MARKET REVIEW

Our quarterly view of the financial markets

Q3 2026 at a glance

S&P 500 +2.3% | Nasdaq +2.6% | CAC 40 -5.2% | FTSE 100 +1.0% | Brent $98

Gold $4,200 | EUR/USD 1.13 | GBP/EUR 1.17 | US 10-Year 5.29% | Fed Funds 3.75-4.00%

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1. Global Economy: War Returns and Interest Rates Take Center Stage

The fragile calm that closed the second quarter did not last. On July 8, the US-Iran ceasefire collapsed after Iran attacked commercial vessels in the Strait of Hormuz, and the oil shock that markets hoped was behind them returned.

Brent crude (the international benchmark price for oil) started the quarter near $72 per barrel, crossed $100 on July 23, briefly topped $109 in mid-September and ended the quarter roughly 35% higher.

The bigger story was interest rates. The US economy kept outpacing expectations, powered by a historic wave of investment in artificial intelligence (AI), while inflation stayed around 3%.

The European Central Bank raised rates on September 10 and the US Federal Reserve followed on September 16, while long-term borrowing costs climbed worldwide. Even so, the S&P 500 and the Nasdaq reached new records, supported by exceptionally strong profits.

5.29%: a two-decade high for US borrowing costs

The 10-year US Treasury yield (what the US government pays to borrow for ten years, a reference for loans worldwide) ended September at 5.29%, up more than half a point in that month alone.

2. Financial Markets: Record Highs on a Narrow Base

In July, AI-related stocks pulled back as investors questioned the vast sums spent on data centers. August brought a recovery, helped by Nvidia’s revenue more than doubling year over year.

September turned rougher as yields surged: the S&P 500 was flat, while its equal-weight version (which gives every company the same importance) fell 4.8%.

Over the quarter, the S&P 500 gained 2.3% and the Nasdaq 2.6%, but the Russell 2000 small-company index lost 7.2%, as smaller, more indebted firms suffer most when borrowing costs rise. Energy led, up more than 16%, while utilities fell 12.4%. Profits remained the main support, with third-quarter S&P 500 earnings expected to grow about 29% year over year.

Europe lagged: the CAC 40 fell 5.2%, hurt by energy costs, rising rates and concerns over French public finances. The FTSE 100 rose about 1%, its seventh straight quarterly gain, as oil majors offset weakness in consumer and rate-sensitive stocks.

3. The Middle East: Ceasefire Collapse and Oil Back Above $100

After the ceasefire broke down, US strikes and attacks on shipping resumed. The Strait of Hormuz, which normally carries roughly one-fifth of the world’s oil, remained largely closed, with Iran demanding sanctions relief and reparations.

The sharpest escalation came on September 10-11, when drones launched from Iraq struck Saudi Arabia’s East-West pipeline, its main export route avoiding Hormuz. The pipeline was shut, and Brent futures peaked at $109 on September 15, while cargoes for immediate delivery reached $132.

The pipeline restarted at low volume on September 22, as Iran proposed a ceasefire of up to 60 days at the United Nations, with a phased reopening of the strait. Qatar-mediated talks followed, but positions remain far apart, with Washington insisting on the nuclear question.

Supply is recovering, but the risk premium remains

Gulf oil flows excluding Iran recovered to over 81% of pre-war levels in September (Kpler), and Brent ended the quarter just below $100. Yet inventories are depleted, and the US Energy Information Administration expects Brent to average around $105 in Q4.

4. Central Banks: The Hiking Cycle Resumes

US Federal Reserve

Under Chair Kevin Warsh, the Fed held rates at 3.50%-3.75% in July, with three officials already voting for an increase. On September 16, it voted unanimously to raise its key rate by 0.25 percentage points to 3.75%-4.00%, its first increase in over three years.

Officials’ median projection points to 4.1% by year-end, implying one more increase. Core PCE inflation (the Fed’s preferred measure, excluding food and energy) stood at 3.0% in August, a full point above target.

European Central Bank

The ECB had already raised its deposit rate (its main policy rate) from 2.00% to 2.25% on June 11, its first increase since 2023. After a pause in July, it moved again to 2.50% on September 10, warning that the energy shock would keep inflation well above target.

Euro area inflation then jumped to 3.8% in September, a three-year high, with energy up 18.8% year over year.

5. Market Rotation: Value Leads, Bonds Struggle and Gold Pauses

Q3 saw a striking reversal of fortunes: large US stocks that had gained more than 20% in the first half lost 6.9% on average, while first-half losers rebounded 8.8%. Value stocks (established companies priced modestly relative to their earnings) beat growth stocks, 2.6% against 0.9% for the Russell 1000 indices.

Bonds struggled, with the main US bond index down about 3.5%, as a US deficit close to $2 trillion, heavy AI-related corporate borrowing and fewer foreign buyers pushed yields up. UK gilt yields reached their highest levels since the late 1990s.

Gold climbed to around $4,600 per ounce in late August, helped by central bank buying, then fell back as yields and the dollar rose, ending near $4,200, still about 4% higher. The euro slipped to $1.13, while the pound edged up against it to €1.17.

6. Recent Developments: October 1-12, 2026

The 10-year Treasury yield touched nearly 5.37% on October 7, a 24-year high, before easing to about 5.25%. In France, the gap between French and German 10-year yields (the “spread”, a measure of the extra risk attached to French debt) briefly reached around 1.5 percentage points on October 2, its widest since 2011, as the 2027 budget was presented ahead of the 2027 presidential election.

Iranian attacks on tankers picked up and Brent topped $105 on October 8, before President Trump pledged no strikes on Iran before the November 3 midterms. After Houthi strikes on Riyadh’s airport over the weekend, Brent traded between $103 and $106 on October 12. The S&P 500 nonetheless set a new record on October 6 and remains close to it as earnings season begins.

7. Outlook for Q4 2026: Rates, Oil and the Ballot Box

Equities enter Q4 near record highs but face an unresolved conflict, tightening central banks and multi-decade high long-term rates.

Key factors to watch

Middle East and oil: whether talks reopen Hormuz or the conflict escalates again.
Central bank decisions: Fed on October 27-28 and in December, ECB on October 29.
Long-term interest rates: whether US and French government bond yields stabilize.
US midterm elections (November 3): control of Congress will shape the US fiscal outlook and bond markets.

Investment positioning

Diversification: with US gains concentrated in a handful of AI-related companies, spreading investments across regions, sectors and asset classes remains essential.
Bonds: new bond yields are the most attractive in two decades, but prices remain sensitive to further rate increases; review how exposed your holdings are.
Energy exposure: maintain some exposure to energy, which has acted as a natural cushion against geopolitical shocks this year.
Quality and earnings: favor companies with real profit growth and solid balance sheets.
Gold as a hedge: central bank buying supports gold as a stabilizer, though it remains volatile.

Conclusion

Q3 2026 showed how resilient markets can be: despite a renewed war, a Fed rate increase and surging yields, US indexes reached record highs on remarkable earnings growth. Beneath the surface, however, gains were narrow and bonds lost ground.

With oil around $100, inflation above target and high rates leaving little room for error, diversified, quality-focused portfolios remain the most reliable path, rather than bets on political or geopolitical outcomes.

This review is for informational purposes only and does not constitute investment advice. Please consult your financial advisor before making investment decisions.