Risk fell in every region in Q3, as investors reassessed their equity preferences

Predicted risk fell from the end of Q2 to the end of Q3 in every region we track, with most down 20–30 percent proportionally. STOXX UK saw the largest decline, followed closely by the STOXX Europe 600 and STOXX International Developed Markets. Falling correlations were the major contributor: asset correlations fell in every region except China and are at or near eight-year lows or longer globally. Low correlations were likely driven by diverging sector returns. Technology gained only in the US, Financials added more outside the US, and Energy was the only sector with positive returns in every region. These different paths help explain why correlations stayed low and risk came down, even as sector and market returns swung from month to month. In the US, short-horizon risk moved from the top third of its history at the end of Q2 to the bottom third at the end of Q3. Emerging Markets remained the highest-risk region, although the risk gap with the lowest-risk region, Canada, narrowed. EM risk relative to developed markets peaked in late August but remains near at least at an eight-year high. At the same time, small cap risk has fallen to parity with large cap.

Figure 1: Short-horizon predicted volatility by region

Sources: STOXX, Axioma

Figure 2: Asset correlations

Figure 3: Sector performance by region

Average daily trading volume has plunged in most regions, with Japan the exception, which suggests less support for market rallies. However, not all markets rallied in Q3. Asia ex-Japan (developed) had the best quarter, returning 4.9 percent. EM leads year to date at 22.7 percent, with Japan close behind at 22.4 percent, while EM fell almost percent in Q3. The US core market returned about twice as much as developed markets outside the US in Q3 and is ahead of that index year to date, helped by its larger weight in Technology, which fared well only in the US.  A strong August kept the quarter positive in many regions, but July and September losses left EM, US small cap, Europe and China returns negative for Q3. China fell 8.3 percent in Q3 and is the only major market down year to date. Low predicted risk may be less positive than it seems when market gains are not supported by it. 

Figure 4: Benchmark returns, periods ending September 30, 2026

Sources: STOXX, Axioma

In the US, Crowding and Momentum both had very difficult quarters, among the worst they have experienced. The performance paths during the quarter were different, although the long positions (most notably in Industrials) in both drove the negative performance. Crowding started the quarter strong, faltered in mid-July and fell sharply in September. Momentum largely did the opposite and recovered in September, when its return was in the 97th percentile, and the two factors became negatively correlated. Crowding was also dragged down by long positions in Consumer Discretionary and by both long and short positions in Health Care, (incidentally one of the best-performing sectors in Q3), while both longs and shorts in Technology hurt Momentum. In most other sectors longs were down while shorts were up, which points to a rotation in the stocks investors preferred.

Figure 5: US Momentum and Crowding Q3 performance breakdown

Sources: Axioma Risk Models and GICS

Predicted risk fell in Q3, and lower correlations and lower stock volatility brought predicted factor volatility down substantially. Realized factor returns told a different story. The most striking observation in Q3 was an across-the-board shortfall in Momentum, which fell more than two standard deviations (based on the risk forecast at the beginning of the quarter) below its long-term average in many regions, including Europe, Asia ex-Japan, Japan and China. In contrast, Value and Earnings Yield fared well, and Earnings Yield returns exceeded the two-standard-deviation threshold in several regions. Volatility and Market Sensitivity returns varied widely by region, indicating that investors in some regions were seeking risk while others were avoiding it.

Figure 6: Q3 style factor returns by region

Source: Axioma

Style risk fell in the quarter, but the recent calm in predicted risk hides volatility in the year's style factor returns. Europe, Japan, Asia ex-Japan, developed markets ex-US and EM each show numerous factors with returns outside a two-standard-deviation range. Although Momentum had a tough Q3, its year-to-date returns remain strong, especially in Asia ex-Japan, China and EM. Profitability, Value and Earnings Yield have fared well in most regions. And despite the overall decline in style risk, some factors (such as Medium-Term Momentum and Market Sensitivity) are at or near the high end of their volatility ranges. Momentum in the Worldwide model saw a 42 percent increase in volatility, even as risk fell for other factors. See chart 18 in the Equity Risk Monitors for more detail. There were also a number of substantial changes in WW5 factor correlations during the quarter, which may have altered active risk even when no trades were made.

Figure 7: Year-to-date style factor returns by region

Source: Axioma

Figure 8: Changes in correlation and volatility, Q2 to Q3 2026

Source: Axioma WW5.1 Short-Horizon Model

Specific risk is the part of risk that comes from individual stocks rather than from the market, sectors or styles. Its share of benchmark risk rose in the US and EM to an unusually high proportion. An increase in specific risk goes hand-in-hand with falling correlations, but the current level for US and Emerging Markets is unprecedented and may unexpectedly impact active risk.

A small sample of exchange-traded funds (ETFs) also shows higher proportions of specific risk, and some of them, especially those investing outside the US, saw a substantial increase in tracking error. This suggests the same may have happened in many portfolios, and that this increase may be broad-based. Checking the components of risk, as well as tracking error, shows where that exposure sits.

Figure 9: Share of total risk that is specific

Of the major risk blocks other than specific risk, in Developed Markets only currency risk rose in Q3. Industry, country and style volatility all fell. Predicted volatility according to the WW4 model for individual developed market currencies rose 10–37 percent, led by the Japanese yen, while correlations between developed market currency pairs fell slightly in 90 percent of cases as central banks chose different paths. Emerging market aggregate currency risk (per the EM4 model) fell as changes in volatility were mixed (some up, some down), while there were some relatively large decreases in correlation.

Figure 10: Developed currencies predicted volatility

Risk fell for about two-thirds of industries in Q3, yet almost 60 percent sit in the top quintile of their long-term risk range, with five industries in the top 2 percent and 11 in the top quintile year to date. Technology continues to dominate many indices and the concentration is rising. While its weight is extremely high, its contribution to risk is even higher. In the US, it reached almost 40 percent of the market and almost 72 percent of predicted risk, up eight percentage points in the quarter and more than 20 points higher than a year ago. In Europe, Japan and EM, Technology's weight fell but its share of risk rose, and in Japan it is now the largest contributor at more than 30 percent. As a result of this increasing dominance, the effective number of names in many indices keeps falling, which means concentration keeps growing.  

Figure 11: Industry risk, current vs year to date

Figure 12: Sector weights and contributions to benchmark risk, STOXX US

Figure 13: Effective number of names by market