September proved more challenging for financial markets as higher energy prices, persistent inflation and rising government bond yields offset continued resilience in the global economy. Equity performance was mixed, with investors balancing supportive corporate earnings against the prospect of interest rates remaining elevated for longer. Value-orientated areas generally held up better than interest-rate-sensitive growth companies, while commodities benefited from geopolitical tensions and higher oil and natural gas prices.
In the US, economic activity remained resilient, supported by business investment, spending on artificial intelligence infrastructure and an improving labour market. Corporate earnings expectations were also encouraging, particularly among technology, energy and financial companies. However, higher bond yields reduced the relative appeal of highly valued growth shares and placed pressure on property companies and other interest-rate-sensitive sectors. The outlook for US monetary policy became less supportive as rising energy costs added to inflation concerns. Oil prices moved above $100 per barrel, while the 10-year US Treasury yield approached 5%. Resilient economic data and persistent inflation led investors to expect monetary policy to remain restrictive for longer. Concerns surrounding government borrowing and increased debt issuance also contributed to a difficult environment for government bonds.
UK equities proved relatively resilient due to the market’s exposure to energy, mining and financial companies. Higher commodity prices supported energy producers, while banks benefited from expectations that interest rates could remain elevated. However, domestically focused companies faced a more challenging environment as rising borrowing costs and pressure on household energy bills threatened consumer spending. UK government bond yields remained under pressure as investors considered both the inflation outlook and the country’s fiscal position. This complicated the outlook for the Bank of England, with markets beginning to price the possibility of further interest-rate increases. Longer-dated gilts were particularly sensitive, although higher yields improved prospective income returns for longer-term investors.
European equities lagged their global peers. The region continued to benefit from improving business activity and planned increases in infrastructure and defence spending, but investors remained concerned about higher energy costs and tighter monetary policy. Europe also has less direct exposure than the US and parts of Asia to companies benefiting from AI-related investment, contributing to more subdued earnings expectation.
Emerging-market equities produced mixed results. Earnings expectations remained supportive in several Asian markets, particularly among semiconductor manufacturers benefiting from AI investment. However, rising US bond yields created headwinds. Higher energy prices also produced significant divergence, benefiting commodity exporters while increasing inflationary pressures for countries reliant on imported oil.
High-yield bonds proved more resilient, with their shorter interest-rate sensitivity and higher starting income providing some protection. Corporate fundamentals and default rates also remained supportive. However, high yield would be more vulnerable if economic conditions weakened materially. Overall, the higher yields now available across fixed-income markets have improved prospective income returns, but volatility is likely to continue.
Commodities were the standout asset class during September. Oil prices rose above $100 per barrel as concerns resurfaced about possible disruption to Middle Eastern energy supplies. European natural gas prices also remained elevated amid uncertainty surrounding winter supplies. Broader commodity indices advanced strongly, while gold moved lower as rising real interest rates and a firmer US dollar reduced its appeal.
Overall, September presented a more difficult environment for diversified portfolios. Economic activity and corporate earnings remained resilient, but rising energy prices, persistent inflation and higher government bond yields created pressure across equities and fixed income. Commodity-related sectors and value shares generally proved more defensive, while long-duration bonds, property companies and some highly valued growth shares were more vulnerable. Looking ahead, the relationship between energy prices, inflation and central-bank policy is likely to remain important. Economic resilience continues to support corporate profits but also reduces the scope for central banks to loosen policy. Against this backdrop, selectivity and diversification remain essential. Higher bond yields have improved prospective income returns, while exposure to a range of equity styles, regions and alternative assets should help portfolios navigate continued volatility.