The final quarter of 2026 has arrived, providing an ideal opportunity for you to review your portfolio and rebalance its exposure.
So far the year has brought continuous market volatility and endless twists and turns, with the conflict in the Middle East shaping the macroeconomic backdrop and the artificial intelligence (AI) stock market boom continuing relentlessly.
That dynamic means investors face a dilemma when deciding where to invest for Q4. AI’s ascendancy seems impossible to ignore, and the possibility of future gains will tempt many investors to keep allocating to the sector.
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On the other hand, the range of risk factors that investors need to account for seems to be growing daily. Inflation is proving obstinate, interest rates are rising and the risk that AI could face heavier regulation (as a counter to its purported existential threat to human life) is rising.
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Why does the market seem so positive in the face of these headwinds?
“2026 is turning into a fascinating year,” said James Klempster, deputy head of multi-asset at asset manager Liontrust. “There seems to be a disconnect between the news flow, which is that there’s not a lot of good news out there…. And the reality that there’s actually some reasonable news behind the headlines, and that’s what’s supporting markets.”
It’s a time for selectivity and diversification, says Aneeka Gupta, director of macroeconomic research at asset manager WisdomTree. Whilst keeping an allocation to growth sectors like technology, she encourages investors to “try to broaden out by also allocating to the high dividend, value-oriented factor”.
What are the key market dynamics going into Q4?
“Front and centre is geopolitical risk,” said WisdomTree’s Gupta. The US intervention in Iran has had far-reaching consequences, she said: “equity markets were pricing in a resolution by the first half of 2026, but where we find ourselves at the end of Q3 is without a resolution and higher energy prices feeding into inflation that appears to be a lot stickier than previously anticipated.”
This has had a knock-on effect on global monetary policy. Central banks had largely been lowering interest rates prior to the war’s outbreak, but the inflationary impacts of the war slowed that trend during the first half of the year. In Q3 it went into reverse, with the US Federal Reserve (Fed) raising interest rates at its September meeting.
The outlook for the AI sector, which is dominated by US large-cap tech stocks, is one of the key variables as far as the equity market is concerned.
“It’s fair to say that through the lens of history you wouldn’t expect [current levels] of concentration and valuations to persist,” said Liontrust’s Klempster. “The difficult part is knowing when it ceases to persist.
“It could be relatively soon, and it could be quite a sharp and painful upheaval, or it could be something that unwinds over years and years and you almost don’t notice because other things take over the leadership and drive you forward from there.”
What is the outlook for stocks in Q4?
Regional equity markets
While investors may have hesitated before buying into the stock market at a time when many indices are trading at all-time highs, underlying earnings growth continues to justify the gains.
“Markets on the whole don’t look too expensive,” said Klempster, adding though that “there remain pockets that look expensive”.
The US is the obvious case in point, remaining “concentrated and expensive by historical standards” according to Klempster.
“Conversely, UK stocks look attractive to us,” he continued. “The UK is concentrated, so we shouldn’t overlook that, but it’s not expensive.”
Gupta sees value in Japan and emerging markets, particularly those that have benefited from favourable positions within the AI supply chain as these offer exposure to the theme at lower valuations than US tech stocks.
“Europe used to be our favourite trade, but given the fact it has such high exposure to energy sources from the Middle East, it has borne the brunt of that high exposure,” she said, though she believes that over the long term Europe could benefit from the strong fiscal package announced last year.
Stock market themes and sectors
While earnings growth has supported higher stock market prices, Klempster feels that earnings are more sustainable in certain sectors than others.
“Defence spending is probably fairly resilient,” he said, “whereas this massive investment in AI… could be slightly less reliable.”
Thankfully, investors who don’t want to keep riding the AI momentum trade have alternatives.
Gupta highlights the appeal of the energy sector, given that it has seen upward revisions to earnings forecasts for next year off the back of the disruption in the Middle East.
“The energy sector is known for high dividend payments,” she said, “so you’re able to earn some yield and also participate in the upside, and you’ve got better valuations compared to the S&P 500. So we like energy as an underlying safe sector, as a way to diversify out of tech.”
More cautious monetary policy could also be a tailwind for the financial sector, according to Gupta. Higher interest rates ought to improve net interest margins, and like energy banks tend to be a high-yielding part of the market.
What is the outlook for bonds in Q4?
With the equity market striking a precarious balance between risk and the potential for reward, the case for diversification is as strong as it’s ever been.
Bonds naturally fit into this puzzle, especially given that bond yields have been rising through the year.
“Yields are higher, so you get a real income for holding these things,” said Klempster. “That, in and of itself, is valuable.”
Given the potential for equity market stress, though, “you can envisage a scenario where there’s meaningful scope for outperformance from fixed income” on a price basis, Klempster continued.
“Our philosophy is that equities over the long run generate the returns, but… what we want to do is harness that real growth of equities and use other stuff as a ballast around it, most notable (but not exclusively) government fixed income, to minimise the impact of market volatility where you can,” he said.
Should you invest in commodities for Q4?
Commodities have been a strong performer over the past year in comparison to both shares and bonds.
This means commodities can play an increasingly important role in portfolio diversification. Traditionally, the asset allocation split has favoured 60% in equities and 40% in bonds, but Gupta maintains that commodities deserve to have their own sleeve when constructing a balanced portfolio.
“It’s a broad asset class, and each of the subsectors are reflecting very different fundamentals,” she said.
Energy commodities have been the strongest performers of 2026, given elevated oil and natural gas prices following the disruption in the Middle East. Natural gas markets in particular could come under strain through the winter: data from the Swiss Federal Office of Energy shows that EU-wide gas storage is currently at around 70%, compared to an average level of 87% over the last five years.
“It’s well below the broader EU target,” said Gupta. “The Strait of Hormuz being blocked has cut off this very important source of natural gas supplies. In addition, we’re seeing a re-escalation of the Russia-Ukraine conflict that is having a strain on refining capacity coming out of Russia.”
Gold and silver have lagged this year despite being top performers in 2025. However, Gupta believes that sustained demand from central banks will provide support to gold prices going forward.
“In addition, higher fiscal deficits across the US, UK and Japan are adding to pressure on fiat currencies, and that again favours the case for gold,” said Gupta.
Agricultural commodities have become the second best-performing subsector within commodities. Grain prices have risen due to drier weather in the US and ongoing tensions between Russia and Ukraine. The closure of the Strait of Hormuz – a key supply route – has also added pressure to fertiliser prices.
The likelihood of a strong El Niño weather pattern over the winter months could also drive up soft commodity prices.
“When this event takes place over the course of November to February, the implications will be felt for the 2027/28 crop cycle,” said Gupta. “That’s what investors need to keep in mind: it is going to have an impact on prices as well.”
