Global markets were generally resilient, with the S&P 500 finishing the quarter close to record highs and the ASX 200 also posting a modest positive return. Beneath the surface, however, performance was far more mixed. Higher bond yields continued to pressure valuations, market leadership in the US became increasingly concentrated, and many stocks remained well below their previous highs despite the strength in the major indices.

The key difference between Australia and the US has been earnings.

US corporate earnings, particularly across large technology and AI-related companies, have continued to grow strongly enough to offset the impact of higher interest rates and falling valuation multiples. Australia has not enjoyed the same earnings tailwind, leaving the local market more exposed to the headwind from higher bond yields.

There were three key themes that shaped markets through the September quarter.

1. Earnings remained the key support for US equities

The most important driver of the US market has continued to be earnings growth.

S&P 500 forward earnings estimates have risen strongly throughout 2026, driven predominantly by the major technology companies and businesses benefiting from the rapid investment cycle around artificial intelligence.

Importantly, share prices have not risen as quickly as earnings expectations. While the S&P 500 has advanced, its forward valuation multiple has actually fallen as higher interest rates have reduced what investors are prepared to pay for each dollar of future earnings.

This helps explain why the US market has been able to remain close to record highs despite bond yields moving to levels not seen for more than two decades.

Australia has experienced a very different earnings backdrop. ASX 200 forward earnings expectations are up only around 5% year-to-date and have eased from their highs earlier in the year. Without the same powerful earnings growth, higher interest rates have had a much greater impact on local equity valuations.

2. Bond yields continued to weigh on valuations

Bond yields remained one of the most important influences on equity markets during the quarter.

US 10-year Treasury yields moved above 5%, while Australian 10-year yields also remained elevated. Higher yields increase the cost of capital and place downward pressure on equity valuations.

Higher bond yields affect equities in two ways. They reduce the present value of future corporate earnings, while at the same time making defensive assets such as government bonds increasingly competitive with shares.

However, higher bond yields do not automatically mean lower equity markets.

Where companies can continue to grow earnings strongly enough, those earnings can offset falling valuation multiples. That has been the story in the US through much of 2026.

The risk from here is relatively straightforward. If earnings upgrades continue, equity markets can tolerate elevated yields. If earnings growth slows while yields remain high, markets become more vulnerable.

Conversely, a meaningful decline in bond yields while earnings remain resilient would provide a significant tailwind for equities.

3. US market leadership became increasingly narrow

One of the more unusual features of the current market has been the gap between the strength of the S&P 500 and the experience of the average US stock.

While the index remains close to record levels, more than half of its constituents are currently more than 20% below their individual all-time highs, while a significant proportion are considerably further below their peaks.

The reason is the enormous influence of the largest companies.

The major US technology and AI-related stocks now represent a substantial proportion of the S&P 500. As long as these companies continue to perform strongly, they can offset weakness across large parts of the broader market.

This concentration has helped drive the significant performance differential between US and Australian equities.

It also creates both a risk and an opportunity. The risk is that the index has become increasingly reliant on a relatively small group of companies. The opportunity is that significant weakness has already been experienced across many stocks beneath the headline index.

If bond yields begin to stabilise or fall, we believe there is scope for market participation to broaden considerably.

Market performance in the September quarter

Equity markets delivered modest positive returns during the quarter, although performance varied considerably across sectors.

In Australia, the ASX 200 Accumulation Index gained 1.33% over the three months to September. Healthcare and energy were among the strongest areas of the market, while consumer discretionary, real estate and technology were weaker.

The performance of the US market was similarly uneven. The S&P 500 gained approximately 2.3% over the quarter, but this headline return continued to mask considerable dispersion beneath the surface.

Technology and AI-related businesses remained important drivers of market performance, while many rate-sensitive, consumer and industrial companies remained under pressure.

This environment has generally favoured businesses capable of delivering strong earnings growth regardless of the economic backdrop.

For active investors, it has also reinforced the importance of understanding what is actually driving an index rather than simply focusing on the headline return.

Commodities and fixed income

Fixed income markets remained under pressure during the quarter as inflation concerns and resilient economic conditions pushed longer-term bond yields higher.

Australian bond yields were also influenced by further tightening from the RBA, which increased the cash rate to 4.60%.

Higher yields have improved the prospective return available from fixed income but have also meant that bonds have again struggled to provide the traditional diversification benefit investors might expect during periods of equity market volatility.

Commodity markets were mixed.

Energy prices remained elevated during much of the quarter, contributing to concerns around inflation and interest rates. More recently, oil prices have begun to moderate, which could prove important if lower energy costs ultimately flow through to inflation expectations and bond yields.

Resources remain particularly important for the Australian market given the significant weighting of miners within the ASX 200.

Our perspective heading into the December quarter

As we move into the final quarter of 2026, three issues remain front of mind: earnings, bond yields and market breadth.

Earnings remain the foundation beneath equity markets.

The US continues to enjoy a powerful earnings cycle, particularly across technology and companies benefiting from investment in artificial intelligence. We continue to believe this is a major structural theme rather than a short-term market phenomenon.

However, the strength of earnings revisions is now increasingly important. If upgrades continue, US equities can absorb relatively high bond yields. If earnings expectations begin to soften while yields remain elevated, the market would become more vulnerable.

Bond yields are the other major variable.

Our preferred scenario is that yields begin to stabilise as inflationary pressures moderate. We do not necessarily need interest rates to fall sharply for equities to perform; simply removing the persistent headwind of rising yields would be constructive.

For Australia, this is particularly important.

The ASX does not have the same earnings growth engine as the US, meaning lower bond yields would provide a more meaningful boost through higher equity valuations and improved conditions for rate-sensitive parts of the economy.

Finally, we are watching market breadth closely.

The strength of the US market has become increasingly concentrated in a relatively small number of companies. We remain positive on many of those businesses, particularly where earnings continue to justify valuations, but a healthier market would ultimately involve more stocks participating.

If bond yields stabilise while earnings remain resilient, we believe there is scope for that broadening to occur.

Overall, we remain constructive towards equities, but selective.

The broad equation remains relatively simple: earnings are strong, valuations have compressed, and bond yields remain the key swing factor.

As always, thank you for your continued trust. If you would like to discuss your portfolio or the outlook in more detail, please get in touch.

The Market Partners Team

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