Markets Unwrapped | October 2026

Market Review: Q3 and the outlook ahead

Global equity markets continued to show resilience during the third quarter, supported by positive corporate earnings and continued optimism around artificial intelligence (AI). However, the backdrop remained challenging for bond markets, as higher oil prices added to inflationary pressures and investors reassessed the outlook for interest rates.

As we move into the final months of 2026, attention is turning towards the next corporate earnings season, developments in the Middle East, interest rate expectations and political events in both the UK and US. Against an uncertain backdrop, maintaining a long-term perspective and a diversified investment approach remains important.

Equity markets remain resilient

Equity markets performed positively across a range of regions during the quarter, although technology and AI-related companies remained important drivers of market sentiment.

Encouragingly, the influence of AI is beginning to extend beyond the companies developing chips, data centres and other supporting technology. Businesses across a wider range of industries are increasingly using AI to improve efficiency, reduce costs and support profitability, creating opportunities beyond the largest technology companies.

This broadening of returns is an important development. Rather than market performance depending solely on a small group of companies, investors are seeing opportunities emerge across different sectors and regions.

UK mid-cap companies gain momentum

The UK was among the stronger-performing equity markets during the quarter, with mid-sized companies attracting particular attention. Unlike many of the UK’s largest companies, which generate significant revenues overseas, mid-cap businesses tend to have greater exposure to the domestic economy.

As a result, expectations surrounding the forthcoming Budget and potential policy changes have influenced sentiment towards areas of the UK market. Housebuilders have been one area of focus amid speculation about support for homebuyers.

A stronger housing market could also have wider implications for businesses linked to home purchases, furnishings and mortgages, demonstrating how changes in the domestic economic and political environment can filter through to different areas of the equity market.

Higher inflation expectations can place pressure on bond prices and push yields higher as investors reassess the returns required from government debt.

Inflation puts pressure on bond markets

While equities proved resilient, it was a more challenging quarter for government bonds. Rising oil prices following conflict in the Middle East contributed to renewed inflation concerns, adding uncertainty around the future path of interest rates. Higher inflation expectations can place pressure on bond prices and push yields higher as investors reassess the returns required from government debt.

The outlook is also becoming increasingly differentiated between countries. The US and UK face different economic conditions and inflationary pressures, meaning their central banks may follow different paths when setting interest rates.

For investors, the key question is how persistent inflation proves to be and what that means for interest rates as we move towards 2027.

Politics comes into focus

Political developments are likely to remain an important part of the backdrop during the final months of the year. In the UK, attention is turning towards the forthcoming Budget and the potential implications of policy changes for households, businesses and financial plans.

In the US, the midterm elections will also be closely watched. Changes to the balance of power in Congress could affect the ability of the administration to pass new legislation. While these political events may influence markets in the short term, their significance should be considered alongside the much wider range of factors affecting global investments.

Looking ahead

Several themes are likely to remain central to markets over the remainder of 2026:

• Corporate earnings, particularly among technology and AI-related companies.
• The broadening impact of AI across industries and company profitability.
• Oil prices and geopolitical tensions and their implications for inflation.
• Interest rate expectations in the UK and US.
• The UK Budget and its impact on businesses, households and investor sentiment.
• The US midterm elections and the implications for future policymaking.

The forthcoming earnings season will be particularly important. While technology and AI companies will remain firmly in focus, results from banks and businesses across other sectors should provide a broader indication of corporate health and the resilience of the global economy.

In summary

The third quarter highlighted two contrasting themes: continued resilience in equity markets and greater pressure on bonds as inflation concerns returned.

AI remains an important driver of market sentiment, but its influence is beginning to broaden as companies across different industries use the technology to improve efficiency and profitability. At the same time, developments in the UK demonstrate that opportunities can emerge outside the largest global technology businesses.

For investors, it is important not to confuse short-term headlines with long-term investment signals. Political announcements, elections and market movements can influence sentiment over days or months, while investment goals often extend over many years.

Maintaining a diversified portfolio and keeping those long-term objectives firmly in mind can help investors navigate periods of uncertainty without being distracted by short-term market noise.

Past performance is no guarantee of future performance.

The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Your capital is therefore always at risk. It should be noted that stock market investing is intended for the longer term.