Weekly market commentary

The new economic regime we’ve long described has been on full display in 2026. As the summer ends, we focus on three lessons to take into the rest of the year. First, we think the global reset in interest rates has further to run. Second, look beyond the AI model race for more opportunities as capital gets more expensive. Third, markets have weathered geopolitical shocks so far – but investors should not mistake resilience for the absence of risks.

The bond trade-off
Returns in excess of cash, 2010–26

Global equities have returned about 10% more than three-month U.S. Treasury bills so far in 2026, while global government bonds have returned about 3% less. See the chart. The split is not unprecedented. But it has become more common since the global interest rate reset began in 2021. That reset has changed the trade-off for bond investors. Rising yields have pushed down prices of existing government bonds and turned excess returns negative, especially at the long end of the curve. On a relative basis, short-term government debt now offers more meaningful compensation for taking less duration risk. Sticky inflation, heavy government borrowing and growing private investment needs give little reason for pressure on yields to fade. That sets up our first lesson: higher yields are here to stay for a reason.

The global bond reset has been broad: U.S. 30-year yields have hit a 19-year high above 5%, German 10-year yields a 15-year high near 3.25%, and Japanese 10-year yields are nearing 3% for the first time since the mid-1990s, LSEG data show. We see scope for further rises, underscoring our strategic preference for short- to medium-term government bonds. The Middle East conflict has lifted energy costs and added to inflation pressures, while the AI buildout and widening government deficits have intensified competition for capital. Uncertainty over the Federal Reserve’s response to inflation has also lifted the term premium. Higher yields have reshaped the income opportunity in bond markets: our analysis of LSEG data shows more than 80% of the global bond universe now yields above 4%. Yet long-term government bonds are less reliable as portfolio ballast. That makes selectivity key: higher yields do not always compensate investors for the risks they take.

Staying selective

This takes us to our second takeaway: stay selective within AI and track where value is accruing. Dispersion is growing, with companies tied to scarce AI bottlenecks – including power, chips and data center infrastructure – outperforming those further downstream. Meanwhile, hyperscalers are running down cash and relying more on debt. U.S. hyperscaler investment-grade bond issuance has topped $100 billion this year, more than twice the 2025 total. Higher rates, growing financing needs and large AI IPOs could further test investor appetite, while cheaper, open-source models are challenging the economics of frontier model makers. We look beyond the AI model race to the scarce resources underpinning the buildout.

Our third lesson: markets have been exceptionally resilient amid geopolitical shocks – but that’s no reason for complacency. Geopolitical fragmentation compounds scarcity and supports our higher-for-longer view, though easing geopolitical tensions could relieve some pressure on yields. The Strait of Hormuz has yet to fully reopen, constraining a critical route for global energy supplies, while U.S.-Canada trade tensions have flared again. Countries and companies are striving for resilience by shifting suppliers, production and trade. But adaptation can delay or shift where risks show up, creating new winners and losers.

Our bottom line

Higher rates, the AI buildout and geopolitical fragmentation are reinforcing the new economic regime. We stay pro-risk with an overweight to U.S. equities, while favoring durable income and companies positioned around scarcity.

Market backdrop

The Nasdaq gained 1% and was roughly 3% below its all-time high after Nvidia’s latest blowout quarter. U.S. Treasury yields reversed earlier declines after Fed Chair Kevin Warsh reiterated the Fed’s commitment to fighting inflation. The 10-year stood at 4.73% and the 30-year at 5.21%, near its 19-year high of 5.30%. AI-driven equity gains amid higher yields reinforce one of our key calls: higher rates need not derail the AI equity case if investment keeps generating durable returns.

U.S. payrolls could shed more light on how supply constraints are shaping the labor market. Slower labor-force growth means softer job gains may not signal materially weaker demand, especially as AI-related investment supports activity. That combination could keep wage and inflation pressures persistent.