What if Goldilocks is real? Growth, inflation and markets align

The year so far continues to challenge investors’ two strongest convictions: that mounting AI capex would trigger a market correction, and that the oil shock would lead to stagflation. So far, neither has materialised. In fact, inflationary pressures have stopped accelerating, while growth has strengthened and early signs suggest market leadership may be broadening beyond technology.

Higher long-term rates remain a key risk, with implications for both governments and market valuations, while AI continues to be the main catalyst for earnings growth. However, if the benefits of AI investment begin to support earnings more broadly, as current market pricing suggests, valuations could expand in a more balanced way across sectors in the second half of the year.

The economic backdrop has therefore taken one step towards a Goldilocks scenario: stronger growth, less pervasive inflation pressure and the first signs of wider market leadership. The main constraint is now the cost of capital. With bonds once again competing with equities, the opportunity set is becoming more attractive, but also more demanding for investors.

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

Supports for market momentum

Ongoing disruption in the Strait of Hormuz has led investors to retain a persistent stagflation bias. Yet an 80% increase in oil prices since the start of the year has encountered two meaningful offsets: lower wage growth and higher productivity, the latter partly linked to AI. Meanwhile, factors including last year’s decline in central bank rates have been positive for growth – first in the US and now more globally (ex-China), as Figure 1 shows.

Overall, the share of global data pointing towards stronger inflation pressures has fallen by 12% (see Figure 1). Japan, Switzerland and the UK remain the exceptions, with respective increases of 3%, 5% and 5%, keeping stagflation a concern for investors. But a Goldilocks scenario is increasingly visible in the data, supporting market momentum.

FIG 1. Change in the percentage of good news for growth and in the breadth of inflation pressures since December 2025¹

Expect AI to drive broader growth going forward

Driven by AI, global technology sector earnings have increased by around 45% since January 2025, exceeding the growth of about 15% for global industrial and consumer sectors (see Figure 2). However, trend signals show that price momentum for non-tech indices is currently stronger than for tech-related ones. This suggests that the benefits of AI are beginning to spread, starting with industrials.

The third-quarter earnings season will need to confirm this price action. The crucial question is no longer whether AI can continue to produce earnings growth, but whether its productivity and investment effects are beginning to support earnings elsewhere. We think they are.

FIG 2. Earnings growth and trend signals for tech-related and other indices²

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Repricing the global risk-return opportunity set

As we have repeatedly highlighted, long-dated yields have increased across markets. Their rise has been driven not by inflation but by the normalisation of real rates and, increasingly, by a rebuilding of term premiums (see Figure 3). Corporate and government bond issuance is adding pressure by increasing the capital fixed income markets must absorb.

Bond carry has progressed to the point where the efficient frontier is now nearly flat: assets with materially different levels of risk (fixed income and equities) are offering broadly similar expected returns (Figure 3). This strengthens the case for long-term investors to lock in the returns available through duration in dollar- and euro-denominated fixed income, and paves the way for higher and more balanced performance for diversified investors.

FIG 3. Risk-return dynamics and the US 10-year yield³

Our positioning for equity, fixed income, convertible bond and multi-asset strategies⁴

Improved growth, persistent earnings momentum, and the early broadening of growth and earnings beyond technology support a constructive stance. Our investment teams are monitoring cyclical exposure and potential rate risk. At the same time, higher real yields and the renewed competition between bonds and equities argue for greater selectivity than earlier in the cycle.

Multi-asset: Market exposure remains stable at about 165%. Positioning remains balanced, with a marginal overweight in equities of around 3% in benchmarked mandates. Our All Roads team remains constructive on cyclical assets, while AI valuations, inflation and rates volatility are still key risks.

Fixed income: Our Global Fixed Income team has moved from underweight to neutral on sovereigns, while staying overweight emerging market (EM) hard-currency debt. It continues to prefer euro and UK rates over the US dollar, and US Treasury Inflation-Protected Securities (TIPS) over nominal US Treasuries. Exposure to both investment grade (IG) and high-yield (HY) credit is neutral, with a preference for US over European HY. Fallen angels and European real estate are a focus, while tech hyperscalers are capped at market weight. Our Asia Fixed Income team maintains positive duration and credit positioning, preferring Asia HY for its room for spread compression and attractive spread buffer over US HY. Strong technicals, improving fundamentals and strengthening credit profiles with close-to-zero default rates continue to support the asset class.

Convertible bonds: Our Global Convertible Bonds team is positive US but neutral Europe and China, with selective AI exposure in Japan and Asia. Focuses include strategic interests, semiconductors, AI hardware and infrastructure, energy transition, high-performance computing, AI software and cybersecurity, while the team is negative on autos, food & beverage and China consumers.

Equities: Strong 2026 earnings-per-share growth and improving geopolitics support the equities rally. Our Global Equities team is positive on information technology in the US and Asia (notably Japan, Korea, and China), neutral on industrials and underweight European consumer discretionary and staples. The Sustainable Equities team maintains quality exposure to the AI trade while diversifying through select AI-related industrials and software names with AI-resilient moats. It remains net long consumer discretionary over staples, with a preference for digital consumption and platforms, and has added to key regional banks. In Asia Equities, our team remains fully invested across a broad sector allocation, preferring technology and platform-technology companies over real estate and utilities, particularly in China and Korea, while adding to long-term growth compounders in financials. Finally, our Swiss Equities team is fully invested, and is overweight healthcare, industrials and information technology while underweight communication services, consumer discretionary, financials, real estate and utilities.