September Barometer of financial markets outlook

The same picture appears to be emerging today. Our business cycle indicators show that, save for a deterioration in China’s consumption spending, the economic picture remains relatively positive. Europe’s economy, for example, is performing better than most envisaged at the beginning of the Iran conflict. Consumer spending and business investment are both rising, while inflationary pressures are easing.

And while the US has seen consumer spending growth slow to an annual 1.8% in recent months, below its long-term rate of 2.5%, increases in capital investment are more than offsetting this slowdown.

Emerging markets are also on a sound economic footing, benefiting from high commodity prices, strong export growth, and relatively low interest rates. True, China is a concern: domestic consumption is weakening and the property market is struggling. But overall, our analysis gives positive signals for the global economy. Indeed, the economic surprises index, which tracks the extent to which data surpasses or undershoots consensus forecasts, has remained in positive territory since the tail end of 2025.

Valuations also support maintaining a higher allocation to equities. One indicator we attach great importance to is the equity risk premium, or the discount investors demand for buying riskier stocks over government bonds. Our analysis, shown in Fig. 2 and comparing stocks’ earnings yields to US Treasury yields, illustrates that the discount, while low, remains some distance from the level that would suggest stocks are vulnerable. Treasury yields would have to rise substantially for that to be the case.

Elsewhere, the technical indicators we monitor are positive for stocks but less so for bonds. Although September tends to be a challenging month for stocks, surveys showing investors don’t hold excessively bullish positions in equities are a positive sign.

While economic indicators, valuations and technical indicators are positive for riskier assets, liquidity is in shorter supply, which could eventually act as a brake on stock markets. The main risk is a tightening of monetary conditions in the US. In our view, US interest rates might soon need to rise to contain a government and corporate borrowing spree that would otherwise fuel inflation. Total borrowing in the US is currently running at 16% of GDP, some 4 percentage points above the longer-term average.

Regionally, our preference is for emerging-market stocks (excluding China), which continue to benefit from strong global trade flows, elevated commodity prices, favourable growth dynamics, and extensive exposure to the AI theme. Exports from emerging economies are growing at more than double their pre-pandemic trend pace, supported by increased trade between developing countries. In particular, China’s imports are increasing at an annual pace of 8.6%, with a significant share of that coming from other emerging markets.

Latin American stocks trade at especially attractive valuations, ranking as the cheapest region globally in our model.

In the developed world, meanwhile, US stocks continue to generate healthy profits, with the median S&P 500 company reporting 12% year-on-year earnings growth in the second quarter (see Fig. 3). However, we are concerned about how much of that is coming from continued fiscal support and the AI capex super-cycle, while consumption, housing, and other rate-sensitive sectors remain comparatively weak. To become more positive on US equities, we would like to see signs of growth drivers broadening beyond capex and corporate investment.

Given the central role of the US Treasury market, these pressures are spilling over into other developed-world bonds, keeping us neutral there too. The only exception is Treasury Inflation-Protected Securities (TIPS), where we see value because real yields now stand above trend growth, a historically attractive entry point for investors (see Fig. 4). TIPS also offer direct protection against unexpectedly persistent inflation and fiscal and monetary policy risks.

We also favour emerging-market local-currency debt outside China. Strong economic fundamentals, favourable terms of trade, and resilience to oil price fluctuations should support emerging nations and, by extension, their bonds.

In credit, we keep to a benchmark weight, as spreads remain tight, providing limited compensation for risks stemming from fiscal dynamics, monetary policy uncertainty, and inflation.

In currencies, the US Treasury’s surprise move to increase bond buybacks suggests that policymakers may prioritise stabilising the yield curve over supporting the dollar. We think this view can be expressed most clearly through gold, the asset class least exposed to fiscal and monetary policy risks. The precious metal also benefits from persistent geopolitical tensions and central bank purchases. We’re neutral on all major currencies.

The dollar weakened, losing around 0.5% versus a trade-weighted basket of currencies as investors started to unwind overextended long positions. Its losses were most pronounced versus emerging-market currencies. Emerging-market local bonds outperformed thanks to solid global trade and resilient domestic economies.

Commodities also held up well, boosting the mining and materials sectors.

Elsewhere, equity markets moved higher, cheered by upbeat corporate reports from the likes of chipmaker Nvidia and cloud-computing firm Salesforce. The tech-heavy US market gained almost 3%, with the S&P 500 setting a new record high during August and the Nasdaq technology index recording its strongest month since May with a 4% gain.

^{Information, opinions and estimates contained in this document reflect a judgement at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.}