September is a crucial month for markets, as volumes pick up after the summer and the tone is set for the rest of the financial year. The consensus among forecasters was that 2026 would turn out to be a “Goldilocks” period for investors with low volatility and steadily rising risk assets, but this has proven to be anything but the case. In fairness to these forecasters, equities have overall had a cracking year, but try telling this to owners of software stocks, long-dated sovereign bonds and sub-investment grade debt who have had a nasty time of it.
To cherry-pick a few examples:
-    The Philadelphia Semiconductor Index: has delivered a total return of 66% this year and that is even after a chunky correction over the summer…
-    … while 30yr Japanese Government Bonds have fallen around 15% in capital terms. (Imagine having bought the JGB 0.4% 2056 at issue in 2016 – now sitting on a 62% capital loss and still only paying  0.4%)
-    And borrowing costs for sub-investment grade companies in the US ballooned over the summer, with the spread on triple-C debt over Treasuries now wider that 10%, the highest since the aftermath of Donald Trump’s “liberation day”.

What are these price movements telling us?

Mostly clearly, bond markets are voting with their feet, as they so often do, telling governments to tighten their belts and central bankers the world over that rising inflation is a material risk in the months ahead. To date, the fallout of conflict in the Middle East, consecutive miserable global harvests and ongoing trade disputes (to pick just a few examples) has been remarkably muted from a headline inflation perspective, but how long can consumer price rises remain muted while the price of fuel, mortgages and electronics are elevated? It might be that the Federal Reserve under Kevin Warsh looks to be on the front foot by putting rates up 25bps at their upcoming meeting, but don’t forget the pressure he must be under from the President to keep borrowing costs down heading into the midterms.
Traditionally, higher long-term rates have been detrimental to long-duration equities such a Tech stocks but this has clearly not been the case in 2026. 

Can the strength of AI growth power-through the headwind of increased rates? 

This is the question at the heart of risk assets right now. Nvidia made a strong case for ongoing AI progress at their recent results that sent shares back to near all-time highs, however we sense markets throwing an increasingly hefty pinch of salt over the AI theme and its supposed beneficiaries. As we mentioned in our article during the July sell-off of the semiconductor names, we are still early in the development and adoption of AI, and the range of potential outcomes is huge at the individual company level. Markets are no longer giving the whole AI theme the benefit of the doubt, and we have seen a notable divergence in share prices. We see this as a healthy development and increasingly reflective of fundamentals. For example, it may well be that the Anthropic IPO flies off the shelf, but one senses the urgency of management (and owners) to get the deal over the line sooner rather than later. What is the rush if they are growing so strongly and can raise capital without the need for listed equity? We will see how September progresses, in the meantime, focusing one’s attentions on businesses with low funding requirements, already robust balance sheets and strong supply chains remains, for us, the best defence against a potentially volatile period ahead.
 

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note that the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.