Our outlook for risk assets remains constructive, supported by broadening earnings growth, though tempered by persistent inflation and an oil market showing little sign of easing. Against this backdrop, we are raising our target range for US 10-year yields to 4.25–4.75%, with rising yields and oil prices standing out as the principal risks to our central scenario.
The trajectory of equity markets remains reassuringly consistent, with the advances in equity prices being underpinned by resilient corporate earnings, and upward earnings revisions providing further support. What initially appeared to be a technology-led dynamic is now gradually broadening across a wider range of sectors.
The picture is more nuanced on the rates side. Inflation remains above the major central banks’ targets, pushing expectations for policy rate cuts out towards 2027. At the same time, the conflict in the Middle East continues to sustain the risk premium on oil, adding to persistent inflationary pressures. Against this backdrop, the US Federal Reserve’s September meeting takes on particular significance; market expectations are now evenly split between a steady policy stance and further monetary tightening – a scenario that would have seemed highly unlikely just a few months ago. The prolonged conflict has clearly caught markets off guard and challenged previously established expectations.
A change in the Fed’s strategy would be far more than a simple adjustment: its repercussions would extend well beyond fixed income, reshaping the broader balance of market forces. This risk is no longer purely theoretical and it is already reflected in a renewed interest in gold and growing uncertainty surrounding the dollar.
We are maintaining our current allocations, supported by still-favourable fundamentals. However, vigilance is warranted: a resumption of tighter financial conditions would mark a genuine regime shift and would require us to reassess our current convictions. This is the key risk that we are monitoring very closely.
Key messages
1. Constructive stance on risk assets, though uncertainties remain
The environment for risk assets remains positive, supported by broadening earnings growth beyond the technology sector. The main risks to this outlook are a further rise in yields or a fresh spike in oil prices.
2. Inflation remains sticky across major economies
Price pressures are still elevated globally, with most major economies running above central bank targets. Consequently this is delaying policy easing until the data turns more convincingly lower.
3. Oil higher for longer is keeping a risk premium in place
Brent crude’s USD 80–100 range remains the reference until year-end 2026, as the Middle East conflict shows no sign of resolution, in turn stoking persistent inflation.
4. US 10-year yield target raised
The US 10-year target range has been raised to 4.25–4.75%, reflecting a resilient economy, higher energy prices, and rising bond supply. We see 5% as a ceiling, as the Fed and Treasury would probably step in if yields rose too sharply.
The conversations that matter
Central banks’ dilemma: to hike or not to hike?
Despite heightened oil and gas prices, global economies have shown resilience and are likely to remain high in the second half of the year. Global growth is set to approach 3.0% in 2026 and 3.1% in 2027. In the US, resilient demand and the boom in AI investments have lifted growth and supported tech exporters and Asia; these economies should continue to lead the cycle. Europe and energy‑importing countries performed better than expected in the first half of the year, but remain vulnerable given uncertain oil and gas prices.
Nevertheless, this resilience comes with a caveat: persistent inflation linked to high energy prices. Central banks will need to recalibrate their policies within a risk‑management framework, leading to differentiated strategies across countries. While the People’s Bank of China (PBOC) could ease its policy rate, the Bank of England (BoE) is likely to leave its rates where they are. In contrast, the European Central Bank (ECB) is widely expected to raise its policy rate to 2.5%, as elevated gas prices are keeping headline inflation above 3.0% year on year.
The Fed sits at the centre of the dilemma: taming inflation at the risk of jeopardising the investment cycle. According to Fed Chair Kevin Warsh, monetary policy may not be restrictive enough; coupled with renewed conflict escalation in the Middle East and resilient demand, this could oblige the Fed to tighten its policy – not our favourite scenario. On the other hand, core prices not reaccelerating, a steady labour market, and moderating wage growth should provide sufficient arguments for the Fed not to begin a tightening cycle.
Alvin Juvet – Economist & Financial Analyst
Will oil prices remain elevated for a prolonged period?
Oil prices should remain higher for longer for several reasons. Supply is tightening on multiple fronts simultaneously, and the buffers (oil inventories on water, strategic petroleum reserves) that absorbed earlier disruptions are running out. Middle East exports have fallen back to roughly 7 million barrels per day (Mb/d), down from a brief near-pre-war peak of 15 Mb/d in June, with Red Sea flows alone dropping from 4.5 Mb/d to just 1.5 Mb/d. Renewed US-Iran strikes and Iranian retaliation against US bases have added a fresh geopolitical aspect to the move, pushing Brent crude up to USD 95.5 per barrel (bbl) or +32% since the end of June.
Inventory data confirms that the tightening is starting to be sticky. Crude on water fell by ~200 million barrels in just four weeks, the fastest such decline in a decade, while onshore inventories, including in China, dropped roughly 40 million barrels over the same period. This crude is being consumed, not stockpiled, which is evidence of genuine physical scarcity. The US Strategic Petroleum Reserve release, which was adding 2.5 Mb/d to supply, is set to stop doing so after September, removing another cushion just as winter demand builds.
Freight logistics are compounding the squeeze. Tanker rates have surged to all-time highs as Houthi blockades force Cape of Good Hope diversions, adding over 30 days of sailing time and up to USD 10 million per voyage in war-risk premiums and bunker costs. On the refining side, outages running at 5–6 Mb/d above normal and Russia’s export ban on refined products have pushed crack spreads (diesel in particular) to all-time highs, giving refiners strong incentives to bid up crude regardless of elevated crude prices for the next quarters.
Therefore, we expect Brent to trade in a range of USD 80–100/bbl at least until the end of 2026, as demand for crude and inventory drawdowns will continue.
Maria Shkolnik – Investment Specialist, Oil & Gas
How have US equities behaved in the two months leading up to US midterm elections?
Across the past 19 midterm election cycles over 1950–2022, the two-month pre-election window (September–October) for the S&P 500 has been positive on average, but with dispersion. The period is positive in roughly 63% of cycles, with an average return of +3.2% while when the period has been negative (37% of the time) the average return has been -3.1%.
Heading into the November 2026 midterms, elevated volatility is expected as investors weigh several other sentiment drivers: trade policy, artificial intelligence (AI) investment trends, geopolitical risks, and monetary policy, with markets remaining near all-time highs as at early September. Pre-election drag has historically peaked in August/September as election uncertainty and risk premiums build. The latter has historically begun to unwind in the 30 days before voting day as clarity on election results starts to grow.
We view the midterms more as a volatility event than a structural inflection point for equities, where the dominant near-term risk is monetary policy (i.e. whether the Fed hikes in September), rather than the election itself. Our constructive stance on equities remains anchored to fundamentals: strong corporate earnings and a still-resilient global economy, both supported by the AI infrastructure build-out. Nevertheless, we remain mindful of the impact of a higher interest rate environment which may limit valuation expansion and mean that further equity market gains are earnings-driven.
Moshmi Kamdar – Head of Equity Advisory
How can investors protect a portfolio without giving up performance?
Protection is usually bought by subtraction: reducing exposure, holding more cash, rotating into defensive assets. These approaches can limit losses, but they carry a second cost that is easy to overlook: a portfolio that has stepped aside is also lighter when markets recover, and the decision to step back in rarely comes early.
A different approach is to remain invested while introducing sources of return that behave differently from traditional equities and bonds. These strategies follow transparent, rule-based and liquid investment processes to access alternative sources of performance.
Being systematic matters here. The rules are defined in advance and applied the same way in every environment, including the moments when judgement is hardest to exercise. Protection is not decided once markets have already fallen.
The approach combines three complementary return drivers:
- The first harvests recurring market premiums – structural opportunities that exist across cycles.
- The second focuses on asymmetric return profiles, maintaining participation in favourable markets while becoming increasingly valuable when volatility rises.
- The third provides crisis protection, designed to contribute most during sharp sell-offs.
Each engine plays a different role; together they seek a source of performance less dependent on the direction of traditional markets. The objective is not to eliminate risk, but to diversify where returns come from.
Alexandre Campana –Portfolio Manager, Tactical & Overlay Multi-Asset Solutions
Mathieu Ullmann – Senior Portfolio Manager, Tactical & Overlay Multi-Asset Solutions
Our investment stance
The global investment backdrop remains constructive, and this environment continues to support our overall positive stance on risk assets. Inflation, however, is proving stickier than hoped, and we now expect price pressures to stay elevated through Q2 2027 before beginning to ease. This delayed disinflation path pushes back our expectations of Federal Reserve easing only starting once inflation data turns more convincingly lower next year. Adding a further layer of persistence to the inflation picture, oil prices are likely to stay higher for longer as the conflict in the Middle East shows no signs of a near-term resolution. The USD 80–100/bbl range for Brent crude remains our reference for year-end 2026.
Against this backdrop, our target range for US 10-year yields is being raised to 4.25–4.75%, from 3.75–4.25% previously. This reflects a combination of factors: a still-robust US economy, sustainably higher energy prices, and the rising supply of government and AI-related investment-grade corporate debt. That said, we expect yields in USD to be capped around the 5% level, as we believe both the Fed and Treasury would step in to manage disorderly moves at the long end.
On currencies, we are turning more constructive on the euro and expect the EUR/USD to trade in a 1.16–1.20 range, as euro-denominated rates have more upward pressure versus US peers. We are therefore cutting our EUR hedges in USD portfolios. On gold, our core strategic allocation remains unchanged, and the yellow metal is expected to also trade sideways in this higher-yield environment. The recent rebound looks more technical in nature, following a roughly 30% decline earlier this year, and it is too early to call the start of a sustainable rally toward all-time highs; our central scenario does not anticipate a large USD decline, which would typically be needed to fuel such a move.
In credit and equities, the environment remains favourable for risk assets despite the risks of rates approaching challenging levels. We are keeping our high allocation to credit risk unchanged. In equities, broadening earnings continue to support the asset class, though an overshoot in oil prices or 10-year yields flirting with 5% would be the key catalysts for a pullback.
Overall, we are leaving our asset allocation ratings broadly unchanged this month, with the exception of a downgrade in the consumer discretionary sector to 2/5 vs. 3/5 previously. Our main portfolio adjustment is to increase our euro exposure in the USD portfolio, reflecting our more constructive outlook on the single currency. More broadly, we remain comfortable with our current positioning, while recognising that recent trend in yields and renewed upside surprises in oil remain the key risks to the outlook.
Macroeconomics
A back-to-school season under the auspices of oil and central banks
A resilient growth cycle but a fragmented global economy
Global growth is expected to approach 3.0% in 2026 and be around 3.1% in 2027. In the second half of the year, activity should continue to be driven by the US (2.2% expected in 2026) and Asia (4.3% in 2026), through exports and by the still-robust cycle of investment in new technologies, infrastructure, and defence. The artificial intelligence (AI) race and the boom in investment in this segment are in fact little affected by the oil shock, and this cycle could extend into 2027.
Geopolitical risks remain present and oil prices continue to be volatile. According to our scenario, the price of Brent crude should remain in a USD 80–100/bbl range over the coming quarters, and the Strait of Hormuz will be neither completely closed nor truly open. Negotiations between the US and Iran are dragging on, and the prospect of a quick resolution to the conflict is receding, leaving a risk premium on oil in place, which reduces visibility on activity and inflation.
Energy-importing countries and Europe will remain vulnerable to oil and gas prices. Resilience was evident in the first half of the year thanks to fiscal support in various countries and the mobilisation of savings. However, activity may be weakened in the second half of the year, and growth could come in at around 0.7% in the euro area in 2026, 0.9% in the United Kingdom, and 0.8% in Japan.
Overall, the oil shock has not broken the global cycle, but risks are not evenly distributed across countries and regions, and this fragmentation of activity is likely to persist in the second half of 2026.
Inflation could remain on a plateau in the second half of the year
Global inflation accelerated in Q2 with the oil shock, but a partial slowdown appeared in June and July as oil prices eased and hopes for a peace agreement emerged. Energy remains a major slippage risk for inflation in the coming quarters. However, if Brent crude averages around USD 90/bbl, inflation could remain on a plateau in the coming months after the highs reached in May.
In the United States, inflation should hover between 3.3% and 3.5% in the second half of the year. In the euro area, it could be between 3.0% and 3.5% as gas prices remain high and stocks are very low in a range of countries. Elsewhere in the world, inflation will also remain above central bank targets. A stabilisation in the price of oil will be needed before a possible return of global inflation to around 2.5% sometime in 2027 can be envisaged.
In this context, the good news is that core inflation remains fairly contained. Apart from transport and tourism, core inflation was, on average, stable in the first half of 2026 and should remain so in H2. Spillover risks seem limited because employment is likely to be more fragile, thus avoiding an upward price-wage spiral.
Patient central banks but divergent paths
Monetary policy is constrained by high inflation and activity that is resilient to shocks. Central banks have been patient and measured in the face of accelerating inflation in recent months, partly justified by the absence of second-round effects, but their tolerance will be limited in the event of a new overshoot.
Consequently, central banks are implementing a risk-management-based policy, pivoting their communications towards a more hawkish tone and becoming data-dependent. Strategies are likely to diverge in the second half of the year depending on the country. Some central banks, such as the Fed and the BoE, should favour keeping policy rates stable at current levels, while others, such as the ECB, the BoJ, and some ASEAN central banks, should raise their policy rates further, even if only modestly. The Fed is nonetheless challenged by historically high inflation and solid activity, which will show little slowdown in the coming months. Its September meeting therefore looks very uncertain, and the risk of monetary tightening is increasing.
Last, a small number of central banks, such as the PBOC, could move in the opposite direction by cutting policy rates based on moderate local inflation and a weak economic backdrop.
US INFLATION
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The financial instruments and investment strategies portrayed in this document are for informative purposes only. They may differ from those effectively held in an investor’ portfolio. Depending on the jurisdiction and investment profile, one or some of these instruments and strategies – including, where applicable, options – may not be permitted, available or suitable. The opinions expressed herein are correct as at 7 September 2026 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
