Investment Outlook - October 2026: Growth without cheap money
Updated: 18 hours ago
The global economy has taken a great deal in its stride this year: an oil shock, a war in the Gulf and, in September, the first US rate rise in three years. Company earnings have kept growing through all of it, which keeps us positive on equities. Bonds are paying a proper income again, and we see little reason to leave surplus cash sitting idle. Infrastructure remains our strongest conviction. Where we are more cautious is in those parts of the market whose prices already assume that nothing can go wrong, private credit among them.
Our views at a glance
Three key themes shaping our outlook this month.
Strong earnings growth keeps us positive on equities
We expect continued earnings growth to support further equity gains despite elevated interest rates. We favour the US, Japan and emerging markets outside China, broadening exposure beyond the largest technology companies. Demanding valuations leave less room for disappointment: profits must continue to grow strongly enough to offset the pressure from higher rates.
Higher yields restore the appeal of bond income
US investment-grade yields around 6% offer an income opportunity uncommon over the last decade. At these levels, bonds can make a substantial contribution to portfolio returns without requiring a rally in prices. We favour investment-grade credit, with tight spreads limiting the appeal of weaker borrowers and inflation risks warranting caution on longer maturities.
Infrastructrure powers the next wave of growth
AI, electrification and energy security require investment in power generation, electricity grids and digital networks. We see particular opportunity in assets where capacity is scarce, expansion is difficult and revenues are underpinned by long-term contracts or regulated returns. Infrastructure is our highest-conviction allocation, with demand extending well beyond the AI investment cycle.
Our current positioning
Our relative views across key asset classes and markets.
Overall asset classes
Less preferred -- - = + ++ More preferred
Equities | + |
We expect earnings growth to sustain further equity gains despite higher interest rates. AI investment and a broadening capital spending cycle support the outlook. Demanding valuations leave little room for disappointment, but do not yet justify reducing overall equity exposure. We favour diversification across sectors and regions, reducing reliance on the largest technology companies. | |
Fixed income | + |
Higher starting yields strengthen prospective returns, with income the principal attraction. We favour investment-grade credit, while tight spreads leave limited compensation for the additional risk in high yield. We remain neutral on duration: persistent inflation and heavy government borrowing warrant caution on the longest maturities. | |
Cash | - |
Beyond cash held for near-term spending, commitments and reserves, we favour deploying surplus liquidity into well-diversified investments across asset classes. | |
Alternatives | + |
Infrastructure is our strongest conviction, supported by investment in AI, electrification and energy security. We also favour macro and relative-value hedge funds, which can exploit differences across markets and reduce reliance on equities and bonds for returns. We remain cautious on private credit, where compressed spreads, weaker lender protections and higher refinancing costs leave limited compensation for risk. | |
Equities
Less preferred -- - = + ++ More preferred
United States | + |
We expect earnings growth to sustain further gains despite higher rates. We favour technology leaders alongside industrials, financials and power infrastructure, supported by rising capital investment and stronger capital markets activity. Demanding valuations leave little room for earnings disappointment, while a further sharp rise in bond yields could compress equity valuations. | |
Europe | = |
Improving earnings and increased spending on defence, infrastructure and energy security support European equities. We favour banks, industrials and utilities. However, dependence on imported energy leaves profits vulnerable to higher costs, while higher borrowing costs and strained government finances constrain growth. We see opportunities in these sectors without sufficient conviction for a broader regional overweight. | |
United Kingdom | = |
Valuations are inexpensive and shareholder distributions attractive, but weaker earnings growth, limited exposure to structural growth themes and domestic policy uncertainty continue to constrain the case for a material re-rating. | |
Japan | + |
Corporate reforms and improving returns on equity support our positive view. AI investment creates opportunities in semiconductors, automation and power infrastructure, while higher domestic interest rates support bank profitability. We favour these areas, with rapid yen appreciation a risk to exporters’ earnings and higher global bond yields a constraint on valuations. | |
China | = |
China’s drive for technological self-reliance supports opportunities in semiconductors, AI infrastructure and advanced manufacturing. We remain neutral overall: weak consumption and property markets constrain the wider economy, while heavy AI spending is weighing on some internet companies’ earnings. Attractive valuations need firmer evidence of improving profitability to justify a broader allocation. | |
Emerging markets (excl. China) | + |
AI investment and improving earnings support our positive view, particularly in Taiwan and South Korea. Selected Latin American markets, especially Brazil, offer complementary exposure to commodities at lower valuations. India offers longer-term opportunities in domestic investment and consumption, but its valuation premium warrants caution. A stronger dollar, weaker AI spending and domestic political risks could undermine returns. | |
US fixed income
Less preferred -- - = + ++ More preferred
Treasuries | = |
Higher yields have restored attractive income and increased the potential for gains if growth weakens. We favour short and intermediate maturities. Heavy government borrowing and competition from corporate financing remain concerns at the long end, where investors face greater price sensitivity without assured protection against inflationary shocks. | |
Investment grade | + |
Broad market yields around 6% and resilient corporate balance sheets support our positive view. We favour short and intermediate maturities, focusing on issuers with manageable refinancing needs. Tight spreads make income the principal attraction, while substantial AI-related borrowing reinforces the importance of diversification across issuers and industries. | |
High yield | = |
Resilient growth and contained defaults support income, while relatively short duration limits sensitivity to rising Treasury yields. However, tight spreads leave little compensation for a deterioration in credit conditions. We favour BB-rated issuers and remain cautious on the weakest borrowers, where refinancing costs and deteriorating cash flows can overwhelm high headline yields. | |
Inflation-linked | = |
Ten-year TIPS offer real yields close to 3%, alongside protection against US inflation. We retain a neutral allocation, favouring intermediate maturities as a complement to conventional bonds, particularly given persistent inflation pressures and energy risks. Inflation indexation does not eliminate interest-rate risk: rising real yields can still cause capital losses. | |
Duration | = |
Higher yields improve the case for retaining interest-rate exposure as protection against weaker growth or a slowdown in AI investment. We remain neutral overall. Even if the Fed eases, heavy borrowing could keep long-term yields elevated. We would extend duration on clearer evidence of disinflation and weakening activity. | |
Currencies
Less preferred -- - = + ++ More preferred
US dollar | = |
US growth, AI investment and relatively high yields continue to attract capital and support the dollar. Substantial further Fed tightening is already priced in, however, and fewer increases would weaken that support. We remain neutral, with a broadly stable dollar our central case and fiscal pressures a longer-term vulnerability. | |
Euro | = |
Higher eurozone interest rates support the euro, but investors already expect further increases, so these may provide little additional boost. US rates are also rising, limiting the euro’s relative advantage. Europe’s reliance on imported energy leaves growth vulnerable to higher energy prices. We therefore see limited scope for sustained gains against the dollar. | |
British pound | = |
Relatively high UK yields support sterling, but weak growth and pressure on government finances constrain the outlook. Markets already expect further Bank of England rate increases. If the Bank raises rates by less than anticipated, sterling could weaken despite higher rates. We therefore remain neutral against the dollar. | |
Japanese yen | = |
Rising Japanese interest rates support the yen, but US rates remain substantially higher and are also increasing. Japanese investment overseas further limits demand for the currency. We remain neutral against the dollar and would become more positive if the interest-rate gap narrowed through faster Japanese rate increases or lower US rate expectations. | |
Alternatives and real assets
Less preferred -- - = + ++ More preferred
Infrastructure | ++ |
We favour power generation, electricity grids and digital networks, where AI, electrification and energy security support sustained investment. Scarce capacity, long-term contracts and regulated returns can underpin durable cash flows. Opportunities span public and private markets, with particular appeal in the infrastructure supporting data centres. Although, high valuations, excessive borrowing and construction costs can still erode investor returns. | |
Private credit | - |
We see insufficient compensation for illiquidity and credit risk in mainstream direct lending. Competition for larger buyout financings has compressed spreads and weakened lender protections, while high interest costs strain vulnerable borrowers. We prefer liquid investment-grade credit, considering private loans only where conservative leverage, strong contractual protections and reliable cash generation justify locking up capital. | |
Hedge funds | + |
We favour discretionary macro, fixed-income relative-value and equity market-neutral strategies. Differences in economic conditions and interest-rate policies create trading opportunities, while uneven company performance provides scope for gains from stock selection. Diversified multi-strategy funds combining these approaches can provide core exposure, reducing reliance on rising equity or bond markets. Manager selection must scrutinise leverage, liquidity and returns after fees. | |
Real estate | = |
We favour selected logistics, rental residential and data-centre assets in the US and Europe, focusing on locations where demand exceeds available supply. Rental income and growth in cash flows underpin the opportunity, but higher financing costs and refinancing pressures constrain returns. We remain cautious on older offices requiring substantial refurbishment and favour assets with manageable debt and established tenants. | |
Commodities | = |
Copper is our preferred commodity: grid expansion, electrification and data-centre demand meet constrained supply. We also favour aluminium, supported by infrastructure investment. We are less positive on silver following speculative excess, and on nickel given less favourable supply-demand conditions. We are cautious on chasing oil prices, which could retreat as supply disruptions ease. | |
Gold | = |
Central-bank buying, geopolitical uncertainty and concerns over government debt support gold’s role as a portfolio diversifier. We remain neutral: strong prior gains and high real bond yields, which increase the opportunity cost of holding gold, temper the case for adding exposure. We favour retaining a strategic allocation and using price weakness to replenish underweight positions. | |
What really matters now
Three things we are watching closely this month.
Whether higher borrowing costs start to bite
Higher yields are manageable when accompanied by stronger growth and profits. The concern is a further rise without improving earnings, particularly as government borrowing and AI investment compete for funding. We are watching corporate financing costs and access to credit for signs that businesses are postponing investment or struggling to refinance.
Whether earnings justify the AI investment boom
AI investment is driving strong revenues for equipment suppliers and infrastructure providers. We are watching whether the companies funding that investment can turn it into sustained profit growth, and whether businesses adopting AI achieve meaningful productivity gains. Continued earnings upgrades would reinforce our positive equity view. Weaker demand or broad cuts to profit forecasts would challenge it.
Whether Middle East energy disruption eases
Conflict in the Middle East continues to disrupt energy production and shipping. Prolonged disruption would keep oil, gas and fuel prices elevated, squeezing household spending and company margins while increasing pressure for further interest-rate rises. A sustained recovery in supply would ease inflation pressures and support growth, particularly in energy-importing economies.
Our perspectives:
Growth without cheap money
Bond yields have climbed to levels not seen in a generation, central banks are raising rates again and the conflict in the Gulf remains unresolved. Equity markets have absorbed all of this far better than most expected, because profits have kept growing. We remain invested, but we are asking more of every investment we make.
For the better part of a decade after the financial crisis, money cost almost nothing, and a good deal of investment return came from little more than owning assets while they were revalued. That period is over. In September the Federal Reserve raised interest rates for the first time in three years, and at the turn of the month the yield on the ten-year US Treasury reached its highest level since 2002. What has surprised many people is how well the economy has coped. Companies are still growing their earnings, and they are spending heavily on technology, on power and on the industrial capacity behind both. That is the main reason we remain invested. What higher rates have changed is the return we are prepared to accept for our clients' capital.
There is an awkward symmetry in all this. The spending that sustains growth is also one of the reasons borrowing has become more expensive. The largest technology companies used to fund their investment from their own cash flow; increasingly they borrow for it, and they are expected to issue around $315 billion of bonds next year on top of some $280 billion this year, much of it at long maturities. Governments are competing for the same savings. Washington is running a deficit of about $1.9 trillion, and in France the bond market is openly questioning the state's finances, with spreads over German debt back at levels last seen in the euro crisis of 2012. Britain's Budget will be read by the same audience. Add an energy shock that has kept inflation stubborn, and long-term yields can stay high whatever central banks decide to do with short-term rates. We would not want to own a portfolio that works only if cheap money comes back.
Chart 1: Borrowing costs have risen across the major developed economies. Ten-year government bond yields for the US, UK, Germany, France and Japan, January 2020–September 2026
Source: Bloomberg
Income earns its place again
For investors with capital to put to work, some of this is plainly good news. With ten-year Treasuries yielding 5.2% and US investment-grade corporate bonds around 6.5%, high-quality income can now do a meaningful share of the work in a portfolio, without relying on anyone paying more for the same assets next year. Even after inflation, the ten-year Treasury offers around 2.8%, among the highest real yields since the financial crisis. It also raises the bar for everything else. Additional credit risk, high fees and capital locked away for years were easier to justify when bonds paid next to nothing; they now compete with a far better alternative, and with credit spreads still narrow by historical standards, the extra reward for lending to weaker borrowers is thin. How that comparison comes out depends on each family's tax position and the currency in which it spends. In general, though, there is more than one sensible way to earn a return again, and that allows us to be selective.
Earnings, not multiples
Our positive view on equities rests on continued growth in earnings rather than on any further rise in valuations, and this year has shown why the distinction matters. Real yields have risen sharply, which in theory should have hurt shares badly. Instead, profits grew fast enough to absorb the blow. Valuations have eased a little, profit margins across the S&P 500 stand at a record 17%, and measured against bonds, shares look about as attractive as they did in January. We own the leading technology companies and, alongside them, industrials, financials and the businesses building the power infrastructure on which so much of this investment depends. We are comfortable holding companies that spend heavily on their future, provided we can see how the spending will make them more profitable. What would make us think again is a sustained run of earnings downgrades arriving alongside a further rise in the cost of financing.
Who keeps the gains from AI
Artificial intelligence is where these questions are hardest to answer. So far the rewards have gone overwhelmingly to the companies supplying the technology rather than to those adopting it, and the chart below shows how wide that gap has become. The build-out has been very good for the builders, and it is now large enough to matter to the whole economy. Spending by the biggest investors is approaching 2% of US output, a scale last seen in the American railway boom of the late nineteenth century. The next stage will be judged on something harder to measure: what the businesses using all this new capacity can actually earn, or save, by doing so.
Chart 2: AI suppliers have grown their earnings far faster than the rest of the market
Source: Bloomberg, data to 11 October 2026
History offers a caution here. The railways transformed Victorian Britain, yet many of those who financed them during the mania of the 1840s lost heavily. Much of the fibre laid in the telecoms boom of the late 1990s was eventually put to good use, often by owners who had bought it out of bankruptcy for a fraction of its cost. Competition tends to pass the benefits of a new technology on to its users, and in AI that process is already visible: on one widely tracked platform, the average price of AI processing has fallen by around 42% since the end of June while usage has risen by about 176%. That is excellent for adoption, and potentially less so for returns further up the supply chain. We believe in the technology. We are less willing to assume that strong demand guarantees a good return for everyone supplying it, so we look closely at pricing power, at how much capital each business must keep reinvesting, and at the price we are being asked to pay. Demand can be real and lasting and still attract more capital than it will ever reward.
Infrastructure, at the right price
Infrastructure remains our strongest conviction. Data centres need electricity, and the generation, grids and connectivity to deliver it, but demand for power reaches well beyond AI: to the electrification of transport and industry, and to governments' determination to secure their own energy supply, which this year's events in the Gulf have only sharpened. We favour capacity that is genuinely scarce, earning contracted or regulated revenues from counterparties we would be comfortable lending to. That often means looking just beside the obvious opportunity. Data centres themselves are expensive to buy today, whereas the power generated on site to serve them, or the fibre that connects them, can often be had on better terms and with less risk of becoming obsolete. Where an investor protection against inflation, the contracts must allow rising costs to be passed on in practice, and not merely on paper. The scale of capital the sector needs tells us how large the opportunity is. It tells us nothing about what we should pay for it.
Two kinds of trouble
Two scenarios would test portfolios, in quite different ways. The first is a slowdown in AI spending, which would strike those shared exposures most directly. The second is a deeper energy shock. The conflict with Iran has already disrupted supply through the Strait of Hormuz, and the world has coped better than feared largely because inventories and strategic reserves filled much of the gap. Those buffers are now far thinner, and the strain has shifted into diesel and jet fuel. A prolonged disruption would bring weaker profits together with inflation that refuses to fall. Government bonds would probably help in the first case, as they usually do when growth slows. In the second they could disappoint, as they did in 2022, particularly if worries about public finances were already holding long-term yields up. No single asset defends against both, which is why we combine bond income with selected real assets and hedge funds, notably macro, relative-value and equity market-neutral strategies. Each has to earn its place after fees and financing costs, with risk controls we expect to hold when markets are at their least forgiving.
Structured products give us a further way to decide which risks we keep. When pricing is attractive, we can exchange some potential upside for additional income, or for a defined degree of protection on the downside. Higher interest rates have improved the arithmetic, since the yield earned on the protected portion of a note now buys more of the upside than it could when rates were close to zero.
Conclusion: Patience, properly paid
Capital that does not have to be returned next quarter can pursue opportunities that others must let pass. This year has offered a reminder of why that is important. Private credit funds sold to individuals on the promise of regular liquidity have faced redemption pressure, just as lending terms were improving for those with steady capital to deploy. Patience is one of the most valuable things a family owns, and we intend to use it. But patience has a price, and we will insist on being properly paid for the flexibility we give up. The growth is there to be had. We do not have to accept every term that comes with it.
Postscript: Seeing the whole picture
For a wealthy family, judgements should not be made in isolation. Imagine a technology fund held with one manager, a data-centre property with a second, a private loan with a third and a stake in a power project with a fourth. Taken one at a time, they look well diversified: four managers, four asset classes, four sets of reports. Taken together, they may all be relying on the same small group of companies continuing to spend. The links are often tighter than they appear, because a growing share of the build-out is financed through private credit and special-purpose vehicles. The Bank for International Settlements has drawn attention to how such vehicles tie banks and institutional lenders together, which means a setback in AI project economics need not stay contained. No single manager would notice, because none of them sees the whole. We therefore look at investment portfolios alongside a family's operating businesses, its private holdings and the commitments it has already made, and we judge any new allocation by what it does for the family's combined position as well as on its own merits.
Across the Street
Year-end 2026 S&P500 targets from major investment banks, with percentage change from current level.
Citi | 8,100 | +4.3% |
HSBC | 8,100 | +4.3% |
UBS | 8,100 | +4.3% |
Deutsche Bank | 8,000 | +3.0% |
Goldman Sachs | 8,000 | +3.0% |
JP Morgan | 8,000 | +3.0% |
SocGen | 8,000 | +3.0% |
Barclays | 7,950 | +2.4% |
Bank of America | 7,400 | -4.7% |
Source: Bloomberg, 8 October 2026
The world in three numbers
Three figures that put this month's investment landscape into perspective.
Global AI investment
The amount global AI-related capital expenditure could reach in 2027 - increasingly large enough to influence power markets, bond issuance and economic growth.
US 10-year Treasury yield
US 10-year Treasury yields have returned to territory barely imaginable during the decade after the financial crisis.
Markets live near the highs
Over the past 100 years, the S&P 500 has traded at or within 10% of an all-time high for more than two-thirds of the time.
About the author
Nick Perryman is Vice Chairman and Partner at Clarus Global Capital and has 25 years of investment and wealth management experience. He was previously a managing director at UBS where he was head of its international wealth business in London, and before that head of investment products and services which included $18bn under discretionary investment management. He is co-author of the book, Leadership in Wealth: Mastering the opportunities of wealth in your family, firm and society. Email Nick
Important notice
This article is provided for general information, discussion and educational purposes only. It reflects the views of the author at the date of publication and is not intended to constitute, and should not be relied upon as, investment, financial, legal, tax, accounting or other professional advice. It does not constitute an offer, solicitation, recommendation or invitation to buy, sell or hold any investment, financial instrument or service, nor should it be regarded as a personal recommendation or as taking account of the objectives, financial circumstances or needs of any particular person.
