Weekly - Regional View Italian

18 September 2026, 04:01 UTC Chief Investment Office GWM Investment Research

The return on patience Weekly - Regional View Italian Matteo Ramenghi, Chief Investment Officer, UBS WM Italy, UBS Europe SE, Succursale Italia

Tensions in the Middle East have pushed Brent crude back above 100 USD a barrel, adding to concerns about inflation and prompting central banks to hike interest rates. In the coming weeks, the way oil prices, inflation, and monetary policy interact will be the key source of risk.

History shows that geopolitical shocks almost always trigger short-term volatility, but rarely alter the market’s longer-term direction. In more than 70% of geopolitical crises since the attack on Pearl Harbor, the S&P 500 was higher one year later.

That statistic is reassuring, but it does not fully capture the complexity of the current environment. A meaningful share of economic and earnings growth is being driven by artificial intelligence investment in the US and Asia, as well as by defense spending in Europe.

These investments require substantial capital, financed through both government deficits and corporate borrowing. Much of that funding is raised in the bond market, where heavy borrowing needs and persistent inflation are helping keep yields elevated.

Historically, stocks tend to struggle not so much while rates are rising, but when tighter monetary policy eventually weighs on growth and earnings. Over the next several months, the economy’s remarkable resilience should remain the dominant force despite these challenges.

If earnings continue to grow at the pace seen in the second quarter of 2026, stocks may have further room to run. Investors could therefore stay invested while reducing exposure to crowded sectors with large index weightings, such as technology, in favor of more traditional areas of the market.

Recent interest rate hikes and subdued performance, the bond market’s outlook remains and should be considered in light of its recent history.

From the 1980s, declining inflation became the dominant factor, supporting a long period of positive returns for bonds despite the sharp increase in public debt.

Public debt continues to rise across major developed economies. From the start of the century through the end of 2025, the public-debt-to-GDP ratio increased from 55% to 123% in the US, from 135% to 235% in Japan, from 59% to 116% in France, and from 109% to 137% in Italy.

This report has been prepared by UBS Europe SE, Succursale Italia. Please see important disclaimers and disclosures at the end of the document.

Weekly - Regional View Italian

During recessions—especially after the 2008 global financial crisis and during the pandemic—central banks cut interest rates and adopted expansionary monetary policies. These measures led to a form of financial repression, helping contain debt-servicing costs and supporting the economy.

Overall, this long favorable period continued—with occasional corrections —until 2022. That year, inflation—fueled by the post-COVID recovery and the war in Ukraine—prompted central banks to adopt a sharply restrictive monetary policy. The result was one of the worst corrections in bond indexes since the 1970s.

Since then, the bond market’s recovery has been slow and uneven, partly because of renewed geopolitical tensions and their impact on oil and gas prices. There is an upside, however: Yields are attractive again. In the euro area, investment grade corporate bonds now yield close to 4%.

Although another bout of volatility cannot be ruled out, these yields provide a cushion against potential setbacks. High-quality bonds with short- and intermediate-term maturities, in particular, appear to offer attractive opportunities.

Looking ahead, central banks and governments could once again turn to policies of financial repression to ease the burden of public debt.

Overall, despite the challenging backdrop, economic and earnings growth should continue to support markets. For now, we believe investors should maintain a constructive stance on equities, emphasizing diversification and concentration-risk management, while taking advantage of opportunities in bonds.