Markets rarely climb a “wall of worry” in a straight line. They climb it through hesitation, reversals and repeated doubts about whether the next step is justified. The third quarter of 2026 was no exception.
Equity markets continued to grind higher, supported by resilient global growth, a surprisingly strong United States (US) economy and robust corporate earnings. Yet the risks were obvious: higher energy costs, renewed inflationary pressure, tighter monetary policy, geopolitical uncertainty and weak growth in parts of the developed world. The market’s progress therefore appeared less like a confident march and more like a steady refusal to be dislodged.
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The global economy remained more resilient than expected. US growth continued to run above economists’ estimates of long-term potential, and there was little evidence of a deteriorating employment market. This suggests that increasing productivity, rather than excessive demand, may be an important part of the explanation as to why inflation is remaining sticky. That distinction matters. If productivity is improving, the economy can grow more quickly without generating the same degree of inflationary pressure. This may just be the first visible positive dividend from the artificial intelligence (AI) buildout.
However, the picture was less encouraging in Europe and Japan, where high energy costs have had a more pronounced effect. Inflation also began printing higher numbers as the energy supply shock worked through the system. Central banks responded as expected, raising interest rates to prevent higher inflation expectations from becoming embedded. Markets are now pricing several further increases, partly because history suggests that hiking cycles generally contain more than one or two moves and often last longer than initially anticipated.
These expectations have weighed heavily on bond yields, which are rising, and the valuations of risk assets. But it is important to distinguish between the immediate effect of higher rates and the longer-term effect of strong earnings. Equity earnings remained remarkably resilient, supported in particular by the technology capital expenditure required to sustain the expansion of AI. Several industries are generating significant earnings, although some of the growth rates are clearly cyclical and unlikely to be sustained indefinitely.
For South Africa, the global cycle was felt through commodity prices, the rand and, most directly, the cost of diesel. The South African Reserve Bank acted early and has remained strict in its interpretation of its inflation-fighting mandate. The market is pricing several further rate increases. At the same time, domestic growth remains sluggish, and forward expectations have been marked lower as higher energy costs and inflation pressure both industry and the consumer. The average South African household is facing a severe increase in the cost of living, while unemployment remains extremely high and continues to rise. This pressure was reflected in the market’s harsh revaluation of South African retail stocks.
Commodity stocks, meanwhile, were subject to the volatility of global macroeconomic and geopolitical developments. During the quarter, expectations surrounding the Middle East moved repeatedly between resolution and escalation. This shifting probability distribution was reflected in commodity prices and in the performance of related equities.
At CAM, our investment philosophy begins with the belief that global macroeconomics drives interest rates and earnings generation. Identifiable risks and asset-class valuations then provide the hurdles for allocating towards specific assets. Our assessment is that central banks would be mistaken to fight a geopolitical, cost-push inflation shock purely through higher interest rates. To achieve the pure outcome of lower inflation, they would need to cool the economy sharply through weaker growth and lower consumer demand. That would be a very expensive price to pay. We therefore believe current expectations for the number and size of rate increases are too negative, and that a strict but more benign interest-rate path lies ahead over the next 18 months.
The principal risk remains an escalation of the Middle East conflict that interferes with oil leaving the region. With global oil inventories at historic lows for this time of year, further crude shortages could produce a substantial increase in prices. Reduced refining capacity is an additional concern, particularly if jet fuel and diesel become scarce. That would be especially damaging for South Africa’s diesel-intensive economy. Elections in both the United States and South Africa could also increase political and fiscal uncertainty at a time when bond markets are already weak. A clear resolution to the Middle East conflict would improve the outlook, although that remains a low-probability event. More importantly, the constructive view would be challenged if equity earnings began to disappoint materially.
For investors, the important point is that equity valuations have already shrunk. That is evidence of a market assessing risks and opportunities in a reasonably balanced and rational manner, with little sign of general overexuberance. Markets may continue to climb their wall of worry. Our role is not to deny the wall, but to judge whether the earnings on the other side justify the effort of climbing it.
I hope you enjoy this edition of Citation.
