Interest rates take center stage again

September came to a close in a mixed market environment, marked by a renewed rise in interest rates and higher energy prices. Despite these headwinds, global equities proved relatively resilient, with the global index gaining around 1%. However, this performance masks significant regional disparities. U.S. equities benefited from the euro's weakness against the dollar and ended the month up approximately 2%, while European markets declined by more than 2%*. Emerging markets, meanwhile, closed the month in positive territory for euro-based investors.

In the United States, large-cap technology stocks once again played a major role in supporting index performance. In dollar terms, the S&P 500 edged slightly lower over the month, while the Nasdaq advanced, once again highlighting the concentration of performance around the technology and artificial intelligence themes. The technology sector gained approximately 7% during the month, whereas most other sectors finished in negative territory. This divergence reflects a more demanding market environment in which earnings growth and companies' ability to monetize their AI-related investments remain key areas of focus for investors.

As the title suggests, the most significant development of the month came from fixed income markets. The yield on the U.S. 10-year Treasury rose from approximately 4.75% at the end of August to nearly 5.30% at the end of September, reaching its highest level since the early 2000s. In Europe, the German 10-year Bund also came under substantial pressure, with its yield increasing by roughly 25 basis points to end the month around 3.53%, after reaching 3.65% during September. The resilience of economic activity, rising energy prices, significant public financing needs, and massive infrastructure investments linked to artificial intelligence all contributed to reinforcing the view that interest rates may remain elevated for longer.

Central banks also contributed to this trend. On September 10, the European Central Bank (ECB) increased its key policy rates by 25 basis points, bringing the deposit facility rate to 2.50%. The institution highlighted persistent inflationary pressures, particularly those linked to the conflict in the Middle East, while also raising its growth projections for 2026 and 2027. A few days later, the U.S. Federal Reserve (Fed) followed a similar path by raising its policy rate by 25 basis points, bringing the federal funds target range to 3.75%-4.00%. The Fed emphasized the strength of economic activity and the still-elevated level of inflation.

From a macroeconomic perspective, U.S. data continued to surprise on the upside. Second-quarter growth was revised upward to an annualized 2.2%, compared with a previous estimate of 1.5%, thanks notably to stronger contributions from consumption and investment. Forward-looking indicators remained equally robust, with the preliminary Composite PMI rising to 58.4 in September, its highest level since July 2021. This strength continues to coexist with persistent inflationary pressures. In August, U.S. inflation stood at 3.4% year-on-year, while core inflation eased to 2.4%.

In the euro area, economic momentum also proved more resilient than expected. Second-quarter growth was revised upward to 0.6% quarter-on-quarter, compared with an earlier estimate of 0.4%. Business surveys continued to improve as well, with the preliminary Composite PMI rising from 52.0 to 53.1, its highest level since April 2023. Improvements were visible across both services and manufacturing sectors. Inflation nevertheless remains a point of attention. The latest available final figure, for August, stood at 3.2%, with energy making a significant contribution.

Oil prices were another key factor during the month. After trading around USD 90 per barrel in August, Brent crude rose by approximately 14% in September, briefly exceeding the USD 100 threshold. The deadlock in negotiations between the United States and Iran, combined with ongoing risks affecting flows through the Strait of Hormuz, maintained a substantial risk premium in energy markets. Nevertheless, disruptions linked to the conflict did not prevent a recovery in Middle Eastern crude oil exports relative to 2025 averages.

Against this backdrop of still-robust growth and more restrictive monetary policy, portfolio positioning remains favorable toward risk assets, while maintaining a degree of selectivity. Equities remain overweight relative to bonds. Sector allocation continues to favor industrials and technology, which are still benefiting from the investment cycle related to artificial intelligence, while the interest-rate environment remains supportive of both European and U.S. banks.

From a geographical perspective, positioning remains broadly neutral, with a recent overweight in the United States. The strength of the U.S. economy and the momentum of AI-related investment continue to provide support, although higher interest rates call for greater valuation discipline. Finally, within the fixed income allocation, credit remains preferred. Carry levels continue to be viewed as more attractive than exposure to long-dated sovereign bonds, which remain particularly vulnerable in the current rising-rate environment. 

_{*Performances are calculated in euros.}