Welcome to our fourth quarterly Markets & Economic Summary of 2026, in which we look back on the performance of markets and economies around the world during the last three months and what we can expect going forward.
Quarterly Overview
The third quarter of 2026 was another interesting period for financial markets. Despite a significant increase in oil prices, rising government bond yields, renewed inflation concerns and continued geopolitical uncertainty, global equity markets remained relatively resilient.
US Market:
- The S&P 500 increased by 2.3% during Q3, reaching another record high during the quarter.
- The Nasdaq increased by 2.5%, continuing to benefit from strong technology and Artificial Intelligence (AI) related investment.
- Returns were increasingly concentrated in large technology companies, while the broader market struggled with higher borrowing costs.
UK Market:
- The FTSE 100 increased by 1% during the quarter and recorded its seventh consecutive quarterly gain.
- The index remained supported by its large exposure to international companies, energy, mining, financials and defensive sectors.
- The more domestically focused FTSE 250 performed more strongly, rising 6.6% during the quarter.
European Market:
- The STOXX 600 fell 1% during Q3.
- Higher oil prices, rising government bond yields and renewed inflation concerns weighed on European equities.
- Technology remained one of the stronger areas of the market, supported by continued AI investment.
Asia-Pacific Market:
- Japan’s Nikkei 225 fell 4.7%, ending a five-quarter run of quarterly gains.
- The Hang Seng in Hong Kong increased 7.6%, although it remained negative over the year as a whole.
- Asian markets remained heavily influenced by technology, AI investment, energy prices and the direction of the US dollar.
Gold Prices:
- Gold increased by 3.3% during Q3.
- Despite falling sharply during September, gold remained significantly higher than it was a year earlier.
- Central-bank demand and geopolitical uncertainty continued to support the precious metal.
Fixed Income:
- Government bonds experienced one of their most difficult quarters in recent years.
- The US 10-year Treasury yield rose by approximately 0.8 percentage points and moved above 5%.
- UK and Japanese government bond yields also increased significantly.
- Higher inflation expectations, increased government borrowing and expectations of interest rates remaining higher for longer were the main drivers.
Economic Outlook:
- The global economy remained resilient despite the energy shock.
- Inflationary pressures increased again as oil prices rose substantially.
- Central banks became more cautious about interest rates, with some starting to make increases or indicate that they would rise in the near future.
- Corporate earnings, particularly within the technology sector, continued to support financial markets.
Markets
Global financial markets delivered another unusual quarter. At the beginning of 2026, investors were largely focused on the potential for falling inflation, lower interest rates and continued economic growth. By the end of the third quarter, the picture had changed somewhat, with energy prices rising sharply and government bond yields increasing across many developed markets.
Despite this, equities continued to perform reasonably well. US equities have now delivered two consecutive quarters of positive returns following the weakness experienced during the first quarter of the year. Once again, AI was a major contributor. Large technology companies continued to invest heavily in data centres, semiconductors and computing infrastructure, while investors remained confident that the significant capital expenditure taking place today will ultimately translate into higher revenues and profits.
However, there was an important difference compared with previous quarters. The rise in the overall S&P 500 increasingly disguised weakness underneath the surface. Higher government bond yields made borrowing more expensive and placed pressure on interest-rate-sensitive areas such as utilities, property and smaller companies. The equal-weighted S&P 500 actually fell during Q3, demonstrating just how much of the index’s performance was being driven by its largest technology companies. This is an important development to monitor. The AI investment story remains powerful, but valuations in parts of the technology sector are already high. Investors therefore need to see continued growth in revenues and profits to justify these valuations.
In the UK, the FTSE 100 extended its run of consecutive quarterly gains to seven. The index remains quite different from the UK economy itself because a significant proportion of FTSE 100 companies generate their revenues overseas.
This means that global economic growth, commodity prices and currency movements can often have a greater influence on the FTSE 100 than the performance of the UK economy. The FTSE 250, which contains more domestically focused businesses, performed considerably better during Q3. This suggests that investor confidence in some parts of the UK domestic economy remained relatively strong despite the continuing pressure from inflation and higher interest rates.
The European market was particularly affected by the increase in oil prices because European economies remain relatively dependent on imported energy. Higher energy costs increase the cost of manufacturing, transportation and household consumption, ultimately creating another inflationary pressure for the economy. Technology companies were again one of the stronger areas of the European market, benefiting from the same AI investment theme seen in the US. However, this was not enough to offset weakness in more economically sensitive sectors as bond yields increased.
In Asia, the performance was mixed. Japan’s Nikkei 225 fell 4.7%, ending a remarkable five-quarter run of quarterly gains. This was partly due to the global increase in bond yields and concerns surrounding higher energy prices. Japan remains heavily dependent on imported energy, meaning higher oil prices can put pressure on both consumers and businesses.
China and Hong Kong provided a more positive performance. However, the Chinese economy continues to face structural challenges, particularly around the property market, consumer confidence and domestic demand.
Overall, the key message from global equity markets during Q3 is that corporate earnings remain more important than economic growth alone. Investors continue to place significant value on companies capable of producing strong earnings and cash flow, even while the wider economic environment remains challenging.
Index
Quarter 3 (July – September) Performance %
Year to Date Performance %
One Year Performance %
FTSE 100 (UK)
1.0
6.8
12.3
S&P 500 (US)
2.0
11.8
14.0
Euro STOXX 600 (Europe)
-1.0
8.0
–
Nikkei 225 (Japan)
-4.7
31.5
48.6
Hang Seng (China)
7.6
-4.0
-8.4
Gold
3.3
-3.9
7.5
Gold
Gold continued to demonstrate why it can play an important role within a diversified portfolio during periods of geopolitical and economic uncertainty.
The gold price increased by approximately 3.3% during Q3, although the headline quarterly return masks a significant amount of volatility. Gold rose strongly during much of the quarter before falling sharply in September as US Treasury yields increased and investors became concerned about the possibility of interest rates remaining higher for longer. Despite this September decline, gold remained around 7% higher than it was one year earlier. The long-term support for gold remains relatively straightforward. Central banks around the world have continued to purchase gold as a reserve asset, while geopolitical uncertainty has increased demand for assets that are not directly linked to any individual government’s finances or currency.
However, gold is not immune to changes in interest rates. Because it does not generate an income, higher bond yields can make holding gold relatively less attractive compared with interest-bearing assets.
As a result, the direction of real interest rates, the US dollar and central-bank purchases will remain important factors for gold over the remainder of the year.
Fixed Income
The most significant development in financial markets during Q3 was arguably not in equities at all, but in fixed income.
Government bond markets experienced substantial volatility as investors became increasingly concerned about inflation, government borrowing and the possibility that interest rates would remain higher for longer. The yield on the US 10-year Treasury rose by approximately 0.8 percentage points during the quarter and moved above 5%, its highest level since before the Global Financial Crisis. Government bond yields also increased substantially in Japan and Europe. Normally, government bonds are expected to provide some diversification when equities become volatile. During Q3, however, bonds themselves became a major source of volatility.
There were several reasons for this. Firstly, the significant increase in oil prices created a renewed inflationary shock. Secondly, government debt levels remain high across many developed economies, meaning governments need to issue large quantities of bonds to finance their spending. Finally, investors are demanding greater compensation for holding longer-dated government debt while inflation and government borrowing remain uncertain.
The corporate bond market remains somewhat different. Many companies continue to have strong balance sheets, healthy cash generation and manageable levels of debt. This has helped corporate bond spreads remain relatively contained compared with the much larger movements seen in government bond yields.
However, higher government bond yields do ultimately feed through into corporate borrowing costs. If rates remain elevated for an extended period, this could place more pressure on highly leveraged companies and weaker borrowers.
For investors, this reinforces the importance of considering both the income available from bonds and the potential capital loss that can occur when yields rise.
Economics
The biggest economic story during Q3 was the renewed increase in energy prices.
Oil prices rose substantially during the quarter, with Brent crude increasing by 40% and moving back above $100 per barrel. This was largely driven by the continued conflict in the Middle East and concerns surrounding energy supply. The effect of higher oil prices is broader than simply increasing the cost of filling a car. Oil is an important input into transportation, manufacturing, logistics, chemicals and many other industries. Higher energy costs therefore have the potential to feed through into the prices of goods and services.
This creates a difficult situation for central banks. Higher interest rates can reduce demand and therefore help bring inflation down, but they cannot directly reduce the price of oil. Central banks therefore have to judge whether the initial energy shock is likely to remain temporary or whether it will begin to influence wages and broader price-setting behaviour.
The UK economy remained relatively resilient during the quarter. The latest ONS figures showed that UK GDP increased by 0.5% during Q2 2026, following growth of 0.6% in Q1. More recent data also indicated that the economy made a solid start to Q3, although the labour market remained relatively soft.
The major concern remains inflation. UK CPI inflation reached 3.1% in August, significantly above the Bank of England’s (BoE) 2% target. The BoE therefore kept the Bank Rate at 3.75% in September. However, the vote was relatively close, with three of the nine members of the Monetary Policy Committee preferring to increase rates to 4%. This demonstrates how much the inflation outlook has changed during the year. At the beginning of 2026, investors were largely expecting further reductions in interest rates. By the end of Q3, markets were instead considering whether the BoE might need to increase rates again.
Higher borrowing costs will continue to put pressure on households and businesses. However, the UK economy has so far remained more resilient than some of the weaker economic forecasts at the beginning of the year suggested. For UK investors, it is also worth remembering that the performance of the FTSE 100 does not necessarily reflect the health of the UK economy. Many of its largest companies earn substantial amounts of revenue overseas, meaning that global growth, commodity prices and currency movements remain extremely important.
The US economy continued to demonstrate considerable resilience during Q3. The latest estimate showed that US GDP grew at an annualised rate of 2.2% during Q2, following growth of 2.5% during Q1. Consumer spending and business investment were major contributors, with AI infrastructure investment playing an increasingly important role.
Inflation nevertheless remained above the Federal Reserve’s (The Fed) 2% target. The Personal Consumption Expenditures index increased by 3.4% over the year to August. The Fed responded by increasing its target interest rate by 0.25 percentage points in September, taking the range to 3.75%-4%.
This was particularly notable because the US had previously been moving towards lower interest rates. The combination of a resilient economy, high energy prices and persistent inflation has therefore caused the Fed to adopt a more cautious approach. The US remains one of the strongest developed economies, but the major question for investors is whether the current level of AI investment can continue to translate into earnings growth at a sufficient rate to justify the valuations of the largest technology companies.
The European economy also showed resilience during Q3. Euro area GDP increased by 0.6% during Q2, while the latest manufacturing data suggested that industrial activity continued to improve into September. AI and defence-related investment have been particularly supportive of manufacturing demand. However, the increase in energy prices created another significant challenge for the region.
The European Central Bank raised its key interest rates by 0.25 percentage points in September, taking the deposit rate to 2.50%. The ECB now expects inflation to average 3.0% in 2026 before falling to 2.5% in 2027 and 2.1% in 2028.
Economic growth is expected to remain modest, with the ECB forecasting growth of 0.9% for 2026. Europe therefore faces a difficult balancing act. Governments are increasing spending on defence and infrastructure while businesses continue to invest in technology, but higher energy prices and interest rates are likely to restrict household consumption and some forms of private investment.
Asia remained a particularly mixed region during Q3. Japan’s stock market experienced a significant correction following its exceptional performance during the first half of the year. Higher global bond yields and energy prices created headwinds, while investors also took profits following the substantial gains already achieved.
China was more positive during the quarter, with the Hang Seng increasing approximately 7.6%. Nevertheless, China’s broader economic outlook remains more complicated. The property market continues to weigh on household confidence, while domestic consumption remains weaker than policymakers would like. At the same time, investment in technology, manufacturing and AI remains an important source of growth.
Elsewhere in Asia, technology and semiconductor companies continued to benefit from the global AI investment cycle. Taiwan and other technology-heavy markets remain particularly exposed to this trend.
The region therefore continues to offer significant growth opportunities, but investors must also consider the risks associated with trade policy, geopolitical tensions, currency movements and dependence on imported energy.
Outlook for the remainder of 2026
Looking forward, there are several important factors that will determine how financial markets perform during the final quarter of the year.
The first is inflation.
The increase in oil prices during Q3 has made the inflation outlook considerably more uncertain. If energy prices remain elevated, central banks may have to maintain higher interest rates for longer or potentially increase rates further.
The second is government borrowing.
Government debt levels remain high across many developed economies. Higher borrowing costs mean governments are paying more to service this debt, while large amounts of new government bonds need to be issued. This could continue to place upward pressure on longer-term bond yields.
The third is corporate earnings.
So far, companies have remained remarkably resilient. Particularly in the US, large technology companies continue to generate substantial revenues and profits, while investment in AI infrastructure remains extremely strong.
The key question is whether this continues. The amount being spent on AI infrastructure is enormous, and investors will increasingly want to see tangible returns from this investment. If earnings continue to grow strongly, the current valuations may prove more sustainable. If earnings disappoint, the concentration of market returns in a relatively small number of technology companies could become a source of volatility.
The fourth is geopolitical risk.
The Middle East remains an important source of uncertainty, particularly because of its influence on global energy prices. Any further disruption to oil supplies could create another inflationary shock.
There are also continuing geopolitical and trade tensions between the world’s major economies. These issues can affect supply chains, investment decisions and ultimately company earnings.
For the UK, the direction of inflation and interest rates will remain particularly important. The Bank of England has so far maintained Bank Rate at 3.75%, but the September vote demonstrated that further increases cannot be ruled out if inflation remains persistently above target.
For Europe, the outlook remains one of modest economic growth combined with significant investment in defence, infrastructure and technology.
In the US, the economy remains relatively strong, but the combination of elevated equity valuations, high government debt, inflation and interest rates means that investors should not assume that the exceptional performance of recent years will continue indefinitely.
Overall, financial markets enter the final quarter of 2026 in a reasonably strong position, but with considerably more uncertainty than at the beginning of the year.
There are still significant opportunities for investors, particularly through continued economic growth, corporate earnings and technological development. However, the third quarter demonstrated that diversification remains important. Equities can continue to perform even when economic conditions are challenging, but individual regions, sectors and asset classes can behave very differently.
As always, a well-diversified portfolio remains the best defence against uncertainty, helping investors capture upside potential while protecting against inflation, inevitable market corrections, and shifting global sentiment.
If you’re an existing client and want to discuss any of the points raised in this article or want further assistance, please contact your usual Fogwill & Jones adviser who will be happy to help you. If you are not an exisiting client, but are interested in using our advising services, please get in touch below.
Simon Briggs
Chartered Financial Planner, Director & Compliance Manager
Liam Burnett
Investment Analyst