Q3 2026 Market Outlook: from war to reflation?

The second quarter of 2026 was undoubtedly marked by the Iran war, the closure of the Strait of Hormuz, sharply rising energy prices, that in return, fuelled inflation expectations, pushing government bond yields higher.

But not too much! Every time the US 10-year Treasury yield approached the 4.5% mark, markets found reassurance in President Trump's repeated promises that progress was being made on trade, diplomacy or the economy, recalls Glenn Coxon from NFG Partners. Whether those promises ultimately materialised mattered less than the fact that they were enough to calm investors and bring yields back down.

At the end, despite the geopolitical turmoil and rising borrowing costs, the first quarter turned out to be remarkably strong for equities.

• Corporate earnings were stellar, particularly in the United States where the artificial intelligence investment boom continued to fuel exceptional profit growth.
• Europe also delivered a surprisingly resilient earnings season,
• while Emerging Markets performed well, many thanks to tech heavy Asian markets shouldering most of gains.

The valuation gap between technology and non-technology sectors widened, however, as investors scrapped the earlier worries (massive AI spending, increasingly financed by debt and unclear path to ROI) and focused on the idea that technology would navigate rising energy costs better than most industries.

At some point, Nasdaq 100 was up by 30% from March 30 dip.

As we enter the third quarter, the macro backdrop is changing. Tensions in the Middle East are easing, oil prices have retreated and, but central banks have just started to react to rising inflation by tightening policy, longer-term bond yields have started moving lower.

• The European Central Bank (ECB) raised its policy rates in June meeting for the first time in almost three years, while
• the Federal Reserve (Fed) adopted a more hawkish stance at Kevin Warsh’s first FOMC meeting as Fed Chair. Another rate increase remains a realistic possibility, according to Coxon, if policymakers want to reinforce their inflation-fighting credentials.

But looking further into the second half of the year, inflation pressures should ease along with cheaper energy prices, limiting the need for significantly higher interest rates.

If inflation returns to downward trend—and provided investors continue overlooking the issue of persistent fiscal deficits—the global economy could move back into a reflationary environment characterised by moderating inflation, resilient growth and improving risk appetite, according to Glenn Coxon. Historically, that has been a supportive backdrop for equities.

The near-term risks, however, should not be underestimated.

• Institutional investors have become overwhelmingly optimistic following the first-half rally, leaving market positioning heavily skewed towards risk assets.
• Combined with uncertainty surrounding the Federal Reserve's next moves, that leaves room for episodes of heightened volatility during the summer months before a potentially more constructive second half unfolds.

Technology remains another important question for investors. Few markets illustrate today's enthusiasm better than South Korea's Kospi index, which has behaved more like a meme stock than a traditional equity benchmark this year. Volatility has been extraordinary, with investors seemingly engaged in stress-buying rather than stress-selling as they scramble to gain exposure to the AI story.

Coxon believes the investment case for AI remains intact, supported by the roughly $700 billion that the world's largest technology companies are expected to invest in artificial intelligence infrastructure this year. That spending continues to generate exceptional earnings growth for AI enablers—from semiconductor manufacturers to memory producers and hardware suppliers.

However, he believes investors should begin distinguishing between different parts of the AI ecosystem.

Hyperscalers will likely remain pressured by massive capex (increasingly financed by debt), while models are becoming increasingly commoditised and pricing power is gradually eroding as competition intensifies. The growing pipeline of mega IPOs could also absorb investor liquidity, making the investment landscape more selective.

As a result, the next phase of the AI story could increasingly favour the companies that adopt the technology rather than those developing it. Companies across the broader S&P 500 that successfully integrate artificial intelligence into their businesses could enjoy significant productivity gains and margin expansion without carrying the enormous capital expenditure burden facing AI model developers, according to Coxon, while falling or stabilising interest rates could make growth assets more attractive again.

Coxon—currently holding around 25% of his portfolio in cash—believes adding to equities could soon become increasingly compelling.

No discussion about the first half of 2026 would be complete without mentioning the SpaceX IPO. The company entered public markets with an extraordinary valuation despite continuing to burn cash, reflecting investors' willingness to pay for its enormous long-term potential in satellite communications and space-based data infrastructure.

For Glenn Coxon, space business could be very promising, but the IPO – and the monstruous valuations - is emblematic of the current stage of the market cycle.

"It's symptomatic of where we are," he says. "There are some late-cycle shenanigans going on."

Make no mistake, SpaceX is exceptional and could be highly promising, yet it would be preferred for index providers, such as Nasdaq, to maintain stricter free-float and profitability requirements before granting inclusion. After all, the valuations remain huge with the company trading at around 100+ times revenue.

Nevertheless, if the Nasdaq continues performing well over the next 12 to 18 months, SpaceX could perform alongside it rather than diverge from the broader technology sector, predicts Coxon.

Glenn remains selectively constructive heading into the third quarter. Although he is currently underweight equities, he believes that exposure could increase if the reflationary backdrop of falling oil prices and easing bond yields continues to develop.

• Emerging markets remain particularly attractive given their relatively low valuations and stronger earnings growth expectations over the next twelve months.
• Commodities also benefit from a positive long-term view despite the recent sell-off following the Iran-US agreement.

Crude oil has retraced all of its Iran war premium following the reopening of the Strait of Hormuz. Yet investors should not mistake the recent decline for the beginning of a prolonged bear market.

Several structural forces continue to support the market:

• governments are expected to replenish strategic petroleum reserves that were heavily drawn down over recent years,
• China's return to global energy markets should provide additional demand,
• the rapid expansion of artificial intelligence infrastructure and data centres is creating a new and increasingly important source of long-term energy demand.

"The geopolitical premium has disappeared," Glenn Coxon explains, "but the structural demand story certainly hasn't."

The disappearance of backwardation also reflects a market returning to more balanced conditions rather than one facing a collapse in demand.

Looking further ahead, Coxon remains constructive on crude oil, especially in the longer run.

As per copper, the investment case extends well beyond the current economic cycle. The global electrification trend continues to accelerate, as the rapid expansion of AI data centres requires enormous quantities of electrical infrastructure. Unlike many other raw materials, copper is difficult to substitute without sacrificing efficiency, making supply growth increasingly challenging as demand continues rising.

Those structural trends continue to support a bullish long-term outlook.

The US dollar has regained momentum following the Federal Reserve's more hawkish tone, and Glenn Coxon expects that strength to persist for at least the next few months.

That could leave the euro with further losses. Although the ECB has also tightened policy, the euro area's growth prospects remain considerably weaker than those of the United States, limiting how far the ECB can realistically go. As a result, the euro will likely remain under pressure against the US dollar in the coming months.

The British pound faces an additional headwind. Beyond monetary policy, political uncertainty continues to weigh on investor confidence, leaving sterling vulnerable if the US dollar continues appreciating.

The Swiss franc, on the other hand, should remain relatively well supported. While the Swiss National Bank (SNB) has no plans to hike rates (Swiss inflation is well below the 2% inflation target), the franc continues to benefit from its safe-haven status and Switzerland's comparatively resilient macroeconomic backdrop.

Gold has experienced significant volatility this year, creating tactical trading opportunities for investors willing to take advantage of price swings.

But the longer-term conviction remains unchanged. The fundamental drivers that have supported gold over recent years are still firmly in place:

• expanding money supply,
• persistently large government deficits, and
• the gradual diversification of central bank reserves away from US Treasuries.

Several countries reduced part of their gold holdings to finance higher energy imports during the recent geopolitical tensions. As energy prices normalise, Glenn expects many of those central banks to begin rebuilding their gold reserves, and the latter to throw a floor under gold around $4,000 per ounce.

One of the more intriguing developments of recent months has been Bitcoin's weakening correlation with technology stocks.

For years, cryptocurrencies largely traded as high-beta technology assets. But that relationship has become considerably less reliable. Today, institutional demand has softened, reducing one of the market's strongest sources of buying pressure.

But, Glenn Coxon notes that roughly half of Bitcoin holders are currently sitting on unrealised losses—a condition that has historically coincided with important market bottoms.

Nevertheless, the disconnect between Bitcoin and the Nasdaq raises legitimate questions about the cryptocurrency's current leadership, and without a clear catalyst capable of attracting fresh institutional flows, there is little reason to become aggressively bullish today.

Overall, investors prepare for the next stage of the bull market rather than position for its end.

The content in this article is provided for educational purposes only. It does not constitute investment advice, financial recommendations, or promotional material.