Rising energy prices, higher bond yields and ongoing geopolitical tensions shaped markets in the third quarter. In this longer read, Schroders reviews the key drivers behind performance across equities, bonds and commodities during the period.
The third quarter was marked by rising inflationary pressure amid renewed conflict in the Middle East which pushed energy prices higher once more.
Commodities performed well. Developed market equities gained although emerging market equities fell slightly. Global bond markets experienced challenges with yields moving higher.
Global equities
Global equities gained during the third quarter of 2026, with the advance coming despite a challenging backdrop marked by geopolitical tensions, higher energy prices and rising interest rates.
While US equities continued to contribute significantly to global returns given the market’s weight in the index, the gain was broadly supported by companies that demonstrated an ability to increase earnings despite higher financing costs and uncertain macroeconomic conditions.
Investors’ continued enthusiasm for artificial intelligence, digital infrastructure and other productivity-enhancing technologies also helped support equity valuations across a range of markets and sectors.
A notable development during the quarter was the divergence between bond and equity markets. Equity investors appeared relatively sanguine about the concerns that drove a global bond market sell-off, including persistent inflation, rising fiscal deficits, higher government borrowing and expectations that central banks may need to keep monetary policy restrictive.
The positive return for global equities reflected confidence in an economic backdrop that remained more resilient than many had anticipated. Labour markets generally stayed healthy, corporate earnings continued to exceed expectations in many regions and concerns about an imminent global recession eased.
US
The S&P 500 Index gained 2.3% during the third quarter of 2026, delivering positive returns despite rising bond yields, higher energy prices and continued uncertainty about inflation and monetary policy. Investors largely overlooked the volatility in fixed income markets.
Instead, they focused on a still-resilient economic backdrop, healthy corporate earnings and the ability of many companies to maintain their profitability in a higher-rate environment.
Performance across sectors varied widely. Energy was the strongest-performing sector by a considerable margin, benefiting from higher oil prices and worries about global supply. The sector’s strong earnings outlook and attractive valuations also drew investor interest.
Information technology posted a strong quarter, as investors continued to favour companies with strong earnings prospects and exposure to long-term technology spending trends.
Healthcare stocks also recorded significant gains during the quarter. The conclusion of negotiations between the US government’s public health programmes and major pharmaceutical companies gave the market much-needed clarity on drug pricing rules.
Utilities was the weakest-performing sector. Rising bond yields reduced the relative appeal of the sector’s dividend income and put pressure on valuations.
Eurozone
Eurozone shares, as measured by the MSCI EMU index, declined slightly in Q3. The energy sector was the standout positive performer amid rising oil prices as the Middle East conflict re-intensified. Financials and materials also made gains.
Among financials, several banks disclosed strong results in the Q2 earnings season. However, other sectors fell with real estate and consumer discretionary among the weakest.
The European Central Bank (ECB) raised interest rates by 25 basis points in September, taking the deposit rate to 2.5%. The move came in response to above-target inflation caused by higher energy prices.
ECB President Christine Lagarde warned that inflationary price shocks could continue into 2027. Annual inflation in the eurozone was confirmed at 3.2% in August, up from 2.0% a year earlier.
Economic growth nevertheless remained resilient. Eurozone GDP rose by 0.6% quarter-on-quarter in Q2. The flash eurozone composite purchasing manager’s index (PMI) hit a 41-month high of 53.1 in September. (The PMI indices reflect survey responses from manufacturers and service providers. A reading above 50 signifies economic activity increasing).
UK
The UK’s FTSE All-Share index advanced in Q3, supported by robust gains for the energy sector. Several other sectors advanced, including telecommunications, technology and basic materials, although healthcare was a notable underperformer.
As in other regions, rising inflation as result of the conflict in the Middle East was a key theme of the quarter.
UK inflation (as measured by the consumer price index) was 3.1% in August but the Bank of England kept interest rates on hold at 3.75% during the period. However, BoE Governor Andrew Bailey warned that interest rates may have to rise soon with inflation forecast to head higher.
During the quarter, Andy Burnham replaced Sir Keir Starmer as Labour Party leader and prime minister. Equity markets generally showed little reaction to the political changes but towards the end of the period investors began to look ahead to the Budget on 28 October.
Shares of UK housebuilders gained in September amid news of a new scheme to help first-time buyers.
Japan
Japanese equities gained in the quarter with the TOPIX Total Return index up 3.8% (in yen terms).
Volatility remained elevated due to changing expectations for US interest rates, an escalation in the conflict in the Middle East, and coordinated Japan–US currency intervention to support the yen.
During July, market leadership shifting away from AI- and semiconductor-related stocks toward value and cyclical sectors. Attention turned in August to earnings results for the April–June quarter, as many companies exceeded expectations and strong performers led the market higher.
In September, the financial sector, led by banking and insurance shares, performed strongly as domestic interest rates rose.
Although concerns about high valuations persisted, AI-related shares also held up relatively well, supported by a continued favourable business environment and sustained investor interest in the theme.
Emerging markets
Emerging market (EM) equities delivered a marginally negative return in Q3 2026 (in USD), underperforming the MSCI World index which posted a gain.
The AI-led rally that drove EM returns in H1 faded in July, with Korea and Taiwan leading EM lower, before partially recovering.
Renewed escalation in the Middle East conflict also weighed on sentiment and pushed oil prices higher. Consequently, higher inflation expectations fed through to the global economy.
Korea was the EM index’s worst-performing market in Q3 2026, following a surge in performance in the first half of the year.
Certain memory maker stocks corrected sharply in July owing to worries over US hyperscaler capital expenditure which were compounded by increasing competition from China.
India also underperformed, as elevated oil prices, higher rate expectations and relatively demanding valuations weighed on the market.
South Africa outperformed in the quarter driven by strong gains in August on the back of rising precious and industrial metals prices and a downside surprise in headline inflation.
China also posted a positive absolute return, outperforming the broader index, as it benefited from some rotation out of Korea and Taiwan in July. However, returns faded later in the quarter as economic activity remained weak.
Brazil was a strong outperformer, advancing in July as a consequence of rotation out of AI-linked names, firmer commodity prices and a downside surprise on inflation.
It weakened in August amid slowing growth and political uncertainty, before recovering in September as the central bank cut rates ahead of a tightly contested October presidential election.
The smaller emerging markets of Greece, Colombia and Poland were the standout outperformers in the quarter, all delivering double-digit returns in US dollar terms.
Asia ex Japan
The MSCI AC Asia ex Japan Index registered a slight decline in the third quarter. While economic conditions remained relatively resilient across much of Asia, rising global bond yields, higher energy prices and uncertainty surrounding the growth outlook contributed to the region’s relatively flat returns.
South Korea’s market experienced a significant decline, with semiconductors, technology hardware and other export-oriented industries dragging on performance.
India’s stock market also retreated as investors reassessed elevated valuations following an extended period of strong gains, which led to greater scrutiny of growth-oriented and cyclical companies.
The Philippines faced challenges from persistent inflation and interest-rate concerns, which weighed on domestic demand and other economically sensitive sectors.
Several key markets proved to be notable exceptions to the region’s lacklustre performance. Singapore posted strongly positive returns, supported by its large financial sector, a resilient domestic backdrop and demand for income-generating assets. China’s equity market also advanced.
Global bonds
Global bond markets faced a challenging third quarter as the ongoing US–Iran conflict pushed energy prices sharply higher.
While hopes of diplomacy and improved supply routes occasionally eased pressure, markets increasingly anticipated persistently high energy costs, intensifying inflation concerns and prompting a more hawkish response from major central banks.
Central banks shifted decisively towards tighter monetary policy as resilient economic activity gave policymakers scope to act.
September’s flash composite PMIs reached a five-year high in the US and a three-year high in the eurozone, reinforcing expectations of further rate rises and higher-for-longer borrowing costs.
The US Federal Reserve raised the Federal Funds target range by 25 basis points to 3.75%-4.00% in September – its first increase since 2023.
Chair Warsh said the move removed a “dose of accommodation,” arguing that inflation had remained too high for too long, while resilient growth and a strong labour market gave the economy scope to absorb tighter policy. The Fed signalled that further rate rises could follow.
Elsewhere, the European Central Bank delivered a further rate hike in September, raising its deposit rate by 25 basis points to 2.50%, warning that inflation was likely to remain above target for an extended period. The Bank of Japan also tightened policy, lifting its rate to 1.25%.
However, the Bank of England took a more cautious approach, holding at 3.75%, although three members voted for an increase in September.
Government bonds weakened across markets, driving yields to multi-year highs. The 10-year US Treasury yield recorded its highest close since 2007, while UK and Japanese yields reached levels not seen for several years amid doubts over whether policy was restrictive enough.
The 10-year German Bund yield climbed to its highest since 2011 while France’s spread over Germany reached the widest since 2012.
Corporate credit remained relatively resilient for much of the quarter, supported by solid fundamentals and attractive all-in yields. However, the rise in government bond yields pushed total returns into negative territory by quarter-end.
Excess returns were also negative with European investment grade (IG) modestly lagging the US on an excess return basis. High yield performed better on a total return basis, helped by its higher income and lower interest-rate sensitivity, although excess returns were weaker.
Overall, Q3 highlighted the tension between resilient fundamentals and persistent inflation-driven policy tightening.
Commodities
The S&P GSCI index registered strong gains in Q3 amid renewed strength in the energy sector. There continued to be low levels of shipping in the Strait of Hormuz, meaning limited exports of oil and other products from the Middle East.
Meanwhile, a re-intensification of the conflict saw damage caused to Saudi Arabia’s East-West pipeline, which had been used by Saudi to export oil by bypassing the Strait.
Elsewhere, the agriculture component also registered gains amid worries over the potential impact of the El Niño weather pattern. In addition, Russia and Ukraine focused attacks on each other’s agricultural exports.
Industrials metals rose while precious metals made a smaller advance. Gold drew support in the middle of the quarter from its status as a store of wealth following news that the US Treasury would increase purchases of long-dated debt, which put pressure on the dollar.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: investment funds, dark blue, norbert-kowalczyk-BasVH2YQ1RA-unsplash
