Key Takeaways
- US midterm elections could constrain the administration’s policy agenda and reshape the fiscal outlook.
- High government borrowing and persistent inflation risks may keep US bond yields elevated.
- Limited fiscal headroom and political fragmentation are likely to keep the UK and France under close investor scrutiny.
- Continued uncertainty around Iran could increase commodity-prices, inflation and interest-rate volatility.
- Resilient economic activity and corporate earnings provide support for risk assets, although they may also reinforce a higher-for-longer rate environment.
Four factors are likely to have an important bearing on financial markets in the fourth quarter of 2026: US politics, fiscal policy in the UK and France, developments involving Iran, and the corporate earnings outlook. Together, they point to a period in which political and inflation risks remain elevated, but the underlying economic and corporate backdrop continues to offer support.
US midterm elections in early November could materially alter the balance of power in Washington. Current expectations point to the Democrats taking control of the House of Representatives, while the Senate remains a closer contest. Democratic control of Congress would create a stronger constraint on President Trump’s policy agenda and subject decisions by the White House to greater scrutiny.
A change in the composition of Congress would not necessarily produce an immediate shift in the fiscal stance, but it could affect the direction and implementation of domestic policy. US government borrowing remains unusually high for this stage of the cycle. The deficit is running at a level more commonly associated with recession, despite an economy that appears to have expanded at an annualised rate of more than 4% in the third quarter.
Recent rises in US government bond yields appear to reflect inflation risk more than immediate concern about debt sustainability. Even so, the scale of the deficit is a longer-term challenge, particularly when the economy requires little additional fiscal support. A less accommodating Congress could therefore become an important counterweight to the administration’s policy programme.
Fiscal policy will also be closely watched in Europe. In the UK, the Budget at the end of October is likely to command considerable attention. The Chancellor has limited room for manoeuvre as higher bond yields increase debt-servicing costs and reduce fiscal headroom. This makes significant macroeconomic stimulus unlikely; the emphasis is more likely to be on marginal tax increases and identifying sufficient spending capacity to meet existing commitments.
France faces a similarly difficult combination of a large budget deficit and political fragmentation. The deficit remains above 5% of GDP, while efforts to bring it down face resistance from both the left and the right. For investors, the immediate concern is that limited political consensus and a demanding fiscal adjustment could keep French government bonds under pressure.
The approaching French presidential election adds another layer of uncertainty beyond the fourth quarter. Potential shifts in the political landscape may complicate efforts to establish a credible medium-term fiscal path. In the near term, the combination of a sizeable deficit and limited political stability is likely to remain an important consideration for European fixed-income markets.
Geopolitical developments involving Iran represent a third source of market risk. The resumption of indirect talks between the US and Iran is encouraging, but there appears to be little momentum towards a durable agreement. Important differences remain over the terms of any settlement, and uncertainty continues around the prospects for normalising key trade and energy routes.
That uncertainty is not yet fully reflected in commodity prices. Any renewed disruption could add to inflationary pressure, complicate the interest-rate outlook and contribute to further volatility in bond markets. Further negotiations are possible, but without tangible progress the geopolitical risk premium is likely to persist.
The corporate earnings outlook provides a more constructive counterweight. Results have been strong so far in 2026, with both the breadth and scale of earnings growth exceeding expectations. Third-quarter reporting begins in the coming weeks, and current expectations suggest that this resilience can continue through the fourth quarter.
Supportive earnings should help underpin risk appetite, particularly while leading business surveys continue to indicate a robust economic backdrop. However, resilient activity also gives central banks greater scope to maintain a restrictive stance or raise rates further if inflation pressures do not ease. Markets may therefore have to contend with higher-for-longer interest rates even as the economy and company fundamentals remain comparatively firm.
Overall, our outlook remains constructive. Political developments, fiscal constraints and geopolitical tensions could generate bouts of volatility, particularly across rates and bond markets. Yet the combination of resilient economic activity and healthy corporate earnings suggests that the global economy remains well placed to absorb tighter monetary conditions. Should the geopolitical or macroeconomic backdrop deteriorate materially, that assessment would need to be revisited.
