By Chris Iggo, Chair of the Investment Institute and CIO for AXA IM Core, BNP Paribas Asset Management
The weather is hot, and equity markets have hit new all-time highs over the summer. 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.
- Key macro themes – Resilience remains key; recession risk remain low
- Key market themes – Equities can push on, with Europe a key focus
Stay bullish
As Europe continues to bake, the narratives that define market activity and investment returns remain unchanged. The Iran conflict is unresolved, but energy markets continue to function and oil prices do not appear to be an imminent threat to global growth.
The artificial intelligence capital spending story remains strong, with second quarter earnings statements reaffirming this. The share prices of semiconductor manufacturers have started to recover after their June and July correction while the hyperscalers are still spending on compute capacity.
Meanwhile, inflation is well behaved, and central banks are mostly resisting increasing policy rates. These factors have not stopped long-term bond yields rising but they have been supportive to equity markets in general.
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
Before I went on my summer holidays – to the Outer Hebrides in Scotland, where we had this phenomenon called rain – I wrote about investor exasperation with long-duration fixed income.
Since then, 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.
As of July, the fiscal deficit was around $1.8 trillion, up a little from the same period in 2025, and close to the Congressional Budget Office’s projection for the entire fiscal year.
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?
So, the Treasury market remains vulnerable to weak sentiment. The Fed could still also hike rates. However, inflation in July did come in around market estimates – the 12-month rates for both core and headline were down a little compared to June’s numbers.
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.
European markets have performed well over the last quarter, with peripheral government bond spreads narrowing and with more subordinated credit delivering healthy returns.
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.
Sunshine on Europe
Relative market performance has been interesting of late. European equities have beat US returns as investors have re-calibrated valuations for the big US technology companies given their capital expenditure.
For Europe, the autonomy theme continues to be powerful, supporting sectors like defence, technology, energy, and finance. And investors are less concerned about inflation and fiscal risks in Europe, at least on a relative basis.
One could also argue that the European Central Bank has been more decisive, while the outlook for what the Fed does is subject to more uncertainty.
Spain won the World Cup and, along with Italy, to date has the best performing European equity market in 2026. As US risks around the Fed and the Congressional elections will remain, Europe might continue to outperform as it cools down, as we head into what could be an interesting autumn period.
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.
