Commentary for October 2026

Market Overview

Global equities pulled back in October, closing 1.6% lower. The decline was driven by equities in the US, which fell 1.8%, after briefly reaching a new high at the start of the month. The catalyst was a sharp retreat in AI hardware and infrastructure stocks, as concerns resurfaced about the enormous sums being invested in AI. Elsewhere, political and fiscal concerns intensified in France, while renewed tensions in the Middle East pushed oil prices sharply higher. The result was a volatile month, characterised by a wide dispersion of returns across markets and sectors.

Technology remained at the centre of the debate. Demand for AI is not in question; however, the sheer scale of capital expenditure by the largest technology companies is alarming investors. This concern was highlighted by earnings reports showing that a further sharp increase in spending had pushed the cashflow of some companies into negative territory, leading them to resort to additional debt and equity financing. Investors questioned whether such enormous spending is sustainable and what returns it will ultimately generate.

Alphabet, Google’s parent company, tumbled 13% after disclosing that its AI search product was eating into its core advertising business. Amazon fell 7% after revealing that it had spent billions more than expected. Intel fell 23% after issuing a weak sales forecast. However, Microsoft bucked the gloom with solid cloud sales.

The fall in AI-related stocks also contributed to a sharp decline in emerging markets, which fell 8.6%. The correction was led by technology-heavy indices in South Korea and Taiwan, which fell 16.3% and 9.4%, respectively. Japan also fell 5%. However, to put these declines in perspective, South Korea, Taiwan and Japan remain up 55%, 65% and 12%, respectively, year to date. Brazil was also weak, falling 12.7% as the market sold off after President Luik Inacio Lula da Silva secured re-election by defeating right-wing challenger Flávio Bolsonaro in a surprise second round victory. The move reflected concerns about spending discipline and the long-term sustainability of Brazil’s debt under Lula. Elsewhere in the region, Mexico rose 3.8%, buoyed by stronger economic data.

Energy remained in the spotlight. Brent crude rose 15.1% to $117, a five-month high, amid renewed concerns about supply after Houthi drones struck Saudi Arabia and Ukraine launched fresh strikes on Russian energy infrastructure.

Perhaps the most interesting feature of the month, however, was what happened beneath the surface. Despite the overall US index falling under the weight of the major technology companies, around two-thirds of its constituents actually rose as leadership rotated sharply. Energy stocks made strong gains following the spike in global crude oil prices. Defensive sectors, including healthcare, utilities and consumer staples also advanced, while small-caps stocks rose 1.3%. In other words, this was not a broad retreat from equities. Rather, money moved away from a handful of mega-cap companies and into the wider market.

Meanwhile, investors also returned to government bonds in a flight to safety amid the sell-off in technology stocks, pushing the yield on the 10-year US Treasury down from 5.3% to 4.9%.

The UK market was the only major region to rise, returning 1.5%, outperforming other major markets. Their higher weightings in energy and defensive sectors proved positive for returns. Investors also breathed a sigh of relief as the much-anticipated Autumn Budget proved relatively muted, focusing more on reassuring markets than major policy changes. With higher debt-servicing costs leaving little room for manoeuvre, the Budget offered some help with the cost of living but nothing likely to change the outlook for growth and inflation. Chancellor John Healey used the opportunity to reassure financial markets that he intends to keep a grip on public sector borrowing, while deferring major decisions. The speech was delivered against a backdrop of soaring government borrowing costs. Ten-year gilt yields had recently reached their highest level since 2007 but, following the Budget, fell back to close the month slightly lower at 5.3%. On the economic front, UK inflation rose to 3.5% in September, prompting the Bank of England to raise interest rates in early November.

The US Federal Reserve held its target interest rate at 3.75% to 4.0%, as expected. Two dissenting members favoured a rise, and Chair Walsh struck a hawkish tone at the press conference. The economic data supported this stance: the US economy grew at an annualised rate of 3.4% in the third quarter, initial claims for unemployment benefits fell to their lowest level since 1969, and inflation rose to 3.6%. Unsurprisingly markets are now expecting a rate rise in December.

The European Central Bank left interest rates unchanged and signalled a likely rise in December. Its President, Christine Lagarde, announced that she would step down early, in February. Europe faces a different set of challenges. French government borrowing costs continued to rise amid political and fiscal concerns. The gap between French and German 10-year bond yields widened further, approaching levels last seen during the eurozone sovereign debt crisis. European bank shares also came under pressure. However, later in the month, a major credit-rating agency surprised investors by deciding not to downgrade France’s official debt rating, prompting a relief rally. Overall, European equities closed the month 0.5% lower.

Looking Forward

As we move into the final stretch of 2026, investors are facing several competing narratives. The US economy has continued to show resilience, with consumer spending holding firm, businesses investing heavily in AI, and equity markets performing well overall. At the same time, central banks are back raising interest rates, bonds have sold off sharply since the summer, inflation remains stubbornly high and geopolitical risks are unresolved. The case for diversification has never been stronger.

Higher rates are a capital allocation story. The voracious appetite for capital among technology majors can no longer be funded out of cashflow and is leading to a sharp increase in both equity and debt financing. Alongside AI and digital infrastructure, other areas such as the energy transition, power generation and defence all require substantial funding in addition to public sector deficits. Public and private borrowers are competing more directly, pushing yields higher across markets. The investment boom is therefore creating both the growth that supports AI-related equities and the cost of capital that tests them.

We are reaching the point where higher yields are starting to provide a constraint. This is not necessarily a bad thing; investors are becoming increasingly uncomfortable with the excessive level of spending in AI infrastructure. At the same time, the political backlash against unrestrained growth in large-scale data centres is rising.

The overall effects have wider implications. The money pouring into building infrastructure has been driving yields higher to levels that much of the world outside of the US cannot easily support, with consequences for economic growth. Moreover, AI-related stocks have been sucking in a disproportionate amount of investors’ capital. This has led to an excessive level of market concentration, where indices have become over-reliant on just a handful of stocks.

In the short term, too much capital has flooded into the sector and some of these excesses need to unwind. This has consequences for both equities and bonds. If the AI bubble shows signs of deflating, perhaps due to financing problems, the Federal Reserve will probably become more dovish. This would be positive for bonds, allowing yields to drift lower across the globe. It also suggests that bonds can again start to play a useful role as a portfolio safe haven.

For equities, the opportunity is the potential for capital to rotate out of AI-related mega-cap stocks into other regions and sectors that have been neglected as investors have chased more glamorous growth stories. Given the sheer scale of money concentrated in these stocks, only a small reallocation of funds could have a disproportionate impact on asset prices elsewhere. This would be a positive development for active investors such as ourselves.

Our Strategy

Looking ahead, the outlook for equities remains constructive overall. However, markets are likely to remain sensitive to both energy-driven inflation risks and the sustainability of AI-related investment and its implications for earnings. These risks call for different diversifiers.

Our current allocation to US equities is significantly lower than a passive index market capitalisation-weighted approach. This should help insulate portfolios from AI-related volatility as well as freeing up more capital to invest in areas that we believe offer a more attractive return and risk profile. Our preferred regions are the UK, Japan, Asia and emerging markets, where valuations are in general much cheaper.

We also remain underweight fixed income given the headwinds of elevated inflation and deteriorating fiscal positions of governments across the West. Having said this, bonds are starting to offer value at today’s higher yields and can provide meaningful income and protection when economic growth weakens. We are watching this space carefully but continue to favour shorter-duration and index-linked bonds for now.

Real assets remain an important diversifier, as they tend to fare much better in an environment of elevated inflation and geopolitical uncertainty. Our standard client portfolios continue to own gold, commodities and infrastructure, where return drivers differ from those of conventional equity and bond portfolios.

Although different commodities have led at different times, the asset class has performed strongly overall. Over the past five years, the sector has been the top performer, beating even the technology sector. Gold has been the early leader, but other areas such as energy have taken up the running this year. We continue to maintain exposure to mining and energy stocks. Gold miners trade at a lower valuation than in 2018 despite generating an unprecedented level of free cash flow. Energy stocks look even cheaper, with record dividend yields, while industrial metal stocks continue to benefit from supply constraints.

UK equities offer genuine diversification because of their unique sector make-up. The market is home to many world class companies that trade at a meaningful valuation discount to international peers. Earnings are forecast to grow by a respectable 19% in 2026, while M&A activity has continued to rise as buyers take advantage of the opportunity to snap up high quality global franchises at unjustifiably low valuations. For example, the average price-to-earnings multiple for our core position in the Artemis UK Select fund is below ten times, with a 3.3% and growing yield.

Emerging markets also trade at a significant discount to developed market peers, despite having the strongest outlook for earnings growth. Our core emerging markets fund is trading at a multiple of seven times earnings. We expect this valuation gap to narrow over time as investors recognise the supportive structural trends already in place and as these feed through to corporate performance. Emerging market equity funds attracted nearly $7 billion of net inflows in the first half of 2026, the strongest period on record and a sharp reversal from 2025’s outflows.

Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while effectively controlling risk to dampen volatility and smooth the path of returns.