Market drop-in September 2026

Headlines

The Federal Reserve raised rates by 25bp to 3.75–4.00% on 16 September, in a unanimous decision and the first increase since 2023. Its projections have prompted markets to reassess the outlook: twelve of eighteen participants expect one further increase this year, while four expect two and the remaining two expect no further rise. The Committee does not project inflation returning to target until 2029.

The move was forced by strength in the data. Earnings growth of 33% was recorded in the latest quarter, a seventh consecutive quarter of double-digit growth, non-farm payrolls rose 162,000 with prior months revised higher, and this week's composite PMI print of around 58 came in well above every estimate. These are good problems, but they point to a US economy that may be overheating. Energy remains the principal inflation pressure, with Brent back near $100 and refined product prices rising sharply.

Equity markets

Equity markets have been remarkably resilient, reaching new highs despite the geopolitical backdrop and rising yields. The driver remains earnings: eight of eleven sectors beat estimates last quarter, and stripping out the MAG7 still leaves growth of around 30%, so participation is broad. Asia-Pacific has been the standout this year after a sharp rebound from the spring, and Japan remains a value story. Returns have come from earnings rather than re-rating. The S&P 500 forward P/E has contracted from 25.6x to 21.1x, with the equal-weight multiple back at 2013 levels, so markets have been pricing these risks all year, which is why indices are not up 30% as profits are. The pressure over the past month has been in the most geared, rate-sensitive areas, US small caps, infrastructure, and UK property. We cut infrastructure earlier in the year in line with our duration view, which has insulated portfolios, and we hold no direct UK property.

Fixed income

Bonds are where the volatility has been this year, and with supply shocks driving inflation, the correlation between bonds and equities is far higher than usual, so fixed income is not providing its traditional diversification. The ten-year gilt yield has reached 5.26%, an eighteen-year high, driven principally by US issuance rather than domestic factors, with Treasuries approaching 5.2%. Markets are also currently pricing an 85% chance of a 25bp Bank of England hike in November. Short duration and credit remains the right positioning, and the steps taken early in the year mean we can consider duration calmly rather than react to long-end volatility.

Global convertibles have been hit again given their link to chip and memory-sector financing; we have no exposure. Global high yield has weathered the recent falls better than most and supports our short-duration thesis, though spreads have widened from their lows of around 250bp to 290bp. That is still tight relative to history, and we have been reviewing holdings with our managers, who remain defensively positioned across high yield and the wider book.

Energy and inflation

The conflict with Iran continues to disrupt transit through Hormuz and Bab el-Mandeb, and the East–West pipeline shutdown in September removed a principal alternative route. Middle Eastern crude is distillate-rich, so the disruption has hit refined products hardest: US diesel prices are up 58% year-on-year and jet fuel 63%, and these feed directly into household and transport costs. The US has now imposed a 90-day ban on diesel exports, which moves the problem elsewhere, with Europe already feeling the effect. European natural gas storage is only 75% full and prices have started to rise; a mild winter would be the saving grace. The forward curve still points to lower prices, with the EIA projecting Brent in the high $70s by mid-2027, and commodity mean reversion remains a key route back to calmer markets, as seen post-April when oil fell from above $100 back to $70. We hold broad commodity exposure through our multi-asset funds (Prima).

The Fed and the pace of tightening

Chair Warsh has passed an early test, corralling the Committee into a unanimous decision despite political pressure ahead of the midterms. A few weeks ago, the risk was runaway inflation and an uncontained long end, now we know the Fed is willing to act, and long-end yields have stabilised more than short-end yields. The debate has shifted to pace, with an October hike now priced. The Bank of England is likely to follow in November, with the Bank of Japan also expected to tighten alongside. The risk is the bond market forcing a policy misstep that squeezes the recovery.

AI capex and funding

Hyperscaler capital expenditure is set to reach $725–800bn this year, against roughly $410bn in 2025, with over half now directed to power generation and construction rather than compute. The effects therefore extend to steel, copper, electrical equipment, and labour markets, with multiplier effects that make the Fed's job harder. These contracts run over several years, so 100bp on the policy rate will not stop the spending. UK, Japanese, and Korean manufacturers are all benefiting from exporting into the US build-out. Some of the tightening work will instead have to be done by credit spreads and the equity risk premium.

Free cash flow no longer covers this expenditure, at 0.82x versus 2.5x in mid-2023, so reliance on debt markets is rising. Hyperscaler bond issuance reached around $180bn by end-August, including a 100-year bond, and technology has overtaken banks as the largest sector in parts of the investment grade index.

Positioning

We remain positioned in favour of US assets. Counterintuitively, the US is more insulated from its own overheating. It is the beneficiary of the capex boom, while the resulting higher yields hit weaker economies such as the UK hardest. The message is therefore not to panic on US technology, to keep bond exposure short duration, and to be cautious of regions that look cheaper but carry more risk. We are weighing whether to neutralise duration, how much spread risk to carry, and a rotation toward quality equities that have lagged.

Sources: FactSet, Bloomberg, Bloomberg Intelligence, EIA, Federal Reserve, data to 24/09/2026