Weekly Markets Review

What you need to know

• Third-quarter earnings have been mixed, with technology giants such as Alphabet and Amazon struggling amid investor doubts over the returns on their huge data centre spending, while energy companies and pharmaceutical firms like Eli Lilly have reported strong profits
• The US Federal Reserve, the European Central Bank and the Bank of Japan all held interest rates this week but signalled rate rises are likely soon to tame rising inflation, although longer-term government bond yields eased, with the US 10-year yield falling 7 basis points to 4.93%
• The UK Budget brought mostly marginal changes, including a £100 energy payment for eligible households (although the income tax thresholds freeze will steadily erode these benefits), and gilt yields moved lower as fiscal discipline was maintained.

Market review – what’s happening now

Earnings are not all about the technology sector

Much has been written about the dominance of the technology sector in 2026, and this is certainly merited given that about two-thirds of the positive earnings revisions this year have come from technology companies.  However, that still leaves one-third from other sectors of the market.  In recent weeks the positive revisions for technology stocks have begun to slow, and investors have been questioning the level of spending on artificial intelligence (AI) infrastructure, how it is funded and what the returns will be.  This has now become full blown scepticism, and the NASDAQ index fell 2.9% on Friday, leaving it 8% below its recent highs, with many individual stocks now down significantly.  The largest technology companies are still reporting strong profits, but upgrades are increasingly scarce.  For example, Alphabet, which owns the Google search engine, saw its shares fall 13% on its reporting day after some rather tepid results compared to expectations.  The advent of AI will no doubt be transformational for many businesses, but if we are entering an ‘air pocket’, as seems increasingly likely, what does this mean for the market?

It won’t be easy for the rest of the market to take up the slack if technology stocks continue to falter, but sectors that are doing well include energy, industrials and healthcare.  Energy companies are currently generating large amounts of free cash flow, benefiting from high oil prices in a fraught geopolitical environment.  For example, Shell reported free cash flow of $16.3bn in the third quarter, up 60% year-on-year, and many peers have reported large increases in earnings.  However, energy is still a small sector in the market, with a weighting of just 4% compared to technology at 31%, so too small to plug the gap.  

Healthcare stocks have also performed better in recent months, especially pharmaceutical companies which are regarded as defensive in volatile markets.  Some of the growth reported by pharma giants such as Eli Lilly has been impressive, driven by its diabetes and obesity drugs such as Mounjaro.  The company just reported third quarter sales growth of 39%, sending its shares up 11% on the week.  Other pharma companies have also reported strong results recently, although some areas of healthcare that are more exposed to elective procedures, such as certain hip and knee replacements, have found it tougher going due to the squeeze on consumer incomes from the rising cost of living.

Finally, the industrials sector looks set to enjoy around 20% earnings growth this year, as the US industrial recovery continues to broaden out, even if some companies do benefit from the AI infrastructure build out as well.  After many years of destocking, industrial growth has accelerated in recent months, and long-term drivers such as reshoring of semiconductor and healthcare factories, and the modernisation of the creaking US electricity grid, remain firmly in place.  With the healthcare and industrials sectors both representing close to 10% of the index, sustained growth in these areas helps support the index, unless technology earnings growth slows dramatically.  

Technology stocks across the globe have dominated investor attention in recent years and for good reason.  However, the benefits of diversification have not disappeared, and when one sector begins to falter it is important to see if other sectors are starting to perform better, which seems to be the case currently.  Economic growth remains solid, the jobs market is healthy, and as long as inflation expectations don’t rise too fast, investors shouldn’t get too pessimistic, despite the possibility of higher market volatility in the near term.

The week ahead – what's next for investment markets?

ISM manufacturing survey

A reading of 54.7 is expected for this widely followed survey on Monday, with readings above 50 indicating expansion.  The survey has been above 50 for several months as the US industrial recovery has broadened.

Mid-term elections

American citizens will go to the polls on Tuesday 3 November for the mid-term elections.  The Democrats are expected to make gains in the House of Representatives, while the Senate could be a close call.  With the current President’s popularity ratings struggling badly, the results could leave him as a ‘lame duck’.  However, markets tend to like a balanced Congress, with Democrats and Republicans splitting control of the House and the Senate, as it means government policies are less likely to change.  Either way, uncertainty will be removed. 

Bank of England rate decision

After holding steady at the previous meeting, expectations are for the Bank of England to increase interest rates by 25 basis points to 4% on Thursday.  This would be the first increase in interest rates since August 2023, and it comes as inflation is proving stickier than anticipated.

Nonfarm payrolls

This Friday release will be closely watched to gauge the strength of the US labour market.  Recent data has indicated some softness, although the overall economy continues to perform well.

Markets for the week 

 

What you need to know

• UK inflation accelerated to 3.5% in September, an 11-month high and above the 3.4% consensus, driven primarily by a surge in petrol and diesel costs, with services CPI (a measure of inflation) also beating estimates at 3.7%; the data, released Wednesday, marked the third consecutive month of acceleration and cemented expectations for the Bank of England's first rate hike in more than three years at its 5 November meeting
• The artificial intelligence (AI) trade remained under pressure despite some strong earnings results as fears over the sustainability of the buildout and the debt issuance it requires dominated sentiment; global equities ended the week slightly negative, masking a sharp rotation towards defensives with health care, staples and utilities all delivering positive returns
• Bonds performed well on the week, triggered predominantly by the AI-related equity sell-off, driving a sharp rally in US Treasuries (government bonds); German Bunds similarly outperformed as investors sought safe-haven sovereign exposure, while French OATs were the clear laggard: the OAT-Bund spread widened 0.29% on the week to c.1.70%, around double its level from August.

Market review – what’s happening now

Halloween fears drive rotational stock market

The risk-off atmosphere continues to drive a rotation away from technology and AI-related stocks towards health care and consumer staples. Elevated oil prices are also casting a shadow across equities, with Brent oil closing the week at US$117 per barrel.

Beyond the rise in oil prices, the fundamentals of this market remain robust. Earnings reports have been good, expectations were revised higher last week and the global economy appears relatively steadfast.

There is a tendency among strategists to reach for ‘uncertainty’ as a catch-all explanation and it is generally too easy a point to make. Investing is, by definition, uncertain; uncertainty is inherent in taking risk and investment returns are the reward for that uncertainty. It is always present. That said, the short-term weakness across equities is compounded by a period of peak near-term uncertainty. From the trajectory of the Iran conflict and the US midterm elections to the UK Autumn Budget, corporate earnings, key interest rate decisions across the US and Europe, AI funding fears and social unrest in Europe, the next few weeks are particularly fraught. This is driving prices lower and the uncertainty/risk premium higher, even as fundamentals remain solid.

This dynamic is partly why index-level performance has been relatively resilient, masking the rotations under the bonnet. In October thus far, seven of eleven global equity sectors have delivered positive returns. Technology is the outlier, falling more than -6.5% month-to-date, with tech related communication services also down -6.5%. Energy is at the top of the pack thanks to higher oil prices, up 10.8%, while consumer staples (+9.1%) and health care (+6.0%) are the other standout performers, a classic defensive rotation.

There is an interesting seasonal element to this too. Midterm election cycles are typically volatile periods for equities. The average US equity market drawdown during midterm election years since 1962 is -19.4%. The average one-year return following the drawdown is +31.0%. While a statistical pattern alone should not form the basis of an investment decision, it is nonetheless a worthy point.

A final, live illustration of uncertainty being priced into markets: the CBOE Volatility Index, the VIX, sometimes called the ‘uncertainty index’, closed Friday at 19.45, up nearly 19% in October alone but well away from a level that implies any systemic concern. According to Laurent Laskowski of Strategas, asset managers’ short positioning in VIX futures is at the 3rd percentile. In simple terms, a large proportion of managers are actively hedging their equity risk. This VIX and positional data reflects a rotational and uncertain market but not one with any major fault lines.

The week ahead – what's next for investment markets?

UK budget

We expect a pedestrian budget this Wednesday, which may be prudent in the current environment. Healey wants to support households while abiding by the fiscal rules and assuaging bond investors. While Gilts have receded into the background relative to French OATs in recent weeks the risk is that by delaying difficult spending decisions the mounting fiscal pressure puts the UK back in the sights of the bond vigilantes.

Federal Reserve (Fed) rate decision

The FOMC is expected to hold rates at 3.75-4.00% this week with the next hike coming in December. Data in the last month has provided evidence for both sides of the interest rate debate, with hotter than expected inflation offset by a slowdown in employment. Chairman Kevin Warsh still sees the Fed’s current policy as accommodative and the probability of a surprise hike should not be discounted, particularly given Warsh’s aversion to forward guidance. The Fed may want to hold given the proximity of the mid-terms and the market pricing puts the probability of a hike this week at 10%.

European Central Bank (ECB) rate decision

Given the turmoil in the European bond market and slowing growth policymakers are unlikely to stir the pot by hiking this week. The rise in bond yields has tightened financial conditions in itself. The ECB is almost certain to hold off until December.

US Q3 GDP

The US economy likely grew at an annualised 3.2% rate in the third quarter, driven predominantly by AI investment and resilient consumer spending. The focus will also be on productivity with stronger underlying productivity growth expected to become increasingly apparent.

US PCE inflation

Higher energy prices are expected to have pushed PCE inflation to 3.6% up from 3.4% in August. Core PCE inflation is also expected to rise to 3.1%.

Peak corporate earnings

Earnings season heats up this week with 36% of US500 companies reporting including a number of the mega cap technology companies. Analysts’ consensus estimates imply Q3 operating earnings per share growth of 24% year-on-year in the US (from Ed Yardeni).

Markets for the week 

 

What you need to know

• In a week when most individual stocks delivered a positive return, semiconductor and other AI-related shares fell sharply; semiconductor stocks fell more than 15% over eight consecutive sessions; the rout reflects concerns over the sustainability of artificial intelligence (AI) spending, intensifying Chinese competition and stretched valuations against a backdrop of rising interest rates.
• US Treasuries (government bonds) provided a meaningful diversification offset despite the inflationary backdrop, with the AI-driven growth scare fuelling a flight-to-safety bid that supported bonds even as hotter-than-expected US inflation data reinforced expectations for further Federal Reserve rate hikes
• Energy markets dominated headlines as Brent crude oil hit US$110 a barrel for the first time since May, closing the week up 4.9% at US$109.86, while WTI oil topped US$100 for the first time in weeks; the move was driven by intensifying Middle East conflict, with Iran-backed Houthi rebels striking oil company Saudi Aramco's headquarters and ongoing Iranian attacks on tankers in the Strait of Hormuz threatening supply flows; an International Energy Agency pledge to release 100 million barrels of emergency reserves offered only brief relief, with bullish sentiment prevailing into the weekend.

Market review – what’s happening now

When the chips are down, bonds step up

Since 2022, many market strategists have questioned the diversification potential of bonds - to what extent can they be relied upon to cushion equities during a drawdown? For most of the preceding forty years, multi-asset investors could simply count on a consistent, negative stock-bond correlation as a structural feature of balanced portfolios. Since 2022, however, inflation has induced a more dynamic and persistently positive stock-bond correlation. In short, bonds have repeatedly failed to diversify equity risk - and many strategists even wrote the obituary of the 60/40 portfolio.

We have increasingly viewed the rise in yields as an opportunity, particularly over recent months, as the move higher has been concentrated in real yields rather than inflation expectations. Bond yields can be decomposed into two components: expected inflation and the real yield - the additional return investors demand above that inflation expectation. In the US, it is the real yield component that has expanded materially, with 10-year real yields approaching 20-year highs near 3.0%, while inflation expectations have remained contained. 

Rising real yields reflect an economy competing intensely for capital, consistent with our view that surging AI-driven spending demand from hyperscalers has been an important force pushing real rates higher, rather than a renewed rise in inflation fears. Hedge fund Citadel made a similar observation, noting that all of September's increase in 10-year yields came from real yields, with inflation expectations remaining stable. For bond investors, this is a more constructive backdrop than a generalised inflation shock - real yields at these levels offer genuine compensation.

The sharp sell-off in AI-related stocks towards the end of last week saw the traditional diversification return in striking fashion. Even as Wednesday's hotter-than-expected CPI print sent two-year yields surging more than 15 basis points (bps) to 4.95%, Treasuries subsequently reversed sharply. The 10-year yield closed the week at 5.07%, a full 25bps below Wednesday’s post inflation peak as the AI growth scare overwhelmed the inflation signal. 

This dynamic presents a meaningful shift in risk sentiment: last week it was equities, not inflation, driving bond markets. Bonds acted as a genuine hedge to the week's equity volatility - precisely the role they have struggled to play since 2022. 

Whether this marks a temporary reprieve will depend on whether the next leg of market stress is driven by growth or inflation fears. For now, the evidence suggests bonds have earned back their place in the diversifier's toolkit.

The week ahead – what's next for investment markets?

UK inflation

Due on Wednesday, UK inflation is anticipated to accelerate to 3.4%, driven predominantly by energy costs. Economists also predict a mild pick-up in core inflation as the passthrough of higher energy costs feeds through into the broader CPI basket. To date there is little evidence of strong pass-through inflation and wage growth remains steady. Inflation is expected to continue to rise, peaking at a little over 4% in the first quarter of next year. 

S&P Global PMIs

Due on Friday, S&P Global’s October surveys are expected to show a global economy still expanding across both services and manufacturing, with the US remaining the principal engine of growth. 

In the UK, both manufacturing and services have held comfortably in expansion territory with much the same expected for October. France’s October readings will be watched closely given the worst civil unrest France has seen in years raising questions over whether consumer and business confidence will take a hit.

Markets for the week 

 

What you need to know

• The S&P 500 and the Nasdaq both closed at record highs last Tuesday, driven by further gains in large technology companies, although under the surface some share price moves are not looking as healthy
• Bond yields remained close to multi-decade highs, as concerns around rising inflation and fiscal indiscipline remained at the forefront of investors’ minds
• Oil prices continued their volatility, driven by headline news from the Middle East where hopes of a resolution to the various ongoing conflicts remain in the distance
• Corporates are about to start reporting their third quarter earnings results over the next few weeks, as high expectations  and results will be closely scrutinised for any hints of a slowdown in spending in the Artificial Intelligence (AI) infrastructure build out.

Market review – what’s happening now

AI agents take centre stage at the third quarter earnings results

Investor focus in the third quarter earnings season will naturally be on different indicators, including margin resilience, cost pressures from higher oil and commodity prices, and funding due to the recent sharp rises in bond yields. However, a key focus will be how much companies are spending on AI infrastructure, whether those investments are starting to generate good returns, and what impact the increasing use of agentic AI will have.  

Agentic AI is where the AI tool used can take actions rather than just giving answers to queries. The agent can plan steps, use appropriate tools and systems, conduct tasks and give results, depending on what it has been authorised to do. For example, agentic AI can actually book a holiday or a restaurant for the consumer instead of just providing helpful information. This is increasingly the future of AI, and how fast it takes off has implications for the earnings, and indeed business models, of many companies.

In the corporate world AI agents can run multiple tasks and checks across the various systems employed by that company, helping to generate efficiencies and increase productivity. In the consumer world personal AI agents can help with bookings, diary and email management and subscription renewals. Just a few weeks ago Meta launched its personal AI agent called Muse, which surpassed ChatGPT in downloads over the first 12 days after launch. Other tech giants such as Alphabet (Google) and Apple will likely launch their own personal AI agents in the near future.

As companies report third quarter earnings, investors will ask who the winners and losers from agentic AI are. Generative AI has already shown it can impact business models, and agentic AI could be even more transformative. For example, will there be the same need for online consumer marketplaces if an agent can do the searches and comparisons instead? Agents care about price and delivery times but not about advertising, so will business models that are reliant on advertising see an impact? Are companies getting a return yet by using more agents, or is it just costing them more as agents tend to use AI tokens more rapidly than consumers do?  Are consumers the real winners here, as a proliferation of agents will likely drive down prices of different goods and services? These questions won’t be answered overnight but will remain a key focus for the quarters and years to come as companies adopt and adapt to this new technology.

Analysts currently expect third quarter earnings growth from US companies of about 25%, with the full year now likely to be in excess of 30%. Expectations are high, but deservedly so given the steep rises in earnings revisions so far in 2026. Technology companies have led the charge, but other sectors such as healthcare, industrials and energy have also seen positive revisions in recent months. With the US market trading at a 20% premium to its 20-year median valuation, based on price-earnings ratios, and with bond yields having risen sharply, continued strength in earnings is important if equity markets are to make further progress.

Recent market strength has been driven largely by the Magnificent Seven, despite fears about potential over-spending on AI infrastructure such as data centres by those same companies. Under the surface of the market, the picture is less rosy, as breadth has deteriorated quite sharply. In fact, almost 60% of the S&P 500 constituents are more than 20% below their highs, showing how concentrated the market has become once again, with large technology stocks doing the heavy lifting. Investors typically view such a narrow market as being unhealthy, with broader participation from the majority of companies usually a better sign for a continuation of the bull market. This makes the forthcoming earnings reports of the largest technology companies in the US even more important.

The week ahead – what's next for investment markets?

US Consumer Price Index inflation
Economists expect an inflation rate for September of 3.6%, with higher oil prices starting to impact.  A higher reading than this would heap further pressure on the US Federal Reserve to lift interest rates again at its next meeting.

US retail sales
The consumer has been struggling from the rising cost of living, and although retail sales have shown signs of weakness, they have remained resilient overall. This month’s data will be another important test as consumer sentiment indicators have been deteriorating.

Bank earnings
Many of the world’s largest banks will report third quarter earnings during the week, including JP Morgan and Bank of America. These reports will be an early gauge of whether the recent rises in bond yields have impacted earnings.

Markets for the week 

 

What you need to know

• Bond markets were again the greatest source of volatility, with French OATs (sovereign bonds) at the epicentre of the global sell-off; the rout reflected deepening investor concern over France's missed deficit targets and political gridlock; the OAT-Bund spread widened to 140 basis points (bps), a level last seen in 2012 during the Eurozone debt crisis; UK gilts performed relatively well by comparison.
• Economic data was mostly healthy with economic growth in the second quarter revised higher for both the US and the UK; global manufacturing activity continued to grow, according to recent data; the September US labour market report was the weak spot as job growth came in at 29,000 well below expectations, job growth in July and August was also revised lower by 60,000
• Energy prices remained volatile with Brent crude oil rising above US$108 a barrel (bbl) earlier in the week before settling at US$102/bbl; the G7 nations announced plans to release as much as 100 million barrels of emergency oil and diesel reserves following pressure from the Trump administration; the deal followed a US threat to restrict diesel exports unless European countries agreed to release reserves. 

France's fiscal reality - should the UK be concerned for themselves?

Friday saw a sharp rally for global bonds and it’s not unusual during bear markets to see very good days - they usually follow particularly nasty selloffs. What was notable however about the rally on Friday was which countries were left behind: France, Italy and Greece.

A common way to measure how investors view a country's financial strength is to compare its government bond yields with those of Germany, which is seen as Europe's safest borrower. The gap between 10-year French and German government bond yields widened from 0.71% at the start of the year to 1.40% by the end of last week, reaching its highest level since the European debt crisis in 2012. This reflects growing investor concerns about France's finances.

While UK government bond yields are higher than those of other G7 countries, a more meaningful comparison adjusts for differences in interest rates and currency costs. On this basis, 10-year French government bonds currently yield 6.51%, compared with 5.37% for UK gilts, meaning investors receive around 1.14% more to hold French debt (sterling hedged) than UK debt.

French equities are also struggling this year having fallen 5.9% while global equities have risen 14.3%, all in GBP terms.

Earlier during September, France officially missed its 2026 budget deficit target of 5% with the shortfall coming in at 5.4% of GDP – sluggish growth was a key factor. France's 2027 budget aims to reduce the deficit to 5%, but doing so would require significant austerity.

The political gridlock makes any budgetary progress difficult; France is on its fifth prime minister in two years. With a split government France has been effectively unable to pass fiscal plans. The 2026 budget was rolled over from 2025 and forced through via a constitutional mechanism without a parliamentary vote after cross-party talks repeatedly failed.

The French are set to go to the polls in May 2027 meaning there is very little incentive for opposition parties to support painful and unpopular austerity measures. France’s 2029 deficit target of 3.0% looks particularly quixotic in this context and the bond market has shown no hesitation in pricing this in.

There is some speculation that the European Central Bank (ECB) will step in to support the French bond market (and possibly the other struggling peripheral countries, Greece and Italy) however the conditionality of such intervention currently requires fiscal compliance with EU rules, with which France is in violation.

France also suffers from a relatively low level of domestic ownership of its bond market which while it may point to a structural weakness could also contribute to a solution if policies are put in place to encourage greater domestic investment.

France should be a warning signal to UK Prime Minister Andy Burnham of the risks of deferring difficult decisions. Labour have the opportunity afforded by a majority to put a multi-year fiscal path in place. Second, the UK should look to incentivise domestic ownership of UK assets, France’s low domestic ownership of OATs has created structural vulnerabilities and amplified the selloff. Third, Burnham’s plans to soften the triple lock (where state pensions rise annually by the highest of either 2.5%, inflation or wage growth) is the kind of decision that French policy makers have not been able to make and that the bond market will reward. The move to a double lock of 2.5% or inflation is a step in the right direction, the case for going further is strong.

There are signs that the UK is on the wrong side of the Laffer curve (a point where raising taxes further can reduce the amount of tax the government collects), yet any reductions in the tax burden seem unlikely. It is probable that for the years ahead higher taxation will remain the principal tool for balancing the books. That makes fiscal credibility elsewhere even more important. The lesson from France is that difficult fiscal decisions do not become easier by delaying them. Eventually, the bond market will force your hand.

The week ahead – what's next for investment markets?

US trade balance: The trade deficit is expected to have widened through August from US$88.6bn to US$102.3bn. This would be the widest since imports were front loaded ahead of the ‘Liberation Day’ tariff announcement in March 2025. While industrial supplies are anticipated to have boosted imports, exports have likely increased as the US has increased exports of oil and refined products. 

Central bank minutes: Minutes from the ECB and US Federal Reserve (Fed) meetings are due this week. Amidst the global bond bear market central banks are becoming more hawkish but the ECB will be cautious given the limited signs that higher energy prices are feeding through into broader inflation. The Fed meeting was notably more hawkish however the meeting predated the weaker jobs report and soft PCE inflation report from last week complicating the picture. Altogether both central banks are expected to hike once further this year with that hike expected at the December meetings. 

Markets for the week 

 

This week in summary

• Bond yields moved sharply higher last week as investors weigh the risk that tighter monetary policy will become prolonged or disorderly, with this week’s economic data being  important markers for this debate
• The Xi-Trump summit indicated the possibility of an extension in the trade-truce but left broader US-China tensions largely unresolved, keeping attention on China’s Purchasing Managers Index (PMI) data and the outlook for earnings
• Equities remained resilient despite higher yields, but narrow leadership in technology and AI-linked stocks leaves markets vulnerable if growth or inflation data disappoint.

Market review – what’s happening now

Bond yields: the risk is disorder, not simply rising

The latest data do not suggest that the global expansion is running out of momentum. Mid-month PMI surveys in the US and eurozone improved further, while US growth, employment and consumer spending indicators remain resilient. Against that backdrop, the case for tighter monetary policy has strengthened: inflation remains too persistent for comfort, and a further rate rise or two would not necessarily be enough to derail activity.

The issue for markets is less whether interest rates move modestly higher, and more whether bond yields continue rising in an orderly way. Central banks have been slow to respond to renewed inflation pressure, perhaps unsurprisingly given the supply-side nature of the shock. They are now in a challenging position – government borrowing remains high; inflation expectations are sticky; and there are few signs of the deflationary forces anticipated this time last year. If investors demand a higher risk premium for holding bonds, yields could overshoot and put pressure on equities, credit and other risk assets.

A gradual rise in yields can be absorbed if earnings continue to grow and economic activity stays firm. A disorderly rise is more problematic. It would challenge equity valuations, particularly in the more expensive parts of the market where expectations are already high, including US and technology-related exposure. It would also reduce the appeal of lower-quality credit (bonds, loans, or debt issuers that major agencies rate below investment grade), where spreads may not fully compensate investors for tighter financial conditions.

We remain constructive on the economic and corporate backdrop, but increasingly alert to the risk that bond markets become the transmission channel for a broader risk-asset correction. In our view, tighter developed-market monetary policy is justified by the combination of steady growth and persistent inflation. However, the balance of risk would change if yields continued to rise sharply from here. The political landscape for the US and UK also becomes increasingly relevant over the next 12-18 months.

With the midterm elections approaching in the US and approval ratings for President Trump low; the risk of the Republicans losing the House of Representatives has risen. Senate control remains finely balanced. A divided Congress could constrain fiscal policy and complicate negotiations around spending, borrowing and trade. In the UK, higher borrowing costs reduce room for manoeuvre for Prime Minister Andy Burnham and Chancellor John Healey. The upcoming Labour Party conference should provide more insight into the government’s priorities for this parliament, but fiscal uncertainty is likely to remain an important market focus in the short to medium term.

The key indicators are inflation data, wage growth, central bank guidance and the behaviour of longer-dated bond yields. Energy prices are also key: even if crude stabilises, tight diesel and refining markets could keep cost pressures alive. For now, the foundations of the expansion remain intact, but the margin for error is narrowing.

The week ahead – what's next for investment markets?

US inflation, Gross Domestic Product (GDP) and payrolls: The combination of Personal Consumption Expenditures (PCE) inflation, the GDP update and payrolls will be the main test of whether the US economy is still strong enough to justify tighter-for-longer US Federal Reserve policy.

China PMI data: Investors will look for signs of whether export strength can continue to offset softer domestic demand, particularly after the Xi-Trump summit left broader US-China tensions unresolved.

Eurozone inflation: The release will help shape expectations for European Central Bank policy at a time when activity surveys have improved but inflation risks remain a concern.

Markets for the week 

 

This week in summary

• Central banks turned more hawkish: The US Federal Reserve (Fed) raised interest rates by 25 basis points (bps) and signalled further hikes, while the Bank of England held its rate but saw three of its Monetary Policy Committee members back an immediate increase; the Bank of Japan also raised rates, though a divided vote weakened the yen
• Geopolitical tensions escalated: Ukraine launched its largest-ever drone attack on Moscow, while Russia struck targets near the Polish border, raising concerns about broader regional and NATO-related risks
• Markets navigated artificial intelligence (AI) and policy uncertainty: AI safety warnings briefly hit chip stocks, but sentiment recovered as investors looked past the concerns, while higher rate expectations boosted US Treasury yields (government bonds) and the dollar.

Market review – what’s happening now

Warsh walks the walk

As the Danish proverb goes ‘It’s hard to make predictions, especially when they’re about the future’ – this is one of the reasons why Fed Chairman Kevin Warsh refrains from providing forward guidance on future interest rate policy decisions.

The other is that reading the market is an important aspect of the conduct of monetary policy, and to influence the market through the provision of guidance obscures the very signals they are trying to read. This has not been a challenge in recent weeks; the market has demanded this rate hike and if the Fed had not delivered the weakness across the US bond market would have become even more acute.

Since taking the helm at the Fed Warsh had talked tough but done little and investors were beginning to question the Fed’s credibility in the deliverance of price stability. The bond market demanded action and the Fed delivered with a unanimous 12-0 vote.

In our view, Warsh is fundamentally a price stability pragmatist and questions over his credibility are unfounded. His commitment to price stability is sincere and this hike is necessary. During the press conference, Warsh said he would be "hard pressed to describe financial conditions as restrictive", signalling that further rate rises remain possible. While Warsh may not be in the forward guidance business, his reaction function here is clear, in making these statements he leaves open the door for further interest rate increases. The FOMC concur with the dot plot showing eight members expecting a second hike this year and a third in 2027 while four see a further two hikes this year. The median expectation across the FOMC is for one further hike this year and none in 2027 – on this basis the Fed remains behind the market which has a more hawkish expectation.

On inflation we have held the view for some time that pressures are primarily coming from two areas: energy and AI. In this regard there is no better argument than August’s data on import prices. Import prices rose 7.0% year-on-year in August, the fastest pace since August 2022. Petroleum import prices rose 27.3%. Import prices from the newly industrialised Asian countries surged 12.6%, consistent with the intense demand we are seeing for the semiconductors, servers, memory and other electronics required for the AI build-out. The AI build out continues to put upward pressure on prices – this is likely to continue until AI adoption produces enough productivity enhancements to offset the demand/supply imbalance – while this could happen, like a leprechaun's gold, such productivity gains seem to be getting further away the closer we get.

The week ahead – what's next for investment markets?

S&P Global PMI survey

The September flash PMI releases due Wednesday are the standout data point of the week, covering the US, eurozone, UK, France, Germany and Japan. Consensus expectations are broadly constructive, though the key question is whether elevated energy costs are beginning to weigh on activity.

Middle East conflict

Brent crude remains elevated at over US$100 per barrel (+68% year-to-date) as the US-Iran conflict keeps Strait of Hormuz transit risk in focus. Investors will be watching for any escalation in Houthi attacks on Gulf infrastructure or, conversely, diplomatic progress at the UN General Assembly (where Trump is meeting Gulf leaders this week).

Markets for the week 

 

This week in summary

• Middle East tensions escalated last week as the US and Iran exchanged attacks on vessels and maritime assets, while the Houthis advanced in Yemen and drone strikes damaged Saudi energy infrastructure, threatening key regional shipping and oil export routes
• Energy markets were volatile: Brent crude briefly surged above US$109, WTI oil topped US$100 for the first time since July before retracting and diesel prices reached record highs amid supply concerns
• US Treasury buybacks disappointed despite an increase in operation size, with 10-year Treasury yields reaching their highest level since 2023
• The European Central Bank (ECB) raised interest rates 25 basis points to 2.5%, with President Lagarde calling the move a "no brainer" ─ markets are now pricing a further three 25 basis point hikes by mid-2027
• UK July gross domestic product (GDP) rose 0.4% month-on month, beating expectations for a third consecutive month
• Monthly US core Consumer Price Indices (CPI) came in slightly above expectations (+0.3% month-on-month), strengthening expectations of a US Federal Reserve (Fed) rate hike next week and further rises by year-end.

Market review – what’s happening now

The evolution of the world's reference rate

The US 10-year Treasury yield pushed higher again last week, edging towards levels markets have not sustained for nearly two decades. The 5% threshold is a symbolic marker for investors and is likely to attract disproportionate attention from the financial press, not least because round numbers naturally lend themselves to headlines and market narratives. A move above 5% may be viewed as a signal of tighter financial conditions, pressure on equity valuations and further evidence that the era of exceptionally low yields has ended. Yet the significance of 5% should not be overstated. It is not a precise tipping point but rather a convenient reference point from which to assess the prevailing interest rate regime.

Why the focus on this 10-year rate? Well the 10‑year isn’t just another bond. It is the reference rate for much of the modern financial system. The modern history of this reference level begins in the 1950s, shortly after the 1951 Treasury-Federal Reserve Accord freed long-term government bond yields from wartime controls. As America's bond market matured, the 10-year Treasury yield gradually became the benchmark against which mortgages, corporate borrowing costs and eventually much of global finance would be measured.

The 10-year Treasury yield is also not just a single instrument, but a title. Since it was first issued, hundreds of different notes have worn the crown. Every few months, a new issue inherits the title of ‘the 10‑year,’ with the current holder being a 4 5/8 coupon Treasury which matures on the 15 August 2036. The 10-year is thus not a single bond, but a lineage of bonds, each passing the benchmark status to the next.

Although Treasury debt stretches back much further, the modern history of this dynasty spans every major American economic regime since the 1950s. The first generation emerged in the post-war boom, when yields were largely contained between 2% and 5% amid strong growth and relatively stable inflation. The ‘Great Inflation’, which ran from the late 1960s to the early 1980s, was a very different world, with yields surging above 10% for half of the 1980s and briefly over 15% as the Fed fought runaway prices. The ‘Great Moderation’, from the mid-1980s until the eve of the Global Financial Crisis in 2008, brought declining inflation, steadier growth and yields that generally ranged between 5% and 8%. Through it all, successive generations of 10-year Treasury notes reflected the economic realities of their time.

The period after 2008 was different. As central banks cut interest rates to zero and embarked on successive rounds of quantitative easing, government bond yields collapsed. By 2016, the reigning 10-year yielded less than 1.5%, a level that would have seemed extraordinary to many of its predecessors. Although the Fed embarked on a rate hiking cycle from late 2015, the broader regime of ultra-low rates, abundant liquidity and subdued inflation arguably persisted until 2022. It took the combination of post-pandemic supply disruptions and Russia's invasion of Ukraine to bring about a decisive break from that era and return inflation, interest rates and bond yields to levels that had become unfamiliar to a generation of investors.

Viewed in that context, the approach towards 5% may tell us less about the significance of a particular number and more about how far markets have travelled from the extraordinary conditions that prevailed after the Global Financial Crisis.

The current 10-year has inherited a very different landscape from many of its predecessors. For much of the post-crisis era, falling inflation, quantitative easing and abundant global savings acted as a powerful anchor on yields. Today, investors are grappling with larger fiscal deficits, reduced foreign demand for government debt, higher real interest rates and a more uncertain inflation outlook.

Yet this is not simply a story of deteriorating fundamentals. The US economy continues to show resilience. Unemployment remains low, wage growth has moderated without stalling, and there is little evidence that inflation is becoming embedded in wages and prices. At the same time, investors appear increasingly willing to give Kevin Warsh the benefit of the doubt. His recent communication has helped restore confidence in the Fed’s commitment to price stability, reducing fears that higher yields will trigger a disorderly repricing across financial markets.

The 5% level on the US 10-year Treasury matters because it is a visible threshold and a key input into borrowing costs, valuations and asset allocation decisions. However, a move over 5% does not automatically signal a fiscal crisis, recession or equity bear market. If yields are rising while nominal growth, productivity and investment are strengthening, the economy and corporate earnings can absorb a higher cost of capital. What 5% represents is a transition to a higher-rate world, not necessarily a breaking point.  

By contrast, a sustained move towards 6-7% would be more significant. Those levels would take yields back towards the upper end of the range experienced during the latter part of the ‘Great Moderation’. After briefly exceeding 7% in the mid-1990s, the 10-year Treasury spent most of the following three decades below that threshold. A return towards 6-7% would therefore prompt closer scrutiny of financing costs, economic growth and corporate profitability.

If last week’s move felt significant, it’s because the market is no longer just debating whether yields are high for the cycle. It’s debating the era. The 10‑year dynasty has entered a new regime. One where 5% is not an outlier, but a new reference point.

The week ahead – what next for investment markets?

Central bank rate decisions

The Fed will announce its policy decision on Wednesday, with markets now pricing a rate hike following firmer core CPI data. The Bank of England (BoE) meet Thursday and the Bank of Japan(BoJ) on Friday, making this a pivotal week for global monetary policy. There are hawkish expectations for both, but while a 25 basis point hike is fully priced for the BoJ, expectations for the BoE are that it will remain on hold.

UK data ─ triple results

Three key results will be announced this week: July employment (Tuesday): Weekly earnings expected at 3.9% versus 4.1% previously, with unemployment forecast to remain at 4.9%; August CPI (Wednesday): Headline inflation forecast to rise to 3.1% year-on-year; August Retail sales (Friday): Expected at -0.2% month-on-month ex-fuel.

US retail sales

August retail sales data are released on Wednesday, providing a read on the resilience of US consumer spending amid persistent inflation pressures.

Markets for the week 

 

This week in summary

• Rising energy prices and persistent inflation concerns pushed sovereign bond yields higher, as investors demanded greater compensation for mounting fiscal risks and questionable policy credibility
• In the US, attention is focused on whether Federal Reserve (Fed) Chair Kevin Warsh can reinforce the Fed's inflation-fighting credentials, with a failure to tighten policy risking further upward pressure on long-dated Treasury yields (US government bonds)
• Japan's move towards higher interest rates has strengthened the yen and challenged the global carry trade (borrowing in a low-interest-rate currency to invest in a higher-yielding one), reducing a key source of demand for international bond markets
• UK gilt yields rose amid renewed inflation concerns, fiscal constraints and structural vulnerabilities to energy price shocks
• This week's focus is on the European Central Bank (ECB) rate decision and US CPI inflation, both of which could have significant implications for bond markets and the path of interest rates.

Market review

The rising cost of fiscal imprudence

Sovereign bond yields continued to move higher across developed markets last week as the escalation of the conflict in the Middle East pushed energy prices higher. More broadly, the markets are becoming increasingly concerned about the combination of fiscal imprudence and central bank credibility in the face of persistent inflation. The bond vigilantes are demanding higher yields, as the 10-year US Treasury yield rose above 4.8% on Tuesday and remains marginally below that level.

The administration appears determined to outrun the deficit through growth having abandoned plans to reduce borrowing as the national debt rises above US$40tn. That leaves Kevin Warsh in the Fed and Scott Bessent in the US Treasury working to alleviate the bond market pressures.

Kevin Warsh took the chair of the Fed at the end of May and quickly affirmed his commitment to delivering price stability. That credibility was impaired by July's decision not to raise rates, which triggered a sharp bear steepening (long-dated yields rising) in the Treasury curve. His Jackson Hole speech was clearly intended to re-establish those inflation-fighting credentials and long-dated bonds initially rallied. Although investors have spent weeks listening to hawkish rhetoric, they increasingly expect action. If inflation comes in above expectations this week and the Fed fails to hike at their meeting later this month, they risk further bear steepening and erosion of Warsh's credibility.

The other major development last week came from Japan. The yield on 10-year Japanese government bonds briefly exceeded 3%, its highest level since 1997. Comments from Governor of the Bank of Japan Kazuo Ueda reinforced expectations that the BoJ will tighten policy again later this month. As Japanese investors become more willing to keep capital at home (because domestic yields are rising), global bond markets lose a significant source of demand. The yen strengthened last week as rising Japanese bond yields challenged the popular carry trade.

UK gilts (government bonds) have underperformed their European peers through the sell-off. The 10-year gilt yield reached 5.29% intraday on Wednesday - its highest level since 2007 - while the 30-year briefly touched 5.92%, a level not seen since 1998. The 10-year stands at 5.13% and the 30-year at 5.78%, with the front end bearing the brunt of the weekly move.

The UK's vulnerability to energy price shocks is more acute than most of its European peers, partly thanks to policy design (The Short-Run Marginal Cost formula for electricity pricing binds the cost of all electricity generation to the most expensive fuel source needed to meet demand). UK inflation is hovering just below 3% and is expected to end the year higher.

The domestic fiscal picture compounds the problem. UK Chancellor John Healey inherited a £23.6bn surplus against the government's main fiscal rule from his predecessor, Rachel Reeves. The surge in gilt yields has reportedly halved that buffer, leaving significantly less fiscal room ahead of his debut budget at the end of next month. UK government debt stands at approximately 95% of GDP, and with a 2026 fiscal deficit estimated at 3.8% of GDP, the debt trajectory is not self-correcting at current growth rates. Chancellor Healey will likely seek to restore most of the fiscal buffer at the October budget through further tax rises. The government has little appetite to address structural overspending. 

The week ahead

ECB rate decision

The ECB is expected to hike rates on Thursday, with markets assigning a 99.5% probability to the move after it was widely signalled by the governing council. The focus will likely be on future guidance with inflation expectations likely higher given the renewed surge in energy prices.

US CPI inflation

US inflation is expected to remain at 3.4% while core inflation (ex-food and energy) is anticipated to slow to 2.4%, its lowest level since early 2021.

Markets for the week 

 

This week in summary

• Global equities rose 0.7% in GBP terms, led by a continued recovery in technology shares
• Technology and communication services outperformed, while energy and healthcare lagged
• Software stocks rallied strongly as investors increasingly view them as beneficiaries of artificial intelligence (AI) adoption
• AI-related capital expenditure remains on an extraordinary trajectory, with major technology firms expected to spend around US$800bn in 2026
• Investors are paying closer attention to the financing structures underpinning the AI investment boom
• Jackson Hole – an annual gathering of central bankers and economists – reinforced the US Federal Reserve’s (Fed) focus on inflation, pushing expectations of a September rate hike higher
• Rising US debt levels and Treasury market intervention highlight growing tensions between fiscal policy, inflation control and bond markets
• This week, investors will focus on euro-area inflation and US payrolls for clues on the outlook for European Central Bank (ECB) and Fed policy.

Market review

Technology sector bounce back continues 

Technology stocks led the market higher in an otherwise mixed week for equities. Global equities gained 0.7% in sterling terms, with information technology rising 1.7% and the technology-adjacent communication services sector advancing 1.5%. Energy (-1.8%) and healthcare (-1.6%) lagged. Energy weakened as oil prices fell following diplomatic progress towards reopening the Strait of Hormuz and restoring Gulf shipments. Energy remains the best-performing sector year-to-date (+33.7%). Healthcare faced a combination of stock-specific disappointments, ongoing drug-pricing and regulatory concerns, and a broader unwind in market momentum.

Technology stocks were buoyed by another round of strong earnings, helping to revive the AI trade after a turbulent summer. The sector has been characterised by significant dispersion this year. Companies viewed as beneficiaries of AI investment, particularly semiconductor manufacturers at the base of the AI supply chain, significantly outperformed through the spring, while software and cybersecurity companies perceived as vulnerable to AI disruption lagged. That trend reversed during the early summer as investors began to scrutinise the pace and sustainability of AI-related spending.

More recently, however, performance has broadened across the sector. Both perceived AI winners and losers have rallied in August as investors increasingly view software companies as the critical distribution layer for AI adoption. While application software remains among the weakest-performing industries year-to-date, sentiment is improving rapidly. The software industry gained 5.3% last week and 8.4% over August, suggesting investors are becoming more confident that software companies will be beneficiaries, rather than casualties, of AI.

Assessing the plumbing of the AI investment boom

The summer swoon in AI-related stocks has done little to dampen the extraordinary investment cycle underpinning the theme. The world's largest technology companies are expected to spend roughly US$800bn on capital expenditure in 2026, primarily on AI infrastructure, with spending projected to rise further in subsequent years. Recent earnings and spending commitments suggest demand for compute capacity, graphics processors, memory and data centres remains strong, helping to support the broad recovery across technology shares through August.

What makes this cycle unusual is the increasingly interconnected, and often circular, nature of the ecosystem. Hyperscalers, semiconductor manufacturers and AI model developers are not simply customers and suppliers; they are also investors and lenders. Nvidia, for example, has provided financing to OpenAI, a portion of which will ultimately be spent on Nvidia’s graphics processing units (GPUs). 

For now, capacity constraints are evident across chips, memory and data centres, and major cloud providers continue to increase investment. Nevertheless, the market is paying closer attention to the financing structures supporting the AI buildout. Credit spreads, debt issuance and forthcoming capital market events, including a potential Anthropic IPO, will likely provide useful clues as to whether the investment boom remains on solid footing.

Warsh reaffirms hawkish tilt at Jackson Hole

Fed policymakers descended upon Jackson Hole Wyoming for the annual economic and monetary policy symposium, where Fed Chair Kevin Warsh delivered his keynote speech. In which he reaffirmed his commitment to delivering price stability, noting that inflation has remained above target for too long. The odds of a rate increase in September rose sharply from 37% to 65%. The yield on the two-year US Treasury bond rose from 4.17% on Tuesday to 4.34% by the week’s close.

The policy symposium comes at an interesting moment for the US Treasury market. Rising government debt and persistent fiscal deficits are increasingly colliding with the bond market's willingness to finance them at current yields, putting upward pressure on long-dated yields. Earlier in the month the Treasury issued 30-year notes with yields not seen since 2001, the market 30-year yield also hit 5.34%, the highest since 2007. 

According to Andrew Lees of MacroStrategy, the US is generating just 34 cents of nominal GDP growth for every additional dollar of debt, raising questions about the productivity of continuous government spending. With government debt now above US$40 trillion and interest costs continuing to rise, upward pressure on Treasury yields has become a growing challenge for authorities.

Recent interventions by Treasury Secretary Scott Bessent aimed at supporting the long end of the Treasury market were small in scale, but nonetheless sent a clear signal – that authorities are unwilling to tolerate endlessly higher bond yields. 

Concurrently, Jackson Hole and the Treasury's intervention offer a glimpse of the policy tensions likely to define the remainder of the decade. The Fed’s fight for lower inflation, the Treasury’s battle to lower yields, and the bond vigilantes demands for fiscal discipline at a moment where authorities are unwilling to deliver it. 

The week ahead

Euro-area CPI inflation

August's preliminary inflation reading, due today, is expected to show a sharp rebound in headline CPI – a measure of inflation that tracks how everyday prices of goods and services change over time – to 3.3% from 2.9% in July, driven largely by higher fuel prices following the Iran conflict. A stronger-than-expected inflation print would reinforce expectations that the ECB will deliver a further interest rate hike at next week's meeting.

US Payrolls report

August's employment report, due on Friday, is expected to show subdued job creation, with hiring over the summer running below the pace needed to stabilise unemployment. Much of the slowdown reflects a pull-forward of hospitality hiring ahead of the World Cup, alongside particularly weak government hiring. However, survey data continues to point to a relatively tight labour market, supporting our view that private-sector employment remains moderately resilient. The unemployment rate is expected to edge up to 4.2%.

Markets for the week 

 

This week in summary

• Bond markets remained under pressure as heavy government borrowing, sticky inflation risks and the scale of AI-related capital spending pushed long-dated yields higher
• US Treasury Secretary Scott Bessent announced that buybacks of 10- to 30-year Treasuries would rise from a maximum of US$2bn to US$4bn or more per operation from September, but the move was viewed mainly as support for market functioning rather than a change in the direction of yields
• Central bank risks remained finely balanced; this week’s discussion continued to focus on whether earlier evidence of easing US inflation was sufficient to justify patience, or whether resilient labour demand, firm underlying consumer activity and ongoing commodity-related price pressures would keep further tightening in play
• Equities were supported by strong earnings momentum and improving breadth; forward earnings for US equities have risen 24.9% year-to-date versus a 12.1% gain in the index, pulling the forward P/E multiple lower despite index highs – earnings strength has broadened to include a much wider section of global markets
• AI remained central to the market debate, supporting productivity and margins but also increasing scrutiny of infrastructure funding, supply-chain capacity and whether leading beneficiaries can continue to exceed elevated earnings expectations
• Japan highlighted the global bond market challenge, with inflation data released on Friday showing headline CPI rising to 1.9% year-on-year in July, core CPI increasing to 1.8%, and core-core CPI also reaching 1.9%, increasing pressure on the Bank of Japan as yen weakness continues to feed imported price pressures
• Japan also highlighted the broadening opportunity set, reflecting the continued expansion of investment themes beyond initial beneficiaries of the AI cycle.

Market review

Bond market pressure: supply, inflation and capital demand weigh on yields

Bond markets were again the main source of macro pressure this week. Long-dated yields rose as investors weighed the combined effect of large government funding needs, inflation risks linked to energy and commodity markets, and substantial private-sector investment in AI-related infrastructure. Together, these factors have increased competition for capital and made investors less willing to hold longer-maturity bonds without additional return. The US Treasury’s plan to increase purchases of older long-dated bonds helped calm trading conditions briefly, but does little to solve longer term concerns around debt sustainability.

US Treasury Secretary Scott Bessent has been consistent in his actions in recent weeks, showing little hesitation to intervene in support of the long end of the US Treasury market. His intervention in Japan at the beginning of August was the first joint US-Japanese intervention in over 15 years. By buying yen in euros rather than dollars, Bessent sent a clear signal that he is concerned about the impact of possible mass sale of US dollar denominated securities on the long end of the US Treasury market. This week’s intervention does nothing to reassure investors that the situation is in any way improved.

Equities: earnings strength supports the market

Equities were supported by another strong earnings season, with the notable feature being that earnings expectations have risen faster than share prices. Forward earnings for US Equities have increased materially year-to-date, outpacing the index and pulling the forward multiple lower even as the market has reached new highs. This means valuations have become less demanding than they were at the start of the year. The rally has also broadened beyond the largest technology companies, with stronger performance from the wider market and record forward earnings across large, mid and small caps. This breadth makes the earnings backdrop more durable than a simple mega-cap technology story.

Valuation is therefore less stretched than the index level might suggest. The premium attached to the largest technology companies has narrowed, while mid and small caps remain cheaper and have participated more fully in the rally. Technology valuations also look more grounded in earnings delivery than in multiple expansion. The key offset is the bond market: as Treasury yields move toward the top of their recent range, the comparison with equity earnings yields becomes more relevant. For now, rapid earnings growth is helping equities absorb that pressure, but the cushion would narrow if yields kept rising or earnings momentum faded.

Japan: policy pressure and AI-related opportunities

Japan is once again providing insight into a range of more global policy and corporate challenges. Inflation accelerated again in July as higher energy and commodity costs fed through into consumer goods, while yen weakness kept imported inflation in focus. This has increased speculation that the Bank of Japan may raise rates again as soon as September, particularly after earlier currency intervention only temporarily stabilised the yen. Japanese equities continue to benefit from improving earnings, revenues and margins, but currency weakness has diluted returns for overseas investors. More broadly, Japan reinforces the message from global bond markets: where fiscal policy is loose, inflation remains sensitive to commodities and central banks look behind the curve, investors are demanding more compensation to hold long-dated debt.

Japan continues to have meaningful exposure to the possible future beneficiaries of AI-related investment, lying beyond the most visible technology names in US and Emerging Market indices. It extends across the supply chain, including semiconductor production equipment, specialist materials, power components, data-centre infrastructure, electricity supply and grid equipment. As the cycle matures, the market is likely to focus less exclusively on the early winners and more on the practical constraints that determine whether capacity can keep expanding.

Despite current market exuberance and a clearly strong earnings environment, valuation discipline remains essential. Treating AI as a broad long-term theme rather than a single trade should help investors to avoid the worst of the hyperbole. Not all companies with exposure to the theme will generate attractive returns over the long-run and looking beyond the most ‘obvious’ beneficiaries of the AI story is likely to yield better results at this point in the story. 

The week ahead

Tuesday 25 August: US consumer confidence and new home sales

Our view: Consumer confidence is expected to edge down to 90.3 from 90.8, while new home sales are expected to fall to 620k from 628k. This would point to some moderation in household confidence and rate-sensitive housing activity.

Wednesday 26 August: Core PCE, Q2 GDP and durable goods orders

Our view: Core Personal Consumption Expenditures (PCE) is expected to rise 0.2% month-on-month, up from 0.1%, while the annual rate is expected to remain at 3.3%. GDP and durable goods are both expected to be broadly unchanged from their prior readings, at 1.5% and 0.5% respectively.

Thursday 27 August: Initial jobless claims and Jackson Hole

Our view: Initial claims are expected to rise slightly. Jackson Hole – an annual gathering of central bankers and economists – will be closely watched for any shifts in central-bank messaging on inflation persistence, fiscal pressures and rates.

 

Markets for the week 

 

This week in summary

• The second quarter earnings season has been very strong, especially in the US, pushing equity markets to new highs
• Upside surprises have come from the technology sector, but also energy and increasingly industrials as economic growth continues to broaden out
• Inflation data from the US showed a continued moderation, which is helpful for equity markets, and led to lower expectations for an interest rate increase at the next Federal Reserve (Fed) meeting in September
• US retail sales in July fell the most in over a year, tempering enthusiasm in markets at the end of the week, and reigniting concerns about the health of the US consumer
• Emerging Market stocks outperformed as investors bought back into the Artificial Intelligence (AI) trade after some steep declines
• Yet another heatwave spread across the UK and Europe, with implications for agriculture production and food prices
• Markets now look ahead to UK inflation and US jobs data, which will provide further clues as to the near-term direction of interest rates.

Market review

Strong corporate earnings are supporting the market

The vast majority of second quarter earnings reports are now in, and the results have been strong.  In the US about 85% of companies have beaten earnings estimates, and while the European figure is lower at about 63%, both metrics are above historical averages.  In the US second quarter earnings growth is expected to be close to 25%, excluding some one-off equity investment gains for large cap tech, which is a very healthy number. Estimates have been rising all year, in contrast to most, when analysts usually start the year too optimistic, and earnings growth for 2026 is now expected to be 30%-35% in the US and 10%-15% in Europe.  In the long-term equity prices tend to follow earnings, so this has been a positive week for markets, with US and Europe both reaching new highs.

So what has been driving this growth?  In the US it has come mostly from the technology sector, as demand for AI compute and investments in AI infrastructure continue to be very strong. This has eased some fears about over-investment in data centres and compute, although this remains a live debate. The energy sector has also shown strong earnings growth, driven primarily by oil prices being materially higher than a year ago due to the Iran war.  The industrials sector has also seen strong earnings growth and a recovery in orders. After several years of lower growth and destocking, industrial companies in the US are enjoying a cyclical upswing, as economic growth continues to broaden out.  Corporate operating profit margins in the second quarter are now approaching 20%, much higher than previous years.

The situation is similar in Europe, with the energy sector seeing the strongest earnings growth year-on-year.  Technology earnings have also increased, but less so than the US, and in Europe the large financials sector has seen higher earnings revisions too.  The industrials sector has not performed as well as the US, as it still has strong links to automotive production, which continues to struggle in the face of Chinese imports.  The sector with the highest negative revisions in Europe remains the consumer, as the high cost of living continues to dampen spending levels.  In Asia results have been more mixed, but technology stocks rebounded on strong demand for AI, leading to Emerging Market indices outperforming over the week.

Are cracks appearing in consumer spending?

On the positive side, inflation figures out last week in the US were encouraging. The core Consumer Price Index (CPI) rose 2.5% year-on-year, in line with economist expectations and matching the slowest increase since March 2021.  This pushed short-term government bond yields down on the day and expectations for an increase in interest rates fell.  On a less positive note, at the end of the week retail sales numbers were clearly disappointing, falling 0.6% month-on-month compared to an estimate of +0.1%.  Even stripping out the more volatile effects of automotive and energy sales it was a weak print, and the worst reading for over a year.  Putting the number in context, retail sales in the US still grew 5% year-on-year, but the consumer remains a very important part of the economy, and continued weakness would be a concern for growth.  However, if inflation remains more stable and the consumer is weak then there would likely be a lower chance of the Fed raising interest rates.

In Europe and the UK, the consumer has been struggling for a while with the cost-of-living crisis, having to cope with persistent inflation and high energy prices. Last week saw yet another record-breaking heatwave across the continent, with wildfires raging in drought like conditions in several countries. This has implications for agricultural production, with lower yields impacting supply, which could lead to higher food prices. It’s a risk that central banks will watch closely given the implications for inflation.

The week ahead

UK CPI inflation

Economists expect stable inflation in July of 2.9% despite the spike higher in oil prices during the month due to renewed tensions in Iran. 

US initial jobless claims

Markets will be watching labour market data closely for any signs of weakness following a surprisingly soft nonfarm payroll report for July.

Federal Open Market Committee meeting minutes

Investors are likely to scrutinise the minutes of the last Fed meeting, given it was just the second for new Chairman Kevin Warsh, with the next taking place  in mid-September.
 

Markets for the week 

 

This week in summary

• UK mid and small caps outperformed as strong earnings, improving economic data and record takeover activity highlighted the valuation opportunity in UK equities
• Foreign buyers continue to target UK assets, with more than US$60bn of mergers and acquisitions (M&A) announced this year as overseas acquirers take advantage of depressed valuations
• Global growth remains resilient, led by the US, with recession risks still appearing low despite signs of moderation in the labour market
• China remains the notable weak spot, with recent PMI data highlighting ongoing challenges in the world's second largest economy
• Key risks remain in focus, including Middle East energy supply disruption, scrutiny of AI-related capital spending and the potential for a more hawkish (favouring higher interest rates) US Federal Reserve (Fed)
• Markets now look ahead to US inflation and UK GDP data, which will provide fresh insight into the outlook for interest rates and economic growth.

Market review

The departure lounge: UK plc

UK mid and small cap stocks outperformed last week gaining 2.4% while large caps rose 0.5%, as a confluence of M&A activity and a broadly positive domestic earnings backdrop drew investors into the ‘cheap’ smaller end of the UK market.

 The M&A backdrop was the defining feature of the week - and of the year. The UK has now seen over US$60 billion of takeover activity in 2026, with foreign and private equity buyers consistently drawn by a valuation discount that continues to make UK assets look cheap relative to global peers.  The pace of dealmaking has accelerated to the point where UK takeover volumes are running some 250% above prior-year levels. 

The buyers are overwhelmingly overseas: US private equity, European strategics and Asian corporates. According to the ONS, the number of UK firms in foreign hands has risen 35% since 2020, with 6.6 million Britons now employed by foreign-owned companies - representing roughly one in five employees. 

The very valuation discount that has frustrated domestic investors for years is now acting as a powerful magnet for external capital, with Bloomberg describing the UK as a ‘departure lounge’. 

On a more positive note, underpinning the index move was also a busy and broadly constructive half-year reporting season. Across the domestically-oriented mid-cap universe, the tone of results was solid; companies in housebuilding, retail, insurance and financial services generally met or beat expectations, with several upgrading full-year guidance.  The one-year forward price/earnings multiple for UK mid and small caps stands at 11.6x, compared with 18.6x for global equities.

Strong UK economic data was the final trifecta of support for domestic equities. The July Services PMI rebounded sharply to 52.1 from a contractionary 48.8 in June, lending credibility to the more optimistic earnings outlooks being set by management teams.

The earnings and economic data suggest that the UK economy is in better shape than the persistent valuation discount implies - a message that overseas acquirers appear to have received more clearly than the public market.

Fresh global economic insights support our growth thesis

Economic activity remains robust, with the US continuing to lead global growth. Last week's data confirmed broad-based expansion. US ISM Manufacturing rose to 55.6 in July, its highest level since May 2022 and a seventh consecutive month of growth, while the Global Composite PMI climbed to 52.6, its strongest reading since February. Consumer spending, corporate profitability and labour markets remain supportive of continued expansion, leaving recession risks relatively low. The one notable exception was China where PMI data was significantly weaker than anticipated with the composite index falling to 50.8 from 53.6. The Chinese economy has struggled with persistent sluggish growth for over three years.

While global recession risks remain low, labour markets bear closer watching. Friday's July US nonfarm payrolls report surprised to the downside, with employers shedding 23,000 jobs against expectations of an 83,000 gain, while prior months were revised lower by a combined 103,000 positions. While hiring came in below expectations, unemployment fell to 4.1%. Some of the weakness reflected temporary factors and recent US government job cuts, leaving the overall picture one of gradual moderation rather than deterioration.

While the growth backdrop remains supportive, several risks warrant monitoring. The situation in the Strait of Hormuz remains unresolved. A deal between Iran and Oman is reportedly close, but key conditions, including sanctions relief, remain outstanding. Strategic petroleum reserve releases have helped cushion the impact of higher energy prices to date, but this is finite and a prolonged disruption would increase the risk of tighter energy markets particularly ahead of the Northern Hemisphere winter.

As discussed in last week's note, the AI investment cycle also continues to attract scrutiny. Hyperscaler capital expenditure remains at historically elevated levels, with investors increasingly focused on the return generated from that spending and the sustainability of the cycle. Last week saw the AI trade bounce back but it remained volatile with a severe mid-week rout particularly in Asian ‘memory’ technology stocks.

Finally, stronger growth and persistent inflation pressures have increased the risk of a more hawkish policy path from the Fed. With no Fed meeting scheduled in August, investor attention will now turn to the Jackson Hole policy symposium, where policymakers have an opportunity to provide further insight into their assessments.

The week ahead

US CPI inflation

Economists expect that inflation slowed in July to 3.4% with lower gasoline prices supporting the disinflation. Notably for the Fed however Bloomberg economists expect core CPI (excluding volatile food and energy) to have slowed to 2.4% the lowest since before the inflationary spiral in March 2021.

UK GDP

Economic growth in the second quarter is estimated at a fair 0.4%, slowing slightly from 0.6% in Q1. The UK economy is holding up given geopolitical events during the quarter. It is expected that consumer spending was boosted by the hot weather and the FIFA World Cup. Most economists see steady (‘slow and low’) economic growth in the second half of the year and through 2027. 

Markets for the week 

 

This week in summary

• Semiconductor stocks continue to drive market weakness despite broader market resilience, with over 60% of US companies delivering positive returns since the end of May
• US earnings remain exceptionally strong and broadly based, but investors are increasingly focused on the economics and sustainability of the Artificial Intelligence (AI) expansion
• Growing Chinese competition is raising questions over future AI and semiconductor profitability as lower-cost models and increased chip supply pressure incumbents
• Rising debt issuance, higher financing costs and concerns around circular financing arrangements are increasing investor scrutiny of hyperscaler AI spending
• Semiconductor fundamentals remain robust, with record earnings expectations and significantly lower valuations than last year
• This week's US employment report is expected to show a gradual cooling in labour market conditions, supporting the Federal Reserve's (Fed) decision to keep rates unchanged.

Market review

Equities resilient despite semiconductor swoon

The summer semiconductor swoon has been the defining feature of equity markets over the last two months as leadership has rotated sharply away from the tech darlings of the spring towards defensive sectors such as healthcare and consumer staples. Last week, despite its volatile nature, provided a useful case study for the current environment, highlighting several important themes: market breadth, earnings, Chinese competition and hyperscaler capex.

Market breadth: It hasn’t been unusual in recent months for most companies to gain on days where the index has fallen. Indeed, since the end of May the US market has delivered a return of -1.2%, yet more than 60% of companies have generated positive returns. This broader pattern was evident again last week as semiconductor stocks were the worst performing major industry globally while much of the broader market, particularly consumer sectors and financials, performed well. Interest rate-sensitive and cyclical sectors underperformed as bond yields rose on the back of the Fed’s reluctance to hike rates.

Earnings: About a third of the way through the Q2 reporting season, the US market remains on track for a ninth consecutive quarter of double-digit earnings growth. Corporate fundamentals, particularly in the US, remain exceptionally strong. Year-on-year earnings growth is currently running at 37%, admittedly flattered by mark-to-market gains (reported earnings looking stronger due to assets or investments rising in value on paper) driven by the strong equity market performance through the spring, but analyst expectations for Q3 and Q4 earnings are also rising. Earnings growth remains broad based, with small and mid-sized companies delivering solid results. Strong earnings within technology have largely failed to halt the rotation out of the sector as investors remain focused on the scale of investment required for the AI buildout and the potential returns that investment may ultimately generate, particularly given growing competition from China.

Chinese competition: The infamous DeepSeek question remains unanswered: how much of the AI opportunity will ultimately be captured by China? Western companies are already using lower-cost Chinese AI models, while competitive Chinese releases continue to put pressure on western providers, contributing to a rapid pace of innovation and falling assumption costs. Similar concerns are emerging across the semiconductor industry. Investors increasingly fear that Chinese competitors could cap industry profitability by expanding supply and driving down prices. Apple has reportedly been lobbying US policymakers to allow Chinese-made chips to be used in products sold outside the US, highlighting how rapidly Chinese manufacturers are advancing across the semiconductor value chain.

Hyperscaler capex: Data centre projects have been under increasing scrutiny during the summer swoon as they continue to deploy capital at an extraordinary pace. In aggregate, free cash flow has turned negative, forcing increased reliance on debt markets to fund the AI buildout. This surge in bond issuance is now beginning to show signs of investor fatigue. There are also growing concerns around circular financing arrangements, with NVIDIA providing financing to OpenAI to fund chip purchases, a significant proportion of which would ultimately flow back to NVIDIA. Taken together, these developments have raised questions about both the economics and sustainability of the current AI investment cycle.

The recent weakness in technology therefore appears less a reflection of deteriorating fundamentals (semiconductors remain strong with revenues, earnings and profit margins at record highs) and more a reassessment of the durability and economics of the AI investment cycle. Economic activity is robust, earnings growth remains broad based, and market leadership has widened beyond a narrow group of mega-cap technology companies. This shift is best reflected in the broadening trend across equity markets.

While concerns around the economics of the AI buildout are undoubtedly real, so too is the scale of capital flowing through the supply chain. The key question is not whether demand for AI infrastructure is substantial, but whether that demand proves durable enough to justify the extraordinary level of investment taking place today. The answer will depend on whether AI companies can meet their revenue forecasts and honour their compute spending commitments to the hyperscalers that are funding the buildout.

The week ahead

US employment report

Economists expect job growth to accelerate slightly in July with nonfarm payrolls reporting 80k new jobs for the month, up from 57k in June. This would still represent a slowdown from the spring. The unemployment rate is anticipated to rise marginally to 4.3% driven by a drop in labour force participation for younger age workers. The US labour market remains robust but the slowdown supports the Fed’s recent decision to hold rates rather than hike. 

Markets for the week 

 

This week in summary

• Energy markets saw a sharp resurgence in volatility as Middle East tensions re-escalated, with Brent crude briefly topping US$100 a barrel – its first move above that level since late May – before easing back under US$96 on Friday, still leaving oil up sharply on the week
• The European Central Bank (ECB) held rates unchanged at its July meeting, but with a notably hawkish tone given the inflationary risk from the energy shock; the US Federal Reserve (Fed) and Bank of England (BoE) both meet next week amid a similarly uncertain backdrop
• New Fed Chair Kevin Warsh continued to strike an unambiguously price-stability-focused tone in recent congressional testimony, raising the question of whether the Fed's dual mandate is being applied differently than under his predecessor
• A new round of US tariffs took effect this week under a different legal authority than before, though the effective rates on most countries were largely unchanged
• US equities were volatile, with a sharp Thursday sell-off in megacap tech (on disappointing Alphabet and Tesla results) partly reversed on Friday.

Market review

Energy volatility returns as Middle East conflict re-escalates

Oil markets swung sharply higher this week as the conflict between the US and Iran continued to intensify. Brent crude moved above US$100 for the first time since May, gaining c.7% in a single session. The escalation was marked: the US launched a 13th straight day of strikes on Iran, with both sides ruling out near-term talks, while tanker flows through the Strait of Hormuz have effectively stalled amid heightened security risks. Iran has reportedly asked the Houthis – an Iran-backed armed group that controls much of northern Yemen – to stand ready to close the Red Sea route if the US strikes Iranian power infrastructure, raising the prospect of both of the region's key export routes being disrupted at once. Prices eased somewhat on Friday as Houthi-related tanker attacks calmed, but the risk premium embedded in oil remains substantial, with the path from here depending heavily on whether diplomacy or further escalation wins out.

Central banks: a hold from the ECB, a hawkish tilt at the Fed

The ECB kept rates unchanged at its meeting on 23 July, with the deposit rate – the interest rate a bank pays for keeping money with them – remaining at 2.25%. The hold was widely expected, but the tone from Frankfurt was firm: with oil back above US$95 a barrel, Lagarde framed the pause as tactical rather than an end to tightening. July is a non-projection meeting, so the bar for a fresh move was always higher. The more consequential decision is likely to come in September, once new forecasts are available. The Fed and BoE both announce decisions next week – the Fed on 28–29 July and the BoE on 30 July.

Fed Chair Kevin Warsh has used his first appearances before Congress to draw a clear contrast with his predecessor. Warsh told committee members the Fed has no tolerance for persistently elevated inflation and shares a resolute commitment to restoring price stability. He has offered no indication of the dual mandate being weighed evenly between inflation and employment. Coming just as energy prices are pushing price pressures higher again, that tilt suggests markets may have priced in more tolerance for an AI-capex-driven inflation impulse than the new Fed leadership is willing to give.

Tariffs: the legal basis shifts, but effective rates hold steady

A new set of US tariffs took effect on 24 July. The temporary 10% Section 122 global surcharge, designed to address trade imbalances, expired at the same moment a new Section 301 action targeting unfair trade practices and tied to forced-labour enforcement came into force across 60 economies, including the UK and EU. For most countries, the new rate simply mirrors the outgoing rate, so effective tariff burdens are largely unchanged. The US is increasingly relying on Section 301 as its durable legal vehicle for tariff policy following successive court challenges to the executive's use of emergency powers.

Regional equity allocations - concentrated exposure and the search for genuine diversification

The Korean equity market has become the clearest illustration yet of how concentrated the artificial intelligence (AI) theme has become within ‘diversified’ regional and emerging market (EM) exposure. Return volatility on Korean equities exceeded 60% as of 20 July, nearly twice the level on Japanese equities and higher than Bitcoin's volatility over the same period. The Korea Exchange has activated circuit breakers seven times through mid-July, compared with none in 2025. Samsung Electronics and SK Hynix saw their combined weighting rise above 50% ahead of the recent pullback, meaning investors buying funds that track the broader Korean market have gained highly concentrated exposure to two semiconductor companies and the global AI investment cycle, rather than a diversified domestic equity market. The index has tumbled around 25% since its June peak, a roughly US$1trn wipeout, with the two chipmakers each losing at least 30% of their value, a sharp reversal after a rally that saw the index nearly double earlier in the year.

The pattern shows up, in a milder form, across the standard EM benchmark. The top ten constituents of the MSCI Emerging Markets Index, which tracks the performance of large and mid-sized companies across emerging markets, make up 40% of the index, with TSMC and Samsung Electronics alone accounting for nearly a quarter of it. In contrast, no single country accounts for more than 10% of the MSCI Frontier & Emerging Markets Select Index, and technology exposure across it is just 1%; returns there are driven by domestic consumption and financial services as much as by exports or resources.

There is also a valuation angle. Some genuinely under-exposed EM markets are being reframed by investors as diversifiers rather than laggards. A headline EM allocation can leave a portfolio more exposed to a single macro theme, AI hardware demand, than a domestic-facing developed-market allocation would. Markets such as the Philippines, Kenya or India offer growth drivers largely uncorrelated with the AI narrative, but only for investors who select them deliberately; standard index-tracking exposure to ‘EM’ increasingly means a leveraged bet on two or three Asian chipmakers. Gold and infrastructure told a similar story earlier this year: broad thematic and regional labels can mask very different underlying risk profiles.

The week ahead

Fed and BoE rate decisions (29 and 30 July).

Our view: Unlikely to see moves this month, but the press conference and commentary will give important signals for future movements. We expect a notable hawkish stance from both meetings – whilst an imminent rate rise is not our base case, it would not come as a huge surprise.

US Q2 GDP and June PCE inflation (30 July).

Our view: GDP should show an improvement versus Q1. Personal Consumption Expenditures (PCE) report (the Fed’s preferred gauge of inflation) will be scrutinised for early evidence of any energy-driven price pressures re-entering the read.

Big tech earnings: Microsoft and Meta report Wednesday, followed by Amazon and Apple on Thursday.

Our view: AI capex and free cash flow trends are likely to remain the key focus after last week's negative reaction to Alphabet and Tesla numbers.

Markets for the week