Clockwise: Still in Stagflation?

Despite a strong rebound in global equity markets over the summer, the outlook remains finely balanced as investors contend with rising bond yields, persistent inflation pressures and ongoing geopolitical risks. Disruptions to global energy supplies from the Middle East conflict have kept oil prices elevated, reinforcing the position of the Investment Clock being in Stagflation.

Equity markets heated up over the summer, with the S&P 500 having its best August in five years. Strong global data and corporate earnings helped lift equity indices up from the lows reached at the end of July, leaving major equity indices within touching distance of all-time highs.

September has historically been the worst month for equity market performance, and this month has begun on a volatile note. With US midterms looming, bond yields continuing to rise and the war continuing in the Middle East, there is plenty of risk out there. During the week ending 11 September, equities finished slightly lower, and nervousness has risen among investors following calls from the CEOs of Anthropic, OpenAI and SpaceXAI for slower AI model development and greater regulatory oversight.

With US midterms looming, bond yields continuing to rise and the war continuing in the Middle East, there is plenty of risk out there.

Despite these risks, investor sentiment remains neutral for now. In August, when sentiment had fallen to oversold levels (Chart 1), the portfolios implemented a positive position in equities. As sentiment has normalised since then, the position has been gradually reduced back towards more neutral levels.

Chart 1: Equity markets rebounded in August

Source: RLAM, LSEG DataStream as at 11 September 2026.

Middle East uncertainty continues

One of the negative drivers behind equity market weakness has been a continued stalemate in the Middle East, as traffic through the Strait of Hormuz remains highly disrupted. Oil prices are firmly back above $100 a barrel again, with Brent touching $110 briefly intraday on 11 September.

The disruption has also spread beyond Hormuz, with Houthi attacks around another shipping artery, Bab el-Mandeb. The shutdown of Saudi Arabia's East-West pipeline following drone strikes has also highlighted the vulnerability of key alternative supply routes.

One of the negative drivers behind equity market weakness has been a continued stalemate in the Middle East, as traffic through the Strait of Hormuz remains highly disrupted.

Despite various reports of peace and progress between the US and Iran over recent months, the observable flow of crude oil through the Strait of Hormuz remains at very low levels (Chart 2). This chokepoint provides a real challenge to global oil supply and has provided a floor to energy prices since the war began in March. As the situation continues and supply remains challenged, investors should be aware of the upside potential to commodity prices.

Chart 2: Strait of Hormuz Flows & Crude Prices

Source: RLAM, Bloomberg, LSEG DataStream as at 14 September 2026.

Bond yields and signs of Stagflation

Recent moves of higher commodity prices and rising yields are consistent with the Royal London Asset Management Investment Clock, which remains in Stagflation at the latest update (Chart 3).

With the recovery in energy prices leading to inflation concerns and fiscal fears also returning to investor attention, US long dated yields hit their highest level since 2007, and German yields hit their highest level since 2011. A host of factors including inflation concerns, strong batches of economic data and fiscal worries have all contributed to pushing yields higher.

A host of factors including inflation concerns, strong batches of economic data and fiscal worries have all contributed to pushing yields higher.

This Stagflation phase of the Clock has historically been the phase of the business cycle where both bond markets and stock markets provide negative returns, while commodity prices rise.

Ongoing uncertainty in the Middle East and rising inflation fears could continue to push yields higher from here especially heading into the US midterms in November where fiscal fears could also remain a central market concern. Fed rate hikes – if they lead to a slowdown in business activity and corporate earnings growth – could be the tipping point that pushes equity markets to give in to the pressures that have been building up since the beginning of the Iran war.

Chart 3: Investment Clock in Stagflation

Source: RLAM as at September 2026. For illustrative purposes only. Trail shows monthly readings based on global growth and inflation indicators.

The outlook remains finely balanced as investors grapple with rising bond yields, persistent inflation pressures and ongoing geopolitical risks, despite a rebound in equities over the summer. The Middle East conflict has kept oil prices elevated, reinforcing the position of the Investment Clock being in Stagflation. In this phase, commodities tend to outperform while equities and bonds face greater challenges.

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The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.