Markets remain optimistic ahead of the US elections
October 14, 2026
By Mario Catalá
The global economy continues to demonstrate considerable resilience in the face of a particularly complex environment, marked by rising energy costs, interest rates at multi-decade highs, two active wars, and the upcoming US elections as an additional source of uncertainty. The main indicators of activity generally maintain a positive tone, especially in the United States, while Europe shows some signs of recovery (now led by Germany) and China continues to advance within the narrow range observed in recent quarters. However, persistent inflation and rising debt yields are tightening financial conditions and increasing the demands placed on equity markets.
United States
The US economy is not currently showing clear signs of exhaustion. Leading indicators for September again delivered very solid readings: the manufacturing PMI rose to 55.9 from the previous 53.9, although it fell short of the expected 57, while the services PMI improved by one-tenth of a point to 58.8, slightly above expectations. Both indices remain firmly in expansionary territory and point to continued growth in the coming months. The final GDP figure for the second quarter of 2026 was revised upward to 2.2%, compared to the initially published 1.5% and the 2.1% for the first quarter. For the third quarter, the Atlanta Federal Reserve’s estimate reaches 3.7%, a figure that, if confirmed, could lead to upward revisions to the 2.2% growth forecast for 2026 as a whole. Retail sales also surprised favorably in August, advancing 1.2% compared to the expected 0.8% and the 0.5% decline recorded in July. This strength in the activity data contrasts with a significant deterioration in consumer confidence. The Conference Board’s indicator fell in September to 81.9 from 88.6, while the University of Michigan’s benchmark dropped to 47.8 from 51.7 in August. The divergence between objectively solid growth data and a much more negative consumer perception persists.
The labor market also offered weaker signals. Only 29,000 non-farm payrolls were created in September, compared to the 89,000 expected, and the August figures were also revised downward. Nevertheless, the quarterly average of 51,000 jobs remains consistent with a scenario of sustainable economic growth. The ADP survey exceeded expectations, with 90,000 jobs added compared to the 73,000 expected, but job openings fell to 7.08 million from 7.27 million. The unemployment rate rose to 4.2%, coinciding with a two-tenths of a percentage point increase in the labor force participation rate, to 61.8%.
Regarding prices, the August CPI rose one-tenth of a percentage point to 3.4%, while core inflation improved by one-tenth of a percentage point to 2.4%. The PCE (Profit Compensation Index) fell from 3.7% in July to 3.4%, and its core component corrected to 3%. For the following months, the Federal Reserve Bank of Cleveland estimates inflation of 3.60% in September and 3.58% in October, with core inflation below 2.40% in both months. Its forecasts for PCE are 3.56% and 3.66%, respectively. Given this scenario, the Federal Reserve raised the interest rate again by 25 basis points, bringing it to a range of 3.75%-4%. Volatility in the debt market has driven US Treasury bonds to levels not seen in the last two decades, while the market had already priced in up to five additional 25-basis-point hikes over the next twelve months. Currently, expectations place the benchmark rate between 4.50% and 4.75% starting in June 2027. Its evolution will depend, among other factors, on the duration of the war in Iran and the level of public debt.
Europe
The environment of high energy prices and rising interest rates is likely having a significant impact on European consumption and investment decisions. However, the latest indicators have offered some optimism, with Germany leading the economic recovery. The manufacturing PMI rose again in September to 52.9, while the services PMI strengthened its recovery, climbing from 51.6 to 53. GDP for the second quarter of 2026 grew by 0.5%, compared to 0.3% in the first quarter. Current forecasts place European growth for the year as a whole between 0.8% and 0.9%. Conversely, retail sales remain virtually stagnant, registering an increase of just 0.1% in August. Investor confidence, as compiled by the ZEW Institute, suffered an unexpected correction, falling in September to 25.8, compared to 31.4 previously and the expected 39.2. The labor market experienced a slight deterioration. The unemployment rate remained at 6.4% in August, but the number of unemployed in the eurozone rose to 11.36 million.
Inflation continues to be a major concern. The eurozone CPI rose sharply in September to 3.8%, half a percentage point higher than in August, while core inflation increased by one-tenth of a point to 2.5%. There are also significant differences between countries: Spain recorded inflation of 5%, Italy 4.1%, France 3.4%, and Germany 3.3% (a total of 16 of the 21 countries reported inflation above 3.8%).
In this context, the European Central Bank raised the deposit facility rate by 25 basis points to 2.50%. The market is pricing in another increase during 2026, probably in December, which would bring the benchmark rate to 2.75%. The more restrictive tone of the last meeting triggered a sharp rise in bond yields, and at times, three to four additional rate hikes were priced in.
China
The Chinese economy is showing slight improvements in some activity indicators, although its main metrics continue to move within the narrow range observed in recent quarters. The market is still waiting for an external catalyst, based on fiscal incentives and increased public spending, to boost domestic consumption and facilitate a faster growth rate. Purchasing Managers’ Index (PMIs) returned to expansionary levels in September. The manufacturing PMI rose three-tenths of a point to 50.1, while the services PMI improved by more than one point to 50.2. Conversely, the annualized GDP growth for the second quarter of 2026 was projected at 4.3%, below the estimated 4.5% and the 5% recorded in the first quarter.
The external sector continues to show the strength of recent months. Exports grew 25% year-on-year, compared to 23.9% in July, while imports advanced 28.8%, up from 27.5% previously. Industrial production in August also improved, rising from 4.5% in July to 5.2%, with the complex international energy landscape not yet visibly affecting the Chinese industrial sector.
Financial Markets: Between Structural Strength and Demanding Valuations
Equity markets maintain their structural upward trend, supported by the increasing weight of larger companies with better growth prospects within the indices. However, this movement is not linear, and corrections could be significant. The average annual decline of the S&P 500 exceeds 15%, although the long-term trend remains positive. By sector, the market continues to be dominated by technology and energy, while recent earnings and corporate forecasts have led to declines in the average P/E ratio across all sectors. One of the main uncertainties lies precisely in future earnings estimates. The CAPE ratio is approaching some of its highest levels in history. If optimistic earnings expectations are met and the earnings portion of the P/E ratio increases significantly, it could be argued that the stock is not so expensive. However, if these forecasts prove to be overvalued, we would be looking at a market with historically high multiples and underpinned by excessively optimistic earnings expectations.
Among the positive signs is the upcoming reopening of the share buyback period. Most companies are still in a blackout period, but the window begins to open on October 15. Corporate demand should increase during earnings season and accelerate in November, which has historically been the busiest month for corporate buybacks.
On the negative side, US government spending has continued to rise for the past three decades, and forecasts indicate that the public deficit will remain above 6% for the next few years. At the same time, the cost of debt issued by major economies has risen steadily since 2022. Structural deficits are making government financing more expensive, and even though short-term interest rates have corrected, yields on long-term bonds have barely fallen.
In short, the global economy continues to hold up better than expected in the face of the combination of geopolitical tensions, high energy prices, and monetary tightening. The United States maintains its lead in growth, Europe is showing some signs of recovery, and China remains stable, although still awaiting stimulus measures to revive its domestic demand. Against this backdrop of macroeconomic strength, markets are grappling with increasingly high debt yields, persistent public deficits, and stock valuations that depend heavily on meeting particularly demanding earnings expectations.