Despite macroeconomic risks, the global economy is growing, and earnings continue to be strong.
But there are things on the horizon that demand investors’ attention, including the US midterm elections; upcoming inflation data and the question over whether central banks are prepared to stay on hold as the leaves start to drop.
Stay bullish
There are always things to worry about – like El Niño, the heatwave and drought in Europe potentially disrupting food supply chains, and political uncertainty ahead as the US gears up for its midterm Congressional elections.
But investors sticking with risk in developed and emerging market equities, and in high yield credit, still seems potentially appropriate.
But not on long bonds
US long-dated bond yields have drifted higher. New Federal Reserve Chair Kevin Warsh has not helped with his clear distaste for providing any forward guidance regarding monetary policy.
It is hard to know what level of yield would make the outlook for total returns from long duration fixed income better. At a 5.25% yield, the 30-year US Treasury bond looks favourable if the Fed can return to meeting its inflation target.
But markets do overshoot fair value. November’s elections could bring forth more policy risk and will certainly focus market attention on fiscal matters ahead of the usual budget season.
Will November’s elections provide enough of a political turnaround for Congress to set fiscal policy on a more sustainable path? Investors are cynical about that.
US mortgage rates have been rising all year with the current national average 30-year rate at 6.8% (according to Bankrate.com). Ideally, one would not want to be going into an important election period with mortgage rates rising even if they remain lower than they were
in 2023.
A difficult semester ahead for US Treasuries?
The Treasury market remains vulnerable to weak sentiment. The Fed could still also hike rates.
The combination of inflation and unemployment numbers certainly rule out any rate cuts it would seem, and the risk is that global food price inflation and the risk of higher energy costs towards the end of the year will keep central banks vigilant to the signs of broader inflationary pressures.
Seasonally, according to Bloomberg, the September-October period tends to deliver negative returns for the long end of the Treasury market. With inflation risks, the midterm elections, and a new Fed reaction function that the market does not understand yet, returns
could remain under pressure for the remainder of the year.
In my opinion, the only things which might change that is a sudden weakening in economic data or some kind of external shock. The latter appears more likely than the former.
Investors in fixed income remain better served, from a risk-return perspective, in shorter duration assets and where a significant amount of the return comes from the credit spread, like high yield.
Solid growth background for equity markets
Sticking with risk assets seems appropriate in my view. The global economy is in decent shape with major economies forecast to grow close to trend through 2027. Manufacturing activity is strong, and indicators of service sector activity continue to be healthy.
This is underpinning continued confidence in companies’ ability to generate strong earnings growth. The aggregated estimates of earnings-per-share growth over the coming 12 months are close to 20% for the S&P 500, 12% for the Euro Stoxx index, 10% for the UK FTSE 350
and 15% for Japan.
Moreover, forward price-to-earnings multiples have come down over the last few months – suggesting the impact of higher long-term bond yields might already have been witnessed.
The AI boom clearly continues to play a role in this confidence and, let us face it, AI adoption is supposed to boost profitability. It might already be happening on a broad scale.
Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, BNP Paribas AM, as of 13 August 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.
