Oct 1, 2026
Promise and Pressure: The road to year end
Q3 2026 Investment Review - Bumpy, Not Broken: Equities Push Through Yields and Energy
IN BRIEF
- Markets stayed constructive but choppier as higher yields, energy inflation, and U.S.–Iran tensions reasserted themselves; leadership broadened beyond AI/growth.
- Strong earnings, in tech but also outside of it carried equities higher.
- A global tightening pulse (hikes by the Fed, the ECB, and the BoJ) pushed 10-year yields to multi-year highs as term premium reasserted itself.
Market Comment
The macro backdrop in the third quarter stayed constructive for risk assets, as higher yields, energy-driven inflation, and geopolitical stress reasserted themselves. Returns shifted away from the narrowest AI/growth cohort towards a wider set of sectors, with volatility rising into September as the "higher-for-longer" rates reset took hold. The U.S.–Iran conflict remained unresolved, with periodic flare-ups pushing oil higher and feeding into yields and central bank hawkishness. Taiwan and U.S.–China tensions stayed a tail risk — the trade truce held, but no breakthroughs on AI, semis, or rare earth emerged. The picture was bumpy, not broken.
Oil was the quarter's key swing factor: the lingering March energy shock, plus a fresh September leg (on unresolved U.S.–Iran tensions and periodic flare-ups), pushed crude and refined products higher, which lifted inflation expectations. That fed directly into higher yields, central bank hawkishness, and a "higher-for-longer" rates reset. Inflation moved back to the center of the debate. U.S. core PCE is tracking around 3% for year-end 2026, Eurozone around 2.5%, with wage growth moderate and no broad-based re-acceleration absent new shocks. Inflation is elevated but not broad — concentrated in energy and supply-constrained pockets rather than a wage-price spiral.
WTI Oil vs. Brent Oil Prices
Source: Bloomberg as of September 30, 2026
Earnings did the heavy lifting for equities. Second Quarter 2026 S&P 500 earnings per share (EPS) growth exceeded 50%, with ex-Tech+ at roughly 26% — a meaningful broadening. Technology+ growth was just shy of 100% year-on-year. Positive revisions pushed calendar year 2026 S&P 500 EPS estimates ~7% higher since end-Q2 and ~16% year-to-date.
Hyperscalers vs. S&P 500 ex. Hyperscalers Earnings Growth
Source: FactSet data as of October 2, 2026.
The S&P hit five fresh all-time highs over the summer, most in August. Sector rotation toward AI infrastructure — semis, electrical equipment — plus banks and selected Industrials remains the preferred playbook. Outside the U.S., select opportunities in emerging markets (Taiwan, South Korea) stay favored; with Europe neutral.
Central banks and rates were the quarter's real story. The Fed hiked 25bps in September, framed as a credibility move rather than the start of a tightening cycle, but the bar for further hikes is lower and data-dependent. The ECB hiked 25bps in September on energy pass-through. The BoE held at 3.75% but warned Middle East risks could keep inflation sticky, and the BoJ hiked 25bps — a global tightening pulse.
Sovereign yields rose through August and accelerated into September, with 10-year Treasuries pushing toward multi-year highs. Drivers are stacked: fiscal deficits, heavy Treasury supply, energy, AI hyperscaler issuance, and a data-dependent Fed. Credit stayed resilient — investment grade and high yield spreads still tight. Gold kept its bid on the geopolitical premium. The regime has shifted subtly. The cost of capital has moved up, and the risk premium demanded is structurally higher.
Q3 Market Returns by Region and Asset Class
Bloomberg as of September 30, 2026. You may not invest directly in an index. Fixed Income returns represent hedged to base currency returns. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Key Portfolio Activity Over the Quarter
As we continue to focus on innovation, late last year we enhanced our portfolio precision with which we target our highest-conviction equity ideas through our Equity Completion Funds — building on five years of successful implementation for our U.S. clients. This approach has proven particularly valuable in the current environment, enabling us to tactically capture opportunities across equity markets as they have emerged through recent volatility, while preserving diversification and maintaining cost efficiency. During the quarter, we increased our allocation to the Equity Completion Funds and actively traded within them — adding to select laggards and trimming overweights in names that had performed well.
In portfolios with liquid alternatives, we favor less-correlated investments that should continue to benefit from elevated volatility across asset classes. Accordingly, we closed our long-standing underweight, moving the allocation to neutral (+2%, funded from core bonds). During sporadic sell-offs, alternatives contributed positively to portfolio resilience. Ahead of rising rates volatility, we marginally reduced duration, tactically shifting part of our exposure from the belly of the curve to the front end.
High-Level Portfolio Positioning
We are positioning our multi-asset portfolios with a moderately pro-cyclical tilt, holding a slight overweight in U.S. equities and a 2% overweight in U.S. and European high-yield bonds. We favor U.S. equities versus global peers on a compelling earnings-growth outlook, supported by greater U.S. energy independence amid Middle East developments. Sector positioning balances high-quality growth and defensive areas with selective cyclical exposure. Technology has led earnings, and key overweights include semiconductors, hardware and select software; pharmaceuticals and life sciences; U.S. entertainment; diversified banks in the U.S. and Europe; and European telecoms.
Portfolio risk is expressed through multiple smaller, well-diversified tilts—avoiding concentrated beta while retaining flexibility. Our moderately pro-risk stance combines the U.S. equity overweight with carry. In fixed income, we underweight core bonds in favor of high yield, keep duration neutral around 6.1 years, and remain modestly overweight credit despite tight spreads, supported by solid fundamentals and attractive risk-adjusted valuations.
For portfolios that include alternatives, allocations remain aligned with our strategic targets, with a deliberate tilt toward relative value and equity long/short—strategies that have historically added value during periods of elevated dispersion.
Returns
Following a bumpy start to the quarter, Q3 delivered another leg higher for risk assets, even as the backdrop grew choppier — higher yields, energy-driven inflation, and unresolved U.S.–Iran tensions reasserted themselves, with volatility picking up into September as the "higher-for-longer" rates reset took hold. The U.S. market outperformed World markets, on backdrop of strong earnings season while Europe was notable underperformed due to challenging energy supply outlook.
On a relative basis, several of our positioning decisions added value. Our overweight to equities—particularly U.S. equities—was a positive contributor. Our high-conviction U.S. technology and healthcare positions added, although semiconductors were a drag, while European banks and telecoms contributed positively. High yield also added to performance on a relative basis versus core bonds, and we continue to see value in the asset class over the medium term.
Notably, portfolios that included hedge funds or liquid alternatives outperformed those without in absolute terms, reinforcing the benefits of diversification in volatile environments. Selection in hedge funds has been particularly additive.
Outlook
Resilient corporate earnings continue to support the cycle — particularly where strength is tied to AI capex and margin discipline — keeping equities biased higher even as leadership rotates and breadth improves. The regime has shifted subtly: the cost of capital has moved up and the risk premium demanded (in rates, gold, and geopolitics) is structurally higher — bumpy, not broken.
Oil remains the key swing factor — Middle East de-escalation would ease inflation pressures, while renewed disruption risks a fresh shock and extends the "higher-for-longer" rates reset. Earnings are doing the heavy lifting, with leadership broadening as Financials, Industrials, and Utilities join Technology at the front of the tape. Central banks remain wary of inflation after September's global tightening pulse, with 10-year Treasuries pushing to multi-year highs as term premium reasserts itself. AI and commodities remain the two dominant themes, with gold holding its bid on the geopolitical premium despite higher yields and a firmer dollar.
Regionally, we prefer the U.S. and select emerging markets over Europe. Within equities, we favor areas leveraged to earnings durability and the capex cycle, alongside financials and defensive healthcare, maintaining diversification against geopolitical and rate-volatility risks. We remain pro-risk, but diversified and disciplined.
DISCLAIMERS
For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material.
Indices are not investment products and may not be considered for investment.
Past performance is not a guarantee of future returns and investors may get back less than the amount invested.
Benchmark definitions
All index performance information has been obtained from third parties and should not be relied upon as being complete or accurate. They are not investment products available for purchase. Indices are unmanaged and generally do not take into account fees or expenses. Furthermore, while some alternative investment indices ay provide useful indications of the general performance of the alternative investment industry or particular alternative investment strategies, all alternative investment indices are subject to selection, valuation survivorship and entry biases, and lack transparency with respect to their proprietary computations.
MSCI WORLD INDEX: The MSCI World Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global developed markets. (Source: MSCI Barra)
MSCI EUROPE INDEX: The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 448 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. (Source: MSCI Barra)
MSCI JAPAN INDEX: The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 318 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. (Source: MSCI Barra)
S&P 500 INDEX: The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with 75% coverage (based on total stock market capitalization) of U.S. equities, it is also an ideal proxy for the total market. (Source: Standard & Poor’s)
STOXX Europe 600: The STOXX Europe 600 index represents large, mid and small capitalization companies across 17 countries of the European region.
NIKKEI 225: The Nikkei 225 is a price-weighted equity index, which consists of 225 stocks in the Prime Market of the Tokyo Stock Exchange.
NASDAQ: The Nasdaq Composite Index is a stock index that conveys the overall performance of all Nasdaq-listed stocks according to market capitalization.
CAC 40: A broad-based index of common stocks composed of 40 of the 100 largest companies listed on the forward segment of the official list of the Paris Bourse.
DAX: The DAX is a German blue chip stock market index that tracks the performance of the 40 largest companies trading on the Frankfurt Stock Exchange.
MSCI EM: The MSCI Emerging Markets Index consists of 23 countries representing 10% of world market capitalization. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 23 countries. (Source: MSCI)
BARCLAYS GLOBAL AGGREGATE BOND INDEX: The Barclays Global Aggregate Bond Index is an unmanaged index that is comprised of several other Barclays indexes that measure fixed income performance of regions around the world. (Source: Barclays)
BARCLAYS GLOBAL CORPORATE HIGH YIELD INDEX: The Barclays Global Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. (Source: Barclays)
BARCLAYS GLOBAL INVESTMENT GRADE INDEX: The Barclays Global Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by industrial, utility and financial issuers. (Source: Barclays)
HFRX Global Hedge Fund Index: The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry. Index returns are net of fees. Performance is reported on a 180 day lag, so recent performance numbers are flash estimates. (Source: HFR)
Important Information
J.P. Morgan’s Chief Investment Office Q3 2026 investment review explores multi-asset portfolio positioning, U.S. equities, AI infrastructure and high-yield bonds amid rising yields and energy inflation.
You may also like
Experience the full possibility of your wealth
We can help you navigate a complex financial landscape. Reach out today to learn how.
Contact us
