Market commentary: 1st July 2026 to 30th September 2026
As we enter the final quarter of 2026, we can reflect on positive returns for our clients. Our investment thesis is that the strong economic growth in the US will continue; there is too much wind in its sails to be knocked off course by three main risks:
- War in Iran
- Concerns over the productivity (and threats) from the unprecedented investment in AI
- Rising bond yields
1. WAR IN IRAN
We wrote the following in March “The US is essentially self-sufficient when it comes to energy supply and can usually get oil from the ground to the pump in about a month…
Every day that the flow of oil is delayed costs Iran billions, but strengthens its negotiating position. We should expect no hurry from Iran. We must also recognise that the pain of supply shortages is felt most acutely outside the US, so they are more sanguine. The impasse we are in favours Iran, is immaterial for the US, but hurts the rest of the world.”
The impasse persists because both protagonists’ political position is improved by its continuation, or more accurately, their political positions would be weakened by a rapid resolution. Trump’s objectives are hard to elastic and hard to pin down. They appear to be regime change, Iran abandoning nuclear ambitions, and reducing Iran’s ability to destabilise the flow of oil and other countries. As things stand, despite the US’ ability to project immense power, these objectives seem distant.
Every day the US does not control the strait of Hormuz evidences Iran’s grip over this crucial avenue. A swift ending would recognise and entrench Iran’s position. This, in turn, would bring sharp focus on the wisdom of embarking on such adventurism, amplified by waning support domestically. For Iran, the “peace” that preceded the war was characterised by street protests and considerable violence. The war may have cost the regime an Ayatollah or two, but this internal threat has diminished.
As neither side is winning, and in the absence of a catalyst or an accelerant, then a continuation of the status quo seems the most probable outcome for now. The consequence is the high price of oil. This adds to inflation, while also acting as a future drag on economic activity, but these impacts should not be overstated. As such, unless something changes significantly, this is unlikely to have the most influential impact on market sentiment.
2. CONCERNS OVER THE PRODUCTIVITY OF (AND THREATS) FROM THE UNPRECEDENTED INVESTMENT IN AI
A truly unprecedented investment is being made in AI, by a concentrated group of technology companies. The burden of proof to justify this spending lies with these companies. The obligation of the observer is to be sceptical. So far, the $1.75 trillion spent on AI has destroyed value. That is not to say there are no areas where it is aiding productivity or research, it is that these benefits currently do not justify the colossal sums spent so far, and the even greater sums committed in the future.
If this investment does not deliver data centres at a cracking pace, and sufficient value to the consumer that it rewards the company making the investment with massive profits, then the investment has destroyed value. The size of the investment, and the speed with which the chips inside data centres relatively degrade, means that the value generated to justify the expense needs to be a) massive and b) very soon.
It is a defense to say that the investment to date has been necessary to unlock the value generation of the future. It’s just not a very convincing one. The data will slowly emerge over the next 18 months and we can modify our analysis accordingly, but to date there is scant evidence of any application that will deliver value.
As we have noted before, while AI’s ability to change the future is unknown, it is significantly changing the present. The overwhelming majority of this investment in AI is being made by US companies buying US products and building infrastructure in the US, filled with US employees. There is a reason (actually several) why the US economy grows much faster than the UK and Europe. US GDP growth will be boosted by around 2% p.a for the next two years driven by this investment alone. This is a big risk for markets, but a delayed one. At some point, the music will stop and we will see how many chairs are left, but this may be a consideration for the end of 2027. One can both be sceptical over the eventual wisdom of this incredible investment, but also acknowledge that it is generating significant economic growth in the medium term. This remains a considerable support for the US stock market.
3. RISING BOND YIELDS
Bond yields have been rising steeply over the last month. In layman’s terms: the cost the government has to pay to compensate people for lending to it has increased. To provide some context, the cost that the US government has to pay to borrow money for 10 years recently exceeded 5%. This is the highest level since 2007. This is partially a function of rising base rates: on 16th September the Federal Reserve (the US equivalent of the Bank of England, often referred to as “the Fed”) raised interest rates by 0.25% to 4.00%. When this happens, the cost of borrowing money increases for everyone, however long you wish to borrow money for. If you have had to remortgage recently, you will have noted the steep increases in cost. If a business wishes to raise some debt, the same applies. The Fed felt compelled to increase interest rates because inflation in the US (and across the western world) is not only stubbornly higher than its target, but also rising. The principal role of the Chairman of the Fed is to ensure price stability – that inflation stays close to the target, i.e. 2.0%. Donald Trump has, with typical disregard for appropriateness, been strongly suggesting that he wanted the Fed to lower base rates, despite US inflation being 3.6%. The Fed is, at least in theory, independent from political persuasion. The new Chairman, Kevin Warsh, was appointed by the President. Political fealties are supposed to be abandoned when a new Chairman is elevated to the role, but they can linger. In these circumstances, when the Fed board voted unanimously for a raise in interest rates, a Fed Chairman would have faced a terminal loss of credibility had he overridden the decision.
Why is inflation above target? The ongoing war in Iran has kept the price of oil high which rebounds on higher prices in the global economy. The surge in AI investment and broader economic growth is also inflationary. We should also note the trend towards deglobalisation – bringing manufacturing closer to home. This delivers increased supply chain resilience at the expense of higher prices. Perhaps most importantly, and why rising bond yields is the key threat we would identify, is that it is a reflection of the fiscal profligacy of the US and the west. Western democracies have been behaving over the last generation as if the answer to the question “what is the correct level of annual government borrowing?” is “as much as we can get away with”. The US is running a peace-time 6% fiscal deficit – this means the government is spending 6% more than it raises in taxes. This should be unsustainable and may well, eventually, prove to be unsustainable, but for the last few years credit markets have absorbed this growing debt pile without drama. Over the last three months, though, we have seen a notable increase in bond yields. Is this the start of the “age of consequences” – when international buyers of government debt start to get cold feet over the country’s ability to pay? It may be. When long term yields start to rise, the market’s interpretation is that this is a loss of confidence in the ability of the borrower to pay. An additional implied critique is that the government has allowed inflation to run out of control and that higher interest rates will be needed in the future. In effect, it is akin to a negative school report after a low exam score.
An amplifier in this is the perception that Scott Bessent (Treasury Secretary) has been trying to manipulate the price of long term US treasuries. The Treasury is a heavily active participant in treasury markets for mostly benevolent reasons. They try to maintain stability in yields and to provide liquidity, e.g. if a large buyer distorts prices. However, in August, it emerged that they had been buying an unusually large amount of long dated treasuries. This drives the price up and the yield down (yields move inversely to price for debt). A widespread interpretation was that this manipulation was intended to gloss over the symptoms (rising debt) without having to address the cause (government profligacy). Markets responded negatively to this attempt at cosmetic window dressing and, contrary to the plan by Bessent, long term treasury yields rose sharply.
The modest premiums, with significant added risk, of buying long dated government debt have always struck as deeply unattractive. We have no exposure to long duration debt so our clients are protected in full from the current volatility.
OVERALL
There are always things to worry about when investing. It is also important to remember the adage: pessimists sound clever, optimists make money. Rising treasury yields are a legitimate worry, as is the productivity (or lack thereof) of AI. But these are questions for another day. The strong corporate and earnings growth story suggests holding fast. Even if you ignore the “hyperscalers”, which we mostly do, there is plenty of growth and opportunity in equities around the world. It’s too early to go underweight.