Download Q3 2026 Market Outlook.
MARKET COMMENTARY
“If there’s hope, it lies in the proles.” That sentiment written by George Orwell in his classic novel 1984 is remarkably relevant today as we approach the important American mid-term elections. In Orwell’s novel, the “proles” are the working-class majority, and the main character, Winston, views them as the potential source of change in the country’s economic, social and political trajectory. Today, many Americans are looking to the November elections for a change in direction and the ability to do so largely lies with the American voters.
Recent congressional polling suggests control of Congress could be closely contested and both the Senate and House turning blue is more than a distant hope. President Trump’s approval rating has also fallen to all-time lows due to his domestic policies, inflation, and the ongoing unpopular war in the Middle East. If Democrats were to win control of both chambers, Congress would have significantly greater leverage over federal spending. Our Constitution gives Congress the power of the purse, so continued funding for an expensive and inflationary open-ended war with Iran could face intensified congressional headwinds. In the end, fiscal spending in general, war funding in particular, and therefore oil prices could be greatly impacted. If there’s hope it lies in the proles.
After decades of tame inflation, the global economy is facing surging price pressures for the second time in five years, with U.S. CPI currently at 3.7%, well above the 2% target. One of the root causes is simple to trace – exploding energy prices following the commencement of the war in the Middle East and subsequent closure of the Strait of Hormuz. Ending the conflict and restoring crude oil supplies may go a long way to reversing the global inflation surge.
Absent a peaceful resolution, global central banks are left to fight inflation by raising short-term interest rates. Meanwhile long-term borrowing costs are also punitively high, reflecting skepticism about governments’ ability to repay ballooning debt, a market that doesn’t think central banks are doing enough to douse inflation, and finally increased competition from hyperscalers issuing debt to finance AI investment. Higher borrowing costs don’t increase the flow of oil, but they are likely to slow economic activity, reducing the demand for crude. Meanwhile, opening the Strait of Hormuz would play a major role in restoring the global supply of crude and the two together could restore the supply/demand imbalance and bring down oil prices.
Monetary policy has started to respond with many central banks increasing interest rates and the Fed joining the group in September. Despite this less favorable macroeconomic backdrop, the MSCI All Country World Index (ACWI) has returned 13% year-to-date through the end of September, largely led by companies linked to the AI theme. The earnings outlook for AI-related companies remains positive for the time being, despite much negative sentiment around data center construction, job destruction, rogue models escaping controlled environments, and broad risks to society. Our view is that Artificial Intelligence remains a powerful technology which can potentially create some positive change, but there are dangers as well. AI development and its tangential industries are unlikely to be stopped but potentially may be slowed, either through industry self-policing or government regulation, or most likely a combination of both.
Against this backdrop, our investment approach remains deliberately diversified. While we continue to research companies positioned to benefit from AI investment, we are also identifying opportunities outside the technology sector and across other regions. This diversification is intended to reduce dependence on a single investment theme and to help provide downside protection in the event of market weakness resulting from rising interest rates, war-related volatility should hostilities persist, and stretched valuations in some sectors and markets, although diversification does not eliminate the risk of investment losses.
Japan is one example of an area that warrants attention. Japanese shares are benefitting from economic and financial market reforms helping the economy escape a decades-long episode of deflation. Relative valuations also favor the Japanese equity market. After recently adding consumer staple Unicharm to portfolios, our investment team continues to research this market for other investment opportunities.
Europe presents another area of interest. Germany’s decision to loosen fiscal constraints last year has created greater scope for public investment across the region. Other nations in Europe have also pledged increased spending on their aging infrastructure. This increase in government spending should create opportunities for selected companies and industries. We have bought several companies this year which are positioned to benefit from these new fiscal developments, and we continue to closely monitor the region for further investment opportunities.
In sum, our Investment Committee continues to research companies positioned to benefit from the AI investment cycle while also seeking diversification away from this theme. This balanced approach is designed to participate in AI-driven growth while helping protect clients’ capital should sentiment toward the technology turn negative or broad market volatility increase. As always, our objective is to build portfolios to benefit from long-term economic growth while remaining resilient through periods of uncertainty.
IMPACT UPDATE
This quarter, our work centered on asking: when information disappears, who benefits? As the SEC considers a proposal to rescind Rule 14a-8, which governs the inclusion of shareholder proposals in company proxy materials, we urged every U.S.-based company in our portfolios to keep engaging with shareholders. We also opposed federal rollbacks of climate and workforce disclosures, urged the FTC to limit surveillance pricing, which uses shoppers’ personal data to set prices based on what companies think they are willing to pay, and pressed Digital Realty Trust on community opposition to data centers. We continue to monitor the landscape and advocate for our clients in both the corporate and policy arenas.
To read more, see Q3 2026 Impact Update | Zevin Asset Management
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