Gilt yields at their highest since 1998, a Budget with very little room to manoeuvre, and clients asking whether a handful of US tech giants now run the market. That was the third quarter of 2026. In our Q3 Investment Update, Alex Crowther and Reva Balasubramanian from the Timeline Investment Team took advisers through what moved markets and what it means for diversified portfolios.
Here is what they covered, from the global bond sell off and the Budget backdrop to Vanguard's research on market concentration, plus the questions advisers asked on the day.
Why bonds sold off in 2026
Equities tend to dominate investment updates, but global bond markets are far bigger and governments depend on them. Anyone who remembers the 2022 mini budget, and the gilt spike that followed it, knows how quickly bond investors can force a government's hand.
The mechanics are simple. A bond's current yield is its annual coupon divided by its price, so when investors sell and prices fall, yields rise. For governments, that means more expensive borrowing.
The pain is at the long end
This is not a one country story. The UK, US, Europe and Japan have all seen selling, and it has been concentrated in medium and long dated bonds. Year to date to 5 October 2026, the Morningstar Global 1-3 Year Treasury Bond index (GBP hedged) returned 1.33%, while the Global Core Bond index fell 1.29% and the Japan Treasury Bond index fell 2.78%.
Japan has had a harder time than most. Years of near zero rates let its national debt grow well beyond the size of its economy, and now inflation, something Japan has not had to manage for decades, has arrived alongside a change of political leadership.
In the US, the split between short and long maturities was even sharper. The US 1-3 Year Core Bond index returned 0.92% year to date, while the US 10+ Year index fell 6.78%. A new Federal Reserve chair, and pressure from the White House for lower rates, raised questions about the Fed's independence. The Fed's unanimous vote to raise rates in September, in response to higher inflation, calmed some nerves but did not lift bond prices.
Gilts take the biggest hit
The 30 year gilt yield reached its highest level since 1998 in September. Year to date, the long duration gilt proxy fell 7.65% and the UK Core Bond index fell 2.47%, while short dated gilts returned 0.17%. Some relief came after the Bank of England set out its quantitative tightening plans, which reduce annual gilt sales and retain longer dated gilts rather than selling them into a market with little appetite for them.
Year to date returns should not be viewed in isolation. Past performance is not a reliable indicator of future results.
So should clients sell bonds?
Alex pointed to two drivers. Inflation is uncertain, not helped by the continued closure of the Strait of Hormuz, and investors who do not feel compensated for that risk look elsewhere. And with many governments now carrying debt at or above 100% of GDP, investors are asking how sustainable that is.
But selling bonds is probably not the answer. The damage has been largely contained to long dated government bonds, while shorter dated and corporate bonds have held up better, which makes the case for diversifying within fixed income rather than abandoning it. Vanguard's data from 2001 to 2022 shows only one year, 2022, when global bonds and global equities both fell. Cash may feel safer, but over time inflation is likely to erode its real value, while bonds have historically shown an ability to outpace inflation.
Past performance is not a reliable indicator of future results.
This year has highlighted that no asset class is completely risk free.
Alex Crowther
Senior Investment Analyst, Timeline
Autumn Budget 2026: little room to move
The gilt sell off leads straight into the Budget, which was one of the biggest talking points in advisers' client meetings this quarter. We do not make predictions, so Alex focused instead on the pressures the Chancellor is working with.
The previous Chancellor left £24bn of headroom against the fiscal rules. Higher debt interest and weaker public finances have eaten most of it, with reports putting it at £5bn to £10bn. The Chancellor has committed to the existing fiscal rules and to keeping a buffer against uncertainty.
That leaves awkward choices. More borrowing risks pushing gilt yields higher still. Higher taxes or tighter spending would weigh on households and growth. Inflation held fairly steady in August, but some reports suggest it could reach 4% in early 2027 as energy and oil prices feed through, and the Bank of England's September decision to hold rates was not unanimous.
It is not all gloomy. GDP grew 0.4% in July, driven by services, with AI and cloud computing businesses among the biggest contributors. Expect the speculation to build in the coming weeks. For most clients, waiting for the actual announcements will serve them better than acting on the headlines.
Should clients worry about the US giants?
of the S&P 500 sat in just ten companies as of 2 October 2026, led by NVIDIA, Apple, Microsoft, Alphabet and Amazon.
It is one of the questions our investment team hears most, and with the weight of the biggest names roughly doubling since 2015, it is easy to see why clients are nervous. Vanguard's research puts the numbers in a much longer context.
Concentration is nothing new
Looking at the largest US stocks from 1925 to 2024, today's levels are not unusual. In the 1920s and 1930s, the ten biggest companies made up more than half of the US market. If anything, the low concentration of the 1980s to 2010s looks like the outlier, and that period still saw the dot com bubble and the 2008 financial crisis.
Buy the haystack, not the needle
The leaders also keep changing. In 2000, the seven largest holdings in Vanguard's US Total Stock Market ETF were led by GE, ExxonMobil and Pfizer. By 2025, only Microsoft was still in the top seven. Their combined weight went from 14% in 2000 to 12% in 2010, 20% in 2020 and 31% in 2025. Outside the US it is the same story, with Vodafone, Nokia and BP giving way to TSMC, Tencent and ASML.
Nobody knows who will lead in the 2030s. As John Bogle put it, it makes more sense to buy the haystack than hunt for the needle, so investors are already holding the winners when they emerge.
The US is less concentrated than you might think
As at 30 June 2026, the top ten stocks made up 36% of the S&P 500 and 32% of the total US market. In South Korea it was 74%, in Taiwan 66% and in the UK 47%. South Korea and Taiwan have both seen sharper swings this year precisely because of that concentration, yet they get a fraction of the attention.
Past performance is not a reliable indicator of future results.
Q3 2026: resilient, but uneven
Reva picked up the story with asset class performance. Strong earnings and economic activity carried markets through July and August, even as investors questioned technology valuations. In September, rising prices, inflation worries and concern over government borrowing pushed bond yields up and brought back some volatility.
Equities: Japan leads, Europe slips
Global equities made modest gains. Japan was the strongest region, helped by earnings, efforts to improve shareholder returns and a recovering yen for UK investors. US equities finished higher after a bumpy ride, as early selling in semiconductor and AI names gave way to a recovery led by large software companies.
UK equities also delivered positive returns. Investors favoured value areas such as energy and materials, and the UK's lighter technology exposure cushioned it from the AI sell off, although housebuilders felt the rise in borrowing costs. Europe hit record highs in July and August before rising energy costs pulled it lower in September. Emerging markets finished slightly down, with early pressure on South Korea and Taiwan, weak demand in China and higher energy costs for importers like India. Global property had a tougher quarter as higher borrowing costs weighed on valuations.
Over five years, global equities have delivered substantial gains despite the 2022 inflation shock. The US led on the back of technology, cloud and AI, while the UK did well through energy, banks and dividends. Emerging markets were positive but trailed developed markets, and global property lagged well behind.
Quarterly data should not be viewed in isolation. Past performance is not a reliable indicator of future results.
Fixed income: longer bonds hit hardest
Government bond yields hit multi decade highs in several markets, with income payments offsetting only part of the price falls. Gilts were negative but held up better than global bonds, despite rising yields ahead of the Budget, and index linked gilts outperformed global bond indices. US Treasury yields climbed sharply after the Fed's September rate rise. In Europe, the ECB also raised rates and German bond yields reached 15 year highs. Japanese government bonds fell but held up better than most, despite a weaker yen and a September rate rise from the Bank of Japan. Credit spreads stayed tight until widening in late September, with heavy corporate borrowing, including to fund AI infrastructure, adding pressure.
Over five years, the move from very low to much higher interest rates has weighed on bonds. UK government bonds recorded the largest fall, reflecting their longer duration, the post Covid inflation surge and the 2022 mini budget. Japan kept rates low for most of the period before ending negative rates in 2024, so its decline was smaller.
Past performance is not a reliable indicator of future results.
Value vs growth vs small cap
Value led the quarter as investors moved out of expensive technology and AI names and into energy and financials. Growth started badly, as investors questioned whether the AI outlook justified share prices, but stronger earnings brought it almost back to where it began. Small caps, more sensitive to borrowing costs, struggled as yields rose.
Over five years to 30 September 2026, all three made gains: value 90.12%, growth 66.07% and small cap 45.12%. Value held up better in 2022 when inflation and rates jumped, while growth recovered strongly afterwards on the back of technology earnings.
Past performance is not a reliable indicator of future results.
What to take into client reviews
Earnings and economic activity held up despite the volatility.
Performance was uneven across regions and investment styles.
Rising yields weighed on returns, particularly for longer dated bonds.
The quarter reinforced the case for a long term investment approach.
Questions from advisers
Will the US midterms bring volatility?
Markets dislike uncertainty most of all, and the midterms should provide some certainty either way. Markets have also tended to prefer a divided government, as it slows sweeping legislation. Alex thinks bond markets are the more interesting watch point, with yields likely to stay elevated whatever the result because of inflation uncertainty and spending on AI data centres. Either way, keep the focus long term.
If the US dominates global indices, does it matter that other markets are more concentrated?
A global portfolio does carry significant exposure to a few US mega caps. But those companies are far more diversified than the names driving markets like South Korea, where Samsung and SK Hynix are closely tied to AI infrastructure. Alphabet and Meta are usually filed under technology, yet much of their revenue comes from advertising, across many countries and industries.
What does this mean for Timeline customers and rebalancing?
Laurentius from our investment team explained that these quarterly updates are open to all advisers and give a general market view. The alternating sessions are for Timeline customers and go deeper into portfolio allocation. He also previewed two research webinars coming up: one on equities, covering emerging markets and the evolving evidence on how to capture the small cap premium, and one on fixed income, looking at inflation linked gilts and whether sovereign or corporate bonds make the better diversifier.
See how our globally diversified model portfolios are built to ride out quarters like this one, or book time with your regional rep for a personalised demo.
Sources and notes: Bond index data: Morningstar, daily total returns, GBP hedged, as of 05/10/2026. Asset class and factor data: Morningstar, as of 30/09/2026. Budget figures: Financial Times, 19 September 2026; Bank of England Monetary Policy Summary, 17 September 2026; ONS, September 2026. S&P 500 concentration: Morningstar, as of 02/10/2026, Vanguard S&P 500 UCITS ETF proxy. Historical and global concentration: Vanguard Investment Advisory Research Centre, using data from CRSP and FactSet. Annual bond and equity returns: Vanguard, Refinitiv, 2001 to 2022.
