LGT Private Banking House View

October 2026 - in a nutshell

Risk assets have not lost their appeal, but they now have more to prove. Resilient growth and strong corporate earnings support the market momentum, but renewed inflation and higher government bond yields have raised the return available without taking equity risk. The bar for taking equity risk is rising: strong fundamentals are necessary, but no longer sufficient.

  • Date
  • Author Patrick Huber, Investment Solutions Europe, LGT Private Banking
  • Reading time 7 minutes

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This more demanding backdrop does not, in our view, warrant a retreat. Economic activity has remained resilient, corporate credit markets are orderly, and earnings growth has so far more than offset the pressure that higher rates have placed on equity valuations. We therefore reaffirm our moderate risk-on stance without changing our tactical asset allocation: equities remain "Overweight" and fixed income "Underweight".

A higher hurdle does, however, call for greater selectivity. Within equities, stronger profitability and earnings revisions continue to support our preference for the US over the euro area, despite the US market’s valuation premium. The same logic applies across sectors: exposure should be concentrated where cyclical or structural demand provides sufficient fundamental support, rather than added indiscriminately.

Fixed income illustrates the challenge from another angle. Central banks can reinforce their credibility and contain second-round effects, but higher policy rates cannot produce more energy or remove other supply constraints. Tighten too little and inflation risks becoming more persistent; tighten too much and the risk of a policy error increases. We therefore favour intermediate maturities, which are less exposed than the front end to renewed hawkish surprises and less vulnerable than long maturities to fiscal and term-premium risks.

The higher bar is not a signal to move against market momentum. It is, however, a reason to ensure that every portfolio exposure earns its place, as the margin for error has narrowed.

Macroeconomic environment

The global economy is proving more resilient than feared despite renewed energy disruption. US growth is supported by AI investment and consumer spending, while exports and German fiscal stimulus are helping Europe, although risks remain. Yet higher energy costs have lifted inflation to 3.4% in the US and 3.2% in the euro area, prompting a more hawkish response from central banks. The Federal Reserve (Fed) raised rates and signalled a shallow tightening cycle. Much of today’s inflation reflects supply shocks, tariffs, AI-driven chip demand and one-off price rises, while core inflation and wages remain contained. Future tightening will depend on how core inflation evolves, as excessive rate rises could strain vulnerable parts of the economy.

Investment strategy

The Investment Committee reaffirmed its moderate risk-on stance and made no adjustments to the tactical asset allocation this month amid a backdrop characterised by resilient growth, renewed inflation pressure and more cautious market sentiment. Equities remain "Overweight", fixed income "Underweight", while alternative investments and cash remain "Neutral" relative to their strategic weights. Within equities, US equities stay "Overweight" and euro-area equities "Underweight", while investment-grade corporate bonds remain "Underweight".

Equity strategy

Equity markets continued to consolidate following their strong performance in early August, which was driven by robust second-quarter earnings. Higher interest rates, elevated energy prices - particularly for products such as diesel -, ongoing geopolitical tensions and typically weak September seasonality weighed on investor sentiment. Nevertheless, earnings growth remains solid, and forecasts continue to be revised upwards, while valuations have returned to more attractive levels. From a regional perspective, we maintain our "Attractive" view on the US equity market and our "Unattractive" view on the eurozone equity market. The key reason remains the solid earnings growth in the US, supported by investment in AI and a broadening economic recovery. While earnings growth is also strong in the eurozone, the risk of disappointment remains considerably higher due to elevated energy prices and political uncertainty. Given the solid economic backdrop, we maintain our pro-cyclical sector bias. We retain our "Attractive" views on Industrials and Materials, as well as on Health care, which serves as a defensive hedge.

Fixed-income strategy

The latest rate increases by the Fed and the ECB have strengthened the credibility of their commitment to fighting inflation and have pushed up yields particularly at the front end. However, we do not regard the marked flattening of the yield curves in the US and the euro area as a clear precursor to a prolonged tightening cycle. The additional tightening currently priced in by markets still appears ambitious, especially as excessive tightening could increase the risk of a policy error. At the long end of the US curve, large deficits, rising interest costs and substantial refinancing needs continue to justify elevated fiscal- and term-risk premia. From a tactical perspective, we therefore prefer intermediate maturities over shorter and longer ones.

Currency and precious metals strategy

The US dollar has seemingly left its crisis of confidence behind and is now benefiting from a growing interest rate advantage and restored Fed credibility, putting most other currencies under pressure. Notably, gold is barely yielding to this US dollar strength despite rising real yields - the currency debasement narrative is overriding the classical relationships. The US dollar and gold are thus simultaneously in the lead, both underpinned by an inflationary environment that structurally erodes the value of fiat currencies.

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