Weekly market commentary

Mega forces are transforming the global economy and markets, especially AI. Technology is becoming capital-intensive, and the AI buildout could be unprecedented in both speed and scale. These investment ambitions are pushing limits – the title of our 2026 Global Outlook – on multiple fronts and trumping the macro. With a few mega forces driving markets, it is hard to avoid making a big call on their direction. We stay pro-risk and overweight U.S. stocks on the AI theme.

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Never broken out
U.S. GDP per capita and long-term trend, 1870-2024

The AI buildout means the micro is macro – our first theme – and its scale has sparked talk of a bubble forming. We don’t see that as a practical lens for investing. Market bubbles grow for some time and only become obvious after they burst. And framing it as a bubble focuses only on the unprecedented spend – but AI could be unprecedented both in terms of investment and potential corporate revenues. We think it is more relevant to see if and how these unprecedented dimensions can be reconciled. We find that justifying the loftiest ambitions would require a U.S. growth breakout from its long-term 2% trend that generates new pools of revenue. That’s hard to make happen. All major innovations of the past 150 years – steam, electricity and the digital revolution – were enough to keep U.S. growth at its 2% trend, not break it. See the chart. Something more is needed, and AI could deliver it.

AI makes such an unprecedented breakout conceivable because it has the potential to innovate the process of innovation itself, generating and improving new concepts on its own. This self-reinforcing loop is key to achieving the growth breakout and expanding the overall revenues. But we don’t know if this will happen – and even if all these revenues are generated, it’s unclear who will capture them. Entirely new AI-created revenue streams could develop and spread across sectors and the economy. It’s also unclear who the winners will be within tech: the capex may pay off overall, but not for individual companies. That’s why we think the AI theme will become an active investing story. The current AI builders have room to grow their share of the revenue as they eat into parts of the tech ecosystem, like software. But we should not expect these companies to be on autopilot. Their investment ambitions are not yet reality, and they could adjust as more clarity on revenues emerges and stark physical constraints bite. Yet we see opportunities where these constraints are most acute, especially energy.

Never broken out

The front-loaded investment in the AI buildout and back-loaded revenues creates a financing hump – and that makes greater leverage inevitable, as seen from big tech corporate bond sales. That’s why our second Outlook theme is leveraging up. The good news: the starting point for private sector leverage is healthy, particularly listed tech. But along with highly indebted governments, this leverage creates a financial system vulnerable to shocks – including bond yield spikes tied to policy tensions between inflation and debt sustainability. We think infrastructure and both public and private markets will support this financing. We favor short- and medium-term U.S. Treasuries and renew our underweight to long-term bonds.

A diversification mirage, our third theme, has emerged with a few mega forces driving markets. Attempts to diversify away from the U.S. or AI amount to larger active calls than before. And traditional diversifiers like long-term bonds do not offer the portfolio ballast they once did. We think investors should focus less on spreading risk and more on owning it deliberately. Strategies like private markets and hedge funds pair diversification with strong return potential, in our view.

Our bottom line

AI’s self-reinforcing innovation loop could break the U.S. out of its 2% growth trend and reconcile big AI buildout spend with potential revenues. We stay overweight U.S. stocks and favor a more active approach as AI gains spread.

Market backdrop

U.S. stocks advanced after a tame inflation report buoyed expectations for the Fed to cut policy rates again this week. The S&P 500’s mild rise brought its 2025 gain to 17%. Delayed U.S. PCE inflation data for September was in line with expectations, reinforcing our view that the Fed is on track to cut. Bitcoin came under renewed pressure and was down about 30% from its record high. U.S. Treasury yields climbed back near the top of their rough 4.00-4.20% range.

All eyes are on the Federal Reserve, with markets widely expecting a third straight rate cut as the labor market cools – and we agree with those expectations. Also key is what the Fed signals about policy rates next year given market pricing of at least two more cuts and officials becoming more divided on how much more to cut rates. China’s CPI and PPI reports should shed light on whether Beijing’s efforts to combat deflation are taking effect.

Read our past weekly market commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, December 2025

Tactical granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2025

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2025

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.