Three forces shaping markets into the end of 2026

By James Yardley on 6 October 2026 in Equities

There are plenty of thorny questions for investors at the start of the final quarter of 2026: will the AI trade contribute to thrive? Will bond market volatility infect equity markets? Where will fragile geopolitics and unpredictable policymaking lead next? There are a few factors that may determine investor outcomes over the remainder of the year.

Rising bond yields

In theory, rising bond yields should be hurting equity markets. Higher borrowing costs curb companies’ ability to invest for growth and may curb the ability of their customers to spend. Yet the stock market is being propped up by a number of vast spending projects: AI, electrification, defence and infrastructure. This has supported strong earnings, which has kept stock markets buoyant in the face of wobbly bond markets.

However, this resilience may not last indefinitely, particularly if bond yields continue to rise. For the time being, it is not clear why bond markets would reverse course – inflation is high, government spending is high and investors have a lot of choice. Rob Perrone, manager of the Orbis Global Cautious fund, frames it as a supply and demand problem: “When demand for capital rises, those hungry for it must offer higher compensation to coax money out of savers’ hands. The cost of capital must go up. That is exactly what we’ve seen this year.

The same is true for government debt. Governments across the world are issuing more debt and investors may not have infinite capacity to absorb it. That suggests higher compensation will be needed to stand out in a competitive marketplace. Ultimately, these higher borrowing costs will weigh on economic growth and at that point, stock market investors may start to take notice.

That said, there is an upside for investors. Paul Flood, manager of the BNY Mellon Multi-Asset Income fund, says: “I’m quite excited. People say it’s a worry, but every time yields rise we add a little more. For the income fund, we can now lock in 6% yields at the long end of the gilt market, and it wasn’t long ago we could only get 0.5%. It’s a fantastic world for an income investor.”

Emerging versus developed markets

It’s been a bumper period for emerging markets, reversing the weakness of much of the last decade. While some of this strength has come from the AI-supported memory and semiconductor names in Taiwan and South Korea, there are broader signs of strong earnings growth. Raheel Altaf, manager of Artemis SmartGARP Global Emerging Markets Equity, says: “The upturn that we’ve seen has largely been driven by earnings acceleration. Emerging market companies are starting to outgrow their developed market counterparts, and that’s really a change from quite a long-term trend.” Yet the valuation discount between emerging market stocks and developed markets remains high.

There are also risk factors in emerging markets’ favour. Raheel adds: “Levels of debt to GDP are lower in emerging markets today than they are for many Western economies, and many are also independent in terms of resourcing needs. Fiscal policies show how emerging markets are maturing, and monetary policy often has quite a bit of flexibility…emerging markets are maturing and are fundamentally sound.” He contrasts this with the heavy debt and rising bond yields for many developed markets, which is leaving them looking increasingly risky.

The preference for emerging markets is increasingly found among bond managers as well. There is still a risk premium for investing in emerging market bonds over developed markets, yet increasingly it is difficult to see why that exists. Andrew Chorlton, CIO of fixed income at M&G, and head of the team that manages the M&G Corporate Bond fund, says: “Emerging market debt, that two years ago no one would touch, suddenly everyone wants to talk about. They like it for diversification. They like it for the discipline relative to developed markets.”

AI or bust?

The fortunes of a significant segment of global financial markets depend on the success of AI. Not only are the US technology giants forming an increasingly vast share of global indices, but they are also dominating bond issuance. That trade has started to look very crowded, as evidenced by the recent volatility.

There has been a shift to look at the second-order beneficiaries, where valuations are more comfortable. Paul Flood says: “We’re not in the Mag Seven or the core AI names. We’ve been moving around into some of the other supply chain parts in the AI infrastructure space; we think there’s a lot of opportunity there.”

Areas such as financials and pharmaceuticals have also drawn support as potential beneficiaries of AI. In countries such as Taiwan and South Korea, the banking sector is benefiting from the wealth created by the AI boom, but financial companies are also in the front line of users of AI. The major banks are spending significant sums on AI to improve productivity and streamline their internal processes. Pharmaceutical and biotech companies are hoping AI could be used to accelerate drug discovery.

Managers focusing on smaller and mid-cap companies believe their part of the market could start to benefit. The team on the Montanaro Global Select fund says that as adoption of AI accelerates, it is becoming a physical story rather than a software story. “Data centres require land, power, cooling, cabling, water, insurance, financing, controls and ongoing maintenance.”

They are focused on firms providing the physical building blocks of AI deployment – “data-centre construction, power transmission, liquid cooling, networking, building controls and industrial connectivity. Their products may be unglamorous, but unglamorous is not the same as unimportant.” They also believe that companies using AI to reduce costs, improve workflows, increase pricing power, launch new services or deepen customer relationships will start to see recognition from the market.

While AI, bond yields and the growth of emerging markets may be the pressing areas, investors will also need to keep an eye on the war in Iran, any new policies from the White House, the mid-term elections in the US, the looming presidential election in France, plus all the usual factors such as the economy, interest rates and inflation. The outcomes of one or all of these elements are unpredictable. Balance may be the greatest defence.