The markets continue to face a delicate balance between high valuations, monetary policies that remain uncertain and persistent geopolitical risks. Maximilian Kunkel still sees potential in equities, driven by broadening earnings growth, and favours certain segments of the bond market, whilst keeping a close eye on inflation, interest rates and fiscal risks.
What are the main risks and opportunities you identify for investors as we approach the final months of 2026?
We are approaching the final months of 2026 with a constructive but selective outlook, particularly regarding equities. In our view, the most obvious opportunity lies in a broadening of the earnings-led bull run. For a long time, the markets have focused primarily on semiconductors and energy. We can now clearly see that earnings growth, both in the US and the rest of the world, should enable the market rally to broaden its scope.
We therefore identify opportunities in technology beyond semiconductors, particularly amongst hyperscalers, as well as in the financial and industrial sectors.
On the risk front, three points warrant particular attention. Firstly, a persistent oil shock that would reverse the trend towards disinflation and lead to further interest rate rises. Secondly, disappointment regarding the monetisation of AI following a particularly significant cycle of capital expenditure. Thirdly, fiscal pressures and the scale of sovereign bond issuance, which could keep long-term yields at high levels, thereby weighing on valuations.
How do you assess the global growth outlook, given that the US economy remains resilient and the major economies are following increasingly divergent paths?
The global economy remains resilient. However, we are beginning to see an acceleration in growth outside the US, particularly in manufacturing-related sectors, such as in the eurozone. This is quite evident in the PMI data from the US, Japan, the eurozone and the UK.
Overall, the data point more towards a cycle of upward revisions to the outlook than a risk of recession.
The divergence between the US and Europe remains marked. But, on the whole, economic activity is holding up well, with a recovery beginning to take shape in the manufacturing sector, beyond AI-related sectors.
US equities have performed strongly, whilst the markets are increasingly focused on a relatively limited number of companies. To what extent do current valuations concern you?
Valuations remain high, which limits the potential for further rises in multiples. However, three factors are worth taking into consideration.
Since the start of the year, we have seen the most significant de-rating seen in a bull market since 2010. Earnings growth among US companies has been significantly higher than the gains recorded by the equity markets. In this respect, markets are now cheaper than they were at the start of the year.
Secondly, the two factors that generally determine the performance of shares over the next twelve months are not valuations, but earnings growth and interest rates. As I mentioned earlier, we are in fact seeing earnings growth that is strengthening and broadening, both in the US and elsewhere.
Finally, with regard to interest rates, we believe that the markets are still overestimating the extent of the monetary tightening that could take place from now on.
Even though valuations are not cheap, the combination of stronger earnings growth and a less restrictive monetary policy trajectory is clearly supporting equities.
How are you positioning the portfolios in an environment characterised by geopolitical uncertainty, shifting trade dynamics and increasingly divergent monetary policies?
We favour sectors that benefit from resilient nominal growth, whilst seeking to limit the impact of bouts of volatility.
This means we are focusing on key opportunities linked to structural transformations, notably AI, energy and natural resources, as well as longevity. At the same time, we are looking at sectors benefiting from the cyclical recovery, such as financials and industrials.
In the bond market, we are complementing our equity exposure with high-quality bonds. We also see value in maintaining exposure to commodities, which can offer additional protection against geopolitical developments and, potentially, against a weak US dollar.
At Jackson Hole, Kevin Warsh once again emphasised the persistent nature of inflation. Should we now expect a rate rise in September?
Warsh’s message was clear: inflation remains the main problem and raising interest rates is the primary tool for tackling it. However, he is not a traditional Fed Chair, so his speech was probably not intended to provide specific guidance on the next monetary policy meeting.
Against this backdrop, we expect the August CPI inflation figures to provide further evidence of disinflation. We therefore believe that the Fed is likely, by a narrow majority, to leave rates unchanged in September.
Following the sharp fluctuations seen this year in the bond markets, where do you see the most attractive opportunities in fixed income?
Yields have risen significantly, which has correspondingly improved the entry point for bonds. We anticipate a further 25 basis point rise in ECB rates in September. However, we believe that the Fed, the Bank of England and the SNB will keep their rates unchanged until the end of the year.
In our view, two-year bonds offer an attractive carry and are likely to be the most sensitive to a downward shift in monetary policy expectations. This is precisely the scenario we favour.
We also believe that intermediate maturities potentially offer a better risk-return profile in a falling yield environment.
Our preferences lie with high-quality sovereign bonds and investment-grade bonds, with preferred maturities of two to six years in US dollars and pounds sterling, and two to ten years in euros and Swiss francs.
We are, however, very cautious on maturities of more than ten years.