Market Overview
Global equity markets rose in August, as enthusiasm for strong earnings results mitigated concerns about growing downside risks.
The month proved to be another turbulent one for global stock markets, marked by investors focusing squarely on interest rates and company profits — the two main levers that set stock prices. Concerns about persistent inflationary pressure from the energy shock caused by the U.S.-Iran war continued to hang over markets as the conflict dragged on into a sixth month in August and the Strait of Hormuz remained effectively closed to the global flow of crude oil. With the prospect of a permanent, negotiated end to hostilities seemingly far away, the two countries settled into an uneasy standoff punctuated by fresh military attacks and the imposition of new economic sanctions by the U.S., all of which kept crude oil prices volatile during August.
With elevated crude oil prices continuing to fuel higher inflation worldwide, the outlook for global interest rates came under intense scrutiny. Stock markets around the world rose after U.S. economic reports suggested that domestic inflation at the consumer and wholesale levels had slowed modestly in July, raising hopes that the news would give the U.S. Federal Reserve (Fed) more breathing room to hold off on raising interest rates. The sense of optimism among stock investors, however, was not shared by bond traders, who worried about stubbornly high inflation stoked by the ongoing U.S.-Iran war and the huge amount of government borrowing that had resulted in massive debt loads. The steady sell-off of global government bonds over the course of the summer accelerated in the latter half of the month, with the resultant jump in yields cranking up the pressure on world stocks by undercutting their appeal. A surprise announcement by the U.S. Treasury Department that it planned to repurchase more longer-dated U.S. government bonds to arrest the climb in yields provided only temporary relief and raised concerns that such an action would only add to upward pressure on inflation.
Global stock markets dipped further after Fed Chairman Kevin Warsh signalled unambiguously that the U.S. central bank may need to increase interest rates soon to drive domestic inflation down to its 2% target. As of the end of the month, Fed-funds futures traders were pricing in a 68.0% likelihood that the Fed would lift interest rates by 25 basis points (bps) in September, according to the CME’s FedWatch tool. The yield on the 10-year U.S. Treasury note—the global benchmark for long-term borrowing costs—ended August at 4.78%, 4 bps higher than a month earlier.
Across the Atlantic, market expectations pointed to the European Central Bank (ECB) delivering a 25-bp hike at its next policy meeting in September amid signs of resilience in the eurozone economy and as higher energy prices had driven inflation in the common currency bloc past the ECB’s 2% target. Elsewhere in Europe, the Bank of England (BOE), in keeping with its go-slow approach to adjusting its monetary policy, was expected to hold interest rates steady at its September policy meeting and increase rates by 25 bps by the end of the year amid data released during the month indicating that domestic inflation had accelerated in July after hovering near the BOE’s 2% target for several months. The yield on the 10-year German Bund, Europe’s principal safe-haven asset, ended August at 3.34%, 11 bps higher than a month earlier.
Meanwhile, in Japan, the Bank of Japan (BOJ) was expected to start an aggressive rate-hiking campaign at its September policy meeting with a 25-bp increase and additional hikes thereafter, which, if realized, would be a departure from the Japanese central bank’s usual pace of roughly two hikes per year. Elsewhere in Asia, China’s central bank, the People’s Bank of China (PBOC), reiterated its commitment to an appropriately accommodative monetary policy but did not explicitly commit to lowering its policy rates or banks’ reserve requirement ratio. The PBOC’s latest comments came after data released during the month indicated that China’s economic growth in the second quarter was the slowest in more than three years.
With debt costs rising worldwide due to higher yields, the artificial intelligence (AI) trade remained wobbly, as investors grew increasingly nervous about the heavy borrowing by technology companies to build out AI infrastructure and whether it would lead to as much profit as hoped. These concerns eased after several companies linked to AI, including chip designer and AI bellwether Nvidia, reported strong quarterly earnings results, which suggested that the enormous demand for AI computing remained intact. Notably, the top five contributors to the MSCI All Country World Index’s overall performance in August were stocks of companies linked to AI and accounted for 44.6% of the index’s return.
The latest data from FactSet suggested that company profits had held up well in the face of stiff macro headwinds, providing strong support for global stock markets. In the U.S., 98% of the companies in the S&P 500 Index reported actual second-quarter results; of these companies, 86% topped consensus estimates, outperforming the long-term average of 67%. The second-quarter earnings growth rate is estimated to have increased 52.2% from a year earlier. In Europe, 94% of the companies in the STOXX 600 Index reported actual second-quarter results; of these companies, 54% posted better-than-expected earnings, on par with the 54% that typically do so in a quarter. The second-quarter earnings growth rate is expected to have expanded 19.6% from a year earlier. In Japan, 96% of the companies in the TOPIX reported actual results for the April–June period; of these companies, 72% reported positive earnings surprises, surpassing the 60% beat rate over the past four quarters. The earnings growth rate for the April–June period is estimated to have increased 74.7% from a year earlier. In Hong Kong, 95% of the companies in the Hang Seng Index reported actual second-quarter results; of these companies, 58% reported better-than-expected earnings, surpassing the 48% beat rate over the past four quarters. The second-quarter earnings growth rate is estimated to have increased 2.3% from a year earlier.
Against this backdrop, equity markets in the developed and developing worlds both gained in August, with the latter outperforming the former. In the U.S., the S&P 500 Index rose and outperformed the global index, as exceptionally strong earnings results boosted risk sentiment. In Europe, the STOXX 600 Index rose but lagged the global index, as concerns about higher oil prices and rising inflation curbed risk appetites. In Japan, the TOPIX outperformed, as domestic-demand stocks helped fuel the rally. Meanwhile, in the developing world, Taiwan’s TAIEX and Korea’s KOSPI recorded solid gains, as the stock prices of semiconductor-linked companies, the flagship industry of both countries, rose on optimism about an enduring demand upcycle for memory chips.
Information technology was the best-performing sector in August, thanks to a rebound in the stock prices of chipmakers. Real estate was the worst-performing sector, as the appeal of high-dividend-paying real estate investment trust (REIT) stocks was undercut by elevated government bond yields.
Outlook
Our outlook at the beginning of 2026 anticipated elevated uncertainty, and this view was reaffirmed in early March with the outbreak of war in Iran. The conflict has already had a profound effect on oil and other commodity prices, interest rates, and a wide range of financial assets. There continues to be great uncertainty surrounding both the duration of the conflict and its eventual resolution.
The most immediate financial market effects have been the surge in fuel and other commodity prices, along with an increased risk of shortages in key inputs for agricultural and manufacturing activity. While near-term pressure on this front has subsided recently, the fragile state of negotiations and significant importance of the region to global supply maintain this as a key economic risk likely for the remainder of this year with important implications for economic activity, inflation and interest rates.
Unsurprisingly, the Midstream Energy sector has been a significant contributor to portfolio performance since the outbreak of the conflict and remains among the strongest sector contributors year to date. Recent developments have reinforced the importance of energy security and the critical infrastructure required to supply global energy demand. Unlike upstream and downstream energy businesses that may experience greater sensitivity to commodity prices and refining margins, midstream companies benefit primarily from fixed-fee, high-visibility revenue streams tied to essential infrastructure assets. As governments and markets increasingly prioritize energy security and supply reliability, we expect these characteristics to remain supportive for the sector.
Defensive utilities have been the largest contributor to year-to-date performance in both absolute and relative terms versus the benchmark. It is perhaps unsurprising that one of the most defensive sectors within our infrastructure universe has outperformed amid heightened uncertainty. We continue to view utilities as a core allocation while volatility persists. At the same time, the sector is benefiting from powerful secular trends, including electrification and rising electricity demand associated with technological innovation, data centre development, and electrified transportation. We expect these structural drivers to support sustained investment in power infrastructure and provide resilience even in the face of conflict-driven economic weakness.
Communication services have also provided stability, with largely resilient—and in some cases exceptional—year-to-date total returns among our holdings. In our view, the sector should retain its defensive appeal given generally undemanding valuations, ongoing industry consolidation, and continued exponential growth in global data creation and transmission needs. This dynamic also applies to telecommunication tower REITs, in our view, which have recently exhibited greater sensitivity to higher interest rates (along with growth concerns) than we believe is fundamentally warranted. Should slower economic growth eventually lead to lower long-term interest rates, this dynamic could become a meaningful tailwind for the sector.
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Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries.
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Published on September 16, 2026.