Stock markets rise despite inflation worries – Q3 2026 market update

Despite concerns about rising inflation and interest rates this quarter, global stock markets continued to rise between July and the end of September. The global economy performed better than many expected, with company profits also remaining relatively strong.

However, the rise in stock markets was not evenly spread. A large proportion of the gains came from a relatively small number of major technology companies, helped by the continued excitement around Artificial Intelligence (AI).

For government bonds, it was a tougher story this quarter. Geopolitical tensions in the Middle East contributed to higher commodity prices, including oil, adding to existing concerns about inflation. This meant investors increasingly expected interest rates to remain elevated for longer than previously anticipated, which puts pressure on bond prices. 

Rising tensions in the Middle East pushed oil prices above $100 this quarter, while prices for commodities including European natural gas, sugar and corn also increased.

That matters because higher energy and food costs can feed into the prices we all pay for our food and energy. If prices continue rising quickly, inflation could remain higher than central banks would like.

Central banks can try to bring inflation down by raising interest rates. Higher rates make borrowing more expensive, which can put some households and businesses off spending more. Lower spending can, in turn, help ease pressure on prices but it can also hurt the economy.

During this quarter, central banks the US Federal Reserve, European Central Bank and Bank of Japan all raised interest rates. The Bank of England held interest rates, although some members of the bank’s committee voted to raise them.

Higher interest rates can have a direct impact on households, especially for people who have variable-rate mortgages or other borrowing and they can also affect financial markets.

Government bonds had a particularly difficult quarter.

A government bond is essentially an IOU. Investors lend money to a government and, in return, typically receive regular interest payments before getting their original investment back when the bond reaches the end of its term.

When interest rates rise, existing bonds paying lower rates can become less appealing compared with newly issued bonds offering higher returns. Investors may therefore sell older bonds, causing their prices to fall.

One slightly confusing feature of bonds is that prices and yields move in opposite directions. When the price of a bond falls, its yield, which gives an indication of the return an investor could receive and the compensation they want for holding a bond, rises.

During the quarter, the yield on 10-year US government bonds, known as Treasuries, rose to 5.3%, its highest level since 2007. The yield on 10-year German government bonds climbed to 3.6%, which is also high.

Governments are also having to pay more to borrow because of these yields, at a time when debt levels are already high in many developed economies. That has added to investors' concerns, particularly in Europe.

As a result, government bonds were among the weakest-performing parts of the market during the quarter.

You might expect higher inflation, rising interest rates and falling bond prices to be bad news for stock markets too. But global shares still delivered modest gains overall.

One reason was that overall, economies remained relatively resilient, while company earnings were stronger than many investors expected. However, there was a big difference between different parts of the stock market.

Technology companies were among the strongest performers, helped by continuing enthusiasm about AI and expectations that businesses will keep investing heavily in the technology.

The S&P 500, an index tracking the 500 largest US-listed companies, rose 2.3% over the quarter and reached a new record high in August. The so-called ‘Magnificent Seven’ – Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla – collectively rose by 11.1%.

That is an important point for investors: an overall stock market can rise even when many of the companies within it are having a much tougher time. The opposite can also be true, so the headline performance of a market doesn’t always tell the full story.

Outside technology, performance was generally weaker. Higher interest rates put pressure on areas of the market more sensitive to changes in the economy.

There were also significant differences between countries. European shares, measured by the STOXX Europe 600 index, fell 0.6% over the quarter. South Korea’s KOSPI index fell 19.2%, partly reversing its strong performance in the first half of the year.

Although global growth has been stronger than expected, particularly in the US and AI investment, energy prices remain a key risk. Hopes of talks between the US and Iran initially helped calm markets but concerns about shipping through the Strait of Hormuz, one of the world’s biggest routes for global trade, pushed oil prices higher again.

Growth remains relatively healthy across the largest developed economies and the risk of a downturn appears low. However, if energy prices stay high, they could squeeze household incomes and business finances.

Inflation is also proving persistent, which could mean interest rates stay higher for longer. In the UK, the Bank of England held rates at 3.75% in September, although three policymakers voted to raise them to 4%.

Overall, the relatively healthy economy and company profits provide a positive backdrop. But uncertainty around inflation, interest rates and energy prices means there is a wider range of possible outcomes for markets.

Stock markets have remained resilient, but much of their recent strength has come from a small number of large technology companies. With inflation and interest rates still uncertain, markets may have some bumps along the way. Rather than reacting to short-term movements, it's often worth focusing on long-term objectives and making sure investments are well diversified.