Key message
I remain constructive on risk assets, albeit in a more demanding environment. Growth remains solid and earnings are reasonable, with no clear sign of deterioration that would justify a material reduction in risk exposure.
The key difference versus previous months is that strong growth is now coexisting with more persistent inflation and more restrictive central banks. This reduces the scope for indiscriminate upside and makes selectivity increasingly important.
Equities
I remain positive on equities into yearend but expect further gains to be more gradual and driven by earnings rather than multiple expansion, with rotation playing a greater role than a broad-based beta rally.
Following Jackson Hole, the “Goldilocks” scenario of a Fed comfortably on hold has become less likely, which delays the case for a meaningful broadening of the rally into small caps and cyclical companies. Until that environment becomes clearer, leadership is likely to remain concentrated in technology, quality growth and the hyperscalers.
One important nuance is that the AI capex boom itself is beginning to change the financial structure of the largest technology companies. Share buybacks have fallen sharply among the biggest AI spenders, while several companies have turned to equity issuance and an IPO pipeline is beginning to emerge, with OpenAI and Anthropic having filed confidentially.
This weakens the marginal technical support that buybacks have provided to equity indices for years and places greater emphasis on the breadth of earnings growth and cash conversion if valuations are to remain supported without that technical tailwind.
Fixed Income
Structurally, I remain negative on government bonds. Higher demand for capital, higher real rates and a potentially higher neutral rate all create an unfavourable backdrop.
The recent rise in yields does not appear to reflect fiscal stress, the term premium has remained broadly stable, but rather a more hawkish monetary-policy repricing, higher energy prices and stronger demand for private capital, partly linked to the AI capex boom itself.
In my view, this is not a disorderly bond-market sell-off. The move is being driven primarily by higher real yields and a more restrictive expected policy path, rather than by an unanchoring of inflation expectations.
Central banks still retain the ability to intervene if market liquidity or financial stability were to become impaired. However, that would amount to treating the symptom rather than the underlying fiscal cause and could even revive the narrative of dollar depreciation through higher inflation.
Tactically, however, the balance has changed. The increase in financing costs is beginning to narrow the spread between returns on capital and the cost of capital that has supported strong investment demand in AI.
This creates a potential reversal risk: if yields continue to rise, they may ultimately begin to slow the very investment cycle that has helped push them higher.
For that reason, I am tactically closing the short position in government bonds at current levels, not because yields have necessarily peaked, but because the asymmetry of remaining short has deteriorated.
At current yield levels, I prefer high-quality investment-grade credit in the five- to ten-year part of the curve, where carry is attractive without taking excessive exposure to any further rise in the long-end term premium.
Credit
I remain reasonably positive on credit. Corporate fundamentals remain solid and absolute yields continue to offer attractive carry. The main risk is less about credit deterioration itself and more about interest-rate volatility.
Issuance from hyperscalers to finance AI capex is becoming increasingly relevant within the investment-grade market, but this should not be confused with a broad-based excess of corporate supply. Overall issuance remains relatively contained, particularly at the long end, while credit spreads are currently trading around the sixth percentile of their twenty-year range.
This is therefore more likely to create greater dispersion across issuers and selective entry opportunities than a sustained widening in the market as a whole.
These remain, overall, high-quality issuers, although their rising capital intensity makes security selection increasingly important.
At current spread levels, the compensation for moving down in credit quality is limited. I would therefore maintain a bias towards stronger issuers, particularly as all-in yields of around 6% continue to provide a reasonable cushion despite the rise in rates.
I would maintain exposure to high-quality investment-grade credit in the five- to ten-year part of the curve, where carry is attractive without taking excessive exposure to any further rise in the long-end term premium.
Currencies
I remain bearish on the US dollar, with EUR/USD targets revised to 1.18 and 1.20 over three and twelve months respectively.
Warsh’s hawkish tone at Jackson Hole has provided some short-term support to the dollar but does not alter the underlying picture. Treasury buybacks announced by Bessent have revived the debate around financial repression and dollar “devaluation”, while any policy-driven reduction in nominal returns on US assets would continue to discourage capital inflows. This is also broadly consistent with the Administration’s interest in addressing trade imbalances.
In the euro, stronger activity data and firmer inflation support an ECB rate increase this week, while there appears to be less resistance to further euro appreciation.
In the yen, the move back towards more stable USD/JPY levels reflects an increasingly hawkish BoJ and the reduction of short-yen positioning, rather than the impact of FX intervention itself, which had previously failed to generate a sustained appreciation on its own.
Commodities
I remain positive on gold and would use corrections caused by hawkish monetary-policy repricing as opportunities to add exposure. Gold continues to make sense as a hedge against monetary, geopolitical and broader regime risks.
I am more cautious on oil. Prices are already close to the upper end of their recent range, and further upside appears limited in the absence of a renewed geopolitical escalation.
Conclusion
I remain constructive on risk assets, but increasingly selective.
Within equities, I favour quality, technology, and structural growth, while monitoring the gradual erosion of the technical support previously provided by share buybacks.
I remain positive on high-quality credit and gold, cautious on oil and bearish on the US dollar.
I remain structurally negative on government bonds, but tactically more neutral after closing the short position at current yield levels.