4Q 2026 Global Market Perspectives

Global market perspectives 4Q 2026

Stubbornly intact

Our quarterly investment outlook highlights the themes and investment implications for the period ahead.

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Key themes for 4Q 2026

Macro Despite mounting challenges, global growth remains stubbornly intact

Global growth continues to exceed expectations. The AI capex buildout, combined with consumer strength, has supported growth even as bond yields, energy prices, and geopolitical risks have risen sharply.

Macro The U.S. economy has become less sensitive to higher rates

The economy has proven unusually robust in the face of higher borrowing costs, reflecting reduced household and corporate interest rate sensitivity. The AI capex cycle has become an increasingly important source of growth.

Macro A synchronized global hiking cycle is underway

A stronger growth backdrop has made major central banks more willing to tighten policy further and keep rates restrictive until inflation shows clearer signs of returning to target. A shallow hiking cycle remains the most likely outcome, but risks are skewed to the upside.

Equities Earnings remain the backbone of the equity market

Strong earnings growth and AI-related investment have helped offset the impact of higher rates. However, persistent inflation, ambitious profit expectations, and rising bond yields leave less room for disappointment.

Fixed income Bond markets are adjusting to a higher cost of capital

Above-trend growth, structural investment demand, and rising borrowing requirements are contributing to higher long-term yields. Elevated income levels continue to provide an attractive starting point across fixed income markets.

Investment perspectives Resilience rewards patience

While AI remains an important driver, broader earnings growth, improved income potential, and a wider distribution of growth across sectors and regions are expanding the range of investment choices. The opportunity set across asset classes is broadening, but so too is the need for selectivity and diversification.

Macro

A growth story: Not all rising yields are equal

Key takeaway

Rising yields reflect not only tighter policy, higher energy prices, and fiscal deficits, but also a resilient global economy and a strengthening AI-driven investment cycle.

Over the past quarter, rising bond yields have fuelled market volatility and renewed concerns about the durability of the bull market. Yet, while higher energy prices and elevated fiscal deficits have contributed to the move, not all of the increase reflects deteriorating fundamentals. Robust global growth and a powerful capex cycle, led by AI-related investment, are increasing demand for capital and pushing up the long-term cost of capital.

While growth expectations across several major economies have softened from earlier highs, reflecting the drag from higher oil prices, most are still expected to deliver at least trend growth in 2026. The outlook for Asia ex-Japan has improved, with the investment cycle helping to offset higher commodity prices and supporting regional growth.

The resilience of global activity is perhaps most evident in the U.S., where nominal GDP is expanding at 6.6% year-on-year, the strongest pace since 2005 outside the post-pandemic rebound. With nominal growth and investment demand remaining robust, higher bond yields should not be viewed solely as a headwind for markets. They also reflect an economy that continues to generate opportunities for earnings growth and capital deployment, providing a constructive backdrop for risk assets.

Macro

A less interest rate sensitive U.S. economy

Key takeaway

Both household and corporate balance sheets offer an underappreciated source of cyclical robustness against higher rates and macro shocks.

Economic slowdowns typically emerge as higher borrowing costs constrain spending and investment. Yet despite net interest payments reaching cycle highs, the economy has proven unusually resilient, reflecting reduced interest-rate sensitivity across key parts of the economy.

Households and corporates locked in exceptionally low borrowing costs during the pandemic, leaving effective borrowing rates well below current market rates. As a result, even with 30-year mortgage rates above 7%, much of the household sector remains insulated from higher financing costs. Meanwhile, strong earnings growth and record-high profit margins have enabled businesses to continue investing.

Moreover, AI-related spending is increasingly driving the investment cycle. Supported by strong expected returns and strategic capacity requirements, it has remained relatively insensitive to higher borrowing costs. Rising household wealth, supported by resilient labor markets and equity markets, has also helped sustain consumer spending.

The government sector stands in contrast. Unlike households and businesses, governments largely failed to extend debt maturities when rates were near zero, leaving public finances considerably more exposed to higher borrowing costs.

Macro

Federal Reserve: “We have work to do”

Key takeaway

The Fed is likely to deliver one further hike this year and another in 2027, as persistent inflation keeps policymakers biased towards additional tightening.

The Federal Reserve has resumed policy tightening. However, because policymakers are responding primarily to energy-driven inflation pressures and currency dynamics rather than a materially overheating economy, this is likely to be a relatively shallow tightening cycle.

Our base case is for an additional Fed rate hike in December, followed by one further hike in 2027. Additional tightening beyond that remains possible should energy prices stay elevated, and policymakers become less willing to tolerate a gradual return to 2% inflation. Markets remain somewhat more hawkish than our forecasts, although current pricing implies only limited additional tightening.

Inflation and currency pressures are also shaping policy outside the U.S. The ECB continues to respond to energy-driven inflation pressures, while the BOJ has slightly accelerated the pace of policy normalization in response to persistent yen weakness. In both cases, only modest additional tightening appears likely.

The policy reassessment of recent months reflects both a more challenging inflation outlook and more resilient economic growth. As such, central banks have become more willing to tighten policy further and keep rates restrictive until inflation shows clearer signs of returning to target.

Equities

Strong earnings enable U.S. equities to defy rising rates

Key takeaway

Strong earnings and AI investment help offset higher rates. However, persistent inflation, ambitious profit expectations, and higher bond yields leave less room for disappointment.

Despite renewed central bank tightening and a sharp rise in bond yields, U.S. equities remain close to record highs. The key reason is that the same force pushing rates higher—resilient growth—is also supporting earnings. Consensus earnings growth for 2026 is over 30%, with gains increasingly extending beyond the tech sector. Earnings, rather than multiple expansion, have driven equity returns this year.

The AI capex cycle has remained largely insensitive to higher borrowing costs, increasingly viewed as a strategic necessity rather than discretionary spending. This has helped sustain earnings expectations despite a higher-rate environment.

The key risk is that inflation proves more persistent, forcing the Fed to tighten beyond current expectations. In that scenario, higher rates could begin to weigh on growth, limiting companies' ability to offset rising discount rates through stronger profits. At the same time, increasingly ambitious 2027 earnings expectations leave equities vulnerable should AI spending fail to translate into profits.

More broadly, higher bond yields are providing a more credible alternative to equities, increasing the importance of earnings delivery and creating greater return dispersion across companies and sectors.

Fixed income

Rate dislocations amid a global competition for capital

Key takeaway

Stronger growth and more volatile inflation outcomes have seen investors reassess duration risk. This repricing is being exacerbated by an intensifying competition for capital.

Bond yields across developed markets have continued to rise, challenging assumptions about where interest rates can stabilize amid resilient economic growth. The move has been pronounced in the U.S., where 10-year Treasury yields have moved above 5.2%, their highest level since 2007.

Although stronger growth has been the immediate catalyst, the rise in long-end yields has also exposed a broader reassessment of duration risk. Rising government borrowing requirements and growing demand for long-term capital are increasing the cost of funding at the long end of the curve, while more volatile inflation outcomes have reduced investors’ willingness to lock in returns for extended periods. Markets are increasingly pricing a higher long-run cost of capital.

While Treasury buybacks and renewed Fed credibility have helped stabilize market conditions, the fundamental drivers of the sell-off remain intact, with 30-year Treasury yields climbing beyond 5.5%, levels last seen in 2004.

Interest rates are likely to remain elevated relative to the pre-pandemic era. A meaningful decline in bond yields would probably require either a significant weakening in economic activity or a credible fiscal adjustment.

Investment perspectives

You miss 100% of the shots you don’t take

Key takeaway

The economy remains stubbornly intact and resilience has rewarded patience. As the opportunity set broadens, diversification and selectivity will become increasingly important drivers of returns.

Growth remains stubbornly intact, earnings continue to surprise positively, and structural investment remains a powerful source of demand. While macro and geopolitical risks remain elevated, the broader backdrop remains supportive.

Importantly, accelerating earnings growth has continued to reward investors who stayed the course through heightened volatility, policy uncertainty and market dislocations. The key lesson of this cycle is that economic and corporate resilience have repeatedly exceeded expectations.

Looking ahead, market outcomes are likely to depend more on earnings delivery, productivity gains and thoughtful capital allocation. Higher rates are not simply a headwind to markets, but increasingly reflect stronger growth, rising investment demand and greater competition for capital.

While AI and infrastructure remain important drivers, broader earnings growth, improved income potential and a wider distribution of growth across sectors and regions are creating a more diverse investment landscape. The opportunity set is broadening, but so too is the need for selectivity and diversification.

Principal Global Insights team

Seema Shah

Seema Shah

Chief Global Strategist

Brian Skocypec

Brian Skocypec, CIMA

Sr. Director, Global Insights & Content Strategy

Christian Floro

Christian Floro, CFA, CMT

Market Strategist

Jordan Rosner

Jordan Rosner

Sr. Insights Strategist

Magdalena Ocampo

Magdalena Ocampo

Market Strategist

Benjamin Brandsgard

Benjamin Brandsgard

Insights Strategist

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Learn more about the factors impacting markets and portfolios in the quarter ahead by downloading the full PDF.

Macro views

Asset allocation

Equities

Fixed income

Index descriptions

Bloomberg U.S. High-Yield Corporate Bond Index is a rules-based, market-value-weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable and corporate bonds.

Bloomberg U.S. Corp High Yield 2% Issuer Capped Index is an unmanaged index comprised of fixed rate, non-investment grade debt securities that are dollar denominated. The index limits the maximum exposure to any one issuer to 2%.

Bloomberg U.S. Corporate Investment Grade Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity and quality requirements. To qualify, bonds must be SEC-registered. The corporate sectors are industrial, utility and finance, which include both U.S. and non-U.S. corporations.

Bloomberg U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint. STRIPS are excluded from the index because their inclusion would result in double-counting.

MSCI ACWI Index includes large and mid cap stocks across developed and emerging market countries.

MSCI Brazil Index is designed to measure the performance of the large and mid cap segments of the Brazilian market.

MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs).

MSCI EAFE Index is listed for foreign stock funds (EAFE refers to Europe, Australasia, and Far East). Widely accepted as a benchmark for international stock performance, the EAFE Index is an aggregate of 21 individual country indexes.

MSCI Emerging Markets Index consists of large and mid cap companies across 24 countries and represents 10% of the world market capitalization. The index covers approximately 85% of the free float-adjusted market capitalization in each country in each of the 24 countries.

MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe.

MSCI Europe Banks Index is composed of large and mid cap stocks across 15 Developed Markets countries in Europe. All securities in the index are classified in the Banks industry group (within the Financials sector) according to the Global Industry Classification Standard (GICS®).

MSCI Germany Index is designed to measure the performance of the large and mid cap segments of the German market.

MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market.

MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market.

MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market.

MSCI USA Growth Index captures large and mid cap securities exhibiting overall growth style characteristics in the U.S. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.

MSCI USA Index is a market capitalization weighted index designed to measure the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in the United States.

MSCI USA Large Cap Index is designed to measure the performance of the large cap segments of the U.S. market.

MSCI USA Mid Cap Index is designed to measure the performance of the mid cap segments of the U.S. market.

MSCI USA Quality Index aims to capture the performance of quality growth stocks by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. The MSCI Quality Indexes complement existing MSCI Factor Indexes and can provide an effective diversification role in a portfolio of factor strategies.

MSCI USA Small Cap Index is designed to measure the performance of the small cap segment of the U.S. equity market.

MSCI USA Value Index captures large and mid cap U.S. securities exhibiting overall value style characteristics. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.

Standard & Poor's 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market.

U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies.

Market indices have been provided for comparison purposes only. They are unmanaged and do not reflect any fees or expenses. Individuals cannot invest directly in an index.

Disclosure

Risk considerations

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. Equity investments involve greater risk, including higher volatility, than fixed-income investments. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Asset allocation and diversification do not ensure a profit or protect against a loss.

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