Investors are currently grappling two narratives: adverse macro impacts driven by the Iran War, and a stronger-than-expected backdrop driven by AI-related capex and three consecutive months of US employment overshoots. Equity returns in recent weeks imply that oil-supply disruption is being largely overlooked, but this view misses the point. Growth prospects for the next decade are being revised up, supported by the large-scale private investments and the anticipated long-term effects, such as greater labour productivity.
Given this, we are constructive on the earnings outlook for companies – albeit selectively, as the uneven rally could broaden to lift laggards. Below we outline three reasons why markets are pricing-in stronger growth.
Bonds: inflation pressures confined to the energy sector
So far, the inflationary pressures arising from the Hormuz blockade are confined to energy, according our global inflation nowcaster. Markets have not encountered the ‘wall of inflation’ feared when the war broke out, but the risk of a broadening complex still weighs on rates and bond markets. The recent rise in real yields reflects a level typically associated with higher inflation – namely higher policy rates – and this has been accompanied by increased volatility (see Figure 1). Unlike equity markets, bond investors’ more hawkish view of Federal Reserve policy this year means they were less shocked by the robust US jobs report in early June. With higher real yields improving the relative attractiveness of bonds, a decline in volatility could deliver a compelling opportunity for the remainder of 2026.
FIG 1. Real yields vs rates’ realised volatility in the US1
Read also: Markets, oil and inflation: pricing the fear premium
Equities: broadening performance
Until the sell-off triggered by the latest US jobs report, equity returns were highly concentrated on the AI investment theme. Yet the recent earnings season delivered positive surprises across sectors worldwide (see Figure 2). Microeconomic data points to corporates being on solid footing, supporting the outlook for both equities and credit to deliver attractive returns in the coming months.
A broader repricing could emerge if investors rotate out of the current growth-orientated momentum trade, into lagging index sectors like Materials or Consumer Discretionary stocks. For this, an end to the Hormuz blockade would act as a powerful catalyst.
FIG 2. Corporate earnings surprises compared to sectors’ equity performance2
Read also: Markets look beyond the Iran crisis as AI momentum and earnings build
AI stock returns are likely to become more dispersed
With the exceptions of software, tech stocks have rallied with little differentiation since March. These gains have been underpinned by the AI-driven growth narrative, with a ‘wall of capex’ fuelling a rapid repricing of demand growth.
Investment at this scale (see Figure 3) leads markets to immediately price in demand for semiconductors and hardware, alongside expectations of stronger economic growth as today’s investment becomes tomorrow’s productivity. Beyond 2026, however, expectations point to a normalisation of this exponential trend, potentially shifting the narrative from ‘all-out growth’ to ‘selective growth’. This scenario would lead to greater dispersion of returns within tech and contribute to a broader market rally, necessitating a more active approach, in our view.
FIG 3. The expected progression of AI capex3
Our positioning across asset classes
Overall, positioning across our long-only investment teams remains risk-on, balancing resilient near-term growth dynamics with evolving earnings and macro risks.
Multi asset.While overall market exposure remains neutral at about 150%, the All Roads team has modestly increased cyclical exposure (42%) while preserving diversification and flexibility through defensives and tail hedges 58% (rebased to 100%).4
Fixed income. Our Global Fixed Income team remains neutral, with an underweight sovereign position and an overweight to emerging market (EM) hard-currency debt. It favours European 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 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 that favours higher-conviction opportunities. The portfolio is overweight India, commodities and subordinated financials versus underweights in China, South Korea, Indonesia and Southeast Asia.
Convertible bonds. The portfolio is neutral on the US, Japan and China, and underweight Europe. Its three high‑conviction equity themes continue to focus on strategic national interest, AI hardware and the energy transition. However, the team has locked-in gains from outperforming segments and is reallocating toward next-phase opportunities – particularly in software, cybersecurity and longer-duration assets.
Equities. Our Global Equities team continues to favour structural growth and innovation themes, with an overweight Technology position in the US and Asia, while being neutral on Industrials and underweight European Consumer Staples and Discretionary. The Sustainable Equities team has moved towards a more balanced geographical exposure, while taking selective sector positions including overweights in Technology, Materials and Ultilities; neutral in Healthcare and Financials; and underweight in consumer sectors and Energy. Our Swiss Equities team has maintained its overall market exposure, focusing on overweight positions in Healthcare, IT 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.
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