4Q Outlook: The Rally: Refusing to Yield?

The rally can continue over the next 12 months, but higher yields, concentrated AI exposure, and geopolitical risks justify reducing equity exposure and favoring government bonds.

• Hartford and Wellington reduced global equities from overweight to moderately overweight because higher oil prices, rising yields, and a more hawkish policy backdrop have weakened the near-term risk-reward balance despite strong earnings and AI investment.
• AI-related capital expenditure remains supported by demand for computing capacity exceeding supply, but unusually strong earnings growth is expected to slow and market breadth has deteriorated as concentration in AI stocks increases.
• Global-equity valuation multiples have contracted by approximately 15% in 2026, while emerging markets remain moderately overweight and the UK moderately underweight; the preference for emerging markets has narrowed after strong relative performance and weaker support from US-dollar weakness.
• Developed-market government bonds have become more attractive as nominal and real yields rise toward multi-decade highs, although markets may be pricing more rate hikes than central banks will ultimately deliver if energy supplies recover quickly.
• Credit spreads and commodities are rated neutral, cash is underweight, and key downside risks include rapid rate increases, difficulty absorbing new credit and equity issuance, a reversal in AI capital-spending expectations, and prolonged disruption to oil flows.

Takeaway: Investors should keep a constructive but more selective stance, combining moderate equity exposure with government bonds while monitoring third-quarter earnings, oil prices, long-term yields, geopolitical developments, and further monetary tightening.