Six investor questions for the final months of 2026

Risk assets delivered strong performance in the first half of the year, despite conflict in the Middle East, higher oil prices, tariff uncertainty and concerns over AI spending. The conditions are in place for further upside. Capital investment is expanding globally, growth remains solid, and the outlook for corporate earnings is going from strength to strength. Yet risks remain. We consider six potential sources of concern for markets.

Economic surprises have been positive in the first half, in spite of geopolitical headwinds, while inflation has remained largely contained. Underpinning the global expansion is a robust US economy, with small productivity increases, tame unit labour costs and low unemployment providing strong evidence of non-inflationary growth. The Federal Reserve (Fed) should thus be able to keep its policy rate unchanged.

But risks to the outlook remain. The US economy unexpectedly shed 23,000 jobs in July, with May and June figures seeing marked downward revisions. Semi-conductor stocks and hyperscalers have seen their valuations fall sharply, reviving the market’s AI-angst and triggering volatility in Korean equities. Long-dated US Treasury yields have hovered around multi-year highs since Kevin Warsh took over as the new Federal Reserve Chair. Meanwhile, the US Treasury and Bank of Japan (BoJ) have undertaken coordinated interventions to support the Japanese yen, a measure not seen since 1998.

Do these constitute material concerns for markets? Our answer is a qualified ‘no’ and we explore six key investor questions as we enter the final months of the year.

1. Do concerns over AI winners and losers risk derailing equity markets?

A key condition for further upside in global equities is that the rotations between AI losers and winners do not turn into a broader tech stock sell-off.

We do not believe this will be the case. Large-cap US IT companies delivered almost 70% earnings growth in the second quarter, with software firms generating profits from broadening corporate adoption of AI. This has allowed their valuations to rise, in line with our positive view on software after the indiscriminate sell-off earlier in the year. Accelerating revenue growth at their cloud businesses also shows that AI monetisation remains on track.

The recent increase in rental prices of graphics processing units – the chips that companies can rent from cloud providers to train AI models – highlights that demand for AI computing power continues to outpace the industry’s ability to bring new capacity online. This is despite the enormous capex of cloud providers, data centre operators, and infrastructure companies. The rapid expansion of computing power demand for running AI models suggests that this demand is becoming broader, more diversified, and recurring.

Demand for AI computing power continues to outpace the industry’s ability to bring new capacity online

While supply growth will eventually ease current constraints, utilisation rates and rental pricing may remain stronger for longer than many expect. We are therefore not overly concerned about current hyperscaler free-cash-flow trends, which are turning negative as investment rises. Their credit fundamentals are stronger than the recent widening in their credit spreads suggests.

This environment favours companies exposed to the whole AI ecosystem, including semiconductor designers, AI infrastructure providers, foundries, networking vendors, and data centre operators. Value is accruing across the entire chain required to power the next phase of AI adoption.

China is increasingly setting the pace in AI adoption. But we do not believe Chinese tech firms will disrupt the industry in the way Chinese electric-vehicle manufacturers did for European carmakers. The capabilities of US and Chinese AI models remain very different. American firms lead in innovation, while China leads in the AI adoption race. AI is too strategically important for any single country to dominate globally. Governments may increasingly follow US efforts to require the most sensitive data, models and computing capacity to remain under national control, creating several competing ‘sovereign AI’ ecosystems.

We stay neutral on the tech sector globally but with a preference for emerging market tech, and for software firms. Emerging market tech firms’ valuations are much lower than their developed market peers’, despite a similarly strong earnings outlook. We therefore see greater upside potential in the former, even though the recent sell-off in Korean stocks shows that their volatility and sensitivity to rising US real yields can be substantial.

2. Is the broadening equity rally sustainable?

After a long period of narrowly-driven performance, with gains concentrated in tech stocks, the rally has now broadened across sectors and regions. This is consistent with the impact of a strong tech and broader capex cycle gradually feeding through the rest of the economy.

Developed market equity valuations are now more attractive relative to expected earnings

Surveys of US manufacturing activity have strengthened since the beginning of the year, ending a long period of stagnation. Corporate earnings surprised positively across most sectors in the second quarter, and the outlook remains robust for both developed and emerging market equities. We continue to favour the financials, materials, utilities and healthcare sectors, supported by accelerating earnings momentum and structural trends such as expanding capex, electrification and rising longevity.

Developed market equity valuations are now more attractive relative to expected earnings than they were at the start of the year. In an environment of non-inflationary growth, we see scope for further gains. We do not expect a Fed hiking cycle to derail the rally or undermine supportive financial conditions. Investor sentiment has rebounded and positioning is not extended. US midterm elections may spark some volatility. However, history shows that, on average, political shifts in US Congress have not prevented US equities from rising over the following year.

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3. What does a coordinated US-Japan yen intervention signal?

A coordinated US-Japanese intervention in currency markets is rare. We believe that for Japan’s Ministry of Finance, the move was an attempt to limit the size of the intervention necessary to stabilise the yen. The US Treasury’s motivations included limiting the potential sale of US Treasuries by Japanese investors. Long-dated US Treasury yields are already at multi-year highs and risks abound: US budget deficits are among the largest in developed markets, tariff refunds are denting government revenues and with the Fed among the largest holders of US Treasuries, the central bank’s chair is guiding towards balance sheet reduction.

We do not believe such interventions will provide lasting support for the Japanese yen. The BoJ continues to face concerns over its policy credibility. During the deflation era, it took years of yield curve control to convince markets that the policy could sustainably encourage borrowing, spending and inflation. Now that it is fighting inflation, markets view the BoJ as lagging peers in responding to persistent price pressures. With markets pricing a somewhat more hawkish Federal Reserve, these broader concerns will prompt the BoJ to accelerate its monetary tightening modestly, with the next rate hike likely at September’s meeting, and three additional increases in 2027.

4. Does the Fed have a credibility problem?

The rise in US Treasury yields since Mr Warsh took over at the Fed has come under intense scrutiny. The ambiguity in communication around the Fed’s future framework is a challenge for markets. But we do not think that the Fed has a credibility problem. Long-term inflation expectations, as reflected by the difference in yields between nominal and inflation-protected 10-year Treasury bonds, have remained stable throughout the oil price shock this year and are at the lower end of their two-year range.

US real yields are likely to stay high, reflecting solid growth, and nominal yields will follow inflation developments

In addition, prices in many categories of goods and services are slowing and AI productivity gains should be disinflationary over time. Nominal US Treasury yields have largely increased because of higher real yields. Absent a marked deterioration in the labour market and recession risks, US real yields are likely to stay high, reflecting solid growth, and nominal yields will follow inflation developments.

5. Who wants to own US Treasuries?

The share of foreign-held US Treasury bonds has declined from 50% in 2012 to about 30% today. Following the Great Financial Crisis, Quantitative Easing (QE) led to large-scale Fed purchases of US Treasuries. As a result, the share of domestically held Treasuries increased, and the central bank balance sheet grew even as US Treasury borrowing rose. At the same time, more competitive and conflictual international relations have also contributed to foreign central banks reducing their holdings of US Treasuries.

With long-dated US Treasuries offering a yield above 5%, we expect domestic holdings and demand to remain sustained. US institutional and retail investors will be attracted by the high yield in nominal and real terms, especially if inflation gradually declines to the Fed’s target of 2%. We also believe that the growing volume of stablecoins – cryptocurrencies pegged to real assets – using US Treasuries as their underlying securities will likely counterbalance a potential decline of US Fed holdings.

Whether the relative share of foreign-held US Treasuries increases again will reflect market views on geopolitics and the compensation available for US sovereign credit risk. Despite geopolitical tensions, since 2023 the foreign share of US Treasuries has stabilised.

We increased our positions in global government bonds to neutral levels in June, reflecting better total return prospects. However, we stay cautious on long-dated bonds, and prefer 5-to-7-year maturities in US Treasuries and other developed economies.

In the current environment of non-inflationary growth, we believe bonds and equities can both benefit

6. Are bonds and equities telling the same story?

Equity-bond correlations have fluctuated since the Global Financial Crisis as market concerns alternated between growth and inflation. In periods of higher inflation, correlations tend to increase and the diversification benefits of holding both bonds and equities decline. This is because tighter monetary policy weighs on both equities and bonds.

The current environment of non-inflationary growth remains supportive for both equities and select fixed income. Robust corporate earnings prospects and rising investment should continue to underpin equity markets, while high income and resilient growth support selected bonds. We therefore remain overweight equities, in both emerging and developed markets. We also continue to favour emerging market bonds, which offer attractive risk-adjusted return potential. In contrast, we have reduced our allocation to gold which offers less compelling upside compared with growth-sensitive stocks and bonds. Rising investment and robust growth are a powerful combination for risk assets, but we expect an intense few months ahead.