In its October 2026 Equity Lens1, Schroders' equity research team delivers a methodical, data-dense tour through global equity markets — one that is candid about the tensions between strong near-term earnings and a structurally more demanding return environment. The core message deserves careful attention: the hurdle rate for equities over bonds has dropped sharply, and investors anchoring to recent performance patterns should understand precisely why.
The Yield Gap: A Long-Term Caution Signal
Schroders opens with a foundational question few advisors ask explicitly enough: by how much should equities outperform government bonds over the long run? Drawing on 155 years of U.S. market history, the team establishes that "US equities have outperformed bonds by 4.8% a year" — a figure that has anchored strategic asset allocation for generations. But the starting point, they argue, matters enormously.
The "yield gap" — the equity earnings yield minus the 10-year Treasury yield — has compressed to historically low levels. This metric carries predictive power over 10-year horizons (a correlation of 0.5, versus near-zero over one year), making it strategic, not tactical, in its relevance. History shows that when it is low, future equity outperformance over bonds tends to be modest. There are exceptions: Schroders identifies historical periods where a depressed yield gap still preceded strong equity returns, and the common thread in those cases was sustained real EPS growth of 10% or more, often alongside falling valuations. Whether the current environment can replicate that outcome is the central question the report deliberately leaves open.
2026 in Review: Value Wins, Japan and EM Lead
The year-to-date performance table tells a clear story. Value has beaten Growth across every major region. Japan and Emerging Markets have led all major equity geographies, returning 23% and 24% respectively in USD terms through September 30. The Magnificent-7 as a group has returned 13% — in line with the U.S. large-cap index — while Tesla has fallen 21%, underscoring that treating this cohort as monolithic is a mistake.
The earnings-driven nature of 2026 gains is notable. "Equity gains are being driven by earnings — markets are cheaper in valuations than at the start of the year," the report states. Forward and trailing P/Es have partially de-rated across regions even as CAPE ratios remain elevated, particularly in the U.S. where CAPE sits 54% above its 20-year median.
The EM Illusion: Brilliant at the Top, Ordinary Below
The EM section is among the most instructive in the report. MSCI EM has returned 24% year-to-date. But Schroders identifies a critical distortion beneath the surface. "By market cap, half of EM has returned more than 50% YTD. By number of companies, half have lost investors money." The equal-weighted MSCI EM has returned just 6%. "Fewer than 25% of EM stocks have outperformed this year." Taiwan and Korea, concentrated in semiconductor giants TSMC and Samsung, have driven the bulk of gains on the back of the AI trade. TSMC alone constitutes 54% of the Taiwan market index.
Sectors, Styles, and the AI Hedge
"Strong IT and energy performance this year highlight the influences of AI and the Iran conflict," the team notes, identifying the two dominant macro narratives shaping sector returns. Defensive sectors — consumer staples, utilities, health care — trade close to their historical valuation norms, making them relatively more attractive on a relative basis than cyclical names.
For advisors thinking about portfolio construction, Schroders offers a pointed observation on value as a risk management tool: "Consider value equities as a hedge against AI-risk, without sacrificing equity exposure." UK and European value stocks have outperformed the S&P 500 over 1-, 3-, and 5-year periods. Small caps globally trade at historically cheap levels versus large caps, a setup that historically precedes mean reversion.
Five Key Takeaways for Advisors and Investors
- The equity premium bar is higher. Rising bond yields have raised the return hurdle equities must clear. The compressed yield gap is a medium- to long-term signal, not a short-term trading cue.
- Near-term earnings are strong; long-term consensus is not credible. Analyst coverage thins sharply beyond FY3. Schroders warns that consensus long-term EPS forecasts come from too small a sample to be relied upon.
- EM is not as broad as it looks. The cap-weighted return masks severe concentration. Fewer than one in four EM stocks outperformed the index this year.
- Value's rehabilitation is real and durable. Outside the U.S., value has outperformed growth for an extended period. Passive value approaches may not deliver true value exposure given residual Magnificent-7 holdings.
- Small caps offer a compelling entry point. On both forward and trailing P/E multiples, small caps trade at historically low levels relative to large caps globally — a setup that historically precedes mean reversion.
Footnote:
1 Schroders Investment Management. Schroders Equity Lens: October 2026. Schroders, Oct. 2026, https://theideafarm.com/wp-content/uploads/2026/10/schroders-equity-lens-october-2026.pdf.
