UBP House View - October 2026

A month ago, we wrote that the outlook for equity markets remained reassuring, supported by resilient earnings, and that only a tightening of financial conditions would signal a genuine change in regime.

That scenario is now beginning to materialise: long-term yields continue to rise, with US 10-year Treasuries now trading at levels not seen since 2007.

For the time being, equity markets are proving remarkably resilient. Artificial intelligence (AI) continues to act as a powerful growth driver, with substantial investment in infrastructure supporting earnings growth and, in turn, the major indices. This resilience is, however, more fragile than it may appear. Some sectors are already feeling the effects of persistently high interest rates, while the overall strength of the markets increasingly depends on a narrowing set of drivers, with technology at the forefront.

The conflict in the Middle East remains a cyclical event with a significant impact on markets, the outcome of which lies beyond investors' control. It leaves us facing a binary environment: depending on whether tensions ease on a sustained basis or intensify, the paths of oil prices, inflation and interest rates could diverge dramatically. The primary risk to markets comes through interest rates: persistently high energy prices sustain inflationary pressures and push long-term yields higher, weighing on equity valuations.

Against this backdrop, the usual central-bank playbook becomes less straightforward. Policymakers must contend with a supply shock that monetary policy cannot resolve and whose eventual outcome is more likely to be determined by political decisions than by economic forces. In Europe, this uncertainty is compounded by growing political and fiscal fragility: widening sovereign spreads in both France and Italy, together with broader political risks, are already weighing on the continent's outlook. Consequently, we are downgrading our rating on European equities, which, in addition to the challenges mentioned above, are benefiting less from the structural support provided by the technology sector.

We remain invested in the markets in order to continue benefiting from the upward momentum in corporate earnings driven by AI, while also favouring strategies capable of navigating contrasting market environments without taking pronounced directional bets. Fundamentals remain supportive, but we stand ready to adjust our convictions should the underlying catalysts change.

Key messages

1. Higher yields: the regime change is materialising
The US 10-year yield has reached its highest level since 2007. Equities are holding up thanks to technology, but breadth is at record lows. We stay invested without taking pronounced directional bets, favouring strategies able to navigate contrasting market environments.

2. US 10-year yield estimated fair value raised again
We raise our estimated fair-value range for the US 10-year yield to 4.75%-5.25%, reflecting renewed inflationary pressure. With risks now more balanced but visibility still very limited, we maintain a neutral duration of four years and rely on carry instead.

3. Central banks: gradual tightening, country by country
The Fed and the ECB have both raised rates by 25 bps, while the Bank of England is expected to follow in November. With core inflation still contained, we expect hikes to remain limited, and rate cuts are unlikely before the second half of 2027.

4. Equities: Europe downgraded
AI-driven earnings growth continues to support global equities. We downgrade Europe, as it faces higher energy costs, rising rates, political uncertainty and less structural support from technology and increase Japan, which combines AI supply-chain exposure with a strong financial sector.

5. Gold and alternatives: diversifiers in a volatile environment
Gold remains a core holding, although it is likely to move sideways until rates stabilise. Hedge funds and quantitative investment strategies continue to add value, as their flexibility suits a volatile market.

Our investment stance

Our asset allocation rests on two opposing forces: the path in energy prices and the momentum of the AI investment cycle. Higher energy prices are weighing on the macro regime, while AI-driven investment is powering an exceptional earnings outlook. This has opposite impacts at asset allocation level, supporting global equities despite driving interest rates and the US dollar higher. The global investment backdrop remains broadly supportive, with growth proving resilient despite a 'higher-for-longer' oil shock. With no rapid resolution to the Middle East conflict in sight, inflation is under renewed and prolonged pressure.

Against this backdrop, we have raised our estimated fair-value range for US 10-year yields to 4.75-5.25%, from 4.25-4.75%. With yields already at 19-year highs, the risks now look more balanced. This supports a wait-and-see stance on duration, which we have kept neutral at 4 years given extremely limited visibility. Should rising yields persist and weigh on growth, intervention by the US government or Federal Reserve (Fed) would become more likely. In this context, gold remains a core allocation, offering a real-asset hedge and portfolio diversifier, and our alternative strategies (hedge funds and QIS) continue to contribute positively to performance.

In equities, global earnings remain the key driver, with growth expected at 36% this year - the strongest outside of post-recession rebounds - as AI infrastructure investment continues to provide multi-year support. That said, rates and energy-sensitive sectors have started to struggle and this is masking deteriorating market breadth. Given the macro backdrop and the nature of earnings growth, European equities face greater challenges than their US and Japanese peers.

Overall, we have adopted a scenario of higher oil prices, inflation and interest rates, while recognising that the outlook remains binary. We maintain a constructive view on equity fundamentals, with limited bets in portfolios except for global tech, the US and Japan. In fixed income, visibility is too low to modify our duration, but any change of catalyst could reverse our positioning.

The conversations that matter

What are the risks of higher yields for credit, and for high yield in particular?

Higher yields increase the cost of refinancing and put pressure on interest coverage for all credit issuers. The direct price impact is smaller for high yield (HY) than for investment grade (IG), as it has a shorter duration (around 3 years), but the indirect impact through refinancing and growth is larger. So far, the economy has held up very well and earnings have been strong, with interest coverage improving in Q2 (latest figures). Solid fundamentals and contained default rates have kept spreads tight by historical standards, even after September's widening, with no broad signs of stress.

Nevertheless, any sign that higher energy prices and higher rates are starting to weigh on growth would hit the asset class, as weaker earnings and tighter financing conditions would quickly feed through to the more leveraged issuers.

However, the underlying quality of high yield has improved in recent decades, with BBs (56% of the index) gaining share at the expense of CCCs (11%), as lower-rated borrowers have moved to leveraged loans and private credit. This makes the asset class safer and more resilient than in the past, which is one of the reasons why we remain positive on it. Another is the all-in yield, which at 8.35% has a greater capacity to absorb shocks such as rate volatility, wider spreads and higher default rates.

How far would interest rates have to rise to end the current equity bull market?

There may not be a single threshold because the effects of higher rates are already visible beneath the surface. Rate- and energy-sensitive cyclical sectors have already fallen into correction territory, and market breadth is at record lows. The headline index is only holding up because strong earnings in technology - by far the largest sector in the index - are offsetting weakness elsewhere. In other words, the bull market is narrowing rather than broadening, which is typically a sign of fragility. We expect the tech's leadership to remain supportive as long as earnings deliver, but a further rise in yields (in the range of 5.5-6.0% for the US 10-year) would increasingly challenge valuations even in those segments that have held up so far.

What is the real price of oil for the end consumer?

The real price of oil for end consumers is not the headline crude price but the cost of refined products such as petrol, diesel and jet fuel, which includes the refinery margin known as the crack spread. Economies rely on oil products rather than raw crude, e.g. diesel for trucks. Adding the crack spread to Brent crude gives a proxy for what the economy actually pays: this is currently about USD 140-180 per barrel, i.e. close to the 2022 peak and well above the roughly USD 100/bbl price implied by futures. The comparison with 2022 is instructive, and so are the differences. In 2022 the disruption was sharp and short-lived, and governments released strategic reserves to calm it. This time, supply of both crude and refined products is constrained in several places at once and for longer. Strategic petroleum reserve releases, which were adding 2.5 mb/d, are set to stop after September, just as winter demand starts to pick up. European refining margins hit an all-time high of USD 50/bbl this summer and diesel margins reached USD 100/bbl.

Margins remain elevated because around 11% of global refining capacity was offline in August, despite it typically being the lightest month with softer seasonal demand (hence maintenance is scheduled). The bottlenecks sit in key regions: Middle East refinery runs are about a quarter below pre-February levels due to physical damage and export difficulties; Russian refineries are running about 40% below capacity because of drone attacks, and Russia has banned refined product exports since July and has since extended this ban to the end of October. Russia supplies roughly 10% of global diesel, so the strain is most visible there. The US, which accounts for over 20% of global diesel exports, is also in focus: a possible export restriction is under discussion, though none has been announced, and the market would struggle to absorb another disruption of that size. Tight refining markets support margins, and strong margins support refiners' demand for crude. Absent any significant demand destruction, this should keep oil and refined product prices higher for longer. An analysis based only on crude captures the first stage of energy's economic cost; the crack spread captures the second, where consumers, businesses and ultimately the economy pay.

Macroeconomics

Global growth to withstand higher oil prices and tighter monetary policies

Global growth is expected to remain resilient, although significant risks are weighing on the economic cycle. The crisis in the Middle East is keeping oil prices elevated, while the initial shock to crude prices has evolved into a broader increase in energy costs, incorporating higher prices for refined products and supply disruptions in certain industries. In addition, global economic activity will have to contend with a more restrictive monetary environment. After remaining patient in the first half of the year, central banks have begun to raise their policy rates gradually in the second half.

Nevertheless, the economic cycle should withstand these two constraints. On the one hand, investment and the race to develop artificial intelligence are only marginally affected by the energy crisis; on the other, although consumers are facing higher petrol prices, they have benefited from renewed government support - particularly in Europe - and are drawing on their savings to cushion the impact of higher energy costs.

Overall, global growth is expected to remain close to 3.0% in 2026. The oil crisis will therefore have had a more limited impact than initially expected, thanks to the various support measures and economic buffers in place. However, risks are set to weigh on growth in 2027, which is still expected to reach approximately 3.1%. A new oil shock, resulting in a sustained rise in crude prices above USD 130/bbl, could slow economic activity. Nevertheless, this risk appears limited, with our estimates pointing to a reduction in global growth of only 0.2 to 0.3 percentage points.

The impact would not be evenly distributed across countries: Europe, Japan, and certain emerging economies - all net energy importers - would face a larger growth loss than the United States, India, and China. This would lead to a new fragmentation of global growth and further widen disparities between countries.

The resilience of global growth has limits and these limits could be exceeded in the event of a broader regional conflict and a self-reinforcing spiral involving fuel prices, inflation, and both short- and long-term interest rates. These developments remain a tail risk, but they could be intensified by the convergence of geopolitical and economic risks.

Oil and inflation: an increase, but no spiral

The rebound in oil & gas prices over the summer is expected to fuel a renewed acceleration in inflation this autumn. New inflation peaks are therefore likely over the coming months, following readings of 4.2% in the United States, 3.2% in the euro area, and 3.3% in the United Kingdom in May.

Higher refining margins - reflecting production and export constraints - will result in overall energy costs remaining higher for longer. This pressure could persist into the first quarter of 2027, leaving average inflation in 2027 just below 3% in the United States, the euro area, and the United Kingdom. Core inflation has so far remained largely insulated from the oil shock, apart from its impact on transportation costs. At the same time, wage growth continues to follow a downward trend across all countries. The longer the conflict lasts, the greater the risk of a broader transmission of inflation; however, no inflationary spiral has yet emerged, unlike the tensions observed in 2022.

Oil and central banks: policy rate hikes on a case-by-case basis

Central banks initially refrained from responding to the first increases in oil prices in Q2 26; since the summer, however, banks have begun a phase of gradual monetary tightening in response to inflation being well above target and a conflict that appears increasingly prolonged. Further interest-rate increases are expected as inflation rebounds over the coming months, however, because core inflation remains under control and long-term inflation expectations are still relatively stable, rate hikes should remain limited and be implemented on a country-by-country basis.

The recalibration of monetary policy is expected to bring policy rates to approximately 4.50% for the Fed in 2027, 2.75% for the European Central Bank, and 4.25% for the Bank of England. Money markets are already pricing in more aggressive scenarios, which could undermine the growth outlook, whereas a targeted approach appears more appropriate. Nevertheless, any rate cuts are likely to be postponed until after the current inflationary episode and will not be possible before the second half of 2027 or potentially in 2028.

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The financial instruments and investment strategies portrayed in this document are for informative purposes only. They may differ from those effectively held in an investor' portfolio. Depending on the jurisdiction and investment profile, one or some of these instruments and strategies - including, where applicable, options - may not be permitted, available or suitable. The opinions expressed herein are correct as at 8 October 2026 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.