Three lessons from a tumultuous 2026
Market take
Weekly video_20260831
Natalie Gill
Senior Portfolio Strategist
BlackRock Investment Institute
Header:
CAPITAL AT RISK. MARKETING MATERIAL.
Opening frame: What’s driving markets? Market take
Camera frame
Title slide: Three lessons from a tumultuous 2026
First, we think the global reset in interest rates has further to run. Second, as capital gets more expensive, stay selective within the AI theme. And third, market resilience amid geopolitical shocks doesn’t mean the risks have gone away.
1: Higher yields are here to stay
The global bond reset that began in 2021 has gathered pace this year. Sticky inflation, heavy government borrowing and growing private investment needs are all pushing yields higher – and we don’t see those factors letting up.
As a result, we think long-term yields can climb higher still. That reinforces our preference for short- to medium-term government bonds, where investors can get attractive income with less duration risk
2: Staying selective within AI
The AI buildout is accelerating, but as capital gets more expensive, selectivity is even more important. We favor the segments where scarcity is creating value across the AI ecosystem – from power and chips to data center infrastructure.
That means looking beyond the model race, where cheaper, open-source models increasingly challenge the economics of frontier large language models.
3: Geopolitical risks aren’t going away
Markets have been remarkably resilient to geopolitical shocks this year. But that doesn’t mean the risks have disappeared.
Geopolitical fragmentation is only adding to scarcity of real resources and capital, as countries and companies shift suppliers, production and trade to build resilience in a more disconnected world.
Outro: Here’s our Market take
We’ve seen the new economic regime we’ve long described on full display in 2026. Heading into September, we stay risk on, favoring the companies positioned around AI scarcity and durable income in bond markets.
Closing frame: Read details: blackrock.com/weekly-commentary
Taking stock
Three things we’ve learned so far: higher rates are here to stay; the AI theme demands greater selectivity; and geopolitical risks remain unresolved.
Market backdrop
Tech stocks surged after Nvidia’s latest quarterly results, reinforcing our conviction in the AI theme despite higher long-term yields.
Week ahead
The US August jobs report is in focus this week. We think softer job gains may reflect slower labor-force growth rather than weaker demand.
The new economic regime we’ve long described has been on full display in 2026. As the summer ends, we focus on three lessons to take into the rest of the year. First, we think the global reset in interest rates has further to run. Second, look beyond the AI model race for more opportunities as capital gets more expensive. Third, markets have weathered geopolitical shocks so far – but investors should not mistake resilience for the absence of risks.
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The bond trade-off
Returns in excess of cash, 2010–26
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and one cannot invest directly in an index. Source: BlackRock Investment Institute with data from LSEG Datastream, August 2026. Note: Returns for MSCI ACWI and FTSE World Government Bond Index, in US dollars, less FTSE 3-Month Treasury Bill Index returns. 2026 dot represents excess returns year-to-date.
Global equities have returned about 10% more than three-month US Treasury bills so far in 2026, while global government bonds have returned about 3% less. See the chart. The split is not unprecedented. But it has become more common since the global interest rate reset began in 2021. That reset has changed the trade-off for bond investors. Rising yields have pushed down prices of existing government bonds and turned excess returns negative, especially at the long end of the curve. On a relative basis, short-term government debt now offers more meaningful compensation for taking less duration risk. Sticky inflation, heavy government borrowing and growing private investment needs give little reason for pressure on yields to fade. That sets up our first lesson: higher yields are here to stay for a reason.
The global bond reset has been broad: US 30-year yields have hit a 19-year high above 5%, German 10-year yields a 15-year high near 3.25%, and Japanese 10-year yields are nearing 3% for the first time since the mid-1990s, LSEG data show. We see scope for further rises, underscoring our strategic preference for short- to medium-term government bonds. The Middle East conflict has lifted energy costs and added to inflation pressures, while the AI buildout and widening government deficits have intensified competition for capital. Uncertainty over the Federal Reserve’s response to inflation has also lifted the term premium. Higher yields have reshaped the income opportunity in bond markets: our analysis of LSEG data shows more than 80% of the global bond universe now yields above 4%. Yet long-term government bonds are less reliable as portfolio ballast. That makes selectivity key: higher yields do not always compensate investors for the risks they take.
Staying selective
This takes us to our second takeaway: stay selective within AI and track where value is accruing. Dispersion is growing, with companies tied to scarce AI bottlenecks – including power, chips and data center infrastructure – outperforming those further downstream. Meanwhile, hyperscalers are running down cash and relying more on debt. US hyperscaler investment-grade bond issuance has topped $100 billion this year, more than twice the 2025 total. Higher rates, growing financing needs and large AI IPOs could further test investor appetite, while cheaper, open-source models are challenging the economics of frontier model makers. We look beyond the AI model race to the scarce resources underpinning the buildout.
Our third lesson: markets have been exceptionally resilient amid geopolitical shocks – but that’s no reason for complacency. Geopolitical fragmentation compounds scarcity and supports our higher-for-longer view, though easing geopolitical tensions could relieve some pressure on yields. The Strait of Hormuz has yet to fully reopen, constraining a critical route for global energy supplies, while US-Canada trade tensions have flared again. Countries and companies are striving for resilience by shifting suppliers, production and trade. But adaptation can delay or shift where risks show up, creating new winners and losers.
Our bottom line
Higher rates, the AI buildout and geopolitical fragmentation are reinforcing the new economic regime. We stay pro-risk with an overweight to US equities, while favoring durable income and companies positioned around scarcity.
Market backdrop
The Nasdaq gained 1% and was roughly 3% below its all-time high after Nvidia’s latest blowout quarter. US Treasury yields reversed earlier declines after Fed Chair Kevin Warsh reiterated the Fed’s commitment to fighting inflation. The 10-year stood at 4.73% and the 30-year at 5.21%, near its 19-year high of 5.30%. AI-driven equity gains amid higher yields reinforce one of our key calls: higher rates need not derail the AI equity case if investment keeps generating durable returns.
US payrolls could shed more light on how supply constraints are shaping the labor market. Slower labor-force growth means softer job gains may not signal materially weaker demand, especially as AI-related investment supports activity. That combination could keep wage and inflation pressures persistent.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of August 27, 2026. Notes: The two ends of the bars show the lowest and highest res at any point year to date, and the dots represent current year-to-date res. Emerging market (EM), high yield and global corporate investment grade (IG) res are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.
Aug. 31
China PMI
Sept. 1
US job openings; EU HICP flash & unemployment
Sept. 3
US international trade balance
Sept. 4
US August payrolls; US unemployment
Read our past weekly commentaries here.
Intersecting mega forces
Since we launched our mega forces framework it has become clearer how their intersection shapes almost all our investment views and opens up alpha opportunities. They cut across asset class labels, spurring a rethink of portfolio construction. Investors need to be deliberate about the economic or thematic exposures they own, the vehicles they use to implement them and their investment horizons.
From drivers to portfolio expressions
Our highest conviction views, August 2026
| Driver | What we think | Portfolio expression |
|---|---|---|
| Growth and AI scarcity | The AI buildout is speeding up, making bottlenecks binding. | Overweight US equities; focus on AI bottleneck opportunities: power, chips and data centers. |
| Duration and diversification | Long bonds carry high rate sensitivity and are less reliable diversifiers. | Prefer short- and medium-term government bonds over long bonds for income. |
| Credit spreads and liquidity | Selectivity is crucial amid tight spreads and uneven fundamentals. | Credit with clear cash flows, lender protections and recovery value; higher-rated high yield. |
| Inflation and scarcity | Scarcity, secure supply and power demand carry inflation risks. | Infrastructure, energy bottlenecks, EM local debt and real-asset-linked exposures. |
| Alpha opportunity | Macro outcomes matter again in the new regime. | Macro hedge funds, venture capital, market-neutral strategies, and selected private credit and non-US alpha. |
Note: Views are from a US dollar perspective, August 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Asset class implications
Six- to 12-month tactical positioning, August 2026
This shows the implementation of our key investment views from the previous page through an asset class lens.
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States |  |
We are overweight. Strong corporate earnings, fueled by the AI buildout and a favorable macro backdrop, are outpacing higher interest rate expectations. | ||||
| Europe |  |
We are neutral. We would need to see more business-friendly policy and deeper capital markets for Europe to outperform. We favor financials, infrastructure, and industrials. | ||||
| UK | |
We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift. | ||||
| Japan | |
We are neutral. Strong corporate balance sheets and governance reforms remain supportive. We prefer targeted exposures to physical AI and the buildout’s bottlenecks. | ||||
| Emerging markets (EM) |  |
We are neutral. We see opportunities where the AI buildout drives demand for infrastructure, particularly in Latin America. | ||||
| China | |
We are neutral. We see opportunities in physical AI. Cheap, open-source AI could drive adoption, but that doesn’t necessarily translate into AI-provider profitability. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are neutral. We prefer short- and medium-term Treasuries, given the attractive risk-adjusted income on offer. | ||||
| Long US Treasuries |  |
We are underweight. We see investors wanting more compensation for holding long-term bonds amid persistent inflation and high debt loads. Long-duration bonds also are a less reliable portfolio diversifier in the new regime. | ||||
| Global inflation-linked bonds | |
We are neutral. We see inflation settling above pre-pandemic levels, but markets may not price this in the near term as economic growth could slow. | ||||
| Euro area government bonds |  |
We are overweight short- and medium-term bonds. Markets are pricing restrictive policy rates of about 3% for several years. We think that’s overdone. | ||||
| UK Gilts | |
We are neutral. We expect periods of elevated volatility given political uncertainty, longer-term bonds making up a larger market share, and buyers becoming more price-sensitive. | ||||
| Japanese government bonds |  |
We are underweight. Rate hikes, higher global term premium and heavy bond issuance will likely drive yields up further. | ||||
| China government bonds | |
We are neutral. China bonds offer stability and diversification but developed market yields are higher. A shift in investor sentiment toward equities limits upside. | ||||
| US agency MBS | |
We are overweight. Agency MBS offer higher income than Treasuries with similar risk and may offer more diversification amid fiscal and inflationary pressures. | ||||
| Short-term IG credit | |
We are neutral. Spreads are tight due to corporate strength; they could widen if issuance increases or risk appetite shifts. | ||||
| Long-term IG credit | |
We are underweight. We prefer short-term bonds less exposed to interest rate risk over long-term bonds. | ||||
| Global high yield | |
We are neutral. High yield offers attractive income. We prefer higher-rated US and European high yield over investment grade and see dispersion of returns increasing. | ||||
| Asia credit | |
We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight. | ||||
| Emerging hard currency | |
We are neutral. Fundamentals have improved, but we see a more attractive risk-reward profile in EM local debt. | ||||
| Emerging local currency | |
We are overweight. We like the yield relative to its volatility and improving fundamentals. | ||||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, August 2026
We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are neutral. We would need to see more business-friendly policy and deeper capital markets for Europe to outperform and to justify a broad overweight. We stay selective, favoring financials, infrastructure, industrials, materials and healthcare. | ||
| Germany | |
We are neutral. Higher spending on defense and infrastructure support the corporate sector. Valuations are not stretched but neither compelling and expected earnings growth lags other countries. Light positioning means potential easing in geopolitical tensions and AI lifting industrials-driven earnings could create opportunities. | ||
| France | |
We are neutral. Strong expected earnings growth and global revenue exposure support French corporates. Valuations are less compelling, albeit not stretched versus euro area peers. Persistent political uncertainty leaves the overall risk reward balanced. | ||
| Italy | |
We are neutral. Earnings growth and momentum are strong, boosted by the significant exposure to financials, utilities and energy. Valuations are still at discount vs. peers, but not as much as in previous years. Political risk is currently low but likely to pick up ahead of 2027 elections. | ||
| Spain | |
We are overweight. Valuations remain attractive vs. peers even if relative earnings momentum has slowed. Strong domestic demand growth and exposure to fast-growing areas like Latin America support Spanish stocks. Financials, utilities and infrastructure-linked stocks would benefit from Europe’s push towards autonomy. | ||
| Netherlands | |
We are neutral. Earnings revisions in the IT sector, a large sector in the Dutch stock market is offset by other sectors seeing less favorable valuations and a weaker earnings outlook than European peers. | ||
| Switzerland |  |
We are neutral. Valuations have improved, from stretched levels, but the earnings outlook is weaker than other European markets. If global risk appetite stays strong, the index’s tilt to stable, less volatile sectors may weigh on performance. | ||
| UK | |
We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are overweight short- and medium-term bonds. Markets are pricing restrictive policy rates of about 3% for several years. We think that’s overdone. | ||
| German bunds | |
We are overweight shorter-term Bunds as the market-implied ECB policy path appears too hawkish. We stay neutral long-dated Bunds. Fiscal stimulus and increased bond issuance exert upward pressure on yields, alongside inflation risks amid lingering geopolitical tensions. | ||
| French OATs | |
We are neutral. Elevated political uncertainty, high budget deficits and slow structural reforms could stoke volatility, but these risks already seem priced into OATs and we don’t expect a material worsening from here. | ||
| Italian BTPs | |
We are neutral. The spread over German bunds looks tight given Italy’s large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and local demand for BTPs solid at current yield levels. Domestic disapproval would likely prevent defense spending from reaching fiscally unstable levels. Political uncertainty is likely to increase ahead of next year’s elections. | ||
| UK gilts | |
We are neutral. We expect periods of elevated volatility given political uncertainty, longer-term bonds making up a larger market share, and buyers becoming more price-sensitive. | ||
| Swiss government bonds | |
We are neutral. The SNB seems comfortable with its medium-term inflation outlook and its current policy stance. Market pricing is broadly in line with SNB messaging. | ||
| European inflation-protected securities | |
We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term. | ||
| European investment grade | |
European investment grade is supported by healthy corporate sector balance sheets, contained default rates and the persistently strong demand for durable income from European households. We prefer European investment grade over the US. | ||
| European high yield | |
We are overweight. While spreads are low, the income potential remains attractive. Defaults are contained and high yield is of higher quality and less sensitive to interest rate swings compared with the US. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, August 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Beata Harasim
Senior Investment Strategist – BlackRock Investment Institute
Natalie Gill
Senior Portfolio Strategist – BlackRock Investment Institute
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