Geopolitics, interest rates and AI dominate financial markets
For some time, financial markets have broadly been driven by three themes: the ‘AI trade’, geopolitical uncertainty and rising interest rates. Although AI-related companies continue to deliver rapid earnings growth and often struggle to keep up with demand, there are also concerns about the high level of investment, funding and AI safety. These concerns resurface regularly, but enthusiasm surrounding AI continues to prevail for now. Geopolitical uncertainty is focused mainly on the conflict between the US and Iran, the Strait of Hormuz and oil prices. Oil prices remain high as peace appears a distant prospect, contributing to higher inflation and prompting central banks to raise policy rates. Combined with widening budget deficits and strong demand for capital, higher inflation and inflation expectations are also pushing up bond yields.
Rising energy prices are adding to inflationary pressures
Because of the ongoing conflict between the US and Iran, supplies of oil and gas from the Gulf region remain severely constrained. The price of Brent crude had fallen below $70 a barrel in early July, but reports of collapsed peace negotiations, falling oil inventories and a Houthi attack on Saudi Arabia’s East-West Pipeline pushed oil prices back above $105 last week. Europe is also contending with gas prices that have risen by around 130% since the conflict began.
As a result, inflation has increased and both the European and US central banks have felt compelled to raise policy rates. Although higher interest rates cannot resolve a supply-driven price shock, central banks are seeking to prevent higher energy prices from feeding through into the wider economy and triggering a broader inflationary process.
Oil prices and interest rates have been rising again since the summer
Bond yields rise on inflation and strong demand for capital
High energy prices and rising inflation have led to an increase in government bond yields. Rising bond yields have also brought the vulnerability of government finances back into focus. Governments need substantial amounts of money for areas such as defence and the energy transition. They finance these expenditures partly by issuing more debt.
However, high spending is also increasing budget deficits, and many governments are struggling to bring these deficits down. Investors therefore demand greater compensation, in other words higher yields, for the risks they take when lending their money. And as governments have to pay more interest on their debt, the pressure on their budgets increases further. In addition, technology companies are issuing bonds to finance their AI investments, meaning governments must compete with them for capital in the bond market. This is putting further upward pressure on yields.
Investment in AI is also contributing to higher interest rates
Artificial intelligence is a major driver of the growing demand for capital. Hyperscalers such as Microsoft, Alphabet, Amazon, Meta and Oracle collectively invest hundreds of billions of dollars each year in datacenters, semiconductors and other AI infrastructure. Running datacenters requires vast amounts of energy, which in turn requires investment in power generation and electricity grids. These companies’ cash flows alone are not sufficient to finance all of these investments, so they also need to issue bonds. This strong demand for investment capital is contributing to higher interest rates.
A slowdown in AI development is unlikely to curb investment
Recent warnings from several leading figures in AI about safety risks, along with suggestions that the development of new advanced AI models should be slowed, caused some disruption in financial markets. Doubts resurfaced over whether the huge investments in AI infrastructure will ultimately generate sufficient returns.
However, we do not expect the investment cycle to weaken in the near term if the development of new models temporarily slows. Most computing power is used to run existing models, and their increasing adoption still requires additional capacity. Moreover, the US government has no intention of surrendering its technological lead over China. Investors appear to agree. After the initial shock, AI-related stocks recovered quickly. The technology-driven Nasdaq Composite index reached a new record high this week.
Higher interest rates need not be a major problem
Bond yields, particularly with longer maturities, are trending higher in many countries due to a combination of inflation, fragile public finances and increasing demand for capital. Ten-year bond yields in the US, at around 5%, and Germany, at around 3.5%, are at their highest levels since 2007 and 2009 respectively. These levels may appear high, but they are not particularly elevated by historical standards. It is worth remembering that we are emerging from a highly unusual period in which money was effectively free and bond yields were even negative.
What matters is why interest rates are rising. Higher rates can become a problem if they are the result of persistent inflation and deteriorating government finances. To some extent, this is currently the case, although inflation remains under control and central banks are clearly acting. However, higher rates are also a consequence of a strong economy, high demand for capital and substantial investment in future growth. Under these circumstances, rising interest rates can comfortably coexist with rising equity markets.
Furthermore, interest rates are rising very gradually. The MOVE Index, which measures volatility in the US bond market, is close to its lowest level of the past five years. There is therefore no sign of an uncontrolled rise in yields that would indicate panic.
"}},{"componentType":"sectionTitle","title":"What's happening in the economy?"},{"alignedImage":{"position":"bottom"},"componentType":"paragraph","richBody":{"value":"Central banks raise policy rates
Both the US and European central banks recently raised policy rates. In both cases, the rate increase was accompanied by a firm message: the fight against inflation is not yet over. Both central banks face the same dilemma: a supply-side shock caused by sharply higher energy prices that has so far had only a limited knock-on effect on the wider economy. At the same time, the inflation surge of 2022, and the central banks’ late response at the time, remains fresh in policymakers’ minds.
The war in the Middle East has not only pushed energy prices to new highs but has also increased the risk that inflationary pressures will spread more broadly through the economy. We therefore expect both the Fed and the ECB to raise interest rates once more in the fourth quarter in an effort to prevent these second-round effects from taking hold.
Economy remains surprisingly resilient
Despite geopolitical tensions and sharply higher energy prices, both the US and European economies have remained remarkably resilient. This can be seen, among other things, in purchasing managers’ indices, which are important indicators of business confidence. Following a dip in the spring, these have been trending upwards in many economies. The global index rose to 53.5 in August, its highest level since May 2024. The Atlanta Fed’s GDPNow indicator currently estimates US economic growth in the third quarter at close to 5%. Economic surprise indices have also remained positive for an extended period in both the US and the eurozone, meaning that positive surprises in economic data continue to outnumber negative ones.
Strong earnings growth offsets the negative impact of higher interest rates
Against a backdrop of steadily rising interest rates and increasingly expensive energy, we believe a neutral equity weighting remains most appropriate within the tactical asset allocation of the ING investment strategies. Corporate earnings growth and economic growth remain strong enough for now to offset the negative impact of higher interest rates.
However, the equity risk premium, the difference between the earnings yield on equities and the yield available on government bonds considered relatively safe, has fallen to its lowest level in more than 20 years as bond yields have risen. This makes us reluctant to take on additional risk.
Higher interest rates not only mean higher financing costs but also make bonds a more attractive alternative and put downward pressure on equity valuations. Since the value of a share is, in theory, determined by the present value of future earnings and cash flows, higher interest rates generally result in lower valuations. Typical growth companies, such as technology companies, are particularly sensitive to this because a large proportion of their expected earnings lies further into the future. However, strong earnings growth in the technology sector is offsetting this disadvantage. Real estate and other sectors with relatively high levels of debt on their balance sheets are also vulnerable to rising interest rates.
Preference for emerging markets, negative on Europe
In terms of equity regions, we maintain our preference for emerging markets. The underlying earnings picture is strong, while valuations are around their lowest level of the past decade. Earnings growth of more than 70% is expected this year, making emerging markets by far the fastest-growing major equity region. Partly as a result, the MSCI Emerging Markets index has already risen by more than 25% this year on a total-return basis in euros.
However, both earnings growth and the index’s advance are being driven to a large extent by chipmakers TSMC, Samsung and SK Hynix. Together, they account for around 30% of the index but have contributed more than 70% of its gains this year. This creates significant concentration risk: if these stocks fall, they could pull the wider index down with them. However, as the outlook for the semiconductor sector remains strong, we do not currently see this as a major concern.
Despite economic resilience and solid earnings growth this year, we maintain an underweight position in European equities. Compared with the US, South Korea and Taiwan, Europe has fewer promising technology companies. Moreover, the European economy is vulnerable to higher energy prices. There is a significant risk that, due to the ongoing conflict in the Middle East, these input costs will remain structurally higher.
Overweight position in IT equities maintained
Of all sectors, earnings expectations are by far the strongest for technology. Earnings growth of more than 90% is expected this year and more than 40% next year. Here too, semiconductor companies account for a significant part of this growth. After all, they provide the ‘picks and shovels’ to the companies developing and training AI models and operating datacenters. Most companies’ results make clear that demand for AI infrastructure remains exceptionally strong.
Moreover, because earnings expectations have risen much faster than share prices, the valuation of the IT sector has become more attractive. Volatility does occasionally increase, however, and investors sometimes shift their attention towards lagging areas of the market, such as software companies. Overall, we maintain our overweight position in the IT sector within the ING investment strategies.
Valuation of the IT sector remains near the lowest level of this decade
Earnings growth is broadly based
Technology stocks play a prominent role in earnings growth and equity market performance, but that does not mean other sectors are making little contribution. Average year-on-year earnings growth for companies in the US S&P 500 index was an impressive 50% in the second quarter. Ten of the 11 sectors reported higher earnings, with eight achieving double-digit earnings growth. Earnings growth is also reasonably broad-based in Europe. Companies in the Stoxx Europe 600 index recorded healthy earnings growth of 25% in the second quarter, while only one sector, consumer discretionary, saw earnings decline. Six sectors achieved double-digit earnings growth.
Upward pressure on long-term bond yields persists
Rising bond yields present two sides of the same coin for bond investors. On the one hand, newly issued bonds once again offer attractive yields. Investors are finally receiving meaningful compensation for duration, credit and inflation risks. At the same time, higher yields put downward pressure on the prices of existing bonds, as these become less attractive relative to newly issued debt offering higher coupons.
We expect upward pressure on long-term bond yields to persist for the time being, driven by structural factors such as continued budget deficits, substantial government and corporate bond issuance and diminishing support from central banks. In recent months, energy-driven inflation risks have been added to this list.
By contrast, short-term bond yields in countries such as Germany and the Netherlands are looking increasingly attractive. The yield on two-year German government bonds is around 3.2%, its highest level since 2008. Compared with ten-year bonds, two-year bonds offer considerably more yield per unit of duration. They therefore provide attractive carry while keeping interest-rate risk relatively limited.
High yield and EMD offer attractive carry
In corporate bonds, spreads remain relatively tight, but the carry backdrop is still attractive. We prefer high yield to investment grade because of its shorter duration profile and higher income potential. A significant part of the high-yield market can still offer attractive carry alongside manageable credit risk, provided bond selection remains disciplined. Emerging-market debt (EMD) also remains attractive, particularly where carry is high and domestic economic fundamentals are solid.
As there appears to be limited scope for a further decline in spreads or additional capital gains on bonds, we are focusing on bonds offering attractive carry, selective positions in corporate bonds and short-dated government bonds. We see no reason to increase interest-rate risk through long-dated government bonds. Overall, this means we remain underweight government bonds and investment-grade corporate bonds, and overweight high-yield bonds and emerging-market debt.
"}},{"componentType":"linkList","iconTitle":{"title":"Read more"},"textLinks":[{"text":"Monthly Investment Outlook (pdf)","url":"https://assets.ing.com/asset/f2e97cb1-54f3-4eae-8c96-4da2a64b8b0a/Monthly-Investment-Outlook.pdf"},{"text":"2026 Midyear Investment Outlook","url":"/en/personal/investing/market-news-and-views/investment-outlook-2026-home"},{"text":"More market views","url":"/en/personal/investing/market-news-and-views"}]},{"componentType":"sectionTitle","title":"Good to know"},{"componentType":"paragraph","richBody":{"value":"Investing involves risks and costs. The value of your investment may fluctuate. Past performance is no guarantee of future results. Read more about the risks of investing.
This publication has been prepared on behalf of ING Bank N.V. and is intended for information purposes only. ING Bank N.V. obtains its information from sources deemed reliable and has taken the utmost care to ensure that the information on which it based its views in this publication was not incorrect or misleading at the time of publication. ING Bank N.V. does not guarantee that the information it uses is accurate or complete. The information contained in this publication may be changed without any form of announcement. Copyright and data file protection rights apply to this publication. Data from this publication may be reproduced provided that the source is stated. ING Bank N.V. has its registered office in Amsterdam, commercial register no. 33031431, and is regulated by the Dutch central bank De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM). ING Bank N.V. is part of ING Groep N.V.
"}}]},"hasMacro":false,"id":"66802dd8-d77b-486f-8e5b-cb5280d01911","localeString":"en-GB","mainHeaderZone":{"backLink":{"textLink":{"text":"Market news and views","url":"/en/personal/investing/market-news-and-views"}},"componentType":"productHeader","coreHeader":{"body":"23 September 2026 – Corporate earnings growth and economic growth remain strong enough for now to offset the negative impact of higher interest rates.","headerImage":{"extension":"jpg","original":"https://assets.ing.com/asset/9b0ead14-86d2-478e-ab19-0fa9615179f2/Untitled-design-3.jpg","publishedAt":"2025-10-07T13:43:52Z","transformBaseUrl":"https://assets.ing.com/transform/9b0ead14-86d2-478e-ab19-0fa9615179f2/Untitled-design-3","type":"image","updatedAt":"2025-10-07T13:43:59Z","width":790},"subtitle":"Market Outlook: October 2026","title":"AI enthusiasm and rising interest rates balance each other out"}},"publishDate":"2026-09-23T16:07:04.371+02:00"}}