Asset allocation update September 2026 How we're thinking about markets...

How we’re thinking about markets…

Oil is back near $100 a barrel, inflation has stopped falling, and three of the world’s four major central banks raised interest rates within nine days in September. Equity markets have absorbed all of that remarkably well, because company profits are still growing strongly. The result is a market that has stopped racing ahead, but has not turned down, and a period in which we have changed where the risk sits in portfolios rather than how much of it we hold.

Three things that defined markets this AAC cycle

1.     Oil rallied back to $100 per barrel

Source: MSCI All Country World Index (LHS) and 10-year yield (RHS), sourced from Bloomberg.

Normally, rising interest rates create a headwind for equity markets, as a higher cost of capital tends to weigh on economic activity and reduce the present value of future earnings. This year, however, markets have proved remarkably resilient. The primary reason has been the continued strength of corporate earnings. Analysts expect the largest US companies to grow earnings by around 18% over the next twelve months, whilst the second-quarter reporting season provided the first meaningful evidence that the substantial investment being directed towards artificial intelligence is beginning to generate tangible returns.

[1] 12-month forward earnings per share for the S&P 500, year-on-year growth rate, sourced from Bloomberg as at 22 September 2026.

That said, something did change over the summer. A sharp unwinding of some of the market’s most crowded positions in July took much of the heat out of investor sentiment, and global equities have largely traded sideways since. The three-year bull market has not necessarily come to an end, but it has moderated into a more subdued phase. Rather than being driven by ever-expanding valuations, future gains are likely to depend increasingly on companies delivering the earnings growth that investors have been anticipating.

A market that keeps getting narrower

The US equity market continues to reach new highs, but an increasingly small number of companies are driving those gains. The technology-heavy Nasdaq Index recorded a new all-time high this week, its first since June.[2] Yet beneath the surface, market performance has become increasingly concentrated. During the week in which the index reached that new peak, around a third of its constituents declined, whilst approximately half of the overall gain came from just five companies. By many measures, the current market advance is among the narrowest on record.

Information technology as a share of the S&P 500 by value. Quarterly, 1997 to September 2026. The sector was redefined in September 2018, when several large companies moved out of it. Source Bloomberg

The profitability of these companies is genuine and continues to grow, and there are compelling reasons why so much market value has become concentrated in a handful of businesses. However, an index dependent on a small number of companies behaves very differently from one whose returns are more broadly distributed. Investors holding a global equity tracker today therefore have significantly greater exposure to a small group of US mega-cap companies than they would have had a decade ago.

MSCI World Value divided by MSCI World Growth. A falling line means growth is outperforming, a rising line means value is. Five years to 21 September 2026.

As concentration risk within the largest US technology companies continues to increase, we remain focused on maintaining breadth and diversification within portfolios. Whilst we continue to recognise the quality and earnings power of these businesses, we are seeking opportunities in areas of the market where returns are less reliant on the continued dominance of a handful of companies. In our view, the current market structure leaves investors increasingly vulnerable should sentiment towards these firms deteriorate.

One area where we continue to see opportunity is in value equities. In late 2025, we began to observe early signs that cheaper and less fashionable companies, commonly referred to as value stocks, could start to outperform their higher-growth counterparts. This represented the first meaningful challenge to growth stock leadership in several years.

The economic backdrop discussed earlier in this note is generally supportive of this style of investment. Persistently elevated inflation, interest rates that are moving higher rather than lower, and an economy that continues to expand have historically favoured companies whose value is derived from earnings generated today rather than those expected many years into the future. By contrast, growth stocks rely more heavily on future cash flows, making their valuations particularly sensitive to changes in the cost of capital. If interest rates remain higher for longer, that valuation headwind is likely to persist, creating a more favourable environment for value-oriented investments than investors have experienced for much of the last decade.

Equities: a tilt from growth to value

We have moved part of the portfolio out of a strategy that favours highly profitable, premium-priced growth companies, and into one that weights businesses by the size of their actual operations – their sales, cash flow and assets. The purpose is to spread exposure more evenly across the market rather than to call which style wins, and in particular to reduce how much of the portfolio rides on the largest handful of companies.

Fixed Income: spreading the government bond risk more widely, with less in corporate credit

We are reducing UK gilts and building a global government bond holding in their place, spread across several developed markets. Hedged back to sterling the yield is much the same, but the risk is no longer concentrated in UK politics. We are also trimming investment grade corporate bonds, where the extra yield over governments is close to its lowest since the financial crisis. We don’t believe we are being paid enough to take the additional corporate risk.

Alternatives: more breadth in our real asset holdings

The committee has brought the gold exposure back to neutral and introduced exposure to natural resource companies – the businesses that mine and process the materials the world is short of, including copper, uranium, rare earths and other specialist metals. Demand is being driven by government policy on energy infrastructure, defence spending and the electricity needed to power data centres. The two work differently, which is the point of holding both. Gold tends to matter when confidence in governments and currencies is tested, the miners when demand for physical materials outruns what the ground can supply. Adding the second gives our real asset holdings more than one way to be useful.