September 2026 Quarterly Market Update

Key Themes

How Different Asset Classes Have Fared

Key Events This Quarter

Markets in Review

The third quarter of 2026 was shaped by a sharp re-escalation of the Middle East conflict and a pivotal shift in US monetary policy. Early in the quarter the ceasefire between the United States and Iran collapsed, the US resumed strikes and reimposed a naval blockade, and the Strait of Hormuz was left largely closed once again. Oil and gas prices spiked, reviving inflation fears that had only recently begun to fade, and the Federal Reserve signalled it was no longer willing to look through above-target inflation. The result was a quarter of renewed volatility, with sharp divergence between sectors and styles beneath an initially resilient index-level picture.

Leadership narrowed further and dispersion beneath the surface widened to extremes rarely seen outside major corrections. Energy and materials were the standout performers, buoyed by the surge in oil prices and firm commodity demand, while real estate, infrastructure and smaller companies lagged as rising bond yields increased the cost of capital. The biggest divergence was again within technology: the renewed conflict and an abrupt unwinding of the AI trade drove a sharp sell-off in chipmakers and large cloud companies in July, before investors returned to the theme later in the quarter as earnings held up. Australia’s natural tilt towards energy and resources left it relatively well placed for much of the quarter, although a hot inflation print and the RBA’s fourth hike of the year triggered a sell-off into quarter end.

Bonds again offered little shelter, and in fact detracted meaningfully from balanced portfolios. The reignited conflict pushed energy prices and inflation expectations higher just as the Federal Reserve signalled it was prepared to tighten further rather than ease — producing one of the sharpest quarterly increases in bond yields in years. The RBA added to the pressure domestically, taking the cash rate to its highest level since 2011.

Equities

The US equity market ended the quarter higher, but that modest headline obscured a dramatic amount of movement underneath. Technology and AI-related shares fell sharply in July as the renewed conflict and a bout of risk aversion triggered an abrupt unwind of crowded positioning, before chipmakers and large-cap AI names recovered strongly through August and September on resilient earnings. Energy was the standout sector given the surge in oil prices, while utilities, real estate and smaller companies lagged as Treasury yields rose. Market breadth deteriorated noticeably, with a large majority of individual stocks sitting well below their own highs even as the major indices touched fresh records — underlining just how narrow this rally has become.

In Australia, the market’s tilt towards energy and resources again worked in its favour, with materials and energy among the few sectors to finish the quarter in positive territory. Beneath that, the picture was highly dispersed and increasingly volatile into quarter end: a hot inflation print and the RBA’s fourth rate hike of the year triggered a September sell-off that erased many of the gains built up over July and August, with banks and most other sectors ending the month lower. The net result left the benchmark only modestly higher for the quarter, up 1.01%.

Foreign Exchange Markets

Currency markets were dominated by extreme moves in the Japanese yen. Having already fallen to its weakest level since 1986 earlier in the year, the yen slid further in July as the widening gap between US and Japanese interest rates and the renewed spike in oil prices weighed on the currency. The move prompted the first coordinated US–Japan intervention to support the yen since 1998, which drove a sharp but short-lived rebound before the broader downtrend resumed. The US dollar was more mixed elsewhere — strength against the yen contrasted with a softer tone against several other major currencies later in the quarter, as growing political pressure on Federal Reserve independence unsettled some dollar holders even as the Fed itself was raising rates.

The Australian dollar was well supported over the quarter, helped by the RBA’s increasingly hawkish stance and firm commodity prices. The Reserve Bank lifted the cash rate for a fourth time in 2026, to 4.60% — its highest since late 2011 — after hotter-than-expected inflation and resilient growth left the Board little choice but to act. That widening gap between Australian and offshore interest rates, together with strong energy and resources export prices, kept the Australian dollar firm against most major peers.

Fixed Income Markets

Global fixed income endured a difficult quarter, with yields recording one of their sharpest increases in years as markets abandoned expectations for rate cuts altogether. The reignited conflict pushed energy prices higher just as the US Federal Reserve signalled it was prepared to tighten further rather than ease, sending yields sharply higher. The US 10-year Treasury yield rose by roughly 85 basis points over the quarter — one of the largest quarterly moves in years — while yields at the very long end pushed towards two-decade highs.

In the United States, the Federal Reserve delivered its first rate hike since 2023 at its September meeting, lifting the federal funds rate by 0.25% to a range of 3.75–4.00% in a unanimous decision under Chair Kevin Warsh. Updated projections left the door open to at least one further increase before year end, with persistent above-target inflation and a resilient economy cited as the key drivers. In Australia, the RBA raised the cash rate by 0.25% to 4.60% at its September meeting — a unanimous decision and its fourth hike of 2026 — and signalled a willingness to tighten further should price pressures persist.

The sharp repricing in yields flowed through directly to yield-sensitive parts of the equity market, with listed property and infrastructure among the weakest performers of the quarter as higher discount rates weighed on valuations. Fixed income investors now face a genuinely higher-for-longer environment, in which persistent inflation, a reignited energy shock and a less predictable path for Fed policy leave the near-term outlook for yields unusually uncertain.

Outlook

Looking to the final quarter of 2026, the focus has shifted from whether central banks would cut or hold to how much further they may need to tighten. The reignited conflict in the Middle East remains the single biggest source of uncertainty: a further escalation could push oil prices higher still and entrench inflation expectations, while a durable resolution would remove a major source of pressure on both growth and prices. We would not want to make confident predictions on either the conflict or the path of rates from here — the environment remains unsettled, and that uncertainty is itself the dominant theme heading into the new year.

For fixed income, the sharp rise in yields is, perversely, a positive going forward: the income on offer is now higher than it has been for some years, even though the repricing delivered negative capital returns in the short term. Given the divergence in central-bank paths and the risk that inflation proves stickier than currently priced, we would favour a cautious, medium-duration approach blending government bonds with corporate credit, rather than taking an aggressive view on the direction of rates.

In equities, we continue to believe the artificial intelligence theme is structural, and July’s sharp but short-lived sell-off was a reminder of how quickly sentiment can turn around a crowded trade rather than evidence the theme itself is broken. That said, the extreme narrowness of market leadership this year is a risk investors should not ignore, and it reinforces the value of a diversified, selective approach over simply chasing whichever part of the market has performed best. Importantly, diversification today cannot rely on equities and bonds alone, given how sensitive both have been to the same inflation and interest-rate drivers this year. Maintaining a portfolio diversified across all asset classes remains the most dependable way to pursue strong long-term returns while helping investors stay the course through short-term uncertainty.