Monthly Macro Outlook: September-October 2026

Improving earnings expectations and expanding economic activity continue to support equity markets. Beneath the headline gains, valuations and profitability vary considerably across regions and sectors. The outlook now depends on whether earnings can keep growing as companies face higher borrowing and input costs.

• Earnings growth has helped US valuations ease. The S&P 500 trades at approximately 19.1 times expected earnings, below its five-year median of 20.3, as earnings forecasts have risen faster than share prices since the beginning of 2026. 
• Europe’s valuation discount deserves closer scrutiny: European equities trade at around 14.2x expected earnings, slightly above their five-year median, while several sectors now command higher relative valuations versus US peers than historically, although healthcare and consumer staples remain more heavily discounted. The gap largely reflects weaker profitability, with median operating margins excluding financials at roughly 12.0% in Europe versus 17.1% in the US, suggesting that a sustained margin improvement would be needed to support further rerating.
• Technology’s strong performance conceals a valuation spread. Technology recorded the strongest monthly sector returns in both the EU and the US. Within the sector, semiconductor valuations stand at approximately 21.2 times expected earnings, compared with 26.7 for software. 
• Earnings forecasts depend heavily on particular sectors. Technology stands out in the US profit outlook, while energy shows particularly large projected increases in both regions. The strength of aggregate forecasts therefore depends partly on a concentrated group of industries delivering the expected growth.

Our Data suggest continued expansion: European manufacturing and services readings are both around 53, above the 50 threshold separating growth from contraction. US manufacturing also shows encouraging signs. New orders at 55.3, alongside inventories at 48.6, suggest potential for production to increase as companies replenish stocks. Advance purchasing may account for some of the improvement, however, leaving uncertainty over the durability of demand. Cost pressures remain substantial. The input-price reading of 77.9 indicates that manufacturers face rising expenses, which could absorb part of the benefit from stronger sales. The combination of orders, inventories and prices will help determine how much of the improvement reaches corporate earnings. 

Expectations of US copper tariffs have encouraged buyers to bring metal into the US before tariffs take effect. This stockpiling has tightened supply elsewhere, causing a difference between COMEX and LME prices as the two markets face different levels of availability. Aluminium tariffs raise the cost of importing metal into the US. US buyers therefore face higher costs, while producers may redirect shipments towards other markets. These changes affect both local supply and prices, widening the gap between what buyers pay in the US and elsewhere. For Brent, concerns over disruptions to oil shipments through the Strait of Hormuz can push prices higher even before a disruption reduces the flow of oil to international markets. Prices can respond before any supply is lost, as buyers account for the risk of shortages. All these pressures complicate the link between commodity prices and economic activity. Price increases can reflect tariffs or concerns over supply, even when industrial demand has changed little. 

Rising long-term bond yields increase financing costs and put pressure on equity valuations. Our analysis suggests that a rising term premium helps explain the recent increase in US yields. At approximately 0.9 percentage points, this premium represents the additional compensation investors demand for holding longer-term debt. Tracking the term premium helps explain why borrowing costs are rising. An increase signals that investors require more compensation for the risks of lending over longer periods, which can keep long-term financing expensive even as expectations for central bank rates fall. For equities, higher yields increase the importance of continued earnings growth. Upcoming business surveys and earnings releases will help show whether companies can sustain profit growth as financing and input costs rise. 

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