Executive Summary
Dear Readers,
Global equity markets continue to prove resilient despite the more challenging environment. Earnings growth remains a key pillar of this resilience. Particularly in the United States, earnings growth has been impressive compared with other developed markets. Much of the earnings growth for 2026 is already visible, meaning that attention is increasingly turning towards 2027. Also, in the upcoming year, US earnings forecasts remain compelling.
Nevertheless, some early shifts are emerging that warrant attention. Market breadth has narrowed, with the performance of the major indices increasingly being driven by a small number of large-cap companies. As a result, the headline indices appear more stable than a closer look at their underlying composition would suggest.
The interest-rate environment also remains challenging. Rising yields have been particularly detrimental to longer-duration bonds, while gold has also remained under pressure. We currently expect three further rate hikes by the US Federal Reserve, implying somewhat less monetary tightening than is currently priced into the volatile futures markets. At the same time, it is important to recognise that interest rates are already at higher levels. Further rate hikes could therefore have a greater impact on the economy than they would in an environment close to the zero lower bound.
Against this backdrop, our market view remains constructive, but nuanced. For us, diversification is becoming even more important. Regionally, we remain committed to our overweight in US equities. At the same time, we are deliberately broadening our exposure to include US small- and mid-cap stocks as well as value equities, thereby reducing the strong concentration in a handful of large technology companies. A similar approach applies to emerging markets, where concentration in the broad market indices is in some cases even more pronounced. The high weighting of South Korean and Taiwanese technology giants is therefore deliberately complemented by an allocation to Brazilian equities.
We also remain constructive on gold despite the currently unfavourable interest-rate environment. Structural demand from emerging markets, particularly China, remains strong. Against this backdrop, the recent decline has so far been relatively modest given the considerable headwind from the interest-rate environment.
I hope you enjoy reading this edition.
Yours sincerely,
Maximilian Hefele
Deputy Chief Investment Officer
Compass
The pressures and risks facing the global economy remain significant. Nevertheless, the global economy is proving surprisingly stable. The AI boom is supporting economic activity. Global economic output is expected to grow by about 3.0% in 2026, which is only slightly less than in previous years. However, the impact of the energy price shock varies greatly across countries and regions. The US economy has proven to be very resilient so far. The likelihood of a recession in the US is low. In contrast, many countries in the Middle East and Asia have suffered significant setbacks. In addition to persistently high oil prices and the resulting risk of inflation and tighter monetary policy, US trade policy and the sharp rise in interest rates on government bonds also pose substantial risks.
The ECB responded to the increased inflation risks with two interest rate hikes of 25 basis points each in June and September. At least one more rate hike is likely by the end of the year. The US Federal Reserve waited longer to tighten monetary policy, raising its federal funds rate by 25 basis points only in September. In the US as well, we expect another rate hike by the end of the year given the excessively high inflation. The Bank of England has so far played for time and kept its bank rate steady. With inflation rising again, it is now under pressure to tighten monetary policy in November. For the Swiss National Bank (SNB), the situation is comparatively straightforward, as Switzerland’s inflation rate of 0.8% lies comfortably within the 0–2% target range. Overall, the situation remains challenging for central banks given the uncertainties surrounding oil prices.
The unresolved situation in the Middle East and the situation in the Strait of Hormuz remain a significant risk factor. The geopolitical situation also remains tense due to the ongoing war between Russia and Ukraine. Targeted Russian provocations against NATO countries carry the risk of further escalation. Other latent risks lurk in the background (including China/Taiwan). The use of trade policy as a geo-economic weapon remains a source of concern. However, global trade has held up quite well so far – in part due to new trade alliances – and is thus making a positive contribution to stabilising the global economy. In the US midterm elections on 3 November, the US Democrats are very likely to win at least a majority in the House of Representatives. The Democrats could also win a majority in the Senate, which would significantly limit President Trump’s ability to act.
Macro
A resilient economy in a high-risk environment
Despite many headwinds, the global economy remains unexpectedly resilient. Recently, there have even been several positive surprises, leading to upward revisions of the 2026 economic forecasts for several countries. At the same time, central banks are under pressure to tighten monetary policy in light of high inflation rates. The major Western central banks are each expected to raise interest rates by 25 basis points by the end of the year. Only the Swiss National Bank faces no pressure to act due to moderate inflation. In addition to geopolitical tensions, high government debt is becoming a more tangible risk. After many years of unnaturally low interest rates, the rise in capital market rates is placing a significant strain on government budgets. Currently, France is coming under scrutiny.
Equities
Equity markets defy the rise in interest rates
Global equity markets were supported in the third quarter of 2026 by strong corporate earnings and the AI boom, even though rate hikes, US yields above 5% and an oil price above USD 100 are weighing on them. The US economy remains resilient. Earnings growth of 35% is expected for the S&P 500 in 2026, but valuations remain demanding and market breadth has narrowed. In the short term, markets are more vulnerable because of cooler sentiment and the US midterm elections; seasonality and the typical post-midterm pattern, however, point to a friendlier year-end. Overall positioning remains neutral for now, with a positive medium-term outlook. US equities remain preferred, complemented by value stocks, small caps and Brazil.
Bonds
Rate repricing rewards active selection
The global rise in interest rates has pushed yields to levels last seen decades ago, while credit spreads have widened after a prolonged period of resilience. Although much of the repricing may already be behind us, rates are likely to stay higher for longer, and supply shocks remain an additional risk. Highly indebted corporates and sovereigns lacking fiscal discipline are increasingly being shunned by bond investors. We therefore recommend focusing on quality and on the intermediate part of the curve, with maturities of three to seven years in USD and EUR, where further central bank tightening already appears largely priced in.
Alternative Investments
Gold: Short-term pressure, long-term potential
After an exceptional 64% gain last year, gold has held up well this year despite rising interest rates. Further volatility may follow the Fed’s latest rate hike, but we do not believe the strategic investment case has changed. Historically, during the last four Fed tightening cycles, gold has often been more resilient after the first hike than in the run-up to it. Concerns about access to reserves, sanctions risk and rising government debt all add to the appeal of an asset that is no other institution’s liability. These forces should encourage further diversification, supporting gold’s role as a store of value. We therefore remain positive on gold’s longer-term potential.
Currencies
How far will the US Federal Reserve go with rate hikes?
We now consider the further US rate-hiking path currently priced in by the market to be too ambitious and expect fewer rate increases. This view is based on lower energy costs, base effects and the possibility that the Federal Reserve may wish to avoid a conflict with Donald Trump over an overly restrictive monetary policy. As a result, a significant part of the expected monetary tightening may already be priced into the recent appreciation of the US dollar. Should rate expectations decline over the remainder of the year, this could put renewed pressure on the US dollar. At the same time, the high US government debt level and its recent rapid increase represent a structural risk to confidence in the US dollar.