Client Update - 17th July 2026

The second quarter of 2026 was exceptionally strong for global stock markets, delivering some of the best returns seen since the post-pandemic recovery period. Most major equity markets rose substantially, with technology companies, particularly those exposed to artificial intelligence (AI), semiconductors and memory chips, being among the strongest performers across the US and Asia.

What makes this rally particularly noteworthy is that it occurred despite a challenging backdrop. Ongoing geopolitical tensions, conflict in the Middle East, concerns about oil supplies and warnings of slowing economic growth did little to derail investor confidence. Markets were helped by the fragile but important ceasefire between the US and Iran, which contributed to a sharp decline in oil prices. Lower energy costs should help contain inflation and reduce pressure on central banks to raise interest rates aggressively.

The dominant investment theme of 2026 has been the enormous level of spending on AI infrastructure. Large technology companies, often referred to as “hyperscalers”, are expected to spend approximately US$725 billion this year on data centres and related technology. This level of investment is approaching the scale of annual US defence spending.

Importantly, this AI expansion extends far beyond computer processors. Demand is increasing for memory chips, data storage, networking equipment, fibre optics, power infrastructure, cooling systems and electricity generation. As AI adoption spreads throughout the economy, demand is also likely to rise for industrial commodities such as copper and for technologies linked to batteries and energy networks.

This broadening investment cycle creates opportunities across multiple sectors rather than solely within technology companies themselves.

One emerging challenge is that financing these investment programmes requires enormous amounts of capital. Historically, many technology giants funded growth from their own substantial cash flows. However, investment spending is now exceeding those resources, leading companies to raise money from investors through both share sales and bond issuance.

Several major technology firms have recently raised record amounts of capital, while others are expected to come to market over the next 12 to 18 months. Investors have generally been willing to provide funding because many of these businesses have exceptionally strong balance sheets and credit ratings.

However, there are reasons for caution. Some companies are issuing very long-term debt despite operating in one of the most rapidly evolving industries in history. While today's market leaders are highly successful, predicting which firms will dominate a decade from now is difficult, let alone over periods of 30, 50 or even 100 years.

The demand for capital is not limited to the private sector. Governments across developed economies face significant spending requirements linked to defence, national security, climate resilience, ageing populations and supply chain protection.

Recent geopolitical developments have reinforced these trends. Countries are increasingly seeking to develop domestic AI capabilities rather than relying on foreign providers. At the same time, conflicts in Ukraine and the Middle East have increased investment in defence systems and critical infrastructure.

This means governments and companies are effectively competing for the same pool of global savings, increasing the importance of fiscal discipline and efficient capital allocation.

A key question for investors is how central banks will respond to this investment boom. In the United States, economic growth remains surprisingly strong. Consumer demand, rising asset prices and ongoing investment spending are supporting activity, while lower oil prices have helped ease some inflationary pressures.

The risk now appears to be less about economic slowdown and more about the possibility of economies overheating. Financial markets currently expect only limited changes to interest rates, but stronger-than-expected growth could result in rates remaining elevated for longer or even rising further.

The base expectation remains that US interest rates will stay broadly around current levels until at least mid-2027, but the first signs of a rate rise in 2026 are starting to show.

The UK enters this environment from a relatively weaker fiscal position. Government borrowing costs remain among the highest in the G7, reflecting investor concerns over public finances and long-term spending commitments.

As global competition for capital intensifies, investors are likely to place increasing emphasis on fiscal credibility. Markets will want reassurance that future governments can manage pressures associated with healthcare, pensions, welfare spending and an ageing population.

For this reason, UK government bonds (gilts) offer attractive yields but also reflect significant fiscal risks. The outlook suggests that the Bank of England may tolerate temporary inflation pressures before beginning a gradual cycle of interest rate reductions from around mid-2027. There is much for our new Prime Minister (but most importantly his new Chancellor), to do to improve confidence in our finances and to finally target growth, not just always increasing taxes.

Looking ahead, several themes are likely to shape investment returns:

• Strong investment spending should continue supporting economic growth and corporate earnings, particularly in the US, underpinning a positive outlook for global equities.

• Government borrowing requirements and inflation risks may keep bond yields higher for longer, reducing the attractiveness of fixed income investments.

• Countries with weaker fiscal discipline could remain vulnerable to market pressure and rising borrowing costs.

• Demand for tangible assets such as energy, industrial metals and infrastructure may benefit from supply chain restructuring, energy security concerns and AI-related investment.

• The continued spread of AI should improve productivity and create opportunities beyond the technology sector itself.

• Gold and other scarce real assets may continue to play an important role as stores of value in an environment of geopolitical uncertainty and elevated government deficits.

  
  

The defining investment theme of the coming decade may be the global scramble for capital. Governments and companies are simultaneously funding enormous programmes in AI, defence, energy security and infrastructure. This unprecedented demand for investment capital is likely to influence asset prices, interest rates and market leadership for years to come. Against this backdrop, maintaining diversified portfolios with a strong allocation to global equities and selective exposure to real assets remains a sensible long-term strategy. Do have a good weekend.