Growth up, inflation up – it’s risk-on across asset classes

Similar to the initial US tariff volatility of 2025, in H1 markets recovered from a sell-off to look through the economic shock of the war in Iran and focus on growth prospects. Now, AI-related companies continue to drive gains as capex is seen as boosting semiconductor and memory manufacturers’ prospects. The belief remains that greater productivity enabled by the new technology will underpin earnings across the broader economy – a global tide lifting all boats. 

Continuing growth and rising inflation keeps the Goldilocks scenario alive – even if rising real yields potentially threaten corporate earnings. For now, however, we believe the strength of market and macro conditions support risk-on positioning.

Read also: Positive equity and bond drivers persist through Iran negotiations

A benign investment environment

The oil-supply shock stoked fears of stagflation, but these were banished by improving growth. Still, stronger output combined with higher oil prices are driving inflationary pressures higher globally, providing a positive investment backdrop (see Figure 1). Central banks are taking stock of price pressures without overreacting, which is another plus for markets. 

FIG 1. Percentage of inflation data rising per country¹

Are AI stocks fairly priced?

The performance of equities, and more importantly of technology names, has been extraordinary this year. Has this been warranted? From expectations of widespread productivity gains to the impact on earnings growth, the overall appreciation does not appear irrational, in our view. This is because AI is both a productivity enhancer and a sales growth catalyst for the semiconductor sector.

While questions about valuations remain, if earnings deliver on the 15% growth that’s expected, the market’s price-earnings ratio could soften and it would not be considered to be overvalued. But this only applies if earnings do not disappoint.

FIG 2. Current and projected PE ratio for the S&P500²

Read also: Markets look beyond the Iran crisis as AI momentum and earnings build

Rising real yields are this cycle’s Achilles heel

It is rising real rates – rather than elevated equity valuations – that are this cycle’s Achilles heel, in our view. In the US, real yields have risen above 2%, and in Europe they are above 1%³. This increase reflects the crowding-out effect of public debt, the pressure on capex funding and a significant term premium (see Figure 3). High real yields are not a problem for markets because they signal strong growth. But equity valuations can only keep rising if earnings continue to increase: elevated funding costs may eventually weigh on profitability.

FIG 3. 10-year real yield decomposition⁴

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Our positioning for equity, fixed income, convertible bond and multi-asset strategies⁵

Overall, our positioning remains risk-on, supported by resilient growth and continued earnings momentum, while acknowledging the constraints of higher real yields. Our investment teams are focused on balancing resilient near-term growth dynamics with the potential risks to earnings. 

Multi asset. While market exposure remains neutral overall at about 150%, the All Roads team has modestly decreased cyclical exposure (38%) versus defensives 62% (rebased to 100%), while preserving flexibility amid evolving macro conditions and structurally higher real yields.

Fixed income. Our Global Fixed Income team has moved to a long-duration stance, while remaining underweight sovereigns (although this is now closer to neutral) and overweight to emerging market (EM) hard-currency debt. It favours euro and UK rates over the US dollar, with a preference for Treasury Inflation-Protected Securities (TIPS) over nominal US Treasuries. Within credit, exposure to investment grade and high yield (HY) is neutral, with a selective tilt. Our Asia Fixed Income team has a preference for defensive high-yield, short-duration profiles and a selective country allocation. The portfolio is overweight India, commodities and subordinated financials versus underweight exposures to China, South Korea, Indonesia and southeast Asia.

Convertible bonds. The global portfolio remains actively positioned and is positive on the US, neutral on China, and has increased its previously underweight European exposure. Its three high‑conviction equity themes continue to focus on strategic national interests, the AI value chain and the energy transition. The team continues to rotate from outperforming segments into next-phase beneficiaries across these themes, increasing exposure to luxury and cybersecurity names and consumption linked to tourism. 

Equities. Our Global Equities team remains tilted toward structural growth and innovation themes, with an overweight technology position in the US, Japan and Asia, while being neutral on industrials and underweight European consumer discretionary names. The Sustainable Equities team has marginally adjusted its sectoral positioning, trimming exposure to AI capex and strong high-beta names, while increasing the allocation to high-quality companies with defensive characteristics. Our Swiss Equities team has maintained its overall market exposure, focusing on overweight positions in healthcare, information technology and industrials, while maintaining an underweight in communication services, consumer discretionary, financials, real estate and utilities. The Asia Equities team maintains its increased conviction in exceptional, stable-growth companies, favouring technology, diversified industrials and consumer discretionary stocks over real estate and utilities. important information.