This dynamic traces back to the summer of 2024, when Macron suffered a crushing defeat in the presidential election to Marine Le Pen and her far-right National Rally, prompting Him to call a snap election in the hope of clarifying French politics and restoring his standing. But instead of providing clarity, the election destroyed the parliamentary logic that was allowing normal governance to proceed.

True, the snap vote did stop National Rally from taking control of France’s already precarious finances, but that was nearly all it achieved. A left-wing coalition finished with the most seats in the National Assembly; Macron’s centrist bloc survived the new political landscape with more legislative backing than one might have expected given his personal defeat, and Le Pen emerged as the biggest single political force in the country. But no party managed to seize the 289 seats needed for an outright majority, leaving the entire country effectively split three ways.

Stopping one party had made it nearly impossible for anyone else to govern.

For the last year, this period of prolonged parliamentary improvisation was characterised by a succession of prime ministers: Michel Barnier, François Bayrou, and, most recently, Sébastien Lecornu. The first two fell after each tried to repair France’s public finances, with Barnier lasting just 3 months in office, and Bayrou slightly longer, for 9 months. That it was necessary to appoint Lecornu for a fourth time just four days after he resigned shows the pretty desperate state of affairs within France. He survived largely becuase the moderate left conceded that extracting concessions from a weak government was preferable to bringing the whole thing down.

France has rivalled its arch-rival, the UK, in the political circus stakes.

But now the Lecornu minority government and its centrist allies have been plunged into its most treacherous season yet as opposition parties dig in over deficit-cutting plans designed to calm both the bond market and most of France’s disastrous finances. This all comes at an awkward juncture with a presidential election due in April-May 2027.

Ever since the Macron government faced a hung parliament following the June 2024 vote, it has tried, and largely succeeded, in using Article 49.31 to force its proposed budgets through without debate, much less a vote. It is true that the opposition may respond with a no-confidence motion, which would force the government to either make concessions to pass its budgets or accept collapse. Yet there is little appetite to compromise at a time when opposition parties are positioning themselves for the 2027 presidential race.

The risk is that it would become impossible to agree on a full budget for the second half of 2027 as the next president dissolves parliament and calls new elections at some point while work was beginning on the 2028 budget. Such a rollover would cause unprecedented budget paralysis, freezing investment and planned defence-spending increases while welfare costs keep climbing. That would widen the deficit by at least half a percentage point, denting investor confidence further and pushing up borrowing costs.

Public debt in France stands at 117% of gross domestic product, expected to rise to 121% by 2027, to be among the largest in the euro area. Behind the US, France also runs the largest deficits, without any forecast that this is set to change soon. The International Monetary Fund (IMF) projects a 2026 deficit of 5.2% of GDP versus a budget target of 5.0%. A series of proposals for fiscal consolidation now being debated in parliament are politically dangerous at a time when candidates are fighting for dominance in the heartland of Blue France.

La Toile de Fond (The Backdrop)

Early indications are that President Macron’s final finance bill may be the most perilous of his presidency so far.

The excess that France pays to borrow money over German bonds (a key barometer of investor mood) is near its highest level since the sovereign debt crisis of 2012. Political and fiscal worries always manifest first in debt markets.

France has had no shortage of problems, but the first presidential debate was consumed by bickering over how best to deal with rising debt. In particular, there was robust dispute over a far-left proposal to cancel a portion of debt.

The on-stage questioning gave the far-right and far-left candidates a chance to stress-test unorthodox ideas. The leading far-right and far-left candidates, Marine Le Pen and Jean-Luc Mélenchon, have vexed senior business leaders in the past with disruptive propositions and have seen their repeated runs for president fall short of victory.

After three hours of hard-hitting probes, the contenders agreed only on the need to narrow the runaway budget deficit as a matter of urgency. The options ranged from clawing back welfare spending to hiking taxes, raising the retirement age, juicing the economy with more spending, or even cutting payments to the European Union.

Mélenchon doubled down on his plan to cancel debt held at the European Central Bank as a negotiable package with other euro members, telling Reuters he would be willing to go further and “just take the bonds and burn them.” We have heard similar appeals before: in Europe as the euro zone debt crisis detonated, and around the same time in the US. Debt cancellation, however, is nothing more than monetary financing and would be highly inflationary.

As these ideas increase, the case for investing in real over financial assets only strengthens. Mélenchon may have said it, but this is in no way a realistic outcome. Yet, even if low-probability, high-impact events don’t come to fruition, they materially warp the distribution of risks, skewing it with fatter tails. We should take them seriously, particularly now that the US Treasury has panicked over its long-end buyback announcement.

We expect to hear more avant-garde debt approaches, such as cancellation, in the months ahead and not just in France.

Former prime minister Philippe said the debt effect “risks generating an extremely brutal shock that will hit hardest those most exposed.” He dismissed Mélenchon’s proposal as “extremely dangerous” and risking cutting France off from financing.

Le Pen, meanwhile, claimed her savings plan of €125bn ($146bn) could be achieved by shrinking the French state, cutting immigration, and possibly reducing contributions to the EU. She proposed a constitutional “golden rule” to ensure balanced budgets, saying she would make sure France honoured its debts.

She reiterated her pension reform, allowing retirees to cash in on their schemes as soon as age 60, which she puts at around €9bn a year.

What options does France have to reduce its debt? Fiscal consolidation is too risky to drum up the votes for, and growth is already heavily driven by massive deficits (and forced down by austerity in the past). Inflation is already an issue for rising interest payments. Financial repression is coming, but too late to save the day (it’s already partly at work via enhanced Treasury buybacks). Selling off government assets such as the gold that sits in Fort Knox may make a one-off splash, but it’s unlikely to move the dial. Debt restructuring or default would cause more damage than good.

Macron seems stuck in a bind: no parliamentary majority, no budget room, and no political capital. It is not obvious what Emmanuel Macron can do to stop the bleed. Instead, the risk is that the bleed accelerates.

The 15y15y forward rate is a way of looking at borrowing costs that strips out the impact of near-term monetary policy. The spread between this metric for France and the equivalent German rate is now just short of its highest level since 2012, a sign that investors are pricing a structural deterioration in France’s financial health relative to Germany in the coming decades.

So what is the story for investors? France’s fiscal arithmetic may be ugly in aggregate, but markets will not experience the adjustment in aggregate. Any credible attempt to stabilise the debt trajectory will create winners and losers across sectors, households, and asset classes depending on where the government chooses to find the money. Tax rises, spending cuts, pension reform, changes to corporate incentives, and further pressure on household savings would each transmit through the French equity market in very different ways.

The approach, therefore, is to determine how it tries to consolidate, who ultimately pays, and where that pain is likely to appear first in markets. We start here, then turn back to the sovereign complex and lay out our convictions on OAT yields and the relative-value trades we prefer across European government bonds.

Below the paywall, we detail our favoured stock-specific long/short trade, which we believe has asymmetric opportunities, along with three rates trades, including one relative play that we have added to our portfolio.

Equity Approach

Constituents of the country’s benchmark CAC 40 Index make less than 20% of revenues at home, which limits the impact of political risk on earnings. However, domestically focused sectors such as banks, utilities, telecoms and construction do feel the stress of a wider French-German yield spread. A bigger yield gap reduces the attractiveness of French stocks and keeps a lid on companies’ ability to invest, ultimately hurting their competitiveness.

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Technology led most of the week, but AI-related weakness persisted, and Broadcom shares fell despite a ninth consecutive beat and sharply higher AI semiconductor revenue; the pattern also appeared in Cisco, Samsung, and Nvidia, as fourth-quarter guidance missed expectations and weighed on shares. Energy stood out as crude oil was on course for a strong weekly gain, helped by the US and Iran resuming military exchanges in a conflict now in its seventh month.

The hawkish reaction, which saw rates rise broadly across the curve, reflected the labour market being behind part of the Fed’s mandate, with the full picture dependent on next week’s CPI figures. Fed’s Waller was framed as a proxy for the committee centre, noting a preference for holding steady if the path of disinflation resumes, and that a hike vote is likely to depend on this week’s CPI. USD edged higher on the payrolls data after retreating through Thursday when falling yields reopened a downtrend through most of August, with the move seen more about positioning than a lack of willingness to price in higher rates.

Into next week, the balance of risk leans towards further USD strength unless CPI is soft. The rates move wasn’t sustained, with 5s30s up only 3 bps over the week, suggesting the market continues to seek more concrete signals on the Fed’s policy path, and most attention shifted to next week’s inflation figures.

Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.

• “September Showdown”

• “Europe Politics”

• “Summary of House Views”

Below the paywall, we look into last Friday’s US labour data and how that plays into the September FOMC decision, alongside our call on a hike or hold. We also share some insights on Europe and the political forces at play in local markets, where the stage is set for a bearish impulse on euro-area bonds to emerge ahead of this week’s ECB meeting.

A France thematic article on the 2027 elections will be sent to all paid subscribers later this week. If you are not yet a paid subscriber, you can upgrade below to receive all published research.

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Markets got some good news from Nvidia and some not-so-welcome news from Warsh. Nvidia did its job in validating the AI complex. Semiconductors were higher, and it gave the S&P 500 its best session since early August. Warsh then stepped up to the podium and made his inflation concerns clear, adding to the hawkish pricing in rates markets.

We’ll touch on Nvidia specifically later on, but elsewhere, software was strong and delivered some much-needed evidence that the AI opportunity is broadening, now a positive for software. Salesforce surged after stronger guidance and an expanded Anthropic partnership, while CrowdStrike rallied to a record as AI-related cybersecurity demand accelerated. It’s a continued case that “SaaSpocalypse” is company-specific. There will be winners and losers in the sector.

Breadth was weaker. Most S&P 500 sectors still finished lower. The relative attraction of equities is also becoming harder to ignore with the 10-year Treasury yield above 4.7%, leaving investors able to earn more income from government bonds than from almost every stock in the index.

Other markets responded largely to the Jackson Hole symposium speech, but we look more into this later on.

Below the paywall, we outline in detail the guide to trades moving markets, where they may be heading, and the actionable trades to consider.

• “Warsh’s Judgment Day” — cross asset implications from Jackson Hole

• “Investment Case for NVDA and META” — why Nvidia can outperform and the overhang that is now gone from Meta’s outlook

• “Summary of House Views” — recapping all macro trades on the book

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Warsh’s Judgment Day

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UK equities trade at their widest valuation discount to developed-market peers in decades. We believe the tide is already turning, and highlight the stocks best positioned to benefit.

With the UK macro backdrop central to the thesis, and the UK being our home, we felt the team was well positioned to offer a strong and reputable voice on the topic.

At the same time, we teamed up with , a leading Canadian-based equity research firm, to leverage their equity-specific knowledge and expertise. The piece includes their latest discussion with ARM Holdings (NASDAQ: ARM), one of the UK’s largest companies and a global leader in semiconductors.

UK equities lack the AI exposure that drives valuations in the S&P 500, which has clearly contributed to the valuation gap. But there is much more to the story, including shifting investor sentiment, domestic capital reform, and a sector mix better suited to the next cycle.

Table of Contents

1. The State of the UK Market

2. Why We Are Bullish on the UK

3. Growth Driver 1: Legacy Investor Ignorance

4. Growth Driver 2: Political Capital

5. Growth Driver 3: Index Composition For The Next Cycle

   5.1 Financials

   5.2 Energy & Materials

   5.3 Healthcare

6. In Conversation: Arm Holdings

7. UK Equities: Pool of Ideas

8. Key Risks

9. Concluding Thoughts

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1. The State of the UK Market

Over the past decade, UK assets have significantly underperformed their global peers. The clearest example is the FTSE 100, the UK’s flagship stock index, which has gained 62% over this period, compared with a 254% gain for the S&P 500.

However, FTSE 100 performance has started to turn over the past year. With almost no tech exposure, the UK market’s gains have been driven mainly by financials, defence, and expectations of lower interest rates.

We then turn to the British pound (GBP), which was trading at 1.39 against the US dollar in August 2021 and remains at a similar level today, at 1.36. Notably, GBP/USD fell to a low of 1.035 in September 2022 amid growing political concerns in the UK.

Next, we turn to the bond market. The long end of the Gilt curve has risen significantly in recent years, with both 10-Year and 30-Year UK government bond yields reaching their highest levels in decades. Loose fiscal policy, weak economic growth, and persistent inflation have pushed yields higher as investors demand greater compensation for holding UK government debt.

The UK’s move has been partly driven by a global selloff in long-term bonds. 30-year US Treasury yields reached their highest level since 2007, while German 30-year yields reached levels last seen in 2011. However, the UK stands out for both its higher absolute yields and the large increase in the extra return required to hold longer-term UK debt. This reflects concerns over government spending, weaker demand for UK bonds, and persistent inflation, all of which have been more pronounced in the UK than in most other G7 economies.

Taken together, these three asset classes paint a consistent picture. Over the past five years, the market has demanded a higher risk premium to own UK assets.

Equities have been held back by weak earnings expectations, political uncertainty, and continued capital outflows. Sterling has struggled as weak productivity growth, a current account deficit, and inconsistent government policies have weighed on international confidence.

Meanwhile, Gilt yields have risen significantly as the market has demanded more compensation for lending to a government facing higher debt, large borrowing needs, and an economy struggling to generate sustained growth.

In our view, there is some irony here: these same headwinds have also created the foundations for an opportunity. The UK is starting from a much lower base, while some of the factors that held the market back are beginning to improve.

2. Why We Are Bullish on the UK

We split our reasoning into three growth drivers.

The first is what we call legacy investor ignorance.

Despite many of the UK’s largest companies generating the majority of their revenues overseas, they continue to trade at a sizeable valuation discount to peers in the US and other developed markets. This discount may have been justified in the years immediately following Brexit, but six years later, it increasingly looks disconnected from the fundamentals. We see this as our first growth driver because the market is already starting to recognise this valuation gap.

Takeover activity has also picked up significantly, as overseas buyers and private equity firms continue to take advantage of depressed UK valuations. UK public M&A reached £35.3bn in the first half of this year, compared with £22bn in H1 2025 and £18.5bn in H2 2025. Overseas bidders accounted for 94% of total deal value.

Inbound cross-border M&A activity tells a similar story, with foreign buyers showing a growing appetite for UK companies.

Meanwhile, the FT recently reported that takeover activity involving UK-listed companies has surged 188% year-to-date, marking the strongest pace since 2007.

A second pillar of our bullish view is the political capital being spent by new PM Andy Burnham to kick-start the UK economy. He may have been in office for only a few weeks, but the market’s initial reaction has been broadly positive.

More importantly, the government’s early priorities have focused on unlocking long-term investment rather than short-term fiscal giveaways. Alongside an ambitious programme of planning reform and housebuilding, Burnham has repeatedly emphasised the need to “mobilise British savings to back British growth.” Ministers are also exploring reforms to ISAs and pension funds that could encourage more domestic capital to flow into UK-listed companies.

Even a modest shift in domestic capital allocation could have a meaningful impact on UK equities. We explore how even a partial reversal of pension fund outflows from domestic markets could bring billions of pounds of additional demand into the FTSE 100 and FTSE 250.

Finally, at the index level, the UK market is dominated by large companies in healthcare, commodities, and financial services.

These are three areas where we are currently overweight and expect to remain so in the next cycle, with each benefiting from different tailwinds. As a growth driver, we believe the market is underestimating the potential upside in these sectors as we enter a period of higher infrastructure spending, larger defence budgets, strong commodity demand, and fundamentally higher interest rates.

3. Growth Driver 1: Legacy Investor Ignorance

The shrug of the shoulders when some overseas investors are told about UK equities tells the broad story here. Even though ignorance might be too strong a word, investor indifference and persistent under-allocation certainly help explain the valuation gap between the UK and its developed-market peers.

The scale of the discrepancy is being arbitraged away, but still remains striking. As of the end of July, the MSCI UK traded at 12.85x forward earnings, against 20.37x for MSCI USA and around 15.5x for MSCI EAFE, while offering a 3.05% dividend yield, versus just 1.13% in the US.

In other words, investors are currently paying roughly 37% less for a pound of forecast UK earnings than for the equivalent dollar of US earnings, while simultaneously receiving almost three times the dividend yield.

Of course, some discount is justified. The US market contains many of the world’s highest-growth and highest-margin technology businesses, and those companies deserve higher multiples than mature banks, miners or oil majors.

But we believe the valuation gap is still too large.

We don’t need the valuation gap to disappear entirely for the return implications to become meaningful. If UK forward valuations moved from 12.85x to 14x, for example, that alone would represent roughly 9% multiple expansion.

UK vs. US Equity Valuation Gap (2023–2026)

Signs of this process are already emerging. The FTSE 100 has lagged the S&P 500 by only around 250bps over the past year, an impressive result when considering the radically different sector compositions of the two indices (more on that later).

Arguably, the most compelling evidence that the UK discount is becoming excessive comes from ongoing corporate arbitrage. Financial and strategic buyers appear increasingly willing to exploit a valuation discrepancy that public-market investors have been slower to recognise.

By July 1, 2026, announced M&A involving UK targets had exceeded $231bn, 210% above the same point in 2025. Even more strikingly, foreign bidders represented around $197bn and a record 86% of UK-targeted deal value.

It’s not hard to sniff out that when overseas corporations and private-equity firms repeatedly conclude that UK-listed businesses are worth substantially more than their prevailing market capitalisation, there’s money to be made.

Companies themselves are reaching much the same conclusion.

UK companies had announced £34.6bn of share buybacks by April 24, 2026. Management teams are opportunistically retiring capital for shares.

This creates an interesting dynamic. Foreign buyers are removing undervalued UK companies from the market, while listed companies are simultaneously shrinking their own share counts through buybacks. Both reduce the available supply of UK equity. Then if we see a continued demand increase from other marginal buyers for UK stocks, it creates a rising tide.

Just as there is some ignorance around ignoring the UK, we also don’t want to be seen as ignorant in simply saying “UK stocks are cheap”.

Cheap markets can definitely remain cheap indefinitely.

The more compelling argument is that identifiable shifts are now starting to close this valuation gap, creating opportunities for investors to generate meaningful alpha through stock selection. Rather than simply buying the cheapest UK stocks, we favour companies where the valuation discount looks hardest to justify.

For example, international businesses still trading on UK multiples, companies with strong free cash flow and significant buyback capacity, and businesses whose strategic value appears materially higher than their public-market valuation, making them potential M&A targets.

Mid-caps are particularly interesting in this respect, as lower analyst coverage and weaker domestic flows can create more pronounced valuation gaps.

Now, let’s take a look at two ideas we find interesting.

4. Growth Driver 2: Political Capital

Andy Burnham entered Downing Street on July 20, 2026, promising a “new political model and a new economic model” after replacing Keir Starmer as Labour leader. The UK has become something of a political laughing stock in recent years, with Burnham becoming the country’s seventh PM in a decade.

Andy Burnham’s First Speech as Prime Minister

The consequences extended well beyond politics, with repeated fiscal missteps triggering serious market turmoil. The clearest example came in September 2022, when Liz Truss’s government, with Chancellor Kwasi Kwarteng, unveiled a mini-budget containing around £45bn in unfunded tax cuts.

Markets reacted badly, with gilt yields surging and severe pressure building across pension funds, particularly those using liability-driven investment strategies. To prevent the stress from turning into a broader financial crisis, the Bank of England stepped in with a temporary programme to buy long-dated gilts, initially offering up to £65bn in purchases. In the end, it bought £19.3bn of gilts before gradually unwinding the entire position once market conditions stabilised.

Even though this shows the damage that can be done, the opposite is also true. Burnham does not need to transform productivity overnight.

He needs to convince companies and investors that the direction of travel has changed, that approved projects will actually be delivered, and that domestic capital will no longer be encouraged to bypass UK assets.

In a market priced for disappointment, simply reducing policy uncertainty can be almost as valuable as an immediate improvement in earnings. Before we even get to the policies, there are already some positive signs. Labour is now polling ahead of Reform UK, the right-wing alternative in the UK’s increasingly fragmented political landscape. The recent improvement largely reflects growing confidence that Burnham can deliver the change he has promised.

What has been more constructive is the absence of a sustained fiscal-risk spiral. The 10-year Gilt yield is almost unchanged if we compare the current yield to the day Burnham took office.

Of course, yields remain high in absolute terms, but the market has so far treated Burnham’s programme as a conventional fiscal debate rather than a broader credibility issue. So, what policies could drive this change, and which sectors should we watch? One of the most interesting levers is savings reform.

UK workplace defined-contribution (DC) pensions held roughly £600bn in assets in 2023, but only 6% was invested in UK equities, compared with 70% in overseas equities. The domestic share of DC assets has also fallen from just over 50% in 2012 to just over 20% today.

The government’s own analysis estimates that a five-percentage-point increase in domestic DC allocation would add £30bn of investment into UK markets. At the same time, ISA reform will reduce the under-65 Cash ISA allowance to £12,000 from April 2027, while keeping the overall £20,000 ISA allowance unchanged. The goal is clear: encourage more savings to flow into investment products.

Given how little the current ISA and pension system supports UK equities, this growth driver does not require a dramatic change. From our calculations, a one-percentage-point increase in DC home bias, a modest shift in ISA cash savings, and a half-percentage-point increase in LGPS listed-equity allocation could generate roughly £6.7bn of incremental demand for UK-listed equities. The impact could be particularly meaningful for the much smaller FTSE 250.

Pinpointing exactly which stocks would benefit is harder. These funds would act as marginal buyers, making the impact difficult to trace directly.

However, we see two clear points.

First, money is likely to flow toward companies seen as undervalued. This supports the first growth driver we discussed above and could help close some of the valuation gap.

Second, it matters less where all the money ultimately ends up, as much of it will pass through UK asset managers, brokerage platforms, insurers, and other financial institutions. These businesses should benefit from higher AUM, greater trading activity, and increased demand for actively managed products.

There are, of course, other ways to play these reforms, such as homebuilders benefiting from potential housing reform or retail and leisure companies benefiting from measures aimed at easing the cost of living.

But if we want direct exposure to the financial reforms themselves, we believe UK financials offer one of the most attractive risk/reward opportunities.

5. Growth Driver 3: Index Composition For The Next Cycle

The lack of AI and broader technology companies in the UK public market is no secret. In theory, this should have caused the UK to lag the S&P 500 even more, given the huge contribution from tech and AI-related stocks.

Yet that has not been the case this year.

YTD, the FTSE 100 is up 8%, compared with 12% for the S&P 500.

Ironically, one factor supporting the UK market is its index composition. While the FTSE 100 has little exposure to technology, it has large weightings in sectors that are already performing well. Financials account for roughly 28% of the index, followed by healthcare at 11.6%, energy at 10.4%, and materials at 8.1%.

The contrast with the US is significant.

Information technology alone represents 36.8% of the S&P 500 and 28.9% of the MSCI World. This means the UK offers investors a very different mix of sector exposure, with greater weightings toward financials, healthcare, energy, and materials, all areas where we see strong potential in the next cycle.

So why does this setup look appealing going forward? Let’s focus on three sectors we are bullish on right now: financials, healthcare, and energy.

5.1 Financials

UK banks have performed strongly over the past year as the interest-rate backdrop has remained far more supportive than many investors initially expected. The Bank of England held its policy rate at 4% through much of 2025 before cutting by just 25bps to 3.75% in December, where it has remained.

This has allowed banks to maintain healthy net interest margins and deposit spreads. Looking forward, we see this continuing based on our macro outlook for monetary policy. The BoE held its policy rate at 3.75% at its July 2026 meeting, with a 6-3 vote and three MPC members voting for a hike.

Current market pricing indicates 25.4bps worth of hikes priced through to the end of the year. A “higher for longer” or even modestly higher rate path, driven by energy price inflation and Middle East tensions, would be incrementally positive for bank NIMs.

Importantly, the benefits of higher rates have increasingly been reinforced by fundamental hedges. Barclays, Lloyds, and NatWest have large hedge books that gradually roll onto higher yields, providing a delayed boost to net interest income even if the BoE cuts rates modestly. All three have guided towards year-on-year growth in fundamental hedge income over the medium term, making the earnings benefit more durable than simply relying on rates staying high.

When you put it all together, it’s clear that the full benefit of this cycle has yet to be reflected in earnings.

The next leg of this cycle could come from a further re-rating of the sector alongside supportive monetary policy. Investors are increasingly recognising that the improvement in profitability since Covid is more fundamental and not simply the result of higher rates. With UK banks still trading within a domestic equity market that remains heavily discounted versus other developed markets, stronger returns and better earnings visibility could give investors a good reason to close at least part of that valuation gap.

5.2 Energy & Materials

Over the past 12 months, UK materials stocks (FTSE 100 members) delivered a total return of +80%, while energy stocks returned +34%. Materials were the standout sector across the entire index, comfortably ahead of even Technology (+55%) and Financials (+26%).

The main driver has been the broad rally in commodity prices over the past year, with the Iran war acting as a key catalyst. However, it would be wrong to attribute all of these gains to the oil complex.

In fact, copper has been the strongest performer across the major commodities, rising 44% on supply deficits and recovering Chinese demand.

Next is Brent crude, up 34%, driven higher by the Iran conflict and related disruptions to maritime trade. Gold is slightly behind at +32%. While it struggled for much of Q2, it remains supported by central bank buying, a weaker US dollar, and safe-haven demand. Not all commodities have performed equally, however, with natural gas (-1%) and iron ore (-7%) standing out as notable laggards.

Looking ahead, we don’t believe this is the end of the road for materials outperformance, even with precious metals having pulled back in recent months.

Copper is a good example. Physical copper markets are likely to remain in deficit in 2026, as production growth cannot keep pace with rising consumption, supporting further price increases. Copper is forecast to average $12,800/t in 2026, with demand supported by China’s power grid, renewable energy, EVs, and machinery, while supply remains constrained.

More importantly, we expect the copper deficit to persist well beyond 2026, creating a longer-term supply problem for the market.

The fundamentals are highly compelling. A decade of underinvestment, combined with the rising capital intensity of new projects, means higher prices will likely be needed to incentivise new supply. This is already reflected in the FTSE 100, with the Anglo American–Teck merger moving towards completion and expected to create the world’s leading listed copper company.

Copper isn’t the only metal expected to face a deficit over the coming year. Aluminium is another market where the supply picture looks increasingly tight. Middle East disruptions are estimated to have caused 3.5–4.0 Mtpa of outages, with around 2M tonnes of regional supply expected to be lost in 2026. If these disruptions continue, aluminium prices could move above $4,000/t.

Regarding gold and silver, we believe the recent bounce still has further room to run higher. More broadly, UK energy and materials stocks still trade at low valuations despite their strong performance.

The median forward P/E is 10.5x, while median forward EV/EBITDA is 4.7x. If commodity prices stay high, we believe these stocks still have room to move higher as earnings grow and valuations improve.

5.3 Healthcare

The case for UK healthcare stocks is becoming increasingly attractive following a prolonged period of neglect. The sector has faced real headwinds, both in the UK and globally, including drug-pricing reforms and reimbursement pressure.

There have also been concerns that AI could reduce rather than improve margins. These factors have led investors to use healthcare as a source of funding for more popular AI and tech names, leaving positioning in the sector unusually light.

We believe this neglect is now part of the opportunity, especially given the UK’s limited exposure to healthcare. Valuations also look reasonable relative to the broader market. The FTSE 350 trades at an average forward P/E of 15.2x, while GSK trades at 10.4x and Hikma at 9.6x. On a P/B basis, versus a 3.5x average for the FTSE 350, Smith & Nephew trades at 2.4x and Hikma at just 1.9x.

Positioning also remains far from crowded, meaning even a modest rotation away from expensive tech names could provide a meaningful boost to healthcare stocks.

The fundamentals offer another reason for optimism. Healthcare companies typically benefit from strong pricing power, high margins, and limited exposure to commodity inflation. An improving earnings environment could therefore create meaningful operating leverage as margins recover. Meanwhile, healthy balance sheets and the need for large pharmaceutical companies to replenish their drug pipelines could support further M&A, particularly across biotech.

We also think the AI angle is under-appreciated.

Investors have largely focused on AI as a threat to healthcare margins, but productivity gains in areas such as drug discovery, diagnostics, and administration could eventually create meaningful upside to earnings.

6. In Conversation: Arm Holdings

Earlier this month, Aurelion Research had a really insightful discussion with ARM Holdings’ VP of Investor Relations, Ian Thornton, who has been with the company for more than 20 years. Let’s just say he knows the ARM business pretty well, and we definitely felt it during the conversation.

For context, ARM is one of the largest companies in the UK and one of the most important semiconductor companies globally.

It develops energy-efficient CPU architectures and licenses them to major technology companies around the world.

It was a great call, and they came away with much more than they typically get from larger companies. Bigger companies often stick to the same points they make on earnings calls. These conversations are about getting a better sense of growth drivers, what customers and investors are saying, as well as how competitors are moving.

First, the long-term margin opportunity is much more interesting than initially thought.

Financial Targets & A Very Different Margin Model

The IP business could become very attractive, with management targeting around a “99% gross profit margin” and potentially 60-65% operating margins.

Those numbers may sound aggressive at first, but ARM has a very different cost structure from most semiconductor companies. The reason is that “everything that goes into that chip is IP that we also license and sell.”

As management put it, “chip costs are just assembly... basically assembly costs.”

That makes the gap between gross and operating margins “a lot, lot tighter than most other semiconductor companies.” Longer term, reaching operating margins around 60% would require moving further toward customer-owned tooling, where “you own the tools that live at the test equipment factory.”

The point here is that ARM is leveraging its existing IP advantage to move further up the value chain while maintaining a relatively asset-light model.

Bringing More of the Chip Development In-House

ARM is also gradually bringing more of the chip development process in-house.

For the first chip iteration, ARM used SocioNext for the back-end processes. For the second, it moved toward a direct relationship with TSMC.

The company also recently completed its acquisition of DreamBig, giving ARM greater capabilities in high-speed interfaces. Previously, it relied on third-party tools from companies such as Synopsys.

The strategy is simple: bring more of the development stack in-house, have greater control over the product, and capture more of the economics.

This also addresses a broader issue ARM encountered when it first started approaching hyperscalers. According to management, the response was essentially: “We don’t want to design chips. We are software and service companies. Don’t make us become silicon designers.”

That is important because ARM is not necessarily asking customers to become chip designers. It can provide much more of the finished solution itself.

And there is a meaningful economic opportunity here.

Management pointed out that if “90% of the IP that goes into that chip is ours,” there is a question of why ARM should let someone else capture a 30% cut for assembling what is largely its own architecture into a finished product.

Enterprise Could Be a Much Bigger Opportunity

One of the more interesting parts of the conversation was around enterprise demand. Companies don’t want to design its own chips. Instead, the question they were asking was essentially: “Why is there no one to sell me this chip?”

That is where ARM saw an opportunity. If “90% of the IP that goes into that chip is ours,” there is “very little opportunity” for competitors to differentiate.

That creates a pretty unique position for ARM. Customers get a chip tailored to their needs, while ARM can capture a significant portion of the economics because it already owns most of the underlying IP.

We think this could become an increasingly important part of the story.

The hyperscalers have already shown that custom silicon can make sense, but there is a much larger group of enterprise customers that simply does not have the resources or desire to build an internal chip team.

Competitive Moat & Future Workloads

When it comes to competition, management was pretty direct:

“The only boulders on the runway are Intel and AMD with their x86 chips.”

ARM’s core advantage remains performance per watt. As they put it, “the primary performance metric customers care about today is performance per watt.”

That becomes increasingly important as AI infrastructure puts more pressure on power availability. The computing industry can keep adding GPUs, but eventually you run into a simple problem: there is only so much power available.

This is also where agentic AI becomes particularly interesting.

Management believes “the rise of agentic workloads” could be an important opportunity because “the agentic is pretty much 100% a CPU task.”

GPUs handle the heavy matrix computation, but the orchestration, API calls and sequential logic around those workloads are largely CPU-driven. If agentic workloads become a meaningful part of future computing demand, ARM could benefit from another structural shift toward more efficient CPU architectures.

Robotics & Physical AI

The other area we found particularly interesting was robotics and physical AI.

These applications require much more than raw computing power. They need “redundancy, safety islands, parallel processing.” As management explained, you need “safety critical systems to go into robotics and cars” because a computing failure in these environments can have very serious consequences.

That plays directly into ARM’s strengths. As more computing moves into environments where power efficiency, reliability and safety are just as important as raw performance, ARM’s architecture should become increasingly relevant.

Overall, the biggest takeaway for us was how broad ARM’s opportunity could become. AI infrastructure is only one part of the story. The company is gaining exposure to data centers, enterprise computing, agentic AI, robotics and physical AI, all of which are pushing demand toward more efficient computing. After this conversation, we came away with a much clearer view of why management is so confident in ARM’s long-term growth potential.

7. UK Equities: Pool of Ideas

We built a Pool of UK Ideas classified by the three growth drivers we identified earlier, with exposure to financials, healthcare, commodities, and other areas where we see the strongest potential for a re-rating.

This basket is live and investable for eligible accounts via Plutus and can be viewed here.

8. Key Risks

The simplest way to explain the main risk from our primer is that UK equities are not necessarily expensive, but the catalysts needed to unlock their value may fail to materialise.

1. The Valuation Gap Could Persist

The UK discount, particularly in equities, could prove to be more fundamental than we expect. Although we believe it is cyclical and already starting to change, our thesis assumes that the valuation gap continues to close as international investors rediscover the market. Cheap, however, does not automatically mean mispriced, and investors could continue to look elsewhere for years.

2. Reforms Could Disappoint

Another risk is that Burnham fails to turn political momentum into meaningful economic reform. The early days of any government are not always a good indicator of future investment performance. A key part of our thesis is that greater political stability and policies aimed at mobilising British savings can improve domestic investment. The risk is that implementation disappoints, reforms are watered down, or political opposition prevents meaningful change.

3. Fiscal Risk

Finally, there is fiscal credibility, an area where the UK has struggled in recent years. Burnham has so far avoided a major fiscal-risk event, but the October Budget will be an important test.

Higher borrowing, unfunded spending commitments, or overly optimistic growth assumptions could push gilt yields higher and put pressure on sterling and UK equity valuations. The 2022 experience under PM Truss showed how quickly UK assets can reprice when confidence in fiscal policy is lost.

9. Concluding Thoughts

Here we fly the flag for the UK.

Expectations remain relatively low, valuations remain attractive, and for the first time in a while there are identifiable catalysts capable of changing the narrative.

Importantly, our bullish case doesn’t require Britain suddenly to become the world’s fastest-growing economy. That’s just not realistic. Rather, we need the direction of travel to improve. The signs are there that this can be the case, from credible fiscal policy and a modest redirection of Britain’s enormous savings pool.

AP and Aurelion Research

Disclosures & Methodology

All forecasts and estimates are based on publicly available information, management commentary, and our own modelling assumptions. This report reflects independent analysis by Aurelion Research and/or AP Research. All opinions and estimates expressed herein reflect the author’s judgment as of the date of publication and are subject to change without notice. This publication is for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. Aurelion Research, AP Research, and its analysts may or may not hold positions in securities discussed. Use only where legally permitted.

Alibaba’s (BABA US, 9988 HK) $10.2 billion (HK$80 billion) share sale, Hong Kong’s biggest follow-on offering on record, is one of them.

Markets have immediately focused on dilution. Shares fell around 8% after the announcement, and criticism followed. Even Michael Burry, a now-native writer on Substack, announced that he had moved his entire Alibaba position in favour of JD.com, and said he would not be interested in Alibaba unless the share price were half what it is now. While Burry stated that he “cannot bless share issuance”, we contrastingly see this action as positive for Alibaba’s pursuit in the AI race and believe the investment, after some short-term pain, will be rewarded.

We are not here to rebut the opinion shared, but instead to highlight what the market is overlooking. Focus is too heavy on the shares issued and too light on what those shares buy Alibaba. The raise provides fuel for the AI buildout while preserving cash, limiting additional leverage, and retaining balance sheet flexibility for what could become an even more capital-intensive arms race.

We don’t often drill down into the micro details and publish a report on a single stock, but today readers can enjoy a different approach. A top-down overview of our bull case for Alibaba in the AI world, and a bottom-up analysis from contributor , an independent equity investor and researcher.

Preserving Debt Capacity

The major concern with share issuance is diluted earnings. That in turn hurts stock performance in the near term. It is a valid concern for an investor, but it does not, by itself, determine a company’s prospects. More has to be considered here.

Alibaba’s fundraising will help drive AI-led growth, and the impact on earnings will be limited if the company can improve AI payoffs. We see this raise as a bigger contributor to the AI “arms race” than the dilution itself.

Let’s start with the mechanics; after all, a few specifics never hurt anyone. The company issued 710 million new shares at HK$112.70, equivalent to roughly 3.6-3.7% of its enlarged share count, priced at an 8.4% discount to Friday’s HK close, with the proceeds earmarked for its full-stack AI capabilities. This creates a mathematical headwind for existing shareholders and was likely a contributing factor in Burry’s decision. Corresponding EPS dilution will be somewhere around 3.5%, but focusing purely on dilution risks missing another consideration:

Why equity? And why now?

Alibaba is hardly a distressed company scrambling for repairs. The balance sheet is strong, liquidity is ample, and in recent years the company has spent cash buying back stock, reducing share count by more than 11%. Switching tack towards issuing shortly after comes across as a slightly awkward capital-allocation approach. Retire equity, and then come to the market asking for more?

On the surface, it seems strange, but there is some logic to it. We would distinguish between needing capital and choosing how to finance growth. Alibaba sits in the latter camp. Financing options are abundant, and Alibaba is issuing equity so that they remain so.

As with many big tech firms, there is little certainty about what the eventual tab will be for the AI buildout. That concern is as present with Alibaba as it is with the others. Estimates rise year on year. The management team’s original three-year infrastructure commitment was (¥)RMB380bn ($56.5bn), but it is already indicating expenditure could exceed this figure. In the last quarter, capital spending jumped 75% YoY to ¥68bn ($10.1bn), against ¥23bn of operating cash flow. Alibaba is a highly cash-generative company, but not sufficiently so to finance the AI buildout at the speed the management team currently wants.

Cash burn also appears to be partly elective. A foothold in AI development means cash must go out before revenues come in, and considerable amounts at that. Servers, chips, and data centres are financed today and rewarded tomorrow. Per Alibaba’s management, servers currently repay their cost within roughly three years, with a potential for that figure to fall towards two and a half, while carrying a depreciation life of five years. At current margins and payback periods, Alibaba could bring the AI-cloud and computing business back to positive cash flow if revenue growth were restrained below roughly 33%. Instead, the company is growing at 45%, allowing it to ease pressure off the accelerator, but choosing not to.

This lets Alibaba continue growing AI infrastructure at 40%-plus rates without forcing the balance sheet to absorb the entire gap between today’s capex and tomorrow’s cash generation.

Dilution at a Fair Price

The alternative funding method would have been tapping debt markets, as has been the predominant case with US Tech. This avoids dilution, but doesn’t avoid cost. 1-year dollar funding options would cost the company about 5.4%, while Dim Sum debt could be issued at a lower rate of 2.5%. However, this option was ruled out because of shallow market depth, an RMB-USD mismatch, and limited global investor reach.

Debt also introduces an obligation. Whether the investment pays off or not, the coupon payment remains, a concern we raised recently in our exploration of Nvidia’s new SPV and the risks to AI financing. Preserving debt capacity deserves more attention than a 3.5% EPS dilution. To us, the headlines and sentiment incorrectly emphasise the risks of this raise.

Alibaba’s balance sheet strength stands out compared with China and global peers. Equivalents of $70bn in cash and investments against $39bn of debt leave the company with considerable financial flexibility. Using equity maintains that balance sheet buffer, which we view as a much preferable approach than converting aggressive but discretionary AI investment into fixed claims on future cash flows.

Preserving this strength and borrowing capacity rather than stretching themselves in the opening stages of the race may prove fruitful. We have already mentioned that Alibaba has increased spending expectations, and these expectations will continue to rise as competitors do their best to keep moving forward. Tencent and Baidu face exactly the same incentives: as one participant raises the stakes, the others must decide whether to follow.

Of course, if Alibaba spends tens, maybe even hundreds, of billions building capacity that customers do not sufficiently value, issuing shares rather than debt makes the economic outcome no different. But if you take the side that AI investment pays off, then Alibaba has limited any risks relating to a financing problem as well. For this, we value the recent decisions and see this as an opportunity to increase exposure.

On the economics, evidence suggests the underlying business is already better than the headline. The company disclosed ¥5.6bn of adjusted EBITDA from cloud computing in the latest quarter, at a margin close to 12%, while revenue grew by 45% in this period. With the server economics repaying costs in a two-and-a-half- to three-year period, as stated previously, against a five-year useful life, this implies a project-level internal rate of return of around 20-30%. Cloud revenue has also accelerated for nine consecutive quarters and just recorded its fastest growth rate in 22 quarters. If these numbers hold, a 3.5% dilution looks fairly minimal.

In an AI race where the distance is yet to be disclosed, keeping some fuel in reserve seems prudent.

Bottom-Up Analysis

Underneath the hood, Alibaba is executing well, but by no means fantastic. To draw that conclusion, we first have to understand what Alibaba is all about. Most investors still know Alibaba mainly as an e-commerce giant. While that is still true for most of its earnings, it transcended that basic premise long ago.

The best way to look at the company is to divide it into three segments. First, there were: China e-commerce, International commerce, and Cloud Intelligence.

But as of this quarter, Alibaba has started reporting its business in a different way, one that makes more sense looking ahead and where they want to end up in a decade’s time.

The new segments are:

• Alibaba E-commerce Group

• AI Cloud and Compute Services

• AI Labs and Applications

Alibaba Health, Amap, Lingxi Games, and the media assets are categorised in the “all others” segment. ​

One thing that stands out is that this “reorganisation” doesn’t clearly improve investors’ view of the company. They actually separated the model labs and consumer AI apps into their own segment.

And by doing so, they exposed the losses clearly to everyone. Instead of hiding it, management showed transparency and brought the Qwen app spending into the open.

As you can see, the E-commerce section is still responsible for the vast majority of revenue. 71.7%, so almost three-quarters of revenue still comes from E-commerce. But that is not the growth story.

Alibaba E-commerce Group

We think the best way to view this segment is as a “cash cow,” funding growth in the other segments. Revenue grew only 4%, and adjusted EBITA fell 0.6%. These numbers are underwhelming, and they are not why one would invest in Alibaba right now.

​

Today, this is by far the most profitable segment, with group-wide adjusted EBITA of RMB27.3bn. E-commerce produced RMB39.7bn. Cloud added RMB5.6bn, but the other segments were unprofitable overall.

China E-commerce, which is responsible for over 50% of this segment, fell 8%. Management claimed this was due to weak transaction activity and a soft customer base, a headwind they’ve flagged multiple times in the past quarters. It’s clear that the China E-commerce engine is facing weaker transaction activity and a soft macro environment.

Meanwhile, the China Quick Commerce segment grew 45% YoY. In this segment, you can find Taobao Instant Commerce, Freshippo, and on-demand grocery delivery. Losses in this segment narrowed this quarter, which is actually quite impressive given how fast it scales right now.

International e-commerce was roughly flat YoY, down about 1%. This is mostly because of geopolitical headwinds and the tariffs. A big milestone to be celebrated here, with AliExpress finally being profitable after years of draining cash to fund growth.

Global wholesale, the smallest segment, rose 7% YoY. In this segment is Accio Work, an AI agent built specifically for cross-border merchants. Accio reached over 50k paying merchants shortly after launch. ​

Looking ahead, management believes quick commerce should become profitable in FY29, and in the long term, they think it will contribute 30% of platform GMV.

A simple conclusion can be drawn: the legacy marketplace is now a cash machine, under pressure from a weak Chinese consumer, but this is where funding for the other business lines starts.

AI Cloud and Compute Services

If there’s one thing to get excited about with Alibaba, it’s the AI cloud and Compute segment. External revenue growth accelerated for the last nine quarters, and in Q2, YoY growth was 45%. Alibaba Cloud margins improved to 11.6%. And if this cloud thing is new to you, growth and margin expansion are very unusual in this line of business.

The key driver here is AI product revenue. It’s unclear what this exactly entails, but Wu recently said it’s mostly AI compute, MaaS (Model-as-a-Service through Bailian / Model Studio), and AI applications and software. Qwen is NOT in here; more on that later.

AI product revenue saw triple-digit growth for the twelfth consecutive quarter. As of the latest quarter, that makes up about 35% of external cloud revenue, up from 30% last quarter. So it’s starting to continue significantly more and more to headline numbers

This also explains why margins were up, as these products carry much higher margins than the rest of the cloud portfolio.

Everyone knows compute is scarce right now, and consensus is that this will remain true until at least 2030. This pushes GPU pricing toward the most profitable monetisation model.

Alibaba claimed that it actually renewed its contracts at a better price than when they initially signed them. So for them, compute is no longer just a cost factor; it’s now more of a revenue-linked asset. CFO Toby Xu said that Alibaba runs servers for five years, and that AI servers cover their cost in three, so years four and five are free cash flow. Utilisation rates for their older GPUs also seem very high. An A100 bought in 2020, or a V100 bought in 2018, is still running at full capacity today. This basically tells us that the useful life runs well past the accounting depreciation schedule.

Another important addition to this segment is T-head, a chip designer. They have already shipped over 500k previous-generation chips.

Their latest new Zhenwu M890 went live on Alibaba Cloud as a SuperNode instance in August. It runs inference for models above two trillion parameters.

As you are probably aware, this is quite a big deal. Chips and storage are the most important parts in an AI data centre, and commercial GPU’s are very expensive right now. So every little percentage point they can squeeze out of their own chips flows straight to their gross margin.

Alibaba’s ambition here isn’t small; they want to do over $100B in external cloud revenue by 2030, preferably with gross margins of 20%. Management stated that they have “good visibility” on both. This means that growth should accelerate further in the next quarters, with EBITA margins expanding on top of it. But doing $100b in 2030 implies a 45% CAGR, which seems extremely aggressive to us.

Alibaba seems well positioned to capture a large share of the cloud market in China, and it’s safe to conclude that this part of the business is likely the most important growth lever to pull in the next few years.

Any meaningful slowdown here will certainly put the eyes back on the e-commerce section, and that’s not what will get investors anywhere close to excited.

Last but not least, the AI Labs and Applications section.

AI Labs and Applications

This is where things start to hurt, as this is the opposite of a cash cow. AI Labs and Applications show an adjusted EBITA loss of RMB13.9bn, against a RMB3.2bn loss a year ago. When you look at the headline numbers, this segment delivers much of the pain.

So what is causing the pain exactly? AI Model Labs, the Qwen app itself, and QwenWork, which is their new enterprise agent. Like other AI model builders, a large chunk of the losses come from training and inference costs. This also applies to the Qwen app. Luckily, the loss narrowed significantly this quarter because marketing spend came down. Management believes this downward trend should continue as marketing normalises and training efficiency improves.

An important distinction to make here is that the money that’s being spent in this segment shows up as revenue somewhere else. Think of the MaaS revenue, API calls, inference, etc. They are all booked into the cloud segment.

So why the focus on open-source models rather than closed models like OpenAI? Wu’s argument is that a growing, open ecosystem drives more demand for compute. And would you know, Alibaba sells compute. He also said gross margins on hosting third-party open models are roughly the same as hosting Qwen. More open models on Bailian is good for Alibaba either way.

Now we are full circle. This is where the connection to the E-commerce platform starts coming through. Over 250M users have used Qwen’s agent to do shopping.

While the share offering rightfully spooked investors, insiders opened their wallets. Alibaba Group co-founder Jack Ma has joined a pair of senior executives in picking up over $100M in shares in support of Alibaba’s AI ambitions. Jack Ma bought more than HK$600 million (S$97 million) worth of shares. This is on top of the US$20 million (S$25.4 million) worth of stock that senior execs Joe Tsai and Eddie Wu had together acquired in recent days.

And we all know the saying: “Insiders only buy for one reason.”

Our Take

Betting on Alibaba is not simply a bet on its e-commerce business. It’s the belief that the cloud and AI segments will drive growth over the next few years.

But to facilitate that growth, management has to continue spending a lot of cash. Capex jumped from RMB38.7bn to RMB67.7bn, taking cumulative spend to RMB190bn of the RMB380bn three-year plan.

While the ROI on these investments remains unclear for now, this seems to be the way forward, especially given where Alibaba’s core business stands today. This is where it will build its growth engine for the next decade.

Wu received the simple question in an earnings call: where does value end up in the AI stack?

He answered that right now, nobody knows; the short-term is concentrated in chips and infrastructure. But Alibaba built all four layers precisely so the answer doesn’t have to matter. They are spreading their bets, ready to make the move when the time is right.

The large increase in capex and the latest $10.2bn share sales are what it costs to place the bet.

The bet on the future.

AP, TH

Disclaimer: both AP Research and TacticzHazel have a position in Alibaba (BABA US).

This article was written in collaboration with TacticzHazel. TacticzHazel is an Independent equity investor and researcher. He focuses on high-quality companies with moats and strong balance sheets. If you enjoy sector deep dives, company research and other investment ideas, you will enjoy his work.

We had a great time writing this piece together as our styles and research approach overlap a lot. We’d highly recommend subscribing to his newsletter via the link below.

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The move had been building since early July as structural concerns such as the deficit rising, inflation staying above 3%, and a wave of AI-related corporate issuance competing for the same duration buyers compounded. The pain point was hit, and Bessent showed his hand, which we’ll speak more on later.

Across equity sectors, traditional defensive areas like healthcare and materials benefited, while energy continued to get support from elevated oil prices. Healthcare was especially lifted after Moderna’s extraordinary rally following positive melanoma vaccine data.

Tech stocks bore the brunt of the weakness on the sector breakdown (as well as the most $ net sold last week, per Goldman). Walmart delivered its slowest US comparable-sales growth in more than six years and guided below expectations, sending the stock down more than 9%. That view is largely comparable with the macro data, as households increasingly make trade-offs. Target had a better quarter and raised its outlook, but the broader picture remains one of uneven consumer spending.

The dollar was used as Bessent’s sacrifice, with the dollar index (DXY) falling about 1%. Bitcoin had an unlikely winning week, benefitting from the buyback announcement, lower yields, renewed liquidity expectations, and optimism following Trump’s meeting with crypto industry leaders. Gold also continued higher, with the “debasement” thesis getting a fresh tailwind.

Instead of doing several short memos on different assets, as is our usual style on a Monday, we’re combining all our thoughts into one continuous analysis this week, all focused on the knock-on effects of Bessent’s buybacks. Yields, dollar, gold.

Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.

• “Not QE, Not YCC”

• “Summary of House Views”

Not QE, Not YCC

This title felt apt to correct any misinformation out there. This was not quantitative easing or yield curve control. The Treasury is altering the maturity and liquidity composition of the debt held by the market. More Operation Twist than QE.

Bessent’s actions in the Treasury market are likely to drive most themes in the coming days, so this week we focus on this core area while exploring knock-on effects across multiple assets. We’ll start first and foremost with Treasuries themselves.

The initial reaction saw the US Treasury’s expanded long-end buybacks deliver a bull flattener on a one-day lookback, but the more consequential market signal is that Washington has now shown its hand. On a 10-day lookback, the 2s10s curve remains in a bear steepener.

Doubling long-end liquidity support is small relative to supply, but the 10- and 30-year still had sizable reactions. Coupled with the administration’s willingness to intervene elsewhere, the message from Wednesday’s move was difficult to miss, and the size of the intervention may be beside the point. Washington is increasingly uncomfortable with the signal coming from the long end, and markets now know that discomfort exists. Importantly, pain points in markets have a habit of being revisited.

It’s an effort to lean against price discovery and compress long-term borrowing costs. That can matter tactically, particularly when positioning is stretched, but it does little to alter the forces that pushed term premium higher in the first place.

It’s all very poetic when you consider the side of a currency trade that Bessent was on in 1992. He should be fully aware of the consequences of intervention signal failure.

Running growth hot, welcoming easier financial conditions, and resisting higher policy rates is difficult to reconcile with structurally lower long yields. A higher long end is an accurate reflection of Washington’s long-term neglect to run a balanced budget. National debt now tops $40tn. As our friend likes to say, “nothing stops this train.”

We still view steepener trades as attractive, and are in our 2s30s trade from a good entry point, but of course there are increasing risks here, that being th Treasury eliciting coordination from the Fed to provide sustained relief at the long end of the yield curve. That raises more concerns about Fed independance, but would offer enough of a showing to the market to maybe not test pain points… So far, the consequences of Bessent’s actions have been short-lived.

The other market that felt this shockwave is the dollar: Bessent’s sacrificial lamb in all of this. Rather than tackle the country’s structural fiscal imbalances, Bessent has clearly shown he’ll take the easier path and manage yields, shifting pressure from bonds to the currency.

The knee-jerk reaction from the news was to add dollar bearish positions, and the sterling and euro attracted the strongest demand. We’ll have to wait for Tuesday to see the positioning change in CFTC data, but prior to the announcement, positioning was still largely positive.

Bessent would welcome these FX movements, as the Trump administration has been praising the benefits of a weaker dollar as a way to increase US competitiveness and reduce trade imbalances.

As for under-the-hood measures, markets are paying for protection against, or exposure to, a higher EURUSD/weaker-dollar outcome. Implied volatility on the pair is still low, but 1m 25-delta risk reversals have moved meaningfully higher and are now positive (orange line below). That means risks have become increasingly one-sided toward USD weakness.

With higher risk reversals but still low implied volatility, we’re in a managed depreciation regime. If, however, implied volatility follows skew higher, that would indicate that the market is starting to view policymakers as having lost control of the move rather than a more orderly dollar sacrifice.

Gold is closely linked to the dollar, and much has been said about fresh tailwinds for the “gold higher” camp and the debasement traders.

It’s been a good couple of weeks for bullion. The precious metal was already on course to log its best month since February before shooting higher on Wednesday. The rebound from a year-to-date low in June has coincided with a pullback in US two-year yields from their recent peak as traders pared bets on Federal Reserve interest-rate hikes.

That inverse relationship will continue to favour gold. US economic data keeps disappointing, leaving the door open to further dovish shifts in policy expectations. Options traders are already hedging the risk that the Fed pivots to cutting rates in 2027.

Meanwhile, long-end US yields remain elevated even after Wednesday’s pullback, but their relationship with gold is more nuanced. The negative correlation strengthened during the Iran war but reversed in June, around the same time the US term premium began to rise. That suggests higher yields pose less of a headwind to gold when investors demand greater compensation for long-duration risks such as inflation and fiscal uncertainty.

As for our call butterfly spread, we remain holding this position, which is up about 7x, with a maximum payout of 1x at $4750. It’s been a great trade so far.

Elsewhere In the Week

The week ahead includes the July US PCE index and the Kansas City Fed’s annual economic symposium in Jackson Hole. Nvidia earnings will also be released, with investors focused on whether AI demand can sustain its valuation.

We spoke about these two topics in more detail last week. In short, Warsh has an opportunity to become better understood by markets, and markets will focus on Nvidia’s continued role as the Bank of AI, looking for fresh details on AI financing and circularity risks.

Top Trade Ideas and Views

Curves

• US 2s10s steepener

• UK 10s30s flattener (here)

• JP 2s10s steepener

Rates

• Fed and BOE on hold for the remainder of the year

• BOJ hike in September, and two hikes in 2027

• ECB October hike

FX

• Bearish USD

• EURGBP six-month put spread, 0.855-0.845

Equities

• SPX call condor (here)

Commodities

• XAU 3-month call butterfly spread (here)

That’s all to start this week. See you soon,

AP

The past few years have been bogged down by AI thematics, leaving little room for markets to explore opportunities elsewhere. That’s not to say they haven’t existed, but one had to search past the noise to find these opportunities.

Of course, markets never turn up on an opportunity for durable growth, and we see healthcare as an under-appreciated market theme. It offers a rare combination of durable growth, Technology-like profitability, attractive valuation and diversification away from concentrated AI and AI-adjacent themes.

For much of the past three years, capital has been singularly focused on the momentous shift in the technology landscape, the biggest change since the start of the millennium. Whether it be building the models, semiconductors and other parts of the supply chain, or data centre buildouts, markets have judged and rated themes based on their proximity to this overarching narrative. Healthcare, conspicuously distant from the centre of the enthusiasm, became a popular funding source for the market’s most crowded positions.

Performance has underscored this dynamic. If we mark the release of ChatGPT as the unofficial start of the tech trade, US healthcare stocks have underperformed the broader market in every calendar year. On five occasions, healthcare has experienced drawdowns of more than 10% even as the market moved higher. Sector weighting in the S&P 500 index has fallen from 16% to 9% (see Figure 2), moving from the second-largest constituent to the fourth-largest (see Figure 1).

A wholesale demotion.

There have been reasons, beyond a hot theme appearing, for healthcare to underperform. Drug pricing reform, reimbursement pressure, Medicaid cuts, and policy uncertainty (initially DOGE1, then tariffs, alongside ACA2 exchange policy) have all weighed on sector sentiment. Investors have also begun to question margin compression, viewing AI as a compressor rather than an improver.

That has led to a deeply negative 3-month correlation (see Figure 3) between Healthcare and Tech, and one of the largest positioning resets in the sector’s history.

Neglect eventually creates opportunities. Healthcare stocks trade at a discount to the broader market, near the 26th percentile of its historical range. Many of the concerns that weighed on sentiment have either moderated or have been reflected in valuations. Earnings growth (inflecting up from -1% in 2026 to +22% in 2027) is expected to be among the largest contributors, outside of technology, to S&P 500 growth next year. A potential gridlock outcome in the coming midterms could alleviate concerns around policy uncertainty, while the bar remains low for potential upside surprise from AI productivity improvements.

Following this period of underperformance, we believe the balance of risks has shifted in favour towards US Healthcare. Not all of its problems have disappeared, but the dynamics have shifted enough to expect the next phase of the recovery to be increasingly driven by stock selection.

With sector weights, active ownership, and relative performance still near cyclical lows, Healthcare appears better characterised as a recovery opportunity, particularly as investors seek to broaden exposure beyond AI-driven market leadership.

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Under Owned

The positioning backdrop is fundamental to our exploration of Healthcare as an overweight allocation. As the sector lived through a prolonged period of underperformance, Healthcare has become a main funding short against AI exposures (see Figure 4). Per S3 data, short interest remains near five-year highs and has steadily increased over that timeframe as markets crowded into AI names. This has also led to an increasingly negative correlation between Healthcare and Technology.

Even with recent relative outperformance, Healthcare remains one of the least crowded areas of the market, while Tech and AI remain at elevated levels by historical standards. Within Healthcare, Equipment & Services remains deeply under-owned, with net exposure in the 3rd percentile of the past 12 months and just the 1st percentile versus the full history since 2018.

We expect capital flows to be a tailwind for this trade. Healthcare ETF flows appear to be turning in favour of investors (see Figure 5), something that had previously been a significant headwind to sector performance. ETFs have received $6.4bn of net inflows over the past 12 months, representing 6.3% of ETF AUM. This is the first time that flows have been significantly positive since early 2023. The largest three US ETFs are shown below.

This combination of funding shorts, low crowding, and structural inflows points to a positive backdrop for Healthcare outperformance and an increasingly attractive allocation away from crowded themes.

Inexpensive

Alongside a constructive positioning backdrop lies an inexpensive valuation. We often argue that expensive valuations are no reason to under-own stocks, so the same should be applied to the opposite. Cheap valuations are no reason, on their own, to hold an asset. We view valuations as a breeze. A high valuation means you are unvesting with the wind in your face. Healthcare, at its current rate to history, is a gentle breeze to our backs. Always welcomed.

Like many sectors in the S&P 500, Healthcare is expensive relative to its own history, but remains fair relative to the broader market (see Figure 6).

These valuations not only attract public market investors, but may also create a more constructive M&A backdrop. Healthy balance sheets, accessible capital markets, ongoing innovation (not even including the potential for AI to enhance this innovation), and a need for large companies to replenish product pipelines should support acquisitions, particularly in Biotech.

Combined, fair valuations and potential catalytic drivers add to Healthcare’s high-quality growth, an area overlooked amid the AI trade.

Poised to Accelerate

Looking towards 2027, the sector is expected to deliver steady revenue growth, but earnings growth is poised to accelerate significantly as margins recover. Consensus estimates see revenue growth of 5%, while net income is expected to shift from -1% currently to +22% in the upcoming year.

Healthcare is expected to have the largest contribution to earnings growth in the S&P 500, second only to the Tech sector. Due to pricing power, the sector enjoys tech-like margins and remains much higher than defensive peers. Most Healthcare industries earn margins north of 20% given patent protection and scale, while Biotech (25.4%) and Pharma (26.2%) generate among the strongest margins of all S&P 500 industries.

As for inflation factors, Healthcare margins remain insulated from rising costs, especially components like agriculture and energy, due to the industry’s limited exposure, whereas other defensive peers, namely Staples, are some of the largest users of commodities.

Demand Drivers

Healthcare has three fundamental demand drivers that support growth in the sector: an ageing population, rising life expectancy, and continued expansion of the middle class.

On the latter point, within the US, Healthcare expenditures as a portion of consumer spending have risen from 5% in the 1950s to 21% as of today (see Figure 7). In contrast, food and beverage spending has decreased from 21% to 7% over the same period. This sustained shift in spending has driven exceptional growth in Healthcare revenue. Since the GFC, Healthcare has generated the second-strongest revenue growth of all sectors, with a 9.2% CAGR vs 5.3% for the S&P 500.

Of course, rising energy costs and inflation concerns are a risk to this measure. These concerns could weigh on discretionary spending and potentially crowd out healthcare spending in the short term, but dynamics could offset this. A shift in spending demographics, along with strong household savings and rising wages, should keep discretionary spending resilient despite macro concerns.

These structural demand advantages have led to consensus estimates of mid-single-digit revenue growth over the next two years. This reinforces Healthcare’s position as an attractive source of durable growth, especially one outside of AI risks.

Midterms

One overarching question in any thematic report in the coming months is connected to the US Midterms. What effect do the Midterms have on the market in general, and specifically towards Healthcare?

While Midterms are often the weakest-performing year in the four-year cycle, performance has been dispersed by sector. Healthcare (10.7%) and Energy (8.9%) have historically held up better, while Industrials (0.6%) and Financials (-0.6%) have tended to drag the market down in midterm years.

Election outcomes, of course, matter. Scenarios where one party lost control of the political trifecta (holding the presidency, and majorities in the House and Senate) saw material underperformance in the six months after midterms (10.4%) compared to when control was gained, or Congress remained divided (16.1%). Thus, the market has still rallied, but it was likely hampered in part by the market re-pricing the expected ability of the government to pass legislation. This, in particular, is key to our thematic.

While healthcare affordability and OBBBA-linked3 Medicaid changes are likely to be included in the political discourse heading into the midterms, we do not see a material change in Washington towards the health policy backdrop. Why? Given limited incentives to compromise between the Administration and Democratic-controlled chambers of Congress, we believe other economic and affordability concerns are more likely to be more central and more impactful in voter behaviour. Therefore, we see minimal policy risks for the Healthcare sector in the coming months.

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Sub Industries

US Pharma remains healthy (no pun intended there). 2026 has been a solid year with upside to estimates. For the upcoming calendar (18 months), Pharma has a rich pipeline and minimal policy risk after the late-2025 MFN4 agreements. The sub-sector also trades at a 10% discount to the broader market, with potential for multiple expansion on improving sentiment.

As for Biotech, performance in 2026 has been mixed. However, sentiment has turned positive, with tailwinds (M&A, clinical catalysts) balanced against headwinds (regulations, rates). As for our recent calls within Biotech, we have now closed out of AtaiBeckley (ATAI US) following its acquisition by Eli Lilly (LLY US) (see Figure 9), marking a 59% return in just over one month.

Life Science Tools has underperformed YTD, with the end-market lagging in any recovery and minimal generalist appetite against AI, semis, or memory. However, Agilent’s (A US) move higher (see Figure 10) in May following its earnings call highlighted a change within this sub-sector.

After a three-year losing streak to the broader market, MedTech is either broken or undervalued, depending on who you ask. Decelerating growth, negative revisions, and a thin calendar have weighed on it this year. The potential as an AI hedge has done little to draw investor interest so far, but that could change if it becomes part of a recovery trade; support would need to come via positive 2027 estimates and new catalysts.

Managed Care may have hit a turning point. We see most MCOs troughing on earnings in 2026 (or already in 2025), setting up upward revisions, with Medicare Advantage a likely margin-upside driver and early signs of positivity in tougher products. Distributor volumes support growth at or above targets. Across facilities, conditions remain stable despite ACA/Medicaid headwinds.

Finally, the area of Healthcare most prone to AI risk: Vertical SaaS and HealthTech. This remains the most cautious sub-sector while the market still finalises its decision and quantifies ROI. The dynamic is driving investors to differentiate between “AI that sells” (revenue expansion) and “AI that saves” (measurable efficiency, lower cost-to-serve).

Now to the part of the article that puts the research and the thesis into action: our Second Opinion Thematic Basket.

Second Opinion Basket, “The Cure for Crowding”

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The AI trade also chugged along. CoreWeave rallied after quarterly results showing revenue more than doubling and backlogged demand growing. Intel upsized its equity offering to $20bn. It marks two weeks of Nasdaq outperformance relative to the S&P 500, its first notable stretch since the tides changed in late June. Energy sectors led as the Iran conflict remains unresolved, while consumer-facing areas lagged after the retail sales miss.

Rates followed the inflation data lower. September hike odds fell, while the opposite was true for the BOJ after reports from Japan.

That’s the short recap of the week. No need for much more to be said.

Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.

• “Right Tail Risks”

• “Largely On Hold”

• “Summary of House Views”

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Macro Monitor
Chartbooks

Right Tail Risks

Despite the lingering question among investors of “what could go wrong?”, equities continue higher. As we look at the equity backdrop, the remainder of August looks constructive, and the risks may instead be on the right tail. We see few macro hurdles until the end of the month, while several supporting fundamentals have returned to the market, so we look towards a new index trade for the coming weeks.

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News broke last night of Nvidia’s new initiative (in partnership with US investment giants Apollo, Blackstone, BlackRock, Brookfield, Goldman Sachs, and KKR) to source financing for artificial intelligence, mobilising $500bn of third-party capital for AI infrastructure.

To break it down to its simplest explanation, (1) create a special-purpose financial vehicle that can issue debt or bonds, (2) use the proceeds of this issuance to buy GPUs and compute infrastructure, (3) then lease these assets and capacity to customers.

So far, the AI buildout has required huge upfront capital to build assets whose economic value is derived from renting out compute. But some good old-fashioned financial engineering never stood in the way of closing a gap before, and is set to do the same this time around. Now, the owner of the GPUs no longer needs to be the financer of it.

CoreWeave has already done something similar. An $8.5bn non-recourse facility is secured against AI infrastructure and customer contracts, while Apollo has also financed a vehicle to acquire $5.4bn of Nvidia’s equipment and lease it to xAI, Musk’s AI house.

However, financial innovation can change the question that needs to be asked. Peter Drucker once said, “The most serious mistakes are not being made as a result of wrong answers. The true dangerous thing is asking the wrong question.”

There is no point questioning demand for Nvidia GPUs. Quarterly calls from the company answer that question without doubt. However, one question hangs over us: Would the demand be equivalent if the financing available to these buyers were any different? Attractive financing can bring demand forward, but it also blurs the lines as to whether that timeline change is demand-led or financing-led.

Per Stanford’s research:

“The cost of querying an AI model that scores the equivalent of GPT-3.5 (64.8) on MMLU (a popular benchmark for assessing language model performance) dropped from $20.00 per million tokens in November 2022 to just $0.07 by October 2024 (Gemini-1.5-Flash-8B), a more than 280-fold reduction in approximately 18 months.”

Applying this to our economics, a lender may currently be financing multi-year debt against assets whose economic usefulness can be repriced significantly over a relatively short period (18 months, as the example above illustrates). This is the point that takes us to the juice of this thought exercise.

The bear case for AI investment need not be that AI falls short of current expectations and brings no ROI, that revenues are fictitious, or that GPUs sit unused. History tells us that technological shifts produce real assets and real cash flows, while still generating financial excess along the way.

Take a look at how the chain plays out.

Cheap financing means more deployed compute. More deployments create more chip sales and demand backlogs. That validates higher valuations. And higher valuations mean more equity and credit available. Nothing in this circularity needs to be fraudulent to bring it down. Reflexivity can do enough on its own to cause a crash (the core of our stress test to end this article).

The circular nature of such transactions has raised concerns about concentrated risks in the sector. We raised this initially in our autopsy of the recent AI selloff, citing the three Cs as factors driving the AI trade, be it higher or lower. Capex (or we could call this C “circularity”) deserves a note of its own.

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C For “Circularity”

Circular financing is a business arrangement where a supplier or investor funds a customer, and that customer uses the money to buy products or services from that same supplier. The cash moves in a loop: money goes out as an investment and comes back as reported revenue.

Several high-profile examples illustrate the depth of these interconnections.

• Microsoft and OpenAI: Microsoft has invested $13.8bn in OpenAI and now holds 27% of its for-profit entity. In return, OpenAI has agreed to purchase up to $250bn of Azure cloud capacity through 2032.

• Amazon, Anthropic, Microsoft, and Nvidia: Amazon has now committed up to $8bn to Anthropic and remains its primary cloud and training partner via Amazon Web Services (AWS). More recently, Microsoft and Nvidia have agreed to invest up to $15bn ($5bn from Microsoft and $10bn from Nvidia), while Anthropic commits to purchase $30bn of Azure compute over the coming years, running on Nvidia systems.

• xAI and Nvidia: Elon Musk’s xAI is structuring a $20bn special-purpose vehicle that will buy Nvidia GPUs and lease them back to xAI. Nvidia is reportedly contributing $2bn of equity for the same vehicle, while also supplying the hardware, effectively financing a portion of its own future sales.

This new deal takes circularity one step further, although Jensen Huang might disagree.

Much of Nvidia’s ecosystem has been direct as described above. Relationships stay between Nvidia and their customers. Whereas this new arrangement allows Wall Street to take a seat between the two. Rather than Nvidia taking exposure directly to the operator, and, indirectly, to its own GPUs, this SPV owns a broader layer of AI infrastructure and can raise different layers of capital against it. A financing stack, so to speak.

Equity sits at the bottom, absorbing the losses first but gaining much of any upside. One layer up sits private credit or mezzanine debt, gaining a higher return for more risk. Senior debt sits at the top level, gets paid first, and therefore remains the most protected.

It’s all very similar to how Wall Street has performed for its existence. Take risky cash flow and divide the losses among investors willing to bear the most risk. Nothing is inherently troubling about this structure, as, for one, it’s common practice on the Street. Uncertainty and unknowns are the risk.

A larger pooled SPV can diversify both the counterparty and the assets, so the risk attached to each dollar of financing falls. It also means that the total number of financed dollars can rise. Yes, the SPV does what it was intended to do, but increased capital efficiency during an investment boom can extend the investment boom. The buildout has transitioned from Big Tech’s balance sheets (strong after years of high FCF) to debt, private credit, new SPVs, and a need for supplier support (circularity).

The bullish takeaway is that the opportunity has become too large for traditional financing channels. Maybe the bearish spin is that the capital required to maintain the current rate of change has become too large for traditional financing channels. The balance between the two is left to the eye of the (risk) beholder.

The development of this new financing is a natural evolution of the industry, but changes the nature of the investment cycle.

Collateral GPUs

One question to ask relates to the collateral. In the intro of this article, we mentioned the use of collateral such as railways and aircraft. There are reasons as to why these were attractive. Economic value persists for decades once they are built. The operator can fail while the asset is still viable, which is where the use of GPUs differs from traditional infrastructure.

There is no question about their value today, but it can be difficult to calculate their useful or economic life when that may differ significantly from their physical life. A GPU may still be functional even as the value of the computing power it creates falls sharply. Nvidia is effectively paid to exacerbate this problem. Blackwell chips are on offer while Jensen boasts of how substantial Rubin is in comparison. It doesn’t take a genius to figure out that Rubin, in time, will also be superseded. The relentless improvement is what equity investors want from the company, and why they have been rewarded handsomely so far. But it remains somewhat of a puzzle what a lender wants from that same asset that supports a multi-year loan.

Therefore, a creditor financing a GPU is underwriting much more than whether a chip remains operational. Important questions remain as to the future earnings power.

• What utilisation rate will hardware achieve in the years to come?

• How quickly will inference costs fall?

• Could workloads migrate towards Google TPUs, custom silicon, or future technology that does not currently exist?

• And what would today’s GPUs fetch in the secondary market if the borrower fails during the life of the loan?

For example, CoreWeave’s GPU-backed financing extends to 2032. The asset securing that borrowing needs to retain sufficient economic value through several generations of hardware development. Nvidia’s new SPV approach does improve this problem marginally, as the collateral is not made up entirely of GPUs. Other areas of the infrastructure stack (cooling, networking, power) will also be used. Much like the railway comparison, a power connection could be released to another operator as the useful life will remain well past the length of the loan.

There is also a limit on what good diversification does here. An SPV with exposure to ten different operators is safer than one with exposure to one, of course. One management mistake or one customer failure causes significant damage without that diversification. However, many plausible problems can arise that are not common to one entity but are instead sector-specific. These risks are prevalent and well documented regarding AI, and lie in the basket of “What Ifs?”

What if AI applications take longer to generate revenues than currently assumed? Utilisation and rental pricing would come under pressure across the sector. The diversification protection disappears as every borrower owns the same exposure, the value of scarce compute. Ten names do not provide protection if all ten face the same stress.

The same issue applies to the claim that GPUs are liquid collateral. Under normal conditions, they likely are. If one borrower needs to sell a fleet of accelerators while demand for capacity remains high, there is plenty of demand for that supply. Yet liquidity is always easiest to demonstrate when nobody needs it. If several heavily financed operators simultaneously discover that they own more compute than they can profitably rent, the secondary market would have to absorb that supply as expectations for the earning power of that hardware deteriorate.

The risk of GPUs as collateral is that the recoverable value is much more cyclical than the current price surge suggests.

The Stress Test

Let’s wrap this all up in a stress test, not an AI doomsday one, just a scenario with some adjusted assumptions.

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An interesting note from UBS this week highlighted that global semiconductor stock valuations imply abnormally strong profits will persist, which is at odds with historical patterns. Less than 20% of companies with cash flow return on investment levels running as high as the chip segment continue to deliver elevated returns. Still, semiconductors are up 20% from recent lows, and the buses feel empty.

Friday’s payroll report showed an unexpected fall by 23,000, while participation again dropped and JOLTS openings softened. Hiring demand is weakening, and workers are becoming less willing to leave existing jobs. The U3 rate fell to 4.1%. For a Fed that has spent much of the post-Iran war focusing on inflation concerns, this data print complicates the dual mandate.

The curve bull-steepened, and the dollar weakened as the next move from the Fed got pushed out from October to December, a strong shift considering markets had a 40% chance of a hike at the July meeting just weeks ago. There is also no longer a second hike priced in 2027.

The dollar faces some pressure, as the recent rally was partly driven by higher rate expectations, but the geopolitical backdrop and higher relative US yields still offer a floor for the dollar long trades. As for the USD/JPY intervention move, the jobs reports likely give the yen rebound more staying power, but we still look towards renewing carry trades.

Falling oil prices and more constructive tones between Iran and the US helped ease geopolitical risk last week.

Overall, the rates higher crowd felt pain, oil bears were rewarded, equity markets moved higher despite the disbelief of stock sceptics, and gold bugs got their groove back.

For access to our newly released Chartbooks, see the link here.

Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.

• “Equity Insights”

• “Back Buying Bullion”

• “The Risk on FX Rotation”

• “Summary of House Views”

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Equity Insights

We’re going under the equity hood this week… Total assets in US-listed leveraged ETFs have retreated from the highs and are now back to near start-of-year levels, reducing the short-gamma exposure and market impact from daily rebalancing.

Leveraged ETF short-gamma exposure has fallen from more than $9 billion per 1% move at the peak to about $6.5 billion. Strategist estimates say that leveraged US ETFs’ daily rebalances net sold ~$150 billion of equity exposure from early June through July 29 as funds deleveraged, with total assets shrinking about $70 billion from a June peak.

Near-term leverage demand in the US and Korea has eased, which has helped relieve pressure on short-dated equity financing costs, but volatility for the momentum trade in the US could persist in August due to sustained tech/AI mania. As we stated in our note Autopsy on the AI Selloff: “We therefore expect volatility to remain structural rather than temporary.”

Historically, weak and volatile momentum performance has often followed periods of extreme underperformance as seen in July, so we expect a more nuanced stock performance over the next month. That divergence has been noticeable among software stocks.

Software’s underperformance has brought it to its cheapest levels on value rankings since the tech bubble implosion in 2022. Meanwhile, the Q2 earnings season continues to argue for little damage from AI companies to their profits and outlook.

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SPX closed July down 0.13%. After all that happened, it feels anything but unchanged.

Much of the recovery last week can be attributed to gains in tech on Thursday and Friday, notably Microsoft and Amazon. The equal-weight index showed no such struggles, as the broader market was less volatile and leadership rotated. The Nasdaq entered correction territory just before the comeback was staged (Wednesday), with the main factors of the unwind being semiconductors and memory.

The FOMC meeting added to what was a crazy week. Rates were held, three officials voted for a hike, and Warsh again made price stability his central focus. Markets took a dovish read of the meeting, particularly as there were no explicit signs that tightening is on the way. However, the removal of forward guidance leaves markets to infer the path from each data print, creating more, not less, sensitivity.

OIS markets price a hike for the December meeting, but long-end yields are at levels that suggest the Fed is behind the curve. Curve steepeners are firmly in play.

The dollar took a soft interpretation of Wednesday, leading to its weakest week since January. Intervention in yen markets added to the USD/JPY move further, but we still see the broader dollar backdrop as balanced, despite last week’s decline.

Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.

• “Warsh’s Word Salad”

• “Co-Ordinated Intervention”

• “Global Equity Strategy”

• “Summary of House Views”

Warsh’s Word Salad

Financial conditions tightened regardless of the lack of move in the policy rate. 30-year yields climbed to their highest level in 19 years, 5.28%. The curve steepened, mortgage rates climbed, equities had their most adverse reaction to a meeting since late 2024.

Warsh offered no better than a word salad in his presser, giving almost no guidance on the conditions that would prompt a hike or the timing of the next move. Three members voted to tighten immediately, and little was done to explain how that disagreement might be resolved.

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At least, that was the narrative to start this week. Following an unusual presser from Warsh after the FOMC held rates, and an AI capitulation leading to Wall Street’s golden child of the AI trade, Leopold Aschenbrenner, on the receiving end of a forced liquidation (just for Citadel’s Ken Griffin to sweep up his holdings), people are asking, “Is the bottom in?”

It may be. Despite the short-term shift, though, we still prefer the question of “Where are the safe havens?” And that answer isn’t immediately obvious. Currency havens offer little respite. Treasury auctions for 5-year bonds earlier this week tailed with bidders AWOL, while the reception for the 2-year signalled no broad shortage of Treasury demand in policy-sensitive paper, where duration risk is limited. And even though equities (S&P 500) may only be 1.5% below highs set on June 2nd, equity exposure in portfolios feels anything but calm.

So, what next? August is now upon us, a seasonally low period of market liquidity. We’ve spoken already about recent Fed and ECB actions; we’ve touched on shifting portfolio exposure towards financials and our search for single-stock catalysts in global markets; and we’ve highlighted idiosyncratic risks in debt markets on our home turf.

It felt right to, instead, turn our attention specifically towards two questions:

• What factors are driving the AI trade other than a hawkish rates environment?

• Do the unusual events of this week signal short-term relief for crowded themes?

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Rates Are Only Part of the Story

The easiest explanation for momentum weakness is the same story that has kept markets busy since March. Higher oil raises inflation expectations, higher inflation expectations raise yields, higher yields reduce the present value of the distant cash flows on which long-duration technology valuations depend.

If this were simply a rates shock, one would expect growth stocks to fall in tandem with the broader market. Instead, the market has become increasingly bifurcated. The equal-weight S&P 500 has reached new highs while the main index has fallen and hundreds of individual stocks have advanced on days when the headline index appeared becalmed.

Rates may have lit the match. But what is now burning through the AI trade is a broader reassessment of spending and returns. We call this “The Three Cs.”

Capex. China. Credit.

A full autopsy of the AI selloff is incomplete without exploring each.

Capex - Unambiguously Bullish No More

For much of the past two years, rising capex was treated as evidence of rising conviction. A hyperscaler announcing an upward revision to its investment plans was seen as confirmation that demand remained strong. Yet, investors no longer treat spending as unambiguously bullish. A quick rundown of recent earnings/outlooks highlights this.

Alphabet (GOOGL US) was an early warning this quarter. Underlying operating results were strong, but another increase in expected capex was received as a liability rather than a sign of confidence. The market’s concern is that the amount of capital required to maintain leadership continued to grow faster than the evidence of monetisation.

Meta (META US) provided the clearest example of what the market doesn’t want to see. Advertising remained resilient, but another increase in capex arrived alongside collapsing FCF. Again, the concern here is that investment is accelerating faster than management can demonstrate where the eventual returns will come from.

Microsoft (MSFT US) offered the opposite case. Capex remains high, but accelerating Azure growth and a sharp increase in paid Copilot adoption provided tangible evidence that AI investment is already translating into revenue. The market will tolerate the spending because Microsoft showed both monetisation and flexibility, including an ability to slow infrastructure investment if demand begins to cool.

Amazon (AMZN US), however, showed that the market has not rejected higher AI spending altogether. It raised its capex outlook again, and FCF turned negative (the same story as peers), but the strongest AWS growth in more than four years gave investors a credible demand story against which to judge that investment.

Apple (AAPL US) remains the outlier. Rather than participating in the infrastructure race, the company continues to consume technology developed elsewhere, which leaves capex low and cash available for shareholder returns. That relative discipline has helped Apple remain less volatile than other names. Yet the latest selloff showed that Apple is still not immune to more conventional concerns around guidance and supply constraints, even if they are more fiscally disciplined than other tech names.

In short, if markets suspect that revenue growth can only be sustained by using an ever-larger share of FCF, capex will be the killer of share price. Tech still has to answer to markets whether the incremental revenue generated by the next dollar of investment is sufficient to justify it.

There is an uncomfortable asymmetry emerging. If hyperscalers maintain or raise spending, investors worry about FCF and returns. If they slow spending, investors worry about the earnings outlook for AI beneficiaries. More capex is no longer unambiguously bullish. And less capex would not necessarily be bullish either.

China - Changing the Calculation

The second pressure is competition, particularly from China, turning the debate away from investment payoffs and towards underlying assumptions of an AI buildout.

The release of Moonshot’s Kimi K3 model revived the questions posed by DeepSeek early last year: How much infrastructure is really required to produce a competitive model, and how durable are the economics of the incumbent AI stack if capable models can be developed or deployed at lower costs?

While much of the debate centres on national security risks to US leadership, a market-relevant question for us to answer concerns capital intensity. The bullish AI investment thesis has rested, in part, on the belief that increasingly capable models require exponentially more compute. If improvements in model architecture and open-source development allow users to achieve similar outcomes with less expensive hardware, that relationship between intelligence and capital expenditure narrows.

We can get our little AI friends to create a visualisation of this relationship.

Some argue that cheaper models do not necessarily mean less aggregate AI demand. Falling costs can broaden adoption and increase usage. But as far as the market is concerned with that assumption, there remains a timing problem. The infrastructure is financed today and built today, yet much of the demand expected to justify it remains forecast rather than realised. This creates a vulnerability whenever technological progress appears to reduce the amount of hardware required per unit of useful output.

A similar issue is appearing further down the supply chain. Progress, for example, in Chinese deep-ultraviolet lithography equipment (used for chipmaking), combined with the expansion of domestic memory producers such as CXMT, force the question of durability on the industry’s moats of today. This is another factor behind a broad semiconductor selloff. The most expensive names, the most crowded positions, the companies perceived to face the greatest risk of Chinese substitution have generally suffered the largest declines.

We also have to call into question the revenue assumptions. As users gain access to cheaper models and more efficient inference, AI adoption can be viewed as bullish, but bearish for the companies attempting to monetise each unit of compute. An index of large-language-model token expenditure has recently continued to weaken, consistent with customers migrating towards lower-cost options.

The optimist has plenty of history on their side. 1) Falling hardware costs brought computing to the household. 2) Collapsing storage prices created an almost limitless appetite for data. 3) Cheaper bandwidth enabled streaming, cloud software and the modern internet economy. In each case, lower unit costs created uses that had previously been uneconomic.

Yet the investment paths of history do not always deliver the intended results. Hard-drive capacity exploded while manufacturers consolidated and struggled to earn attractive returns. Telecom operators financed the networks over which software platforms captured much of the value. The current market assumption is that those funding the buildout reap the rewards, but history’s example is hardly dismissible right now. Cheaper intelligence could produce enormous growth in consumption without guaranteeing that the companies financing the infrastructure earn returns commensurate with the capital committed.

If the price of intelligence falls faster than usage rises, the companies funding the buildout may find themselves generating less revenue per unit of capacity at a time when depreciation and financing costs are accelerating. That shockwave would travel through the entire chain.

And on financing…

Credit - Equity Concerns Become Financing Concerns

Maybe it comes as no surprise that credit risks feature in this article.

AI investment has become an interconnected web of chip suppliers, cloud providers, start-ups, infrastructure companies, and financing vehicles. One participant invests in another, which commits to purchase capacity from a third party, which then uses those commitments to finance additional construction. “Circular financing...” Explaining such feels like the below.

Young industries frequently require creative financing, especially when demand is outpacing existing infrastructure. Circularity, however, can become dangerous when valuation depends partly on the continued spending of others. The widening of CDS spreads across parts of the AI complex, therefore, deserves more attention. Equity investors can debate whether vendor financing deserves a higher multiple or a lower one. Neither will stop credit markets from analysing the balance-sheet risk.

Big tech is widening, with clear inflexion points happening in July…

…but ORCL and CRWV need their own axis. ORCL CDS sits 90bps higher than its peers above.

Take-or-pay agreements may be described as cloud contracts, but economically they function much like credit. Providers commit billions upfront to data centres and GPUs against customers’ promises to purchase capacity over several years. The infrastructure becomes the collateral, and future revenue becomes the asset supporting today’s investment. That leads us to pose another new question:

Is AI demand growing quickly enough to justify the financial commitments already embedded in the system?

Financing can become strained even without an industry contracting. A data centre underwritten on expectations of 70% demand growth can disappoint if growth slows to 40%. Revenue may still be reaching records, the industry is certainly not contracting, but the assumptions supporting the financing change. That is the second-derivative problem.

If this sounds similar to the GFC, your connections would be correct. But this is a different market, but both rely on future growth validating commitments made in the present.

This point ties together the first two Cs we mentioned.

If more efficient models and cheaper Chinese alternatives reduce the amount of compute required per task or compress the economics of inference, it pressures the investment cycle. Ultimately, balance-sheets will determine who can absorb that adjustment.

This explains the spread that Coreweave and Oracle have over the other tech CDS. CoreWeave finances GPUs against contracted demand, and Oracle has become increasingly concentrated in AI infrastructure through debt financing and lower cash flow bases than the likes of MSFT, AMZN, and GOOGL.

So the first two Cs culminate to this. Credit will be the market’s first attempt to distinguish between the companies capable of funding the AI transition and surviving adjusting assumptions of monetisation.

A Clearing Event, Not an All-Clear

The above questions help us to navigate the AI trade in the medium- to long-term. What happened this week, however, can guide us in the short term.

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- Takeaways from last week in cross-asset markets

- Thoughts and key considerations ahead of the upcoming week

- House views and expressions

US equities finished modestly lower, but the headline move understated another difficult week beneath the surface, particularly for the parts of the market most exposed to the AI investment cycle.

The S&P 500 fell 0.6%, the Nasdaq 100 1.6% as assessments of hyperscaler spending and technology valuations continued ahead of a crucial run of mega-cap earnings. Alphabet provided the first test, and the market didn’t like what it saw. Revenue beat, but management raised its 2026 capex forecast to as much as $205 billion, reigniting the debate over how much capital the AI buildout can absorb before investors begin demanding more evidence of returns.

Alphabet, Amazon, Meta, and Microsoft had already indicated combined spending of around $725 billion this year, and Alphabet’s updated guidance suggests that figure could move higher as the remaining hyperscalers report. More so, Alphabet generated negative quarterly free cash flow for the first time since becoming a public company. The tolerance for spending without an obvious near-term payoff is narrowing.

Goldman Sachs’ PB data showed hedge funds have net sold US tech at a record pace over the past eight weeks. The SOX index is now on course for its worst month since June 2022, and Mag7 lost almost $800 billion of market value on Thursday alone. Markets are also targeting large VIX call spreads in the 45-65 area for August and September. Pay up for protection heading into the thinner summer liquidity period.

The macro backdrop did little to provide relief. There were no major US releases and the Fed remained in blackout, leaving markets to continue repricing the policy path ahead of Wednesday’s FOMC meeting, in a new environment where Warsh’s reaction function to data is still unknown. OIS prices a full 25bp hike by September, with further tightening priced in early 2027.

The repricing supported another strong week for the dollar. Renewed haven demand from Iran and higher short-end US yields took the dollar close to its year-to-date high. USD/JPY drifted to near 164. Higher-beta currencies have begun to show larger moves as US rate volatility increasingly feeds into FX markets, particularly since the Fed stepped away from traditional forward guidance.

Treasuries reflected a similar dynamic, with the curve flattening sharply from the five-year sector onward. Put demand increased as investors hedged against further yield upside, although open-interest data suggests much of the move has still been driven by existing longs being liquidated rather than a large build-up of outright shorts. The FOMC is on Wednesday, and markets are taking the hawkish side.

This week, therefore, has the potential to determine whether the recent tech weakness remains a rotation or becomes broader. Microsoft and Meta report Wednesday, followed by Amazon and Apple on Thursday. After Alphabet, the market will look beyond headline earnings beats and focus on capex and margins as evidence that AI investment is generating acceptable returns.

The bar is high.

Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.

• “Oil Is Again the Macro Variable”

• “Policy Can Do Only So Much (JPY)”

• “Summary of House Views”

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Oil Is Again the Macro Variable

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AP Research, Global Primer Series: Equity Issuance

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Often, headlines can create concern among investors, concerns that may not have been considered previously. When the noise starts, people listen. Lately, this has been the case regarding the equity supply equation. Mega-IPOs have done the heavy lifting in this regard, along with some Big Tech headlines of standout equity financing. But beneath those headlines sits an equation that has helped shape the modern US equity market. Companies are either creating shares or retiring them, either asking investors to absorb more equity or removing equity from circulation. For much of the past two decades, the second force has dominated. In 2026, that balance remains supportive but is no longer as one-sided.

There is a cleaner way to think about buybacks and IPOs than the usual “froth” versus “fundamentals” argument: strip the equity market back to plumbing. Buybacks are a corporate bid. IPOs and secondary issuance are corporate supply. For valuation, neither leg matters in isolation, but instead the balance between them: net equity supply. Approaching this primer through that lens can help explain much of the modern-day bull market, why the dynamic shift in 2026 is important, and it explains why the late-1990s experience ended so badly once the funding model broke.

The US market is still in a net-negative equity-supply regime in 2026, because buybacks remain very large even as IPOs recover sharply. But this market regime is becoming less generous. Capex is rising (most notably from hyperscalers in the AI buildout), secondary issuance is picking up, mega-IPOs are back in the conversation, and some investors are starting to reward reinvestment over payout.

This is a different dynamic from the one financial markets found themselves in during the height of the tech boom and bust. It does, however, look like the first meaningful test of the post-GFC de-equitisation tailwind. The market has spent years benefiting from shrinking equity supply, but the AI capital cycle may be the first force large enough to test that habit.

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Framing the Debate

Markets tend to obsess over IPOs, but their value as a signal is mostly psychological. The scale and breadth of new issuance reveal how much risk appetite is available in the system. But even then, IPOs are only one piece of gross equity supply. Secondary issuance by already-listed companies is usually a larger channel. So the better measure is net equity supply, which includes IPOs and secondary issuances and offsets them against buybacks and M&A-related share retirements. On that basis, buybacks remain the dominant force. Even with the IPO window reopening in 2026, repurchases should still be large enough to keep overall net equity supply negative.

A marquee IPO may draw headlines because of the story, the narrative, or maybe draw concerns linked to valuations ahead of the release. Yet the market impact of an IPO relies on just one thing: whether the market can absorb more supply. A large IPO can be flashy, but it is often smaller than the buyback machine running in the background. Issuance is negative in isolation, but its effect has to be read inside a broader demand-supply framework that includes positioning, flows, and buybacks.

Buybacks are no magic alpha signal, nor are increasing volumes of IPOs automatically bearish. The market impact is reflected in index-level supply and demand. Periods with large issuance can still coincide with strong returns, and periods with heavy buybacks can still disappoint if other factors (such as rates, earnings, or risk appetite) move in the opposite direction.

Let’s start by looking at each side of the equation…

Market Plumbing

Demand

Buybacks reduce free float, support per-share metrics and, at index level, create a structural buyer. US net buybacks reached roughly $914 billion in 2025, up from about $816 billion in 2024, with fourth-quarter activity around $229 billion1. Big Tech alone accounted for roughly $55 billion of that quarterly total. Yet record nominal buyback dollars are far from historical extremes when scaled to operating cash flow. The headline number draws attention, but the support isn’t as overwhelming as it may suggest.

Within the S&P 500 ex-Financials and REITs, buyback activity moderated in dollar terms into late 2025. Corporates instead redirected cash toward capex and liquidity preservation. Yet corporate behaviour remains much the same, with participation unusually broad and the share of S&P 500 constituents actively repurchasing stock close to long-term highs. Yes, the dollars have become more concentrated in the largest firms, but the practice itself remains deeply embedded in US corporate financial policy.

In textbook corporate finance, buybacks don’t change enterprise value. The share count falls, but the company also has less cash, so the two effects should offset. In theory, investors value the company as the sum of its parts and treat a dollar of cash inside the company the same as a dollar of cash returned to them. Buybacks and dividends are simply two routes to the same destination.

In practice, it may come as no surprise that the market is messier. Some investors target fixed portfolio weights, some chase returns, some judge value through per-share earnings, while some treat cash received through dividends differently from cash embedded in a higher share price. Not all investors optimise around enterprise value. This is where the “endowment effect” comes into play. Investors often demand more to give up an asset they already own than they would be willing to pay to acquire it fresh. Applying this framework to buybacks, it means shareholders may require a higher price to sell stock back to the company than they would be willing to pay if the same cash had arrived as a dividend and they were deciding whether to reinvest it.

If a company pays a dividend, some of the cash may be consumed, held in money-market funds, allocated to bonds, or diversified across the broader market. If, instead, the company buys back stock, it directly removes equity supply. Investors who still want the same proportional exposure to equities then have to compete for a smaller pool of shares. In that setting, the adjustment comes through price.

This is why buybacks at the index level look different than at the company level. It’s a flow. When the corporate sector retires equity and investors are slow to reduce their desired equity allocation, the market-clearing price rises. The exact impact is uncertain, but Elm Wealth’s framework2 suggests that buybacks on the order of 3% of the market could plausibly lift prices by 3-5%. The same happens on the flip side. If the buyback bid fades, or if large-scale issuance starts increasing the equity float, the same supply-demand logic can begin to work against the market rather than for it.

Yet, it would be a false step to romanticise about buyback behemoths. Stocks with above-median buyback yields have looked cheaper than the broad market, yet have underperformed over the past five years. Buybacks can support the tape and are far more important at the index level, but fall short of providing any edge at the single-stock-picking level.

Supply

IPOs are different, and where the plumbing gets more subtle. US IPO proceeds could reach roughly $160 billion this year, which would make it the biggest year on record in dollar terms. Taken at face value, that sounds late-cycle. Historically, the years with the largest IPO dollar issuance have often been followed by weaker returns over the next 12 months. But the dollar figure is the wrong denominator. The US equity market is much larger today than it was in 1999, 2007 or 2014, so the same nominal issuance number now represents a much smaller absorption challenge. Normalised by S&P 500 market capitalisation, 2026 IPO supply sits only in the second quintile, away from prior market-top extremes.3

Deal count tells the same story. A true IPO mania is a broad rush of companies trying to capture an open window. While 2026 could be a record year by proceeds, the number of IPOs is likely to sit slightly below the 30-year average. Supply remains concentrated. The market is being asked to digest a handful of very large deals, rather than a late-1990s-style flood across every sector. Broad-based issuance tells you much more about speculative excess than a small number of trophy transactions.

Another important point is that IPOs are only a portion of equity supply. They attract more attention than secondaries because they are pro-cyclical and easy to narrate. Recall your minds back to mid-June and how much attention SpaceX’s IPO release had. But secondary issuance from already-listed companies usually contributes more to gross equity supply than IPOs each year. IPOs appear when companies can issue, while secondaries often appear when companies need to issue. As is often the case, the full story, the full picture, or in this case, the full equation is needed instead of one aspect out of context.

Viewing the dynamic in its full context is therefore the best lens when assessing equity issuance and its impact on the market. Start with IPOs and secondary issuance, then offset them against buybacks and M&A-related share retirement. In that equation, the US market is expected to remain net negative in 2026, with buybacks remaining the largest force in the equation, even if IPOs may be the loudest channel. The correct concern for markets should be that IPOs and secondaries rise alongside buybacks becoming a smaller tailwind.

A Long Era of Buybacks

Let’s turn now to the recent history of the equity supply equation, and why the net result has underpinned the modern bull market.

Over the last 10-15 years, US equities have operated in a regime in which corporates have often been shrinking rather than expanding their equity base. Buybacks have usually been the dominant force keeping US net equity issuance negative, and today’s elevated valuations have been supported not only by stronger earnings and free cash flow but also by more negative net equity supply than at prior market tops. In the late 1990s, valuations rose to even loftier levels despite buybacks being small and net supply being much less negative.

This regime underpinned the resilience of the post-GFC and post-pandemic market, even amid a challenging macro backdrop at times. A market in which companies are persistently taking stock out of circulation has a built-in cushion that the late-1990s market did not have to the same extent. The modern bull market has been helped by a structural de-equitisation story.

This is also why the last decade’s multiple expansion is not separable from the buyback machine. The US P/E multiple rose by roughly 4% per annum over the past ten years, and a 3-5% potential annual price impact from buybacks offers one explanation. The result is a market that appears richer as profits improve and the available equity supply shrinks. The important restraint is that this is not a free lunch. If buybacks lift today’s price without lifting the firm’s underlying assets or earnings power, then they also lower forward expected returns. The long-run welfare gain is less obvious than the near-term market impact. Buybacks support the tape, but if they replace productive reinvestment with excess cash distribution, they borrow from the future to bid up the present.

This pattern has not been linear. One example came earlier this decade. After the 2022 spending surge, companies became more conservative with cash usage in 2023. Buybacks slowed alongside debt discipline improving, and management teams conserved liquidity amid macro uncertainty and rising rates. That was an early sign that the buyback machine, while powerful, remains cyclical and sensitive to changes in cash flow and investment needs.

Why 2026 Feels Different

In 2026, the flow may change. The supply/demand line is still negative, but it is moving sharply less so as primary and secondary equity issuance rises… a change in market weather. The same inelastic-market logic that made buybacks powerful on the way up can also work in reverse when supply rises.

The forward-looking risk is that large-scale equity issuance by capital-intensive AI companies could have the opposite effect of recent history’s record buybacks. We are now asking whether the next AI funding wave turns the corporate sector from a net absorber of equity into a larger issuer of it. So far, spending has been debt-funded, but Alphabet’s $80 billion equity deal stands out as the primary example of a hyperscaler tapping equity markets specifically for AI capex.

Two legs of the equation are moving simultaneously. On one side, IPO issuance is rebounding sharply. Market expectations are that US IPO proceeds will quadruple to a record $160 billion in 20264, marking the biggest IPO year on record in dollar terms. On the other side, buybacks remain large but face a more serious rival for cash: capex. The five main hyperscalers have driven most of the recent capex surge, and for that group, capex has grown much faster than earnings, pushing quarterly net buybacks from roughly $30 billion to essentially zero.

This differs from the whole market, though, and makes 2026 more nuanced than a “capex crowds out buybacks” conclusion. Companies benefiting directly from hyperscaler spending are raising their own buybacks (many may have seen the below FCF chart that did the rounds online recently). The broader S&P 500, still responsible for the bulk of earnings and buybacks, increased quarterly net buybacks from about $180 billion to $240 billion over the last year. Hyperscalers are weakening one part of the corporate bid, but they are indirectly strengthening another.

There is also a behavioural shift under the surface to note. In software, at least, investors have recently rewarded aggressive AI-related R&D and capex over buybacks. In an AI-disrupted sector, the evolutionary rule of “adapt or become obselete” is behind this behavioural change, and highlights the markets valuation of discriminating about when cash return is supportive or when a reinvestment story is more credible. A decade of blindly preferring lower share counts over higher spending is different to the regime we are now in.

Taken together, 2026 feels like a transition year. The market still has a supporting corporate bid, and US buybacks in 2026 are expected to remain around 2-3% of market capitalisation. But that support looks less one-sided.

A Dot-Com Reflection

“2000 was a little different. 2000 was the easiest bear market I’ve ever seen my whole life. It’s got so many similarities to right now, in the sense that the bear market of 2001 and 2002 were a consequence of all the IPOs in ‘99 and 2000. And then as they unlocked, you just had this never-ending cascade of selling.” — Paul Tudor Jones

Alongside high valuations, the late 1990s were a period of aggressive, broad-based equity issuance into an investor base willing to fund narratives rather than cash flow. 392 US IPOs came in 1998 and 512 in 1999, with average first-month gains of 16.5% and 91.3%, respectively. The IPO machine may never have been hotter than it was in this period.

Issuance hurt the market due to financing dependence, rather than share dilution. Many telecom and fibre companies built capacity ahead of demand (dark fibre was the archaeology of the dot-com bust), using fragile debt and equity funding, while pure dot-com names such as Webvan, eToys and Pets.com were negative-EBITDA, cash-burn models dependent on fresh capital to survive. Once the Nasdaq cracked, the IPO market froze, equity funding disappeared, debt markets stopped refinancing weak balance sheets, and the model collapsed. The bust was, in that sense, a funding-stop event.

The numbers underline the difference between then and now. Today’s market, while expensive, remains far inside the profit-detached extremes of 1999-2000. Implied-yield spreads for high-momentum stocks are around -1.5% versus the market and -2.1% versus low momentum, compared with roughly -6% and -9%, respectively, at the bubble peak. Aggregate market cap to forward Economic Profit ratio is around 29x, elevated relative to history but below the high 30s seen at the tech bubble apex. Today’s largest companies command large weights because they are generating large profit pools, whereas many of the biggest TMT names in 2000 were carrying more market value relative to profits that later faded or never truly arrived.

The comparison between then and now must be made at the correct layer. The rhyme is more to whether the marginal parts of the ecosystem are becoming reliant on continued external capital in a way that would be lethal if the window shut, whether that’s debt or equity financing. The largest AI spenders are mostly funded from operating cash flow and debt financing, unlike the centre of the dot-com bubble. Debt investors have been happy to absorb the issuance so far, while equity investors have largely rewarded the practice, treating today’s capex as the price of future dominance rather than a sign of financial strain.

The takeaway from the dot-com era? High issuance does not create a crash. However, equity issuance becomes dangerous when it’s part of a broader market architecture in which unprofitable or overbuilt business models need continuing access to fresh capital.

Four Factors to Watch

Whether the net supply/demand balance moves closer to zero will be a continued debate this year and further out as the AI buildout continues. If earnings accelerate, it can counterbalance concerns about reduced buybacks. Demand for equity issuance remains strong, as evidenced by the recent SpaceX IPO (reportedly three-and-a-half to four times oversubscribed). What remains a key risk for the market is a combination of concerns: reduced buyback support, rising primary/secondary issuance, and earnings fading amid already high “priced for perfection” expectations.

The first factor to watch is aggregate net buybacks instead of headline IPOs. As long as the broader S&P 500 continues to offset weak hyperscaler buybacks with strong buybacks elsewhere, the corporate bid remains alive. If that broader participation starts to roll over alongside a larger issuance pipeline, the market loses one of its most important structural supports.

The second is the financing mix of the AI capex cycle. If core spenders continue to fund primarily from free cash flow and debt financing, today’s set-up remains very different from the late-1990s equity-funded boom. If, however, more of the capex burden migrates toward secondaries, the comparison to the dot-com period grows less rhetorical.

The third is whether issuance stays concentrated. Record proceeds are not matched by dot-com-style deal counts or by a market-cap-adjusted supply shock. If that changes, if the big IPOs are followed by a much broader and more indiscriminate new-issue wave, then the signal shifts towards late-cycle enthusiasm.

The fourth, and maybe the most important, is earnings quality. Buybacks and issuance shape valuation, but earnings and free cash flow still decide whether the market can carry the supply. In that sense, the question is whether strong profits can keep outrunning a less benign supply backdrop.

Bottom Line

Buybacks remain a fundamental supporting bid, and IPOs are indeed an aggressive supply channel. But the market has lived for years with the first force dominating the second. In 2026 that balance is no longer one-sided. Still supportive, yes, but less so than recent history. Whether the AI capital cycle may be the first force large enough to test that habit is the key concern.

As usual, your support for these primers is appreciated. They continue to be our most-read series and work. We welcome you to share comments and your opinions. For more primers, you can see our full library here.

AP

- Takeaways from last week in cross-asset markets

- Thoughts and key considerations ahead of the upcoming week

- House views and expressions

US equities finished lower as technology stocks dragged the broader tape into the red, with the Nasdaq 100 and semiconductor complex once again absorbing the worst of the damage. Stretched valuations, growing scrutiny of hyperscaler capex, and fresh concern that cheaper Chinese AI models could change the economics of the infrastructure buildout created pressure. Moonshot’s Kimi K3 release revived the same type of questions that followed DeepSeek last year.

The banks offered a cleaner earnings story. Equity trading revenues were exceptionally strong across the major US lenders, with Goldman, JPMorgan, Bank of America and Morgan Stanley all posting major beats. That reflects a market environment that has been ideal for trading desks. The fact that bank shares saw only modest gains speaks more to expectations than to fundamentals.

Energy led as renewed US airstrikes in Iran kept crude risk alive. The market reaction was less severe than during the height of the conflict, but the sector still benefited from the return of the geopolitical premium. United Airlines showed the other side of that same move, with strong travel demand being overshadowed by higher fuel costs. The Iran conflict remains a meaningful margin and inflation variable for companies exposed to energy.

Macro gave equities some temporary support. June CPI and PPI both came in softer than expected, producing a dovish cross-asset reaction and giving the market its best session of the week before the technology headwinds took over again. But Warsh pushed back in congressional testimony, making clear that one soft inflation print does not amount to victory. The market has spent recent weeks fading the most aggressive hike pricing, while the Fed is still trying to preserve credibility amid inflation that remains above target.

Rates reflected that tension. The short end reacted to the softer inflation data, and SOFR options flow suggested investors are becoming less concerned about one or two hikes this year. Even so, OIS markets still price a 25bp hike in December. If oil-price pressure fades quickly from the data, that pricing could come under further pressure. If geopolitical risk keeps energy elevated, the Fed will have less room to look through inflation, even with softer core readings.

The dollar told a similar story. It sold off sharply after the inflation data but ended the week little changed, helped by short-covering into the weekend as traders hedged against another geopolitical flare-up. The broader trend has shifted toward dollar selling as the market fades the most hawkish Fed outcomes, but volatility remains unusually low. EUR/USD spent the week in a narrow range, suggesting traders still want clearer direction from the next Fed meeting before committing to a bigger move.

The market has entered a more discerning phase… Cheap AI has raised the bar for the companies selling expensive infrastructure, while the latest earnings season is showing clear winners and losers from the reallocation of technology budgets. The broader equity market can still hold together if breadth improves and inflation continues to soften, but the AI trade no longer has the same ability to carry everything indiscriminately. From here, Alphabet and Intel matter because they will tell investors whether AI spending is still accelerating or whether the market has begun to price in a capex cycle that is becoming harder to defend.

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Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.

• “Earnings Will Underpin Momentum

• “Reviewing a Policy Mistake”

• “Summary of House Views”

Earnings Will Underpin Momentum

For many of the last weeks, equities have been the front and centre of our commentary each week. Although our team covers and trades all markets, we understand that a large majority of portfolios concentrate around equity positions, and less so in institutional markets like rates or credit. The past few weeks have, for equity portfolios, been tumultuous.

Often we can set aside equities as our themes take hold of markets, focusing instead on more intricate themes developing in other areas. As the pre-August storm continues, the attention on equities matters more. No calm summer markets as of yet, although we are not ruling that out.

So where to start? Momentum has once again faced the chopper.

The current drawdown from momentum trades is as steep as during the last bear market and marks a new condition for the AI trade since it began. However, Friday’s rebound from the overnight lows in semiconductors and momentum looked like a squeeze after positioning had become too negative.

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The Federal Reserve’s credibility problem has rarely been about finding the right words. Central bankers have no shortage of those (although if Warsh has set a precedent, he’d like to have less in the future). The harder task is convincing markets that the words describe a reaction function rather than a pre-committed strategy.

Warsh entered his congressional testimony insisting that the Fed has “no tolerance” for persistently elevated inflation. Had the CPI report landed hot, that language would have been perceived as a threat to markets, with an appropriate hawkish extension of recent moves to follow. Instead, those words arrived alongside the weakest inflation print since 2020. Headline prices fell 0.4% month-on-month against expectations for a 0.1% decline, while core CPI was unchanged rather than rising the expected 0.2%. Annual core inflation slowed to 2.6%, undershooting the 2.8% consensus.

Warsh did not have to demonstrate his inflation credentials by delivering an immediate rate hike. The data has done some of the work for him. In that sense, the credibility question received a favourable answer. Warsh can continue to present the Fed as intolerant of inflation without forcing policy tighter into a cooling price backdrop. His rhetoric looks more like a framework that is producing the desired outcome.

The two-year Treasury yield fell about 10bps, July hike pricing fell back, and the expected timing of the next move was pushed back towards the autumn.

The most effective inflation hawk is sometimes the one who does not need to hike. If households and companies believe the central bank will respond when necessary, inflation expectations can moderate before the response itself arrives. The “Maradona theory of interest rates,” as Mervyn King once said. Tuesday’s report therefore strengthened Warsh’s hand, giving him permission to sound hawkish while remaining patient.

(For those looking for added context to this theory, Mervyn King coined it in 2005, comparing monetary policy with Diego Maradona running virtually straight through the England defence because defenders moved in anticipation of where they thought he would go. King’s point was that markets react to what they expect the central bank to do. Those expected future rate changes can influence spending and inflation even when the official policy rate moves relatively little. He described this as the monetary-policy framework “doing the work” through expectations. An interesting economic insight and incredibly well timed, given Wednesday’s game…)

Yet, one benign report cannot settle an inflation debate. Credibility is not earned by a singular win, but by how the Fed responds when the next uncomfortable number arrives. Oil is rising again, underlying measures of sticky inflation remain above target, and the economy is not obviously weak enough to rule out another inflation wave.

Warsh has passed the first test, but more difficult ones are likely still ahead. In the spirit of the ongoing World Cup… it’s Warsh 1 - 0 Inflation as the ref calls for the first hydration break.

The Disinflation Engine

The immediate temptation is to dismiss the report as an energy story… the market bear and the rates hawk might do just so. Motor fuel did much of the work in pulling headline CPI lower, reflecting the retreat in prices following the earlier easing in geopolitical tensions. That component is volatile and may reverse quickly now that oil has moved higher again.

Shelter inflation rose just 0.1% on the month. Core services excluding energy were flat. Price pressures moderated across a broad range of goods and services, with several major categories making a negative contribution. Services inflation posted its smallest contribution since the early months of the pandemic.

The report was unusually soft, which raises the more important question:

Why?

Part of the answer may be that the consumer is increasingly unwilling, or unable, to absorb further price increases. Real wage growth has been weak for several months, the labour market is losing momentum, and businesses are finding it harder to pass costs through without sacrificing volumes. Inflation is cooling partly because demand is becoming more price-sensitive.

The post-pandemic period brought excess savings, strong employment, and rising asset prices… all contributing to why households could look past repeated increases in the cost of living. That cushion is now thin. This is healthy from an inflation perspective, although less bullish for nominal growth. The economy may enter a phase in which slower demand performs some of the work that monetary tightening previously had to do.

Call that the less celebratory reading of Tuesday’s report.

Our broad view remains that inflation is not out of control. Shelter is moderating, goods disinflation has returned, and consumers are becoming more resistant to price increases. The risk of a renewed wage-price spiral has fallen meaningfully.

The path back to target will still be uneven. June benefited from a large energy reversal, while oil has since moved higher on renewed geopolitical tensions. If sustained, that will feed back into petrol, transportation and distribution costs, making the next few prints firmer. Of course, the higher oil rises, the more incentivised DJT will be to diminish tensions in the ME.

A rebound in headline inflation would not necessarily invalidate Tuesday’s message. The key distinction is between an energy-driven bounce and a broader reacceleration across shelter and labour-intensive services.

Our central case remains for headline inflation to rise from June’s unusually soft reading while core inflation trends lower more gradually. That leaves room for recurring inflation scares, but not another inflation crisis. The report changes the timing of the Fed’s next move more than the destination.

What does this mean for our cross-asset views? A softer inflation print changes the near-term policy path, but its implications extend beyond the next Fed meeting. From the shape of the Treasury curve to the outlook for gold and the durability of the equity rally, the more important question is where the market has already moved too far, and where the best asymmetries now sit.

Rates Waiting for Warsh

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- Takeaways from last week in cross-asset markets

- Thoughts and key considerations ahead of the upcoming week

- House views and expressions

A week of two halves, but the S&P 500 finished higher, as early-week geopolitical stress gave way to another late-week bid in technology.

Fresh attacks around the Strait of Hormuz and retaliatory US strikes in Iran briefly brought inflation concerns back into the conversation, pushing oil higher as a key inflation data print lies ahead this week. But equity markets proved more resilient than they looked at the start of the week, with dip buyers returning to semiconductors and communication services into Thursday and Friday.

Samsung’s disappointing earnings initially hit sentiment across the chip complex, weighing on Micron, Sandisk and the broader memory trade. That mattered because investors have become increasingly sensitive to any sign that expectations are running ahead of delivery. Yet the successful US debut of SK Hynix ADRs helped steady the sector, with the stock surging above its offering price after the largest-ever US listing by a foreign company. If Samsung provided the warning shot, SK Hynix provided the reassurance.

The sector rotation told a cleaner story than the index. Information technology, energy and communication services led, while materials, healthcare and staples lagged, marking a partial reversal of the recent defensive rotation, helped by evidence that the US consumer is not yet rolling over.

Macro was quiet, but not irrelevant. ISM Services was in line with expectations, and the employment component moved back into expansion for the first time since February. The FOMC minutes were uneventful, which may itself be a signal of the Warsh regime. The headline snapshot below is a great reminder that even in business economics, if you put two people in a room, you’re lucky to get only three opinions.

Rates reflected the oil move more than the data. Treasury yields rose across the curve as the ceasefire in Iran frayed, although demand at the 10-year and 30-year auctions remained strong. Real money still appears comfortable buying outright yield when levels are attractive, even as options activity suggests some investors are fading the remaining hike premium for later this year. The market is no longer in a simple “higher for longer” repricing, but it also is not ready to remove the inflation-risk premium while oil remains hostage to Middle East headlines.

FX was quieter, though that may not last. The dollar was broadly flat, but low G10 FX volatility is starting to look vulnerable as the market becomes more data-dependent ahead of CPI, PPI, and the next Fed meeting. With forward guidance being pulled back, each inflation print has more power to reset the curve and the dollar. Low FX volatility has been driven by low market conviction, rather than low macroeconomic uncertainty.

Our macro desk explored this topic in further detail and outlined their preferred vol plays.

APFX Research

Vol Is Too Cheap

G10 FX implied volatility is near multi-year lows, with the JPM G10 FX Volatility Index hovering around 5.87% on a one-month basis, close to its lowest levels since 2024. There are several structural and macro forces converging to suppress vol, but opportunities for both hedging and speculating on both sides are becoming apparent…

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2 months ago · 6 likes · AP Research

The takeaway from last week: the market remains supported, but the sources of support are narrowing and becoming more conditional… AI still has buyers, especially where scarcity is obvious… the consumer is still spending, but not evenly… the Fed is quieter, but not easier… and the Iran risk premium has not disappeared in certain markets, even if equities are less reactive to every headline than they were earlier in the conflict.

As earnings season begins, the market’s tolerance for disappointment is likely to be far lower at the single-stock level than at the index level. That is the next phase: calmer indices, wilder stocks.

Let’s get into the guide to trades moving markets, where things stand, and where they may be heading.

• “Duration Rotation”

• “Ahead of CPI…”

• “Summary of House Views”

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Duration Rotation

For much of the AI rally, time was treated as a free input. Investors were willing to pay today for earnings expected years into the future, confident that technological progress would eventually fill in the numbers. That bargain becomes less comfortable when the risk-free rate is rising, inflation is resurfacing, and oil is again helping to set the direction of bond yields.

This is the logic behind the emerging “duration rotation.” Equity duration is an imperfect concept, but a useful one. A company whose value depends heavily on distant cash flows is more sensitive to changes in the discount rate than one returning capital today. Technology, software, and other high-growth businesses sit at the long end of that spectrum. Banks, insurers, energy companies, and much of healthcare sit closer to the front.

The market recognises the difference. Semiconductors including Micron, Nvidia, Broadcom, and SanDisk have fallen sharply from recent highs, while banks, insurers, pharmaceutical companies, and healthcare stocks have assumed leadership. Since June, the broad pattern has been one of lower-duration sectors outperforming as higher-duration groups have lost momentum.

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That is increasingly the story in our home base of the UK. For years, the equity market has been described in the language of polite dismissal: too old-economy, too low-growth, too politically messy, too easy to ignore. But neglect has a habit of creating value. British takeovers are up 250% year-on-year, with overseas buyers rediscovering that one of the most unloved corners of global equities still contains real assets, cash flows, brands, and strategic value that public markets have been reluctant to price properly.

EasyJet (EZJ LN) is the latest example from our Master Fund of that cheapness being tested in public. Castlelake, the US investment firm, made a series of approaches for the airline, initially at levels the board rejected as opportunistic and undervaluing the group. On Monday, however, easyJet agreed in principle to a sweetened 690p-per-share offer, a meaningful premium to the prevailing 603p share price.

The market had already started to close the gap. EasyJet shares have risen almost 100% over the past two months as investors have gradually come around to the value proposition. At the beginning of June, Citi argued that the airline’s fleet alone could be worth double the share price. When the aeroplanes are worth more than the equity market’s view of the company, maybe it’s not such a surprise when a financial buyer starts circling.

There is also a wider macro footnote here. The strength of inbound UK M&A may help explain one of the more surprising moves in FX this year: sterling’s resilience. The pound has had to digest geopolitics, domestic political noise, and shifting rate expectations, yet it has remained one of the better performers in G10. Deal flow will never dominate a market as deep as sterling, where daily turnover dwarfs even the largest transactions. But cross-border acquisitions do create real currency demand, hedging flows, and corporate activity.

With the bulk of the profit from our easyJet long position now locked in, the focus turns to sniffing around for other cheap UK purchases that could be ripe for a move higher.

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Why the UK Remains Attractive

Before moving into the more speculative part of the exercise (which UK-listed companies might be next?), it is worth stepping back and asking why the bid for UK assets has returned at all.

There are three reasons private equity firms and overseas strategics keep circling London: the valuation gap remains wide, the domestic buyer base has withered, and the market is full of cash-generative companies that public investors have deemed too unfashionable to own.

The UK is cheap for reasons that are both structural and self-reinforcing. The market has the wrong sector mix for the current cycle, too little technology, too much exposure to banks, energy, staples and healthcare, and a domestic investor base that has spent decades walking away. Although the discount has become embedded, it does not mean it is justified.

1. The Valuation Gap Remains Wide

Start with the obvious point. UK equities are still cheap. The FTSE 100 trades on roughly 16x earnings, compared with 27.7x for the S&P 500, and remains at a discount to most European and Asian markets as well. Some of that discount is deserved. The UK does not have the same technology weighting as the US, nor the same earnings momentum from AI. But the size and persistence of the discount has created a clear arbitrage for strategic buyers.

For public-market investors, a UK-listed company can remain cheap forever. For a buyer with a longer time horizon, a balance sheet and a willingness to act, that same company becomes something different: a decent global asset trading at a local-market discount.

That is the essential appeal. Buy real assets in London at UK multiples, then own them privately, restructure them, or fold them into a larger global group where the same cash flows may be valued more generously.

2. Domestic Ownership Has Collapsed

The second issue is ownership. The UK market no longer has a strong domestic buyer standing behind it. Pension fund allocation to UK equities has fallen from more than 50% around 25 years ago to roughly 4.4% today. LSEG has estimated that more than £1.9tn has exited UK equities since 2000 as pension funds and wealth managers shifted capital toward global markets, especially the US.

Valuation is not only about earnings. It is also about who is willing to take ownership of those earnings.

The answer in the UK has been “not enough people.” Persistent domestic selling has kept valuations depressed, liquidity thin in parts of the market, and boards more exposed when a credible bidder turns up offering a 30–40% premium.

3. London Is Cash-Generative But Unfashionable

Third is composition. The UK’s discount is not a mystery. The market looks the way it does because of what it owns. The FTSE 100 is roughly 28.1% financials, 15.1% consumer staples, 14.2% industrials, 12.2% healthcare, 9.8% energy, and only about 0.4% technology.

That is almost the opposite of what global investors have wanted to own over the last decade. The FTSE 100 is dominated by banks, miners, insurers, energy companies, consumer staples, and healthcare names rather than Big Tech, software platforms, or AI infrastructure winners. A market built this way can look optically cheap for a very long time.

But that is also why it keeps attracting buyers.

For public investors chasing growth and narrative, many UK-listed companies look dull. For private equity firms and overseas corporates, “dull” can be another word for “useful”. These businesses often have real assets, steady cash flows, defensible market positions, and underappreciated strategic value. They may not deserve US-style multiples, but they don’t need to. When the starting valuation is low enough, the upside can come from someone else deciding the asset is worth more than the London market is willing to pay.

Where to Look Next

Jupiter Fund Management (JUP LN)

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US equities were on course for a clean holiday-week advance before technology stocks once again complicated the picture. A softer payrolls report, less hawkish language from Kevin Warsh, and further signs of resilience outside the AI complex all supported risk appetite, but the late-week semiconductor selloff kept a lid on the broader move. The S&P 500 finished higher, the Dow outperformed and the Nasdaq lagged, which tells the story clearly enough.

After using his first FOMC meeting to signal a much tougher inflation stance, Warsh sounded less aggressive, noting that inflation expectations and price risks had eased slightly in recent weeks… enough to push back against the idea of an imminent hike, which gave equities room to breathe.

Payrolls then added to the same message. June nonfarm payrolls came in well below expectations, with a negative two-month revision and a drop in participation. The expected summer hiring boost failed to appear, particularly in leisure and hospitality, which made the report feel softer beneath the surface as well as at the headline level. Equity futures initially rallied as markets pushed hike pricing from October to December. After several weeks of the Fed becoming an active constraint on risk assets, this was the first clean data point that gave investors permission to question the urgency of tightening.

Across rates, the curve steepened as the market reacted to Warsh’s softer tone and the weak payrolls print. The move in the dollar was equally straightforward, with the greenback slipping as traders faded the more aggressive Fed path. USD/JPY briefly moved back below 161, offering some relief to Japanese officials, though the pair remains close enough to intervention-sensitive levels to keep the Ministry of Finance in focus, particularly in thinner holiday liquidity.

The market has not lost its appetite for risk, but is becoming more selective. A softer Fed path, lower oil, and resilient non-tech sectors are enough to keep the index supported. But the AI trade is now more volatile, more crowded, and more exposed to changes in market structure than it was earlier in the year.

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “US Labour Market and Rates Impact”

• “Small Themes, Defence Shines”

• “Software Strength, the Pain Trade”

US Labour Market and Rates Impact

The dominant macro event of the week was Thursday’s June payrolls print. The number came in at just 57,000, barely half the consensus expectation and a sharp loss of momentum from the spring run-rate (three consecutive beats). On the surface, the unemployment rate falling to 4.2% should have been hawkish. In normal times, a lower unemployment rate is not exactly an invitation for the Fed to relax.

But this wasn’t the market’s read. The unemployment rate fell because the labour force shrank. Participation dropped sharply, removing workers from the denominator and inflating the headline unemployment rate.

Treasuries rallied, the dollar sold off, and the market quickly stripped out the near-term Fed hike risk that had been building since the stronger May print. The 2-year yield fell around 5–6bps toward 4.11–4.13%, while the 10-year was little changed around 4.46–4.48%, leaving the curve with a cleaner path to re-steepen.

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Keir Starmer is out, which is to say Westminster has once again managed to produce a surprise everyone had spent weeks preparing for.

The exit was priced before it happened, and the market reaction since has reflected that. The Makerfield byelection gave Andy Burnham his route back to Westminster, and Donald Trump, never knowingly under-briefed on another country’s political instability, had already previewed the ending from across the Atlantic the weekend prior.

Andy Burnham looks set to replace Keir Starmer as Labour leader and prime minister, thus becoming the seventh occupant of the “top job” in just the last ten years. That said, while removal firms busy themselves once more in Downing Street, Burnham will likely face the same challenges his predecessors have faced and quickly find himself boxed in on all sides. While it is not confirmed yet, a lack of competition and polling websites suggest a near certainty that Burnham takes No. 10.

From a political perspective, there is clamour among Labour MPs to shift leftwards, to counter an insurgency in the polls from the Greens, and to provide an offering that is distinctly different from Nigel Farage’s reform. Such a shift, if it were to pan out, would likely tee up a “populist left” vs “populist right” contest at the next election, due to be held in 2029, and unlikely to be called sooner, considering the current parliamentary arithmetic.

Burnham is more interventionist in tone, but he has also tried to reassure markets. He has pledged to stay within existing fiscal rules and honour Labour’s promise not to raise taxes on working people, while arguing that privatisation and deregulation have created inefficiencies, especially in housing and utilities. The view is enough to make gilt investors nervous, but not yet to make them panic.

Gilts sold off the week after Burnham’s emphatic Makerfield victory, with the 10-year yield pushing higher and the long end once again becoming the most sensitive part of the UK political weather map. Sterling weakened too, which was the more revealing move. In normal circumstances, higher yields should support a currency. When yields rise and the currency falls, the market is not rewarding policy credibility. This has been much of the same reaction that we saw following the most recent ECB “policy mistake” (After You, Christine).

There is an echo of 2022, albeit on a far smaller scale. No Liz Truss moment has played out. No forced selling or pension-fund stress. However, markets are marking up the chance that the next prime minister might be more relaxed about borrowing, more willing to test the fiscal rules, and more tempted to treat the bond market as a political opponent rather than a funding source.

A lot was already in the price. Starmer’s authority had been fading for months. The UK was already carrying a political risk premium. The gilt market was already dealing with heavy supply, sticky inflation anxiety, weak growth, and a public-sector balance sheet with very little margin for error. Burnham did not create those constraints, but he inherits them for his reign (Gilt Trip, Starmer Drama).

In Hock, Whether He Likes It or Not

“We’ve got to get beyond this thing of being in hock to the bond markets.” — Andy Burnham, September 2025. For Andy, this may instead be the factor he has to live by. If Truss left us with anything, it’s that you have to have credibility with the bond market to survive.

That last line may be the constitution of modern British fiscal politics, a line not written down but enforced daily at the 8 a.m. open by gilt traders, liability-driven investors, overseas reserve managers, and anyone else absorbing a round of long-duration UK paper.

Burnham appears to understand this, and his tone has changed since that remark in September. In the wake of the market wobble last week, Burnham moved to contain any concerns by bringing in what we could call an A-list of fiscal personnel: former Bank of England chief economist Andy Haldane, the former Goldman Sachs economist and Conservative government minister Jim O’Neill, and the former head of the Office of Budget Responsibility Richard Hughes. A team of economic centrists, so to speak. Bringing in people with credibility around monetary policy, fiscal rules, and institutional economics sends a clear, positive signal.

Bringing in fiscal adults is in stark contrast to Starmer’s efforts (sorry, Rachel).

Markets can tolerate redistribution. They can tolerate higher taxes. They can even tolerate selective intervention if it is funded, explained, and tied to a plausible growth story… but talking about growth in a country that has become allergic to it does sound strange. What they cannot tolerate is unfunded ambition on ideological views alone.

That is where the Truss comparison is useful up to a point. Truss tried to tell markets that credibility could be asserted. Burnham’s challenge is to show that credibility can be borrowed, at least initially, from the institutions and people around him. Fiscal rules, OBR oversight, Bank of England independence and a serious chancellor are the guardrails.

There is also little to no desire among the general population for broad-based tax hikes, unsurprisingly, given that the tax burden is already on its way to a record high. And, make no mistake, the days of “just tax someone else” are now behind us. Wealth is too mobile, and the tax base far too top-heavy, for that to be a coherent strategy anymore.

Substantial additional borrowing is also off the cards, whether within or outside the fiscal rules, or whether dressed up as “borrowing to invest” or suchlike. The nub of the matter remains that higher borrowing is just that, no matter the clothing it wears, and that greater Gilt issuance would increase not only the fiscal risk premium that the UK must pay in the form of higher yields, but also the inflation risk premium that is paid.

While Burnham’s political capital will never be greater than the moment he enters No. 10 for the first time, plenty of fiscal stumbling blocks have already emerged.

The ‘Defence Investment Plan’ requires £4.7bln of funding that has not yet been found, while last year’s Budget was conditioned on departmental spending cuts and pre-election tax tweaks that always looked somewhat far-fetched. As a result, any honeymoon period that Burnham might’ve been expecting is likely to prove relatively short-lived.

Pre-Budget trial balloons will likely start flying almost as soon as Parliament returns from recess in September, beyond which Burnham’s choices will likely boil down to either growth-negative tax hikes, or politically unpopular spending cuts. With that in mind, any near-term relief experienced either by the GBP or Gilts is set to prove relatively short-lived, as after a summer of relative stability, may come yet another tumultuous autumn.

Where We Go From Here

The immediate market reaction also tells us what investors are really worried about. If we take a look at sovereign default swaps, fiscal irresponsibility is not showing up as it did in previous instances such as Covid and the Truss moment.

The concern is subtler and will show up more in yields, the curve, and currency markets.

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