Q3 Multi-Asset Perspectives

15 October 2026

The third quarter of 2026 saw a more subdued return from global markets compared to the second quarter, with the MSCI AC World Index delivering +1.3% in local currency terms. A combination of headwinds gathered momentum from late summer and slowed market progress. Foremost among these was the question of whether the enormous spending by the so-called hyperscalers on artificial intelligence (AI) infrastructure would eventually pay off. Morgan Stanley, a major US bank, recently forecast that five of the largest operators will spend some USD 805 billion¹ on AI infrastructure in 2026 alone. Market leadership bounced around between hyperscalers, semiconductor manufacturers, memory makers and then partly back again as investors attempted to identify clear beneficiaries amid one of the largest capital expenditure booms the US has ever seen.

At the same time, a government bond sell-off pushed yields higher. No advanced economy was immune from this trend but in the case of the US, the proximate cause was not so much inflation expectations as measured by the 10-year inflation breakeven² rate, but higher growth expectations off the back of the AI capital expenditure (capex) boom as well as the ‘term premium’. The latter reflects uncertainty in yields and compensates bondholders for bearing additional risk. Economist Paul Krugman last year suggested that an additional “insanity premium”³ might be contributing to higher US long-term interest rates, a term referring to the additional risk premium that may arise when investors perceive policy uncertainty to be unusually elevated. In the US that premium reached nearly 0.9% out of a total yield of over 4.5%* by mid-August this year (see chart below).

The sources of this uncertainty were clear: first was new US tariff announcements which revived fears of a broader trade conflict and potential supply-chain disruption. The US administration’s falling out with Canada over trade was no less than spectacular. Second, and I believe, more pernicious, was the ongoing war in Iran. After the memorandum of understanding undertaken by both sides in late June broke down, the conflict has ebbed and flowed with no apparent urgency to end it. This of course weighed heavily on oil prices which started the third quarter at USD 73 per barrel for Brent crude but by end-September remained close to USD 100*. The US Federal Reserve (Fed) for its part raised interest rates to just under 4%* in September, citing a prolonged period of elevated inflation above its official 2% target⁴, much to the dismay of the White House which called for significantly lower interest rates. For the Fed and several other central banks (the European Central Bank⁵ and Bank of Japan⁶ also raised rates), the concern was that higher oil prices would start to feed into more pessimistic consumer expectations of elevated prices which in turn would themselves drive actual prices higher. Taken together, these uncertainties conspired to slow progress in equity markets.

Chart 1: ‘Insanity premium’ in US Treasuries has been steadily rising

From 31 Dec 2019 to 28 Sep 2026

We construct multi-asset portfolios for resilience, recognising that the world economy and stockmarkets are subject to highly unpredictable forces. But we also know that history has demonstrated listed corporations serving as an effective financial proxy for human progress, delivering real earnings growth over time despite countless natural and man-made catastrophes. Pragmatically, this means that the essence of multi-asset investing is a globally diversified equity allocation at its heart. We seek to combine this with other asset classes producing independent return streams to provide varying degrees of portfolio return ‘smoothing’ according to investors’ risk profiles.

While this sounds relatively static, we believe it is important to remain vigilant to investment opportunities when markets exhibit signs of euphoria or despondency. Following a period of strong market performance, investors are increasingly weighing supportive economic and earnings fundamentals against elevated valuations in some areas of global equity markets.

While the earnings backdrop remains constructive, particularly in the US where recent results highlighted continued strength in areas such as cloud computing and AI, we believe market expectations may have become excessively optimistic and that forward returns could be less attractive than those achieved in recent years. Valuation measures such as the Shiller CAPE ratio⁷ (which adjusts for long-term earnings) at 41x* remain elevated by historical standards, suggesting a less favourable risk-reward trade-off over the medium term, even if such measures offer little insight into the exact timing of any potential market movements.

Against this backdrop, we continue to favour a disciplined and diversified investment approach. While global equities remain an important source of long-term growth potential, we believe investors should remain mindful of valuation levels and the potential for continued market volatility.

Within fixed income markets, credit spreads remain relatively tight by historical standards, meaning investors are receiving less additional yield over risk-free rates (ie government securities) in return for taking credit risk than in some previous periods. Similarly, we believe that longer-dated government bonds may remain susceptible to continued volatility as described in the market review section.

We aim to improve portfolio resilience and preserve flexibility, while still maintaining exposure to the long-term growth opportunity equities have historically offered. While the allure of credit and longer-dated bonds has, in our view, diminished, we see better value in short-dated bonds which offer strong risk-adjusted yields, as well as gold.

The main concerns facing investors are twofold. First, whether and when there will be a return on the enormous investment in AI described above, and second, the issue of what will have to be done to control inflation in the coming months. On the first, there is some evidence now that the payoff is starting to come through. Remaining performance obligations (RPO) is the technology industry term for the backlog of contracted but not yet recognised revenue. Microsoft and Alphabet’s combined RPO was reported at over a cool USD 1 trillion* at the end of the second quarter, highlighting the strength of underlying demand for AI and cloud services and going some way to explaining Microsoft’s share price recovery in recent months (see chart below). However, this remains a work in progress and the market remains sensitive to any bumps in the AI road. September’s ‘AI freak-out’ in which senior AI leaders collectively called for a slowing of the technology’s development amid instances of it going rogue* was one such example. There is of course no reason why regulation of AI need hamper profitability (see aviation), but anything viewed as a delay to return on investment is likely to be met with a ‘sell now, ask questions later’ response.

On inflation, which remains elevated in large part due to energy prices, central banks would not consider raising interest rates simply to reduce demand for oil, given its vital role in keeping so many parts of the economy functioning. However, rising inflation expectations among consumers could make inflation more persistent, increasing the prospect of higher interest rates. For different reasons, higher rates are already a reality in the long-dated bond market, despite efforts by the US Treasury Secretary to suppress them through buybacks* ahead of the midterm elections in November. Regardless, the continued increase in the cost of both short- and long-term capital has the potential to slow the global economy and stockmarkets. Some reassurance can be drawn from the fact that markets may welcome the controlling of elevated inflation. When US consumer price index (CPI) inflation again came in at an above-target 3.4%⁸ on 11 September, the S&P 500 Index actually made progress that day.

Finally, there are the US midterm elections which have potential implications for funding of the Iran war and AI regulation, as well as, of course, for the 2028 presidential election. All of these issues have yet to play out in the coming months, but the skill of the multi-asset manager will be less about predicting exactly which of these materialise than ensuring portfolio resilience regardless.

Chart 2: Microsoft’s recovery could speak to a potential wider return on AI capex

Performance from 2 Sep 2025 to 29 Sep 2026

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.