Stock markets in 4Q26: crossroads

Crude oil and rates put pressure on assets, while economic strength, technological investment and possible energy relief maintain investor hope

That is the expression that best defines the situation in which the markets find themselves at the beginning of the quarter. There are arguments for and against the stock markets to maintain an upward trend that is struggling to continue.

The arguments against the stock markets are strong

The price of oil may continue to climb as the talks between the United States and Iran do not lead to any progress and inflation data (headline, not core) soar, which supports a progressive tightening of central banks’ monetary policies (at the latest, they will raise rates in December), thus causing more financial costs for companies and individuals.

Strong economic data and rising rate hike expectations are causing a sharp rally in bond yields: the IRR (yield) on 10-year US Treasury bonds exceeded 5.20% last week, reaching its highest level since 2007 and that of German 10-year bonds rose to 3.60%. its highest since 2009. This penalizes the valuation of the share price and makes the purchase of fixed income vs. equities increasingly attractive.

France is immersed in a constant political dispute that blocks the management of the country (approval of budgets and deficit reduction as required by the EU), which casts doubt on its solvency as an issuer of debt in the market (risk premium on German debt of almost three times that of Spain). A rating downgrade is looming and with it would come the tremors in the European public debt markets, in addition to deepening the fall in the price of the Euro that has been sliding down against the Dollar since the beginning of the year and is now at the lowest in the last 18 months.

To put an end to the negative arguments for the stock markets, I could not forget Artificial Intelligence (AI) and the apocalyptic statements that we hear more and more frequently from politicians, analysts and company executives. All of them based more on spurious reasoning than on true economic foundations.

The case for a strong end to the year for markets is also robust

Despite the environment of rising rates, the US business confidence figure rose to 58.4 last month, its highest level in five years. The current strength of the U.S. economy is beyond doubt. And this in spite of this? of Trump. And in Europe, the composite PMI rose to 53.1 points in September from 52.0.

Data center construction continues to drive AI and has quickly become one of the largest infrastructure investment booms in U.S. and European history. While there is still a broad debate about the long-term returns on these investments, their short-term effects are already being felt favorably in the economy with higher productivity and firms’ ability to compete. The results published by many companies, not only technology companies, make this clear.

The flow of oil in the Red Sea is recovering, which should help end the rise in the price of oil. It appears that tankers have already begun loading oil on a large scale from Saudi Arabia’s East-West pipeline, which was shut down last month after being damaged in an attack. Iran appears to have lost some of the advantage it had over energy transit, although the risk of disruption and escalation remains elevated.

If bond yield volatility eases and oil prices stabilize, the breadth of equity markets could improve rapidly and support further price increases, and not just in the technology sector. Finally, although I am one of those who believe that statistics are about to be broken, the US stock market is usually taking off strongly after the midterm elections to be held on November 3.

What to do?

I believe that there are sufficiently consistent reasons for us to be able to attend the two scenarios described here. All in all, my vision is simple: to maintain the investment strategy, both in bonds and in the stock market, along the lines that I have been here for the last few weeks.