A hawkish first outing at Jackson Hole

Central to this transition was the latest US inflation data on Wednesday, which showed core price rises (which exclude volatile food and energy costs) over July in line with expectations but well above the Fed’s target. This was addressed in Kevin Warsh’s first speech to the Jackson Hole conference as Fed Chair, in which he reinforced expectations of higher interest rates. His speech surprised those who expected the new Chair to be a vehicle for President Trump’s desire for lower interest rates. This surprise was evident in asset prices as both the US Dollar (DXY index up 0.6% over the day) and Large Growth companies (down 2.3%) fell while US government bond yields rose as shown in the chart below.

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While these moves may look dramatic in the context of a single day, they do not represent a significant change in expectations or indicate a turning point in monetary policy. The next test for the new Chair will come when the FOMC concludes its meeting on 16th September. Interest rate futures now imply that a 0.25% rise is more likely. Failure to deliver that rise may undermine Warsh’s credibility as Chair, especially if he is subject to noisy White House pressure over the next couple of weeks.

Two credit markets that do not agree

The change in interest rate expectations did not appear to dent the confidence of corporate bond investors, as credit spreads, the additional yield paid by US high-yield bonds to reflect the risk of default, remain near historic lows. In contrast, there are signs of growing weakness in the private credit market.

Data from PitchBook* shows that among the ten largest Business Development Companies (BDCs) that are the primary conduit of private credit for individual investors, the proportion of debt with ‘non-accrual status’ (a sign of distress) rose last quarter to 3.95% of the portfolio (measured at cost). This combination of weakness in private credit and unusually low spreads in public credit markets is incongruous and a reminder to investors to ensure that we fully understand the credit risk in our portfolios, especially given the current interest rate environment.

The software rally behind the BDC debate

Concerns about the prospects for BDCs precede the latest PitchBook data and were primarily driven by fears that AI would undermine the software as a service (SaaS) business model. These fears appear to have receded over recent weeks as US Software (up 4.8%) continues to recover, led by Salesforce (up 22.4%) and ServiceNow (up 12.6%). Most notable was Microsoft (up 6.3%), capping a rise of over 30% during the last month.

It seems unlikely that this will be the final word in the debate over which companies will benefit most from the growing adoption of AI, and it is consequently important that we do not become too attached to a single narrative. Against this background NVIDIA (up 1.3%) delivered another set of impressive results. However, the sustainability of those results remains in the spotlight amid complex funding arrangements within the AI sphere and a decline in the conversion of profits to cashflow. You can read my take on these results here.

Outside the US

Developed markets were virtually unchanged in US Dollar terms (up 0.1%) while Emerging Markets (up 0.5%) made progress despite the drag of a stronger US Dollar. Canadian equities (down 0.1%) were flat in local currency terms and remain significantly higher over the year to date (up 17.1%) despite the ongoing trade battles with the US.

This is partly a reflection of the exposure of an index that is dominated by Financial Services, Energy and Basic Materials but also indicates that investors are no longer responding so violently to the latest announcements from the White House.

What to Watch This Week

Energy prices rose this morning following renewed attacks by the US on Iran over the weekend, a development that is likely to stoke inflation fears. The main economic news this week will be the US employment report on Friday. This is expected to show an increase of 50,000 jobs. While this would represent good news for those seeking work, following a period of weaker employment data, it is likely to harden expectations of a future interest rate rise and may negatively impact equity prices.

Alongside this we have the release of the Fed’s Beige Book on Wednesday, an anecdotal view of conditions across the twelve Federal Reserve districts, and trade data on Thursday that is expected to show an increase in the trade deficit in July.

A Final Thought

The shift in focus from individual companies and stockmarket themes to macroeconomics reminds us that the market has a short attention span, quickly moving from topic to topic. In this environment, the ability to maintain focus and take a longer-term perspective is an investing superpower.

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*PitchBook is a subsidiary of Morningstar in which I hold stock.

The disciplines of investing and gardening may appear to be polar opposites. The former is frequently associated with precision, active decision making and the latest technology, while the latter is slower, more passive and dependent on external factors such as the weather.

The principles of success, however, are similar, and there is much that the investor can learn from the gardener. I thought it would be useful to share some of the similarities I have observed.

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Planting happens in the cold, harvesting in the warmth

Planting can be an arduous task, undertaken in poor conditions at a time when one would rather be indoors than outside. Harvesting, by contrast, tends to occur when the weather is favourable, we enjoy being outside and the plants are looking their best. It also brings an end to the growing process and often mars the appearance of the garden; a sunflower is not nearly as attractive without its head.

The natural rhythm of the seasons discourages us from both activities. We would rather disengage from the garden in the winter and maintain it at its best in the summer. The same is often true of investing. The best investment decisions are frequently made when we feel worst about them. We fear sowing new investments in the market winter, when the forecast is bad and negativity among investors is at its peak, and we loathe harvesting holdings that appear to move continually higher, fearing that we will miss out. Both activities are essential to a good crop.

Gardeners have the advantage of knowing that winter will become spring and spring, summer, whereas the cycle is far less predictable for investors, and it is easy to confuse a change in the market weather for a genuine planting or harvesting opportunity. Fortunately, valuation can support those decisions. Our eventual return is determined in large part by the price we pay. When an asset is bought below a reasonable estimate of its fair value, the odds of a bumper crop improve

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Your garden contains a variety of environments

No garden offers a uniform environment, and the positioning of plants needs to reflect that. A shade loving plant will wilt in full sun, while its sun favouring neighbour will sulk in the shade. The plants we choose must reflect the growing conditions we are able to provide. Those conditions are not stable. A garden is dynamic, and so it cannot be fully optimised; conditions change through the year and from year to year. A successful garden must be robust to those changes.

Building a portfolio is similar. We set ourselves up for disappointment if we optimise a portfolio for a single environment or a single expectation of the future. A flourishing plot can be replaced by bare earth if we fail to consider a range of possible futures, and to include assets capable of doing well in darker, rockier and stormier conditions.

Do not constantly make changes

Because a robust garden is never fully optimised for current conditions, we are constantly tempted to move plants around, to uproot those that are not flourishing and to plant new crops better suited to the near term forecast. This increases the work we must do and, more importantly, lowers the probability of success, as plants take time to become established and fruitful. Constantly moving them diminishes the overall growth.

We often see the same behaviour in portfolio managers. In continually changing the portfolio, the manager feels that incremental improvements are being made, while more often limiting the opportunity for growth.

Growth happens naturally

One of the most humbling lessons of gardening is that growth happens naturally. We do not make the plant grow. All we do is support its growth by placing it in the right environment, ensuring it has access to food and water, and offering some defence against pests. Growth is a natural phenomenon from which we benefit.

The same is true of investing. The source of the return we receive is growth in the global economy, itself a product of the ingenuity and work of employees at the businesses in which we invest. We simply provide the capital that supports that growth. The challenge for gardener and investor alike arises when we forget that fact and try to engineer or artificially accelerate the result. Complex structures and leverage can have an effect similar to intensive growing methods. They not only damage the individual plant but can ruin the soil, harming the yield of the whole garden for years to come

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A certain level of loss must be acceptable

Avoiding that damage does not mean that all losses can or should be avoided. One of the most difficult concepts to accept, as either gardener or investor, is that some losses are inevitable and are simply the price we pay for accepting the risk that accompanies growth. Naturally we seek to minimise them, but it is important to understand when accepting a loss is necessary to the growth of the garden or the portfolio as a whole. I am always reluctant to discard seedlings, but I know that unless I do, the remaining plants will become crowded and will not flourish.

As investors, we tend to hold on to our mistakes at the expense of our successes. Peter Lynch likened this to cutting the flowers and watering the weeds. That is the mirror image of the reluctance to harvest described earlier, and the two errors share a root. Each anchors the decision to the price we paid rather than to what the asset is now worth.

The earlier a mistake is recognised, the less likely it is to interfere with the success of the whole portfolio. It can, however, be difficult to distinguish weeds from flowers amid a noisy market. Gardeners avoid the problem by labelling plants carefully so that they are not confused with lookalikes. Investors can do the same by articulating clearly, at the point of purchase, the reason for owning a particular asset and the expectations on which that decision rests. It is not a glamorous part of the process, and nothing like as enjoyable as the harvest, but it is one of the secrets of success for investor and gardener alike.

As the summer wanes, it is important not only to enjoy the fruits of past labour but also to plan for what follows. How will the garden fare if the weather turns suddenly? How is it safeguarded against slower moving challenges such as a changing climate? Are we prepared for the autumn and winter that inevitably follow?

Each of these questions is as relevant to the investor at a screen as to the gardener with a spade.

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Two negotiations that did not conclude

The expiry of President Trump’s sixty-day negotiation deadline with Iran, coupled with a threat to bomb US ally Oman if it “gets in the way” of talks over the Strait of Hormuz, kept upward pressure on crude oil prices (WTI up 5.0%) and on energy stocks (up 2.8%). Relations with Canada also soured as trade negotiations broke down and Prime Minister Carney threatened to match US tariffs “dollar for dollar”. Although investors have become accustomed to conflict, and are consequently unlikely to react strongly to these latest developments, the longer term impact on economic growth and inflation remains important, especially where valuations are elevated.

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A borrower supporting its own market

US government finances also came under scrutiny as the federal debt passed $40 trillion. Treasury Secretary Scott Bessent responded by announcing increased support for US bond prices through a buy-back programme, at least doubling the size of the Treasury’s operations in longer-dated debt to $4 billion each from 9 September.

This created considerable volatility in government bond prices but failed to make a lasting impression, as the 30-year yield ended the week broadly where it started. Gold (up 5.1%) seemed to be the main beneficiary of the announcement while the US Dollar declined (DXY index down 0.75%).

Three votes for higher rates

The minutes of the July meeting of the Federal Open Market Committee (FOMC), released on Wednesday, revealed that three of the twelve voting members had preferred an increase in interest rates, with the remaining nine voting to hold at 3.50% to 3.75%. Many other participants indicated that tightening would be needed if inflation did not fall.

The subsequent decline in the dollar and the rise in energy prices last week add to the pressure on inflation and interest rates.

What Walmart did with its tariff refund

Cyclical and interest rate sensitive stocks were especially hard hit, as Industrials (down 4.2%), Utilities (down 3.5%) and Technology (down 3.1%) led the decline. Consumer Defensive stocks (down 0.8%) also fell following results from Walmart (down 9.8%), which revealed that the 7.5% boost to operating income growth from tariff refunds had been primarily spent on price reductions, indicating ongoing weakness in consumer spending.

Despite these declines, most US sectors and the US Dollar continue to be priced above our estimate of fair value. However, this view reflects the dominance of very large companies. We continue to see better valued companies further down the market capitalisation scale and in overseas markets.

Where the sector’s gain actually came from

The impact of those larger, more richly priced companies could be seen clearly in the Healthcare sector (up 4.2%) last week. Moderna (up 129%) responded to positive results from a Phase 3 melanoma trial run with its partner Merck (up 12.3%), yet that movement accounted for only around 45 basis points, or hundredths of a percentage point, of the sector’s gain.

Merck contributed around 57 basis points, whilst Eli Lilly (up 6.4%), the largest stock in the sector, accounted for almost a percentage point despite having no disclosed mRNA cancer vaccine programme in its current pipeline. This reminds us of the importance of digging more deeply into markets, and of the opportunities available to active managers when the largest constituents appear overpriced.

Where we still see value

Developed markets outside the US declined (down 0.4%) despite the boost from the weaker dollar, with Japan (down 3.0%) leading the fall among the major markets. In contrast, Emerging Markets (up 0.8%) were led higher by Brazil (up 3.6%), South Africa (up 3.4%) and Mexico (up 2.6%). Although these countries have trailed the broader (AI dominated) emerging market indices over the year to date, these remain our favoured markets given their compelling valuations.

The Week Ahead

The focus for economists this week is likely to remain on inflation, with the Federal Reserve’s preferred measure, core personal consumption expenditures, released on Wednesday. This is expected to show inflation unchanged at an annual rate of 3.3% over the twelve months to the end of July. A higher reading is likely to cause further concern about the path of future interest rates.

At a company level, AI is likely to return as a focus for investors as the earnings season finale arrives with NVIDIA’s results on Wednesday. These will undoubtedly be impressive given the enormous sums being spent on AI. However, investors are likely to focus on the quality of that growth given the circular nature of some of NVIDIA’s relationships, where it is providing the funding used to purchase its products. The Jackson Hole symposium opens on Thursday, with Kevin Warsh giving his first keynote there as Chairman of the Federal Reserve on Friday.

A Final Thought

The gain in Moderna last week is a reminder of the returns available to investors who are prepared to be patient. We all enjoy the dopamine hit of constantly rising stock prices, but the greatest gains are often found by patiently exploring the areas that others ignore.

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The price pressure the core rate leaves out

Energy stocks (up 7.4%) benefitted from the higher crude price, whilst Consumer Cyclical stocks (down 1.7%) were the weakest of the sectors as heavyweights Amazon (down 4.3%), Home Depot (down 4.7%) and McDonald’s (down 0.6%) all declined.

It would be easy to attribute these movements to a growing divide between the optimism we see in equity markets and the weakness in the broader economy, which cannot escape the very costs that the core measure excludes. However, the confounding strength of Consumer Defensive stocks (up 0.9%) is a reminder to avoid drawing conclusions from a single week’s price movements.

The cure for high prices

The modest gain in technology stocks (up 0.4%) was variously attributed to the inflation data and to results from CoreWeave and Supermicro. Whilst these helped to demonstrate the growing demand for semiconductors further along the supply chain, they also highlighted the scale of investment required to meet that demand, as CoreWeave raised its capital spending plans for the year to between $35 billion and $39 billion against adjusted operating income of $128 million for the quarter.

Supermicro’s order figures also drew some scepticism. The company’s own July filing notes that some of the orders it has announced may not constitute firm commitments and may be subject to cancellation or delay.

In the meantime, the consequences of rapidly rising demand were evident in Cisco (down 8.0%), as record revenue was accompanied by weaker gross margins, attributed in part to the rising cost of memory chips. That same scarcity helped to lift SK hynix (up 20.6%). Whilst this appears to demonstrate the benefits of investing in the ‘right’ part of the supply chain, in all cyclical industries, including semiconductors, the cure for high prices is the effect those prices eventually have on demand.

The capital that is moving out of view

The largest gains outside the technology sector came from the alternative asset managers. KKR (up 11.1%), Apollo (up 10.5%), Ares (up 5.2%), Blackstone (up 5.0%), Blue Owl (up 4.9%) and Brookfield Asset Management (up 3.5%) all advanced after Nvidia announced financing platforms with several of them to mobilise third-party capital for AI compute infrastructure.

Raising private capital has obvious appeal to those engaged in massive AI infrastructure development. Yet the lack of transparency it implies for public market investors adds another risk to the long list of concerns about the capital being committed to this build.

Is emerging market diversification still diversification

Developed equity markets outside the US did a little better (up 0.7%), whilst Emerging Markets (up 2.5%) advanced more sharply as renewed gains in Korea (up 12.6%) and Taiwan (up 4.7%) overcame declines in Brazil (down 5.3%), China (down 2.7%), Mexico (down 2.7%) and India (down 0.5%).

Korea and Taiwan together account for over 44% of the emerging markets index. The bifurcation between those two technology-driven markets and the remainder of the index necessitates a more detailed approach to investing here than has previously been the case. Those seeking valuation support and diversification from large US technology companies are better served by stocks focused on Latin America, while Korea and Taiwan may be more useful holdings for investors whose home markets already have little exposure to technology.

The bond market is not one market

The change in interest rate expectations had little impact on longer-term bond yields, or on the US dollar, which started and ended the week at a similar level. An exception was the movement of the dollar against the Japanese yen. Following support from both the US and Japanese governments in late July and early August, the yen drifted lower over the week, costing dollar-based investors 0.7%, although Japanese equities (up 2.3%) still advanced in dollar terms.

In contrast, 10-year gilt yields moved above 5%, Bund yields moved above 3.2% and Japanese 10-year yields moved to 2.9%, from 2.1% at the beginning of the year. These rising yields are currently acting as a drag on multi-asset portfolios, especially those with large government bond holdings. The temptation in these circumstances is to ‘reach’ for additional return by taking on credit risk, or by replacing government bonds with alternative strategies such as hedge funds and private assets that appear to deliver higher returns at lower volatility. However, the mark of an effective diversifier is how it behaves during a crisis, not whether it lowers volatility in relatively calm market conditions.

None of this argues for indifference to the contents of a bond portfolio. As the yields above show, there is clear differentiation across markets, alongside varying economic drivers. It is consequently important to understand what a portfolio holds, and to assess its effectiveness as both a diversifier and a return generator.

What to Watch This Week

The strength of the US consumer is likely to remain a focus for investors this week as Home Depot reports on Tuesday, Target and TJX on Wednesday and Walmart on Thursday. Traders will be seeking hints about the future path of interest rates from the minutes of the most recent FOMC meeting, published on Wednesday, with preliminary August purchasing managers’ indices following on Friday. Continued reporting on conditions aboard US Navy ships in the Gulf of Oman is likely to keep the Iran conflict, and therefore the oil price, in the spotlight.

A Final Thought

As technology companies continue to become a larger part of the market, and increasingly of the economy, it is natural to direct our attention towards the companies that appear to offer both the greatest potential and the most important risks to our portfolios. However, attention is a finite commodity, and it tends to drive prices. It is therefore always worth looking at parts of the market that others are ignoring.

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Since launching Portfolio Thinking’s model portfolios at the end of May, asset prices have moved substantially, especially within the US, where voguish growth stocks fell sharply to the end of July before recovering through the first two weeks of this month as the broader US market reached new highs. Little has changed in the fundamentals of the businesses over this period and consequently these moves appear to primarily reflect the fluctuating enthusiasm of investors for developments in AI and the path of future interest rates.

This is not a new phenomenon. Nobel Prize winner Robert Shiller demonstrated that prices move more than the fundamental value of a business in 1981 and consequently much of the oscillation in prices we observe is merely noise that can be safely ignored. However, in practice this is far from easy, as the noise is a reflection of deeply embedded heuristics and biases in our decision making that behave like the sirens in Homer’s epic. The noise of market movements provides a constant temptation to act in ways that are harmful to our long term financial wellbeing. These biases and habits are so deeply ingrained that they can be extremely hard to resist.

As Circe warned Odysseus, there are only two ways to overcome the sirens: the first is to block out the noise and the second is to tie yourself to the mast. Within these instructions lie the core strategies recommended by behavioural scientists to overcome the temptation we experience.

Wax

By stuffing wax in their ears, Odysseus’s crew could not hear the sirens’ song and so did not feel compelled to respond to it. Put another way, by reducing their exposure to the distracting noise, they were able to continue with their primary task. This sounds straightforward but is seldom practised by investors. We are all drawn to the financial news, the company results, the economic headlines and the latest utterances of market commentators. None of these things is intrinsically bad. Statistical agencies provide useful data, companies provide transparency about their progress, and commentators are trying to help people make better decisions. However, each provides an implicit call to action, an invitation to do something that will add to the sum total of the noise we observe.

By reducing our consumption of this noise we can remove the temptation to set aside our primary task and instead remain focused on our goal. In practice this is challenging as the lack of noise creates a void. I’ve therefore found a replacement strategy more effective than simply trying to remove the noise. Reading classic investment books and long-form research papers provides time to think and explore ideas rather than simply respond to the latest stimulus.

Rope

Despite our best efforts it is impossible for us to avoid the noise entirely, and so Circe has a second strategy: tie yourself to the mast. Prevent yourself from acting on the noise. As we saw from Matt Damon, this is not an easy path, and exposing yourself to the noise while being unable to act can cause anguish. In modern investment terms, the ropes that secured Odysseus would be investing rules agreed in advance, one of the most powerful of which is rebalancing.

This forces us to bring a portfolio back into line with our planned exposures and therefore removes the need to make a decision when we are assailed by the sirens’ song. In some circumstances it works better than simply tying our hands, as it enables us to take positive action when that impulse is at its strongest. It is not costless, and it is better governed by tolerance bands than performed reflexively, but the principle holds.

While it is easy to become focused on applying these two strategies, there is a deeper lesson in the story, and that is the importance of avoiding being surprised. Circe’s advice enabled Odysseus to plan for the trouble that lay ahead and consequently he was prepared when crisis struck.

As human beings we tend to respond much better to a difficult situation if we are expecting it. We are less likely to adopt the typical fight or flight response that leads to poor investment decisions. Traditional investment commentary and research increase the probability of surprise by downplaying the range of potential outcomes to fit our preferred narrative or current investment strategy.

By actively considering the breadth of possible outcomes, and how they could impact our strategy, we can reduce the dangers associated with surprise. This approach can be improved further by assigning probabilities and timescales to each outcome. In this way it is possible to turn a vague possibility into a scorable forecast that can be used to identify the most important risks to the portfolio and create feedback loops that improve our future decision making.

The following table sets out some scenarios and the likely impact on our PT Core Moderate model portfolio, together with my assessment of their likelihood over the next year.

Modelled twelve month outcomes in sterling, total return, before adviser and platform charges. Source: Portfolio Thinking scenario modelling, as at 16th August 2026. Modelled figures are illustrative, are not a forecast and are not a reliable indicator of future returns.

The reader will notice that these probabilities sum to 80% rather than 100%, and that is deliberate. A set of scenarios that sums to 100% would be a claim to have imagined every possible future, which is plainly beyond me or anyone else.

While I never make investment decisions based on such a short time period, it is complex to model these scenarios over a longer period, because a five year investment horizon will include more than one event and the order of these events will impact overall returns. By combining the likelihood of an event with its outcome, our focus is naturally drawn to those portfolio construction decisions that are most consequential over the longer term, rather than having our attention directed towards the news story that is currently gripping markets.

This naturally does not absolve us of responsibility or prevent us from having to make difficult choices. However, those choices can be made in a calmer environment, where we are more likely to make better decisions than in the heat of a crisis.

As ever, preparation triumphs over reaction.

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This article is published for general information and education. It is not investment advice or a personal recommendation and does not take account of the objectives or circumstances of any individual. The value of investments and the income from them can fall as well as rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

A Weaker Labour Market Sets a Higher Price

ADP recorded 44,000 additional private sector jobs in July, with education and health services alone contributing 36,000 and goods-producing industries shedding 3,000. Friday’s official figures were weaker still, with payrolls falling by 23,000 against an expected gain of around 83,000 while revisions to the May and June data removed a combined 103,000 jobs. Although the headline unemployment rate edged down to 4.1%, this reflected a people leaving the workforce as participation fell to 61.4%, its lowest level in over five years.

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Markets were quick to reprice the future path of interest rates with the probability of the Fed holding rates steady at the September meeting jumping to 60% (from 45% prior to the release). Longer term interest rates were also impacted as US treasuries yields fell (down 4bps) over the week.

The response from equity investors highlights the importance of low borrowing costs to technology companies that are both investing heavily in AI infrastructure and recording sales and profits from trading among themselves rather than selling to end consumers. A situation that was perfectly demonstrated by SpaceX which released its first set of results showing that it has converted 92% revenue growth into a $143 million operating loss through its ongoing capital investment programme. The stock finished up 22.8% on the week, but remains below its IPO price.

The Profits That Never Become Cash

The widening gulf between the profits reported by the ‘hyperscalers’ and free cash flow available to shareholders is shown in the chart below which shows the combined quarterly figures for Microsoft, Alphabet, Amazon and Meta over three years. In the second quarter these four businesses generated revenue of $470bn and operating income of $128bn, while free cash flow came in at $6.7bn. Net income of $227bn was nearly double the operating income, an inversion that is only possible because it includes the revaluation of stakes held in other, mostly private, companies.

Before this investment cycle these were among the most reliable cash generators in the listed market, converting the greater part of operating income into cash available to shareholders. That characteristic underpinned the argument that the present boom differs from the late 1990s, when technology businesses consumed cash rather than produced it. The distinction has not disappeared, since operating profits of these businesses are enormous, but it is being eroded by the actions of management.

A closer parallel may be the energy sector in the years before the pandemic, where fundamentally sound businesses invested heavily with the expectation of high future energy prices and saw their value plummet when those prices did not arrive. It would be foolish to predict the same fate for these technology giants, but important to note the reliance of these businesses on AI being a huge commercial success for its providers.

Technology (up 7.3%) led at the sector level with Intel (up 12.7%), Qualcomm (up 13.7%) and NVIDIA (up 11.6%), which has bucked the trend of cashflow decline, all rising sharply from valuations that were already demanding. Palantir rose (up 39.8%) after results but remains lower over the year to date (down 3.2%). Consumer Defensive (up 0.2%) and Consumer Cyclical (up 2.6%) lagged well behind.

Interest Rate Expectations Boost alternative Asset Managers

The same repricing of interest rate expectations ran through the listed alternatives. An exchange traded fund tracking business development companies, which lend directly to smaller private businesses, gained ground (up 6.9%), though it remains lower over the year to date (down 4.2%). Among the managers, Blue Owl (up 15.2%), Brookfield (up 8.5%), Blackstone (up 8.4%) and Ares (up 6.8%) all rose sharply. The exceptions were KKR (up 1.4%) and Apollo (up 1.5%) that barely moved.

Emerging Markets Tail Developed

Developed markets outside the US (up 2.5%) advanced with Australia (up 3.7%), Germany (up 2.9%) and Japan (up 2.5%) among the stronger performers while the US Dollar ended roughly where it began. Emerging markets (up 0.4%) told a more divided story, as Taiwan (up 2.5%) and India (up 1.5%) were offset by Korea (down 5.5%) and Brazil (down 3.5%). The UK (up 1.0%) trailed continental Europe, held back by its heavy weighting in Energy (down 3.2%) as crude prices continued to fall on the prospect of an agreement to reopen the Strait of Hormuz.

The Week Ahead

The attention of investors is likely to remain focused on the US economy this week as the latest CPI measure of inflation is released on Wednesday and Producer Price Inflation data on Thursday. Core CPI (which excludes volatile food and energy costs) is expected to cool to 2.5% over the last 12 months. A lower reading is likely to reinforce expectations of lower interest rates, while a higher inflation will raise the spectre of ‘stagflation’. The UK publishes second quarter growth figures on Thursday, the Eurozone reports industrial production, and China releases its latest inflation data. The Reserve Bank of Australia decides on rates on Tuesday. Results from Cisco, Applied Materials and CoreWeave will offer a further reading on the pace of capital spending in artificial intelligence.

A Final Thought

It is natural for us to assume a strong link between the strength of the economy and the returns on stocks as strong growth should encourage more spending and higher profits. However, last week reminded us that the link is weak over the short term and can be counter-intuitive in a world where the cost of debt is a key driver of financial results. While noisy economic data can affect short term market sentiment, it is a poor foundation on which to make long term investment decisions.

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The Quarter’s Largest Profit Was Not Earned in the Business

Amazon (up 17.0%) reported earnings of $5.75 a share against the $1.82 forecast, lifting the expected year on year earnings growth of the whole US market to 47.4% (source: FactSet). The greater part of that profit came not from selling anything but from marking up the carrying value of the company’s stake in the private AI developer Anthropic.

This is the second week running in which the market’s aggregate earnings have been lifted by a single company revaluing its private company holdings. As a consequence, the reported earnings are of limited use when assessing the progress of the businesses reporting.

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Sorting the Winners From the Victims

Microsoft (up 21.8%) was rewarded for strong growth in cloud computing revenue and Alphabet (up 11.4%) recovered the ground lost the week before. In contrast Apple (down 7.2%), Meta (down 6.5%) and NVIDIA (down 2.9%) all lost ground as investors highlighting ongoing diversification within the broader AI investment theme.

Korea’s Round Trip

Korean equities (up 2.1%) finished close to where they began, having been halted by circuit breakers in two consecutive sessions before delivering their largest single-day gain on record on Friday. The fall was attributed to doubts about the sustainability of memory chip prices following results from the two dominant manufacturers, though no such doubt was evident in Shanghai, where CXMT, a leading maker of memory chips, gained 466% on its first day of trading.

Swings of this size in a homogeneous corner of the market, during the thinnest trading weeks of the northern hemisphere summer, are more likely to be noise amplified by weak liquidity than a signal worth acting upon. They also carry a high probability of causing investor whiplash.

What a Boring Company Is Worth

Away from technology, Coca-Cola (up 6.5%) responded to earnings growth of 11%, a rate that looks pedestrian beside anything the hyperscalers reported. Over the year to date the shares (up 26.8%) have nevertheless outpaced Amazon (up 17.7%), Alphabet (up 13.9%) and NVIDIA (up 7.8%) reminding us that a ‘boring’ business can be an exciting investment when acquired at a good price.

The Cost of Capital Rises Everywhere

The Federal Reserve held rates for a fifth consecutive meeting, while the first estimate of second quarter US growth arrived below consensus at an annualised rate of 1.5%. Yields moved higher regardless, with the US 10 year Treasury reaching 4.7% and the 30 year at its highest level since 2007. The move was not confined to the United States, with the 30 year gilt yield at 5.8%, the German Bund at its highest since 2011 and the Japanese 10 year yield at its highest since 1997.

The Bank of Japan also held rates at 1%, whilst Japanese authorities intervened to support the yen (up 4.9%) with help from the US Treasury. A softer US Dollar (down 1.5%) flattered overseas returns, leaving developed markets outside the US (up 1.7%) and the UK (up 2.2%) ahead of the US market.

In light of these moves, it is understandable for investors to consider the role of bonds as diversifiers to equities in portfolios. But it may be more useful to consider the impact on equities. Higher yields on bonds naturally raise the implied cost of capital for stocks, especially those dependent upon future growth to justify elevated valuations. Rather than focusing on whether bonds still provide protection, a clear understanding of the interest rate sensitivity of the equity portfolio may be more important in the weeks ahead.

What Bond Investors Are Charging the Hyperscalers

Although credit spreads, the additional yield paid to lend to a company rather than a government, remain very low, the cost of insuring against default by the largest technology borrowers has nevertheless climbed, with five-year protection on NVIDIA moving from 42 basis points, or hundredths of a percentage point, a couple of months ago to 82 on Monday.

While this rise in cost does not imply that these companies have lost the confidence of bondholders, it is a reminder of the increasing financial risk being accepted by these businesses in order to attain AI leadership. This is being noted by the ratings agencies, with S&P having cut the credit rating of Oracle debt earlier in the month to BBB-, the lowest ‘investment grade’ rating.

What to Watch This Week

Friday’s July employment report is likely to provide the key economic news of the week, while the corporate calendar remains full as we enter the final stages of the reporting season.

Palantir reports on Monday, AMD and McDonald’s on Tuesday and Eli Lilly on Wednesday. SpaceX also reports on Tuesday, its first results as a listed company, giving its equity and bond investors a common set of numbers to argue over.

A Final Thought

The forced unwinding of Situational Awareness, a very large and highly leveraged fund built around the AI theme, carries an important lesson. The fund delivered exceptional returns over the previous two years, but the borrowing used to accelerate them created a fragility that ended in the sale of its entire public portfolio when prices turned. We cannot yet calculate what its investors received over the life of the fund, though it seems likely that a patient holder of a low-cost diversified index fund has done considerably better. This demonstrates the tyranny of percentages: a fund that quadruples and then falls 80% leaves its investor needing a further 25% simply to break even.

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The lure of forecasting geopolitics

Energy shares rose last week as the conflict between the US and Iran drove crude higher. That move has since reversed, with prices falling on news of a de-escalation, a change that appeared to be anticipated by traders at the end of last week and is consistent with President Trump’s previous behaviour.

While those who called this move correctly will undoubtedly be congratulating themselves, forecasting geopolitical moves is an unlikely path to investment success. The more useful question is not where the oil price settles, but what part energy companies play in a well-structured portfolio and whether they are priced to play it.

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The earnings that flattered the market

At the company level, Alphabet’s results were large enough to lift the expected earnings growth of the whole US market from 25.9% to an astonishing 37.9% (Source: FactSet). Yet the company’s own shares ended the week lower (down 7.8%), as investors appeared unimpressed with the quality of those earnings, which were dominated by a $98 billion revaluation of Alphabet’s holdings in other technology companies, including SpaceX. Excluding that gain, earnings were $2.85, a little short of expectations.

The outsized impact of revaluations on corporate earnings flatters the historic price earnings ratio, used by many to assess the attractiveness of stocks, and increases the likelihood that earnings will fall in subsequent quarters.

A mixed message from the chip makers

Despite the decline in other technology-driven stocks, semiconductors rose last week (up 2.6%). However, the gains were not universal as Intel (down 2.9%) and NVIDIA (up 2.0%) diverged.

Beyond the chips themselves, Dell (up 10.5%) continued to rise rapidly, supported by its leading position in the servers and storage AI requires.

Value has quietly outpaced growth

While the AI theme continues to dominate investing headlines, it is worth noting that following recent declines in leading technology-orientated companies, large value stocks (up 11.8%) have comfortably outpaced large growth (up 0.8%) in 2026, reminding us that the path of a dominant investing theme is seldom straight.

While it would be foolish to predict that value stocks will continue to outperform in the short term, it is worth noting that despite their recent underperformance, the prices of large growth stocks continue to reflect very optimistic assumptions and consequently our valuation models indicate higher expected returns from large value stocks over the longer term. Under-researched smaller companies look even more attractive.

The price of extraordinary optimism

Nowhere was that optimism clearer than in Tesla (down 17.8%), which reported lower profits after discounting to hold up sales, while promising to more than double its capital spending to remake itself as a business built on artificial intelligence and robotics. The effect has been to return the company to the negative free cash flow more usually found in a young start-up.

Even after the week’s fall, the shares still trade on a price/earnings ratio of 156. A multiple of that size leaves no room for disappointment.

Beyond the United States the mood was steadier, with the European Central Bank holding its rate at 3.25%, UK inflation easing to 2.6% from 2.8% and a firmer US Dollar (up 0.6%) taking a little from overseas returns that were generally positive as developed markets outside the use rose 0.4% in USD terms. The emerging markets were a little more muted (up 0.25%) as strength in Brazil (up 1.3% and Taiwan (up 2.3%) was partly offset by ongoing weakness in Korea (down 1.4%) and India (down 2%).

What to Watch This Week

The Federal Reserve’s decision is the week’s main event, and with the odds of a rate rise now at 34% from 13% at the start of last week. This is likely to be the first real test for the new Federal Reserve Chair, Kevin Warsh. President Trump added to the uncertainty with a fresh round of tariffs on 60 trading partners, a move likely to increase the likelihood of inflation.

Thursday brings fresh inflation figures alongside the first reading of second-quarter US GDP, where the consensus expects growth of 2.1% against the lower 1.7% suggested by the Atlanta Fed’s Nowcast.

Earnings results are likely to be dominated by Apple, Amazon and Meta as investors digest the capital being invested by those companies in AI and the impact of that investment on the cashflow dynamics of the businesses.

A Final Thought

Given the extraordinary amounts of capital being poured into AI development, it is understandable that the success of these strategies and the relative strengths of the leading companies can consume our attention. However, it is important to understand that the range of outcomes is so wide that it is difficult to reach a view with a high probability of being right. At times like these our attention is better directed towards some of the simpler questions relating to overlooked companies that can offer very attractive returns to shareholders whoever wins the AI race. This was best summed up by Warren Buffett who said: “I don’t try to jump over 7-foot hurdles; I look for 1-foot hurdles that I can step over.”

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While it is tempting to extrapolate future market direction from the movements in technology stocks over the last couple of weeks, over-interpreting short term market movements raises the probability of being ‘whipsawed’ by subsequent market events.

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When Bond Investors Set the Price

The mood was captured most sharply by SpaceX (down 14.7%), now trading below its listing price and around 45% beneath its recent peak. This latest decline appears to highlight the increasing importance of bond investors as technology companies that find themselves requiring additional capital to fund their ambitious expansion plans. While it is possible to excite equity investors with the promise of returns in the far future, bond investors are naturally a more sceptical bunch. You can read more about the SpaceX valuation here.

Is Emerging Market Weakness Diversification in Disguise

Emerging markets took much of the strain (down 4.0%), with Korea among the worst affected (down 8.3%) as the recent US listing of SK Hynix (down 8.3%) went into reverse and Taiwan (down 6.9%) followed it down. Given this synchronised decline, it would be easy to conclude that emerging markets have lost their value as a diversifier to US equities.

However, the correlation between the two has not really changed over recent months. This presents a dilemma for investors, especially those using optimisers to build portfolios. The backward looking data indicates that emerging markets still provide diversification, but current market movements appear to undermine that view and could lead to optimisers underestimating the level of volatility of a portfolio.

Although it is too early to conclude that emerging markets have lost their diversifying benefits, it is important to understand the constituents of your portfolio and ensure that your investment strategy is not overly reliant on past relationships.

Does the Oil Move Change the Case for Energy

Energy led the pack (up 4.7%), lifted by a sharp move in crude oil (up 12%) as the conflict in the Middle East escalated once more. Government bonds behaved as investors would hope, with the yield on the 10 year Treasury easing (down 7 basis points, or hundredths of a percentage point). This provided ballast even as the risk of higher inflation rose.

Investors appear confident that a resolution will be found. However, this optimism may be undermined by subsequent events as the risk of miscalculation by politicians in these circumstances is high. Rather than adjusting the exposure of the portfolio based on the expected outcomes, it is better to focus on how the portfolio will behave across a range of scenarios given current prices.

Political Noise and the Price Already Paid

Beyond the US the picture was quieter, with developed markets ex-US a little lower (down 0.6%) as a firmer US Dollar (up 0.3%) weighed on returns for dollar-based investors. The UK stood out (up 1.4%), even as the country prepared for its seventh prime minister in ten years, a change that was greeted calmly as sterling and gilt yields remained broadly where they have been for months.

That the market shrugged at a fresh bout of political upheaval sits awkwardly with the instinct that politics and prices move in step. The UK’s long habit of instability looks to be reflected in the price of its assets already, indicated by the attractive real yields available from gilts.

What to Watch This Week

Company earnings dominate a week light on economic data, with Alphabet and Tesla reporting on Wednesday and Intel on Thursday among many others. Alphabet’s capital spending plans will draw particular attention after the week’s renewed doubts over the scale of AI investment. The season has begun strongly, with blended second quarter earnings growth of 24.7% (source FactSet). With the market presently offering little reward even to those companies that beat expectations, the next fortnight will test how much good news is already in the price.

A Final Thought

Last week again demonstrated that markets can be surprisingly volatile on little news when trading volumes are low during the summer. The patience of investors may be tested further over the coming weeks. However, it is important to resist the temptation to call a turning point in the market as these are only ever identified with the benefit of hindsight. Instead we must ensure that we do not regret the positioning of our portfolios if a turning point were to arrive.

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SpaceX has gathered exactly this kind of following. In an earlier note I set out what an investor had to believe to justify the price soon after its flotation, a set of assumptions that included something close to certainty that the company would build a market leading position in artificial intelligence. Since peaking at $225.64, the shares have fallen by around 45% and at the time of writing trade near $124, below the $135 at which they were sold. This naturally raises two questions for investors. Does the fall represent an opportunity to invest, and what has driven it?

A discount is not the same as cheap

To answer the first, it is important to recognise that a discount does not necessarily make something good value. As every savvy consumer knows, a price reduction is only attractive if it provides us with the opportunity to buy a good below its true worth. A reduction that leaves the price above fair value is not a bargain but a sales technique, designed to exploit the impatient and the inexperienced. A fall of 45% from the peak feels like a bargain. Whether it is one depends on a realistic assessment of its fair value.

Using the framework I established in my previous note, we can estimate what the current price requires an investor to believe. Because this single company houses several businesses, the model offers several belief dials to turn. Given the speed of the decline, it seems unlikely that the market has changed its mind about the dominant launch operation or the satellite communications business, the aborted Starship test this week notwithstanding, or about the social media platform. Consequently, if the decline in price reflects changes in beliefs about the success of the business, the best way to reflect this is by adjusting the dials that relate to eventual size of the market for artificial intelligence and the share of it the company’s AI arm might capture.

As figure 1 shows, the present price still assumes that the market for AI services grows to around $12 trillion a year, approaching two fifths of the US economy, and that this one company captures and keeps some 12 per cent of it. None of that is impossible, though it appears distinctly unlikely. The larger consultancies have put the eventual economic contribution of AI at between $11 trillion and $15 trillion within a decade, but they expect the greater part of that value to accrue to the users of the technology through higher productivity, rather than to the firms that sell it. A single supplier booking well over a trillion dollars of AI revenue would therefore have to command most of the global market for AI services. Consequently, the valuation remains very demanding, and implies disappointing returns across most plausible futures even after the fall in the shares.

Figure 1: the beliefs implied by the current share price

The more interesting question is what changed

The second question is the more interesting one, because the trigger appears to owe little to rockets, satellites or models, and a great deal to the investors from whom the company sought to borrow within a fortnight of listing.

Alongside the roughly $86 billion it raised in equity, SpaceX borrowed a further $25 billion in its first venture into the bond market, across five tranches carrying coupons between 5.4 and 6.7 per cent, chiefly to refinance the bridge loan taken earlier in the year in connection with its acquisition of the AI business. It did so having secured investment grade ratings from all three leading credit ratings agencies, each of whom judged the risk of default to be low. That verdict rested heavily on the capital just raised in the equity market, and it surprised some investors given the company’s losses and a capital investment programme so large that the company is expected to consume rather than generate cash for years to come.

The bonds were popular when issued, but no longer. The Financial Times reports that the yield on the company’s thirty year debt has climbed from 6.7% at issue to 7.3% within a fortnight, a premium of more than two percentage points over equivalent government borrowing, while across its bonds the average spread has widened to around 1.6%. On that measure the company’s debt has come to yield more than the average borrower rated below investment grade, despite the investment grade label it carries. The lenders have proved harder to persuade than the shareholders.

When the lenders decline to believe

This may look like a tenuous explanation for a fall in the shares, given the relatively small size of the borrowing to the equity valuation. Yet it illuminates the anomaly I described in an earlier note, which a second set of beliefs makes plain.

As figure 2 shows, if we hold the market for AI services and the company’s eventual share of it at the more reasonable levels than used earlier, the only route to the current price is to lower the rate at which future cash flows are discounted, from a reasonable 9% to an aggressive 7.5%. When viewed in the context of falling confidence in the bonds, the impact on the equity valuation becomes clearer.

A company’s equity ranks below its debt in the capital structure. As shareholders are paid last and promised nothing, theirs is typically the most volatile claim on the company’s assets, and the one that must offer the highest expected return. The cost of equity must therefore exceed the cost of debt. Once the bond market decided that SpaceX should pay between roughly 6 and 7.5 per cent to borrow across the range of its maturities, an implied cost of equity of 7.5 per cent left little or no premium over the company’s own bonds. At the peak price, that premium would have been negative. Consequently, as lenders lose confidence and demand more, the equity beneath them must fall until a sensible gap between the two is restored.

[Figure 2: reaching the current price through the discount rate]

The lesson for a capital hungry age

This carries a lesson beyond SpaceX. As technology companies that were once capital light and richly cash generative turn into heavy consumers of capital, spending unprecedented sums to build AI infrastructure, the views of the lender come to matter more than those of the shareholder. Because credit investors have little to gain when things go well and much to lose when they do not, they tend to be more cautious and harder to convince. Nor is this confined to one company: technology borrowers now rival banks as the largest issuers of investment grade debt, and the market is being asked to finance a wave of capital spending whose eventual returns remain a matter of belief.

A charismatic founder can sustain extraordinary optimism among those who own the shares. Convincing those who lend to the company is a harder matter. So the re-rating of an expensively priced technology business may begin not with its shareholders abandoning the story, but with its creditors declining to fund it on the same terms.

The equity holder is invited to believe; the creditor insists on being repaid. That is why a creed of this kind is rarely broken by the doubts of the faithful, but by the caution of those who never joined them.

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Two Listings and the Price of Ambition

Technology rose (up 3.3%) as semiconductor stocks continued their advance (up 6.3%), helped by South Korean memory chip giant and AI beneficiary SK Hynix, which added a US listing to that of its home market. Having raised $26.5 billion, the largest sum ever raised in a US listing by a foreign company, SK Hynix saw its US listed stock rise 12.8% on debut. That enthusiasm proved short lived, with heavy selling in SK Hynix and Samsung Electronics leaving the Korean market sharply lower on Monday and surrendering much of the debut gain within a single session. Life on the public markets also appears tough for SpaceX (down 10.3%), which is now priced only 7.6% above its launch price a month ago, despite Raymond James issuing a research note with a target price of $800, implying a 450% gain over the current price.

This highlights the challenge of growth-focused investing at a time of significant technological change. Such change tends to favour a small number of providers who benefit disproportionately, yet high returns attract excess capital, which typically lowers returns for the sector as a whole and can lead to capital destruction. Put simply the genesis of internet shopping attracted capital to both Amazon and Pets.com. This evolutionary process is very challenging for investors as the ultimate winners appear obvious with the benefit of hindsight but are difficult to spot at the early stages.

When the Supply of Capital Is the Valuation

The challenge is being made even more difficult at present as the evolutionary process is being slowed by the huge sums now available to private companies along with the constant flow of new money into passive vehicles and the accommodation of index providers. A low return business (SpaceX) and a highly cyclical one (SK Hynix) can each attract very large amounts of capital at very favourable valuations, and can go on doing so for longer than seems reasonable to valuation-aware investors. However, this does not mean that the process has stopped. Any reluctance by investors to supply that capital to those companies requiring a constant stream of new investment may trigger a significant re-pricing. That is a materially different risk from the one most portfolios are constructed to withstand, which is a disappointment in profits.

Gilts, Inflation and the Limits of a Diversifier

The impact of this ongoing disruption on inflation likely contributed to a rise in 5 year Treasury yields (up 8 basis points, or hundredths of a percentage point), which reached their highest level since February 2025. UK Gilt yields rose more sharply midweek (up 23 basis points) before falling back to end the week up 11 basis points. The dollar firmed on Monday morning as investors revived their expectation of a rate rise before the year is out.

This is a reminder of the high degree of sensitivity of UK government bonds to global events. That sensitivity adds to their usefulness as a diversifier, but it simultaneously increases a portfolio’s overall exposure to inflation shocks, and the two effects are easily confused. An asset that moves a great deal is not the same thing as an asset that moves in the direction a portfolio needs.

Growth Rates, Not Profits, Do the Damage

Communication Services rose (up 2.2%) led by Meta (up 14.8%), which launched a new AI image generation model spanning Instagram and its other applications. In the same week the European Commission issued a preliminary finding that the addictive design of Instagram and Facebook, including infinite scroll and autoplay, breaches the EU’s Digital Services Act, carrying a potential fine of up to 6% of global annual turnover. Investors appeared unfazed by the challenge, despite the fact that Europe accounts for around 23% of Meta’s revenue.

At the other end of the spectrum Netflix (down 5.5%) declined ahead of earnings on Thursday, as investors appear to fear a similar disappointment to the previous quarter in an increasingly competitive streaming market. The shares are lower over the past twelve months (down 41.3%) despite consistent earnings growth over the last five years, a reminder of how much optimism is built into the prices of the large technology groups. Often it is the decline in the rate of growth that does the greatest damage to the share price.

The Lowest Expected Return in the World

In contrast to the optimism displayed by US investors, both developed markets outside the US (down 1.3%) and Emerging Markets (down 1.7%) declined, with technology-heavy Taiwan (down 3.7%) and Korea (down 6.1%) especially hard hit. The differing paths of these markets can be somewhat explained by the greater sensitivity of economies outside the US to the disruption in the Gulf.

The lower prices attached to those markets nevertheless appear to more than compensate investors for their weaker expected growth profile. Of the 29 countries covered by Portfolio Thinking’s valuation model, the US continues to offer the lowest expected return when measured in US Dollars. For a portfolio that has drifted towards its winners, the uncomfortable question is whether it now holds the least attractively priced market in the world largely by accident.

What to Watch This Week

As the earnings season moves into a higher gear, US Financials will be the key focus of investor attention. A laggard so far this year (up 2.9%), the sector is expected to deliver lacklustre earnings growth of 6.6%, the eighth highest of the eleven sectors, though the variety of industries contained within it, from investment banks to property and casualty insurers, is likely to deliver a diverse set of outcomes at the individual company level. Investors will be especially focused on the big banks including Bank of America (up 1.6%), Citigroup (up 0.6%), Goldman Sachs (up 3.4%), JPMorgan Chase (up 1.0%) and Morgan Stanley (up 3.9%).

At an economic level the focus will be on inflation, as the latest US CPI data is released on Tuesday and Producer Price Inflation on Wednesday. Economists expect both core, which excludes volatile food and energy prices, and headline inflation for both measures to decline relative to last month. Fed Chair Kevin Warsh testifies to the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday. Both the data and the testimony now land into a market already unsettled by the weekend.

A Final Thought

A week light on economic and company news left investors free to respond strongly to whatever else arrived, and the resumption of the conflict with Iran duly obliged. This week presents the opposite problem, a crowded calendar of data and results competing with an escalating conflict for the same limited attention, and there is no reliable way to know in advance which will be judged to matter. That the same story can dominate one week and be waved away the next reflects the shortness of our attention rather than any change in the facts, and it is precisely why those able to take a longer term perspective enjoy an advantage over those who simply follow the news.

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Beneath the weakness in the chip makers, the broader Technology sector still advanced (up 0.9%), supported by Apple (up 12.2%) and Microsoft (up 10.7%) as investors reassessed the price rises announced the week before. Communication Services (up 5.1%), Consumer Cyclical (up 2.5%), Financial Services (up 3.4%) and Healthcare (up 2.3%) all made strong gains. Moves of this size are a feature of the summer, when thinner trading volumes allow prices to travel quickly in either direction, and the potential for mistakes is high.

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A broader rally beyond the US

Developed markets outside the US shared in the rally (up 1.1%) in US Dollar terms, with Germany (up 4.6%), the UK (up 2.8%) and Japan (up 2.6%) especially strong, helped by the US Dollar (down 0.3%). Emerging markets also advanced (up 1.2%) but told a more divided story, as gains in Taiwan (up 5.2%) and China (up 3.2%) were partly offset by Korea (down 4.2%).

Have this year’s biggest winners already paid out

As we pass the half way point of the year, US stocks are up 10.7%. While this is a substantial return over that period, the gains in other markets such as Korea (up 95.5%) and Taiwan (up 63.7%) have been startling. Such gains naturally encourage us to invest more.

Our own return expectations point the other way, as strong performance lifts price above a reasonable estimate of fair value and lowers the probability of high future gains. Korea and Taiwan now carry expected annual returns in US Dollars of around 6.0% and 5.8%, whilst the US is lower at 4.6% and developed markets outside the US more attractive at 6.4%. Actual returns will differ from any estimate, yet the gap is a reminder that the advantages the US enjoys appear fully reflected in its price, which invites a careful look at our overall exposure to US equities..

The cross-current between data and prices

The economic news was less encouraging, as the June employment report recorded a weaker than expected rise of 57,000 against an anticipated 115,000, with the prior month revised down. Where investors might once have looked to the Federal Reserve to cushion a softer labour market, the new Chair Kevin Warsh used remarks on Wednesday to stress that prices are too high, lifting Treasury yields and reinforcing expectations of a rate rise that would itself act as a headwind to growth and hiring.

The contrast between weaker data and a rising market captures how loose the link is between near-term economic figures and asset prices. Reacting to a single report, in either direction, tends to introduce noise into a portfolio rather than information, and the temptation to trade each release is one worth resisting. The more valuable question is whether the businesses we own can compound over years, not whether one month’s number surprises.

Earnings season without its usual cushion

The next test arrives with second-quarter earnings, and expectations have moved in an unusual direction. Analysts typically trim their forecasts as a quarter runs on, leaving management a lower bar to clear and room for a welcome surprise. This time the pattern has inverted, with the aggregate estimate for the index raised by 3.4% since the end of March, the largest such increase since 2021, and a record number of technology companies issuing positive guidance ahead of results.

With the estimated growth rate now at 23.3% and the index trading on a forward earnings multiple of 20.4 (source: FactSet), above both its five-year and ten-year averages, the season opens with little of the cushion that low expectations usually provide. That leaves a narrow range of outcomes to consider, in which companies either clear a demanding bar and justify current valuations, or fall short and disappoint.

A Final Thought

In a light week for both economic data and earnings releases, there are few obvious catalysts for market movements which make the potential for surprise greater.

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The Bill Arrives at the Checkout

The proximate cause of these concerns was the news that Apple raised prices across its Mac and iPad ranges last week, with Microsoft following on its Xbox consoles. Both companies cited the soaring cost of memory chips as manufacturers divert their most advanced capacity towards the high-bandwidth memory that AI servers consume. Apple shares ended the week lower (down 4.8%) while Microsoft, less exposed to consumer hardware, held up rather better (down 1.7%).

It is tempting to read these price rises as a warning, yet a company able to raise prices on its flagship products is demonstrating the pricing power that should reassure its shareholders rather than alarm them. Formerly resilient semiconductor companies were hit harder as investors questioned the sustainability of the current investment boom, with NVIDIA (down 8.6%), Broadcom (down 11.1%) and Qualcomm (down 16.2%) all lower.

The steepest declines were reserved for the companies whose valuations reflect the most optimistic assumptions about AI infrastructure spending, including Oracle (down 19.4%), Palantir (down 12.1%) and Texas Instruments (down 11.6%).

The Rotation Towards the Unloved

While the crowded trades unwound, the unloved corners of the market did the opposite, with Healthcare (up 4.8%) the strongest sector of the week and a broader rotation into defensives lifting Utilities (up 2.8%) and Real Estate (up 2.7%). These sectors share a useful characteristic, namely cash flows that are weakly tied to the AI capital cycle, and that is what allows them to hold their ground when that cycle stumbles. This reminds us that diversification is not driven by the number of companies you own but by the variety of cash flow drivers they encompass.

Exuberance in the Credit Markets

The same optimism that has lifted equities has also been visible in credit, and the clearest example last week was the $25 billion bond priced by SpaceX following its recent listing. The three major rating agencies assigned the debt investment-grade ratings, the designation reserved for the most creditworthy borrowers. Yet in secondary trading the bonds changed hands at a spread, the additional yield demanded for lending to a company rather than to the government, of up to 201 basis points (hundredths of a percentage point) over US Treasuries, wider than the 156 basis points or so typical of speculative high-yield debt.

While rating agencies and equity investors are leaning on a forward-looking growth story, bond investors are clearly concerned about the return of their capital. In these situations, it is not normally wise to ignore the bond investors. The apparent souring of investor sentiment towards SpaceX appears to be having a broader impact on the IPO pipeline as OpenAI is reported to be delaying its planned listing until next year.

Against this more cautious backdrop, the listed managers of private assets, widely regarded as beneficiaries of a coming wave of flotations, fell in sympathy, with Apollo (down 14.0%), Ares (down 15.6%) and Blackstone (down 6.8%) all sharply lower. While this connection between technology and private asset funds is rarely visible in their day-to-day movements, it points to a potential fault line in portfolios that rely on alternatives as a source of diversification.

Higher Inflation Boosts Rate Rise Expectations

The Federal Reserve’s preferred inflation measure showed US core prices rising 3.4% over the year, the fastest pace since 2023, with personal income and consumer spending both running ahead of expectations. With reports that President Trump is no longer pressing new Chairman Kevin Warsh for a near-term cut, the expectation of a rate rise this year has hardened further.

The WTI oil benchmark fell to $70.24 a barrel, far below its conflict-driven peak above $110 but still above the $57.40 at which it began the year, so energy continues to feed prices even as it falls.

Politics Without a Market

The resignation of Keir Starmer, and the expectation that Andy Burnham will succeed him, caused hardly a ripple. UK equities rose higher (up 1.4% in local currency), sterling was broadly stable against the dollar and gilt yields eased, a notably calm response given Burnham’s left-leaning reputation and his recent remark that the country must get beyond being in hock to the bond markets.

This is the second week running that British politics has failed to move British assets in the direction commentators expected, and it is a reminder that the link between politics and prices is seldom as direct as it appears in the headlines. An investor who reshapes a portfolio around a political event is usually trading on a connection that proves unreliable the moment it is tested.

What to Watch This Week

As markets enter a holiday-shortened week, the principal release is the US employment report, brought forward to Thursday, which will shape the debate over whether the Fed leans towards a rate rise. Second quarter reporting season also approaches with analysts unusually optimistic, having lifted their estimate of earnings growth to 23.1% from 18.8% at the end of March, a reversal of the usual pattern in which forecasts are quietly guided down. In the UK, the Labour leadership contest set in motion by Starmer’s resignation runs into September.

A Final Thought

As we enter the summer, it is worth remembering that liquidity is likely to be lower and market swings consequently greater. In the UK this is paraphrased as “Sell in May and go away. Don’t come back until St Leger’s Day”, the St Leger being the world’s oldest Classic horse race, which shares its birth year with the United States and this year runs on the 12th of September. Although this is not a reliable recipe for higher returns, it carries a useful warning, since we tend to make our worst mistakes during volatile periods, and the summer is more than usually capable of supplying them. To hold our nerve through it, we must have a clear understanding of why we own each of the holdings in our portfolio.

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When a Story Sets the Probability

The most obvious example last week was the way investors responded to Kevin Warsh’s first FOMC meeting. Although the outcome was squarely in line with expectations, as the committee held rates steady while indicating a high probability of rate rises later in the year, the apparent alignment of Warsh to this outcome appeared to shock investors who subscribed to the narrative that he would immediately push for a rate cut in line with the wishes of President Trump. The fact that Warsh’s conventional approach elicited so much surprise is illustrative of the strength of that narrative and should act as a warning to all of us.

In a busy week for central bank watchers, the Bank of Japan raised interest rates by 0.25% while the Bank of England held steady. Apparent differences in the paths of interest rates strengthened the US Dollar (up 1.1%) and raised pressure on Sterling and the Yen, increasing the attractiveness of assets denominated in those currencies for US Dollar based investors as the gravitational pull of valuation becomes stronger.

Similar narrative-busting movements were evident in the UK. Despite commentators highlighting a rise in UK Gilt yields following the convincing election win by likely prime ministerial challenger Andy Burnham, recently criticised for saying “the country must get beyond being in hock to the bond markets”, the yield on the 10 year Gilt simply returned to the level at the end of the previous week. Hardly an indication of panic.

Energy and the Limits of a Relief Rally

Among this forest of narratives, those arising from the conflict in the Middle East are naturally the most consequential. Following the signing of the much-debated Memorandum of Understanding, which everyone appears to understand differently, US Energy stocks (down 5.7%) followed crude oil prices, which continued their decline (down 9.8%), helped by an IEA forecast of lower oil demand as consumers seek alternatives following the disruption to supply. Energy reached a nadir of $74 (WTI) on Thursday before recovering to a close of $77.50 on Friday.

The path of these prices is a reminder that the situation remains volatile and consequently the relief rally we have seen can be unwound quickly. For the long-term investor the question is not where the oil price settles this week but rather the role energy companies play in a robust portfolio and whether they are appropriately priced to play this role.

Hardware, Software and the Trap of Relative Value

Although Technology (up 3.3%) led the rise at a sector level, price movements were again bifurcated between hardware manufacturers (up 6.4%) and software companies (down 3.2%) as a US export control order forced Anthropic to restrict its latest models to domestic users, reminding investors of the ongoing development in the coding capabilities of AI. News that SpaceX plans to raise $20 billion of debt capital following its recent IPO continues to challenge the credulity of investors, while the forthcoming IPOs of Anthropic and OpenAI provide more opportunities for investors to pick a side in an increasingly expensive arms race among AI developers.

If one rejects the idea that the presence of Musk at the helm of a business can add hundreds of billions to the value of future cash flows, there are two possible conclusions given the valuations ascribed to these companies. The first is that these companies are extremely overpriced. The second is that adjacent companies trading at more reasonable valuations are absurdly cheap. This relative approach to valuation is dangerous for investors as it encourages us to invest in companies that appear inexpensive while actually being a vector for long-term capital destruction.

Faster Gains Beyond the US

Outside the US, developed markets (up 2.9%) did even better, despite the headwind of a rising US Dollar. Emerging markets (up 7.2%) did better still, led by Korea (up 11.3%) and Taiwan (up 5.7%) as the outgoing Apple (up 0.8%) CEO Tim Cook warned about an increasing shortage in memory chips. While there is clearly a mismatch in the supply and demand of semiconductors, previous semiconductor cycles, and the recent path of crude oil prices, should remind us that high prices and supply constraints tend to change the behaviour of consumers and consequently sow the seeds of their eventual resolution.

Japan (up 3.7%) led the gains among developed countries while Germany (up 2.7%) also benefitted from the positive news emanating from the Gulf, while the energy-heavy UK index delivered a more pedestrian rise (up 0.3%). Dispersion of this scale within a single week highlights the importance of understanding the underlying drivers of each market, especially when using international exposure to create diversification.

The Week Ahead

Although inflation is likely to be the key focus for economists as the latest reading of the PCE measure of inflation is released on Thursday, investors are likely to look through this data if progress continues to be made in the Middle East peace process and the Strait of Hormuz continues to move towards normal levels of activity.

A Final Thought

It can be helpful to consider each investment as a decision that cannot be undone for the next decade. Too often we use the availability of market liquidity to avoid making long-term decisions. If you would not wish to be locked into an investment, it may be better avoided, as the ability to change that decision can come at a steep price.

Share Portfolio Thinking

Despite this vertiginous rise, nothing about the business has changed. There has been no earnings report, no new contract, no product, no disclosure that moves the thesis. It is the same three businesses, carrying the same losses, run by the same person. So what has changed?

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If share prices are efficient, as many academics claim, then their movements should reflect the market’s collective view of the impact of new information. When prices move dramatically without a change in the business, they cease being a window onto the business and become a mirror of our emotions.

To see what the mirror reveals, I returned to the model from the previous article and asked what one must now believe to reach $191. There are several routes to the higher number. Two of them deserve attention, because each is the same belief spoken in a different language. In both, the operating story is left exactly where the first article set it: Starlink reaching 180 million subscribers, a market for artificial intelligence services of around six trillion dollars, a fair wind behind the launch business. Only one further assumption changes in each case.

Pricing out failure

The model carries a probability that the artificial intelligence venture succeeds. In the base case this was an even chance, with a heavy loss recognised if it fails. This feels like a reasonable way to treat a business that lost more than six billion dollars in its intelligence arm last year and whose own prospectus warns of a genuine risk of bankruptcy. To reach today’s price while leaving the discount rate at a fairly ordinary 8.5%, you must set that probability to 100%. You take the possibility of failure out of the calculation altogether.

While it is possible for reasonable people to disagree on the correct probability of success, no serious assessment of a frontier technology, in the most fiercely contested arena in the economy, gives a single contender a certain victory. Companies fail; the great ones fail less often, but the base rate has never been zero. To pay today’s price by this route, you must believe not that SpaceX is likely to win, but that it is sure to, so completely that the word risk no longer attaches to it.

One route to $191, reached by pricing the chance of failure down to nothing.

Pricing out risk

The second route leaves the odds at an even chance but lowers the rate at which future cash is discounted to the present, to 7.5%. Because SpaceX is financed almost entirely by equity, that rate is, to a rounding error, its cost of equity: the annual return its owners are agreeing to accept.

Measured against any outside yardstick, 7.5% is extraordinary. It is below the expected return on the average listed company, which sits close to 8%. It is below the return the market attaches to the aerospace and defence industry to which the launch business belongs.

It is also well below the 12.5% the company pays on some of its own borrowings, which should trouble a careful reader most of all, because it prices the riskiest claim on the business, its equity, below the safest, its debt. That cannot stand in any coherent account of risk. A cost of equity of 7.5% is the figure the market reserves for its steadiest names: the makers of soft drinks, of household staples, of beer. To pay today’s price by this route, you must believe that owning a loss making rocket and intelligence venture is about as risky as owning a maker of fizzy drinks.

The same destination, reached instead by demanding almost no compensation for risk.

The shape of the Musk premium

Although these routes to the current price appear to be driven by different assumptions, they actually reflect a single view. The optimism you remove from the discount rate has to reappear as certainty in the probability; take it out of the probability and it surfaces somewhere else again. A third route to $191 keeps the discount rate low and instead imagines the market for artificial intelligence services reaching eight trillion dollars within the decade, around a quarter of American output today. The premium does not disappear when you move it from one assumption to another. It is conserved. Whichever lever you choose to pull, you are paying for the same thing: the belief that one man suspends the ordinary risks of commercial life.

Viewed in this way, the belief of investors in Elon Musk becomes a measurable quantity, the distance between a sober assessment of an uncertain future and a price that has assumed the uncertainty away. Investing at this valuation becomes an act of faith in an individual.

A third route, with the same premium booked against the size of the AI market.

This is naturally not the first time that the business of an entrepreneur operating in new technology has been valued primarily on the belief in that individual rather than on traditional fundamental analysis; this approach is a staple of the venture capital industry. However, I cannot recall a situation in which so many individual investors are being drawn into an act of faith of this kind, through the nature of index tracking.

This may be an extremely successful investment, but such an outcome becomes less likely with every rise in the share price.

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