult backdrop.
What does this mean for investors?
September showed how the same economic news can affect investments differently. Strong growth made interest rate cuts less likely, hurting bond prices, while also supporting the profit expectations that helped equities hold their ground.
We continue to see opportunities across both equities and bonds. Higher yields have improved the returns available from government bonds, with UK gilts looking particularly attractive as markets may be pricing in more UK interest rate increases than the economy ultimately requires, meaning yields could fall if expectations for future rate rises are scaled back. For equities, resilient company earnings and continued investment in AI remain supportive, although performance is likely to vary between companies, sectors and regions. This makes it important to look beyond the headline market figures and focus on where the underlying opportunities lie.
For long-term investors, the message remains unchanged. Maintaining a diversified portfolio and remaining focused on long-term fundamentals continues to be the most effective way to navigate periods of uncertainty.
Information correct as of 2nd October 2026.
Disclaimer
Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.
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The value of investments and any income from them can fall and you may get back less than you invested.
The value of investments and any income from them can fall and you may get back less than you invested.
