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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16 days 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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US equities ended lower after a rough week for tech stocks, with the Nasdaq suffering the bulk of the damage as markets reassessed the valuations, positioning, and durability of the AI rally. A warning shot from Asia carried across to US equities, an upside surprise from Micron couldn’t hold for long, and by the end of the week, the sector breakdown looked much more defensive.

Leverage is very much at play here. Highly leveraged semiconductor ETFs create a messy gamma backdrop, forcing dealers to hedge aggressively as volatility picks up — and it has. Pressure transmits from derivatives into cash equities, which amplifies the moves in sectors which have become crowded after aggressive moves higher. The volatility spread between Nasdaq and the S&P is at its highest since 2020.

The rotation away from tech was softened by falling oil prices. Traffic through the Strait of Hormuz continued to increase, helping crude extend its decline and giving airlines, especially, a major boost. Lower fuel costs do not solve every consumer problem, but do help offset some of the pressure from higher rates and elevated prices. Without that move in oil, the equity selloff would have looked more severe last week.

On the macro side, May PCE came in slightly softer than expected and triggered a dovish cross-asset reaction. That reaction shows how sensitive markets have become to any sign of disinflation now that the FOMC is focused almost entirely on one side of the dual mandate. Fed speakers didn’t give investors any extra comfort. Goolsbee, Williams, and Kashkari all reinforced the message that inflation is too high, risks remain elevated and further tightening is still possible.

• Goolsbee: Core inflation is too high and is trending the wrong way

• Williams: Substantial risks to inflation remain; sees level at 3.5% at the end of 2026

• Kashkari: Sees need to hike this year due to elevated inflation

Bloomberg’s Fedspeak index shows continued hawkish language, despite Z6 pricing easing.

The Treasury curve rallied as markets smoothed out the path of expected hikes rather than pricing a more urgent tightening cycle. Monday may have been peak hawkish sentiment, but given how the rates trade has played out this year, that view may come back to bite us. The move helped fade some of the prior bear flattening, but it did not change the broader policy picture. The Fed remains live from July onward, and the next payrolls report now carries extra weight after Warsh’s recent hawkish reset.

The dollar continued to benefit from the macro backdrop. Institutional positioning has shifted more bullish as solid US data, the prospect of medium-term Fed hikes, and still-resilient equity inflows make the dollar attractive against lower-yielding currencies. The rally was limited by falling oil prices and month-end flows, but the structural tone is firmer than it was earlier in the year.

Elsewhere, Starmer is gone. Burnham is set to be next in command, but in hock to the bond market. We’ll have a specific note out on the UK in due time.

Lower oil and resilient earnings are keeping the broader equity market supported, but the leadership is becoming more fragile. In thinner summer liquidity, we see that as a caution to pay attention to.

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

• “Putting Debasement Through the Warsh”

• “A Bruising Round for the AI Trade”

• “Dollar Haven”

• “Defensive Allocation (portfolio update)”

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Putting Debasement Through the Warsh

The gold trade, or the debasement trade as it became known in more excitable corners of the market, took another leg lower last week.

What began as a fundamentally driven thesis morphed last year into something more speculative. It then ran into a sharp selloff in late January, before facing fresh pressure as oil soared and dollar demand refused to roll over. Sell your gold pieces for dollar bills (more on this later).

That is not to say there is no perfectly good rationale for central banks to hoard gold. There clearly is. But at the height of debasement-trade thinking, gold was being bought not only as protection against US financial warfare, fiscal deterioration, or the slow erosion of fiat credibility. A meaningful slice of demand for gold (silver and Bitcoin were speculative, too) was bolstered by the sense that the Federal Reserve was moving out of sync with a broader tide of central bank tightening.

In late March, we laid out why we still believe in the trade over the medium- to long-term, with a predominant focus on oil and dollar demand dynamics…

…However, gold now faces a fresh headwind to overcome before the upside case can reassert itself.

With new Fed Chair Kevin Warsh taking a more hawkish approach, the idea of the Federal Reserve being meaningfully out of step has been kicked into touch. Inflation expectations have fallen quickly enough to become a gift for long-end Treasuries, while the shift from expected rate cuts to expected rate hikes has pushed the Fed toward the more hawkish end of the central bank spectrum. That has supported the dollar. It has also made the short end of the Treasury curve look much more interesting, with 2-year yields now well above 4%.

Kevin Warsh’s reputation was already well known on Wall Street. Note the inflexion point across XAU, BTC, DXY, and 2s10s after his nomination.

For investors looking for something to speculate on, AI and chip stocks still offer the cleaner dopamine hit. Admittedly, that comment might sound off after last week’s price action, but the broader point holds. Precious metals and Bitcoin are no longer the obvious home for marginal speculative capital as they were when the market was convinced the Fed was about to turn dovish.

The sell-side has started to reflect that shift. Deutsche Bank cut its gold price forecast to $4,300 for the third quarter, down by more than a fifth from its prior outlook, and to $4,800 for the final three months of the year. That followed Goldman Sachs, which last week cut $500 from its year-end target to $4,900, as it now expects no rate cuts from the US central bank this year.

If the Fed has regained a hiking bias, it is hard to see how the debasement trade materially benefits in the short term. To be clear, the argument was never solely about monetary policy. Concerns over government borrowing, debt sustainability and the political incentives around inflation remain firmly in place. The US budget deficit is still running close to 6% of GDP, despite Treasury Secretary Scott Bessent’s pledge to halve it by the end of Trump’s term.

The debasement narrative is structural, and has not disappeared altogether. But structural stories still have to survive cyclical pressure, and right now the cyclical pressure is running in the wrong direction for gold.

A Bruising Round for the AI Trade

The AI trade had its first proper wobble in a while last week.

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We first explored this theme in early February, as AI disruption risk became front and centre for software investors and private credit markets. As SaaS valuations compressed, attention naturally turned towards the lenders that had spent the better part of a decade financing those businesses at generous multiples.

Our focus was less on software equities (which had already experienced a significant downturn themselves) and more on the companies behind them. Alternative asset managers (Alt AMs) and business development companies (BDCs) had found themselves under scrutiny as investors questioned how resilient private credit portfolios would prove in a rapidly evolving technology landscape.

Nearly five months have passed. Now, we’re seeing a new trade emerge around private credit risks, outside of the SaaS-pocalypse and Loan-mageddon.

Software-as-a-Selloff

If you missed that piece or simply need a refresher before we move the story forward, it is worth reading below.

Since publication, our short basket of alternative asset managers and BDCs has returned approximately 19%, validating much of the original thesis.

Several of the largest listed alternative managers have reported increased redemption requests as institutional investors become more selective about committing fresh capital to illiquid strategies. That itself is not indicative of a run on private credit, but it does represent a growing shift in behaviour. After years of almost indiscriminate inflows, allocators are beginning to ask harder questions about liquidity, valuations, and borrower quality.

The software story has evolved as well. Rather than indiscriminately selling anything with recurring revenue, investors have begun separating businesses with genuine competitive moats and AI implementation ability from those without. Companies built around proprietary datasets, embedded workflows, or regulatory complexity have proved far more resilient than generic application software.

The original software sell-off may have been only the first-order effect. Credit cycles rarely announce themselves all at once. Equity investors react immediately; credit investors tend to discover the damage in instalments.

Which brings us to today. The market is asking a different question altogether: If private credit becomes the problem, who ultimately owns the loans?

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Insurers

Where we’re starting to see this trade pick up on Wall Street relates to insurance companies. More specifically, it relates to the credit default swaps linked to these companies.

We could continue this article by explaining private credit markets or credit default swaps. Fortunately, we have a catalogue of primers published across our research, and both topics have been explained in depth previously.

We move, then, to the trade itself.

Private credit risk has been building for some time. What matters now is that markets are beginning to identify where the next pressure point might emerge in public markets: Insurance companies.

At first glance, this may seem an unlikely focal point. Insurers are not originators of software-linked loans in the way that BDCs are, nor are they the architects of private credit structures like Apollo (APO US), Ares (ARES US), KKR (KKR US), Blackstone (BX US), or Blue Owl (OWL US). They do not sit at the obvious centre of the narrative — which is precisely why they merit attention.

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That changed on Wednesday, at least temporarily, when Kevin Warsh delivered his first FOMC meeting as Chair. Rates were left unchanged, as expected, but the statement and press conference made clear that this is not a Fed trying to preserve optionality around cuts. The new message was inflation first, patience second. The shortened statement was blunt: “The Committee will deliver price stability.” Updated projections showed headline and core PCE revised materially higher, with nine officials now seeing at least one hike this year and six pencilling in 50bps or more.

Markets reacted accordingly. Equities sold off through the statement, press conference and into the close, while rates repriced sharply. OIS now prices a 25bp hike by October, a remarkable shift from the pre-war environment.

The front end bore the brunt of the move, with 2s5s close to inverting as policy expectations adjusted. The Fed reaction function has changed, and the market is still adjusting to what that means.

Yet equities again proved reluctant to stay down. Thursday’s rebound was led by semiconductors. Macro markets are trading a genuinely tighter policy path, while equity markets are still willing to look through it as long as AI-linked earnings and capital spending remain intact.

The dollar was the clearest macro winner. Even as oil prices fell toward the end of the week, the hawkish Fed repricing kept the greenback well bid and raised the question of whether the USD can finally break out of the structural weakness that defined the last 18 months.

USD/JPY moved back above the prior intervention zone, trading beyond 161, which keeps Japanese officials firmly in focus.

Markets have entered a more complicated phase. The geopolitical tail risk has eased, the AI trade remains alive, and dip buyers are still active. But the Fed has become an active constraint. From here, the market needs either continued AI earnings strength, a durable fall in oil, or a clean disinflation impulse to offset a policy path that is now moving in the wrong direction for risk assets. For now, equities are still climbing, but the macro floor underneath them has become noticeably less forgiving.

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

• “AI Funders and Winners”

• “The Hawkish Hold Needs a Witness”

• “Sentiment Can Adjust Immediately, Oil Barrels Can’t”

AI Funders and Winners

The dominant theme over the past week has been a broadening of the AI trade away from the largest mega-cap names. Mag 7 and hyperscaler names are both nearly flat for the year.

For most of the past two years, exposure to AI was simple. Own the largest US technology platforms and own the semiconductor leaders. The trade is now starting to separate. Memory, semiconductors, custom chips, Asian supply chains, and data-centre infrastructure are among the leading beneficiaries of the AI capex cycle. The hyperscalers themselves are beginning to look more like the funding vehicle for the cycle than an upside expression of it.

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1. Where to allocate capital on the basis of global rates either remaining elevated for longer or simply moving higher.

2. Where the better areas of the market are, from a valuation perspective, to rotate some profit from AI/tech names.

3. And defensive angles to portion some funds to help hedge or protect against an expensive market.

In our view, the common area that addresses all three points is financials. We believe bank equities have a credible case as a 12-month thematic. As with anything, it’s not simply as easy as saying “all banks benefit from higher rates,” or that “all banks trade on a low book multiple.” But there are plenty of options for finding likely winners among banks with the right balance-sheet structure (especially asset-sensitive franchises), sticky deposit bases, effective hedging, and manageable credit risk.

There are three drivers to consider: higher global rates, relative value, and defensives in an expensive market. We’ll start with the former ahead of the Fed this evening and the BOE tomorrow.

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1) Higher Global Rates

The current policy backdrop is directionally supportive for global bank stocks, but it is not the same story everywhere.

In the US, we pivoted our view earlier this month and now expect the Fed to hike rates this year. The move came after the strong employment report, with labour market conditions now tighter rather than deteriorating. At the same time, growth has remained resilient, and that’s before we start talking about inflation.

The economy is not overheating in a crude sense, but the policy stance is now too easy relative to the data. We think it plausible that the unemployment rate will fall gradually toward 4.0% by year-end, but see the headline CPI staying in the 3.5-4% range over the same period — a “higher-for-longer” backdrop for US banks.

In the euro area, the story is even cleaner for the theme. The ECB raised all three key rates by 25 basis points on 11 June, taking the deposit rate to 2.25%. The ECB’s own statement said euro-area headline inflation is expected to average 3.0% in 2026, and Eurostat’s May flash estimate put current euro-area inflation at 3.2%, up from 3.0% in April.

The tone of the presser was hawkish. Even though Lagarde did not pre-commit to further hikes, the updated inflation figures (and downgraded growth projections) clearly shifted the burden of proof. With inflation revised higher, core inflation above target through 2028, and adverse scenarios indicating a meaningful risk of second-round effects, the GC has effectively told markets that today’s hike won’t fix all of that and, therefore, more tightening is needed. We spoke about this factor specifically in our note last week, “After You, Christine.”

In the context of today’s equity focus, European banks have been among the main beneficiaries of post-2022 margin normalisation, and we expect this to continue into H2 2026.

The UK sits between those two cases. Headline May CPI out today held at 2.8% YoY, defying consensus expectations of a rise to 3.0% and coming in at the low end of the forecast range (2.8%–3.2%). The ONS attributed the softer reading in part to lower food costs, particularly meat and dairy products, which offset other upward pressures. Money markets trimmed BOE rate-hike bets, with swaps implying ~27bps of hikes for the year versus ~29bps the prior day.

The data reinforces expectations that the BOE will hold the benchmark rate steady at 3.75% at its meeting tomorrow, but the consensus view of one hike for this year still makes complete sense. The services inflation beat, and broader inflationary pressures already in the system, are likely to push CPI higher into year-end.

For UK banks, that makes the coming period less a pure hiking story than a higher-for-longer plus structural-hedge story.

Japan is the smallest absolute-rate market in this set, but arguably one of the most important in directional terms because it is coming off decades of ultra-loose policy. For Japanese banks, the thematic is therefore about normalisation from a very low base, which can have an outsized effect on margins and investor perception.

TLDR: The thematic is strongest in Europe and Japan, where policy direction is still moving towards tighter conditions, constructive but more selective in the UK, and more valuation-driven in the US, where the benefit comes less from fresh hikes already delivered and more from the market’s retreat from rate-cut expectations.

2) Relative Value

Cheap sectors are only interesting if they are cheap for no good enough reason. Other than that, they’re cheap for a reason.

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The S&P 500 ultimately recovered from Tuesday’s 2.3% intraday drawdown, with the Nasdaq 100 helped by Friday’s successful SpaceX debut. In a market increasingly starved of clean positive catalysts, the IPO gave investors one. SpaceX priced its $75bn offering at $135 per share, opened at $150 and closed at $160.95, giving the company a fully diluted valuation of roughly $2.2tn. That made it more than just another listing. It became a test of whether public markets still had the balance sheet, appetite and imagination to absorb a mega-cap growth story at a premium valuation.

For now, the answer was yes. Demand was reportedly multiple times oversubscribed, with several institutional orders of $10bn or more and visible participation from Gulf sovereign wealth funds. This mattered because it framed the listing as something bigger than a retail liquidity event. SpaceX has become a global capital allocation story, sitting at the intersection of space infrastructure, defence optionality, AI compute geography, sovereign ambition, and Elon Musk’s retail gravity machine. The first-day performance lifted risk sentiment into the close, but the real test starts now. If SpaceX continues to trade well, it can remain a risk-on barometer. If the stock starts to fade, the speculative bid that carried markets into Friday could disappear very quickly.

The macro backdrop is less forgiving. Last week’s ECB hike was the clearest signal yet that central banks are not ready to look through the Iran shock. The ECB raised the deposit rate by 25bps to 2.25%, its first hike since 2023, and framed the decision around the broader inflationary impact of the war rather than energy alone. We’ve now shifted our view from thinking the ECB would halt at one insurance hike to now looking for multiple further hikes this year, something we explained last week in “After You, Christine”.

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

• “Same Old Global Playbook”

• “Warsh in the Hot Seat”

• “UK Risk Premium Gets Two Votes”

Same Old Global Playbook

Markets keep deciding, after briefly noticing the risk, that it is still better to buy the same winners.

Wars, oil shocks, higher yields, and occasional policy scares are all still capable of producing a wobble. But they are not yet capable of producing a durable change in equity leadership. The market continues to come back to the same trade: AI-linked momentum, semiconductor earnings, hyperscaler capex, and the equity markets most exposed to that supply chain.

If that sounds too simple, remember that simple has been working… a lot.

Momentum remains the dominant factor globally, up nearly 31% year-to-date. Low-volatility stocks, by contrast, are down 23% and remain the worst-performing global factor. Value has made occasional appearances, but has not managed to take control outside a few regional pockets. The market keeps flirting with rotation, only to return to concentration.

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Today, the committee, led by Christine Lagarde, raised its deposit facility rate by 25bps to 2.25%, its first rate hike since September 2023. Even though the move was widely anticipated (65 of 67 economists surveyed by Bloomberg expected this outcome), it was the updated staff projections on inflation and growth that caught our attention, as did Lagarde’s own comments at the press conference.

It’s clear to us that the ECB have swiftly pivoted to a “go big or go home” approach to tackling the inflationary impact, and we now think the deposit rate can rise multiple times this year. Lagarde clearly did not frame today’s 25bp hike as a one-off response or an insurance hike, as we thought they might, to retain optionality further out.

Yet we believe the multiple likely hikes this year will ultimately prove to be a mistake, given the likely hit to economic growth, and could see EUR come under pressure later this summer. This leads us to add a six-month EUR/USD option structure.

Inflation Projections Lifted…

The ECB revised its inflation forecasts significantly upward and trimmed growth expectations, as detailed below.

That makes it difficult for the ECB to sound dovish. In the baseline, inflation is not back at target until 2028, while core inflation remains above target through the entire projection period. The ECB also expects headline inflation to peak at 3.4% in Q3 and Q4 2026 and remain above 3% until early 2027, with the energy shock gradually feeding through to food, goods, and services.

The scenario analysis strengthens the point. In the milder scenario, oil normalises faster, inflation undershoots the 2% target in 2027 and 2028, and growth recovers more robustly. But that is essentially the “everything calms down quickly” case. The more policy-relevant risks sit in the adverse and severe scenarios. In the adverse scenario, HICP inflation runs at 3.3% in 2026, 3.0% in 2027 and 2.3% in 2028, with core inflation peaking at 2.7% in 2027. In the severe scenario, headline inflation reaches 4.0% in 2026 and 5.3% in 2027, while core inflation rises to 3.8% in 2027 as energy costs feed into domestic prices and wages.

So even though Lagarde did not pre-commit to further hikes, the updated inflation figures clearly shifted the burden of proof. With inflation revised higher, core inflation above target through 2028, and adverse scenarios indicating a meaningful risk of second-round effects, the GC has effectively told markets that today’s hike won’t fix all of that and, therefore, more tightening is needed.

It’s not even just our perception here, as the ECBspeak Index continues to climb.

The extent of any further tightening wasn’t specified, with Lagarde saying there would be no preset rate path. The neutral rate wasn’t discussed either, but consensus is that it’s around the 2.50-2.75% range, which would suggest at least two further hikes this year. Arguably, in order to materially provide an impact to dampen the inflationary pressure, we’d say it needs to be at least at the neutral range, if not higher.

…But Growth Downgraded

The problem as we see it lies in the health of the economy, which will only be put under further pressure from monetary policy tightening.

The ECB now sees eurozone GDP growth at just 0.8% this year and 1.2% next year, both lower than previously expected. That is not recessionary, but it is hardly an economy with much spare capacity to absorb additional tightening. The central bank is raising rates into an economy already being squeezed by higher energy costs, weaker consumer confidence, slower household spending and pressure on exporters.

If the inflation problem was being driven by excessive domestic demand, we’d be less concerned. But it’s not. It is being driven by an external energy shock.

There’s also concern that although higher interest rates can cool demand and lean against second-round effects, they cannot produce more oil, reopen supply routes or remove the geopolitical risk premium from energy markets. What’s to say that the base rate needs to go higher still in 2027 if we don’t get a conflict resolution in H2?

The central bank statement concluded it could no longer wait out the shock, prioritising price stability over economic momentum. That’s all well on paper, but markets aren’t stupid when assessing longer-term implications.

Turning to the Trade

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US equities began the week with another record on Tuesday, as another burst of AI enthusiasm carried the market higher. Nvidia (NVDA US) pushed deeper into the PC market, Alphabet (GOOGL US) raised $80 billion for AI-related capex, and Marvell (MRVL US) surged after Jensen Huang declared it could be the next trillion-dollar company.

By Friday, the same mega-cap and semiconductor names that had dragged the market higher since March became the source of the drawdown. Broadcom’s (AVGO US) disappointing forecast was the first real warning that AI expectations are now running ahead of even strong fundamentals. In a market priced for perfection, “good” no longer clears the bar.

The jobs report then turned a valuation wobble into a rates shock. May payrolls came in far stronger than expected, with positive revisions reinforcing the idea that the US economy is not slowing enough to justify easier policy. Fed pricing moved further toward hikes, while the dollar squeezed higher.

Geopolitics remained in the background rather than the driver. The US-Iran ceasefire looked increasingly fragile, with little progress toward reopening the Strait of Hormuz and fresh clashes testing the truce. Oil and the dollar still carried some war premium, but the dominant move was domestically in the US.

The CTA setup adds another layer of fragility. Goldman Sachs estimates that systematic flows now look asymmetric, with downside scenarios carrying far more potential selling than upside scenarios offer buying. The rally has leaned heavily on momentum, positioning, and forced participation. Once those flows turn, the same mechanics that supported the market can amplify the reversal.

The burden of proof has shifted. AI still has the structural story, earnings are not collapsing, and the S&P 500 remains close to highs after an extraordinary run. But the combination of stretched expectations, narrow leadership, and a Fed path moving toward hikes leaves the market much less forgiving.

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

• “Equity Risk-Off”

• “US Rates View”

Equity Risk-Off

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On paper, issuance is still a long way from the madness of 2021. US IPO volume has edged higher in recent years, but the five-year average remains near its lowest level in four and a half decades.

A few aftermarket stats: mean first-day returns (equal-weighted) were 11.9% in 2023, 15.3% in 2024, and 29.3% in 2025.

More revealing still is the quality of the appetite. 53% of 2025 IPOs had negative trailing earnings, and the loss-making cohort enjoyed mean first-day returns of 39.8%, against 17.2% for issuers with positive EPS. That trend tracks back in five of the six years this decade. Markets react as much to narratives as they do to fundamentals.

Ahead of the big release, we wanted to run through some comments on Musk’s history of selling narratives, some equity market plumbing on float size and Nasdaq inclusion/S&P exclusion, and the read-throughs for the upcoming AI IPOs.

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Not Just a Space Company

In 2018, SpaceX President Gwynne Shotwell said that the company would not go public until it was flying regularly to Mars. Musk himself had echoed a similar thought over the years. For a space company, that makes sense. Having to stand up and explain your quarter to shareholders has its drawbacks. And for a research-heavy, capex-heavy company, focusing on engineering progress matters far more than quarter-to-quarter bottom lines. But that old logic has collided with a new reality. The dream has got bigger, as has the bill.

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That’s what makes the latest sell-off more interesting than the usual crypto drawdown. Tuesday’s uncorrelated move took Bitcoin’s weekly decline to 11% and erased roughly $160 billion in market value. This does not mean Bitcoin is dead. Assets do not die just because their holders have a bad week. But Bitcoin’s newfound characteristics suggest that the trade has entered a different phase.

In our view, the old pitch relied on volatility, purity, and unfinished upside. All three now look weaker. Speculative capital has found a more exciting outlet in AI, semiconductors, and memory stocks. The largest symbolic buyers are no longer quite as mechanically one-way as the market assumed. And the great institutional and regulatory catalysts that once sat in the future have largely arrived.

Bitcoin has not lost its relevance, but it is increasingly losing its edge. The asset that began as a rebellion against the financial system is now liquid, institutionalised, ETF-wrapped, policy-recognised, and increasingly well-behaved.

Bitcoin has become what it swore to destroy.

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The Monopoly on Volatility

Part of Bitcoin’s recent underperformance can be explained by a shift in where speculative capital now believes the best trading assets are located to generate large short-term returns.

For much of the last cycle, Bitcoin was the high-beta expression of liquidity and retail risk appetite for those chasing what was coined “financial nihilism.” This is the belief that traditional methods of building wealth are broken or inaccessible, driving the younger generation to an “all or nothing” mentality via dumping money into highly volatile assets.

Throughout periods of 2024 and 2025, it offered these nihilistic speculators regular large price moves with perceived permanent narrative optionality (institutional adoption, CLARITY Act, etc.). More than that, Bitcoin contained a market structure loose enough for momentum to feed on itself.

That proposition has become less compelling as the asset has matured. ETF ownership, institutional hedging, deeper liquidity, and a broader derivatives market have made Bitcoin more investable, but also less feral. In other words, the same institutional adoption that helped legitimise the asset has also dampened some of the volatility premium that made it attractive to retail and pro traders in the first place.

For example, the one-month ATM implied vol for Bitcoin is currently 36.9. Contrast this to some large-cap equity names that have been the flavour of the month (and arguably the past year).

The implied vol is direction agnostic, but that’s not the point we’re trying to prove here. Traders don’t really care whether the asset is moving higher or lower, they just want the potential for future price movements to be high. The greater the potential volatility, the greater the chance of loading up on quick riches.

Speculative capital that seeks these riches is not loyal. It follows realised movement and implied volatility. If Bitcoin is no longer offering the sharpest upside tails, traders will look elsewhere for volatility with a better story attached.

As we’ve just visually depicted, that story right now is in AI infrastructure, semiconductors, and memory.

They contain the same formula as Bitcoin did a couple of years ago. We’re talking about violent moves, strong narrative momentum, and a credible structural growth backdrop. If you removed the legend from the chart below and asked someone two years ago which normalised return was linked to the Galaxy Crypto Index and which was linked to the semiconductor index, gold, and silver, we’d wager the majority would get it wrong.

To a certain extent, this thesis extends into the future. May was a tough month for outflows from IBIT, and logically this cycling out of Bitcoin hasn’t just found a home in the money markets. Money is actively flowing out of crypto and into higher-volatility assets, which, in turn, makes those assets more volatile and attracts more capital. That’s the problem for Bitcoin going forward. It has not entirely lost its narrative; it has simply lost its monopoly on volatility.

Bitcoin ETF flows turn persistently negative over May…

…while VanEck Semi ETF trading volume enjoyed a bumper month.

While the AI boom is grounded in genuine fundamentals, it has also become the latest vessel for financial nihilism, offering a new arena for speculative hope at a time when crypto’s promise of escape no longer feels quite as compelling.

Sayl-ing Away

Bitcoin’s short-term weakness has also been amplified by a more subtle confidence shock, as news broke that Saylor’s Strategy sold Bitcoin. In absolute terms, the sale was irrelevant. A disposal of 32 BTC against a treasury still measured in the hundreds of thousands does not change the supply-demand balance of the asset.

According to Citi, the sale was anticipated as Strategy had signalled plans to dispose of certain tax-disadvantaged bitcoin holdings during its Q1 earnings call as part of a portfolio optimisation effort.

But markets do not trade only on size. They trade on symbols, and Strategy has been one of the most important symbols in the Bitcoin ecosystem. Michael Saylor built the company’s public identity around the idea that Bitcoin was not a trading asset, but a permanent treasury reserve. Strategy was not supposed to sell Bitcoin. Strategy was supposed to buy Bitcoin, hold Bitcoin, issue paper against Bitcoin, and then buy more Bitcoin (even if this doesn’t actually make sense in the real world).

So when we boil it down, the issue is not that 32 coins hit the market. The issue is that one of the flag-bearing corporate holders has introduced a new uncertainty into what had previously been a very simple story. For years, the appeal of Strategy and the wider Bitcoin treasury cohort was that they behaved almost mechanically. They bought, they held, and they reinforced the idea that institutional adoption would create a one-way absorption vehicle for supply. The moment that model becomes conditional, even at the margin, the market has to reprice the narrative.

If the most evangelical holder can sell a small amount to fund obligations, then investors have to at least consider whether other Bitcoin treasury vehicles might also become sellers if financing costs rise, equity premia compress, or balance sheet pressure builds.

In the age of misinformation on social media and the plethora of so-called crypto gurus, it’s also hard for some retail traders to see the wood from the trees. For anyone who instead listens to their favourite crypto doomsayer, the story can easily be spun into Strategy starting to sell holdings due to being underwater, etc. Again, it’s the narrative, not the size.

Bitcoin has not been damaged by the size of the sale. It has been damaged by what the sale says about the purity of the holder base.

“We’re So Early”

We touched on it earlier, but another factor at play is that crypto bros are no longer early to the party.

For much of the last decade, Bitcoin was the cleanest expression of being early to the next financial architecture. Institutions hadn’t arrived. Regulators had not fully turned. ETFs had not been approved. Traditional finance had not built the pipes. Buying Bitcoin felt under-owned and under-discovered.

That is harder to argue today, and therefore pushes it more towards a maturing asset where reasons for explosive growth are harder to justify. Institutional adoption has already happened. Spot Bitcoin ETFs are live, asset managers have products, custody has improved, corporates have put Bitcoin on balance sheets, and the language of digital assets has been absorbed into mainstream finance.

Let’s also not forget that the regulatory environment (particularly in the US) is also about as favourable as it has ever been. Bitcoin has already received the policy and institutional recognition that bulls once argued would unlock the next leg of demand.

The crypto crowd might argue that the “we’re so early” tagline can’t apply to AI either, but we’d disagree. Semiconductors have been a popular feature of the AI trade since the unofficial beginning of the trade (the launch of ChatGPT in November 2022). The picks-and-shovels approach. And yet, March 2026 may have presented itself as the ideal time to go long semiconductors in this cycle.

For Bitcoin, the problem is not that the story has disappeared. The problem is that the story has matured. The easy narrative tailwinds have been harvested. The asset is still investable, but it no longer carries the same informational edge.

The Bottom Line

To reiterate, we’re not perma-bears on crypto. We could argue why a diversified portfolio might still deserve small allocations to the major coins. However, the narrative of Bitcoin heading “to the moon,” with some forecasting earlier this year of a $250k target by the end of 2026, just lives in fairy land.

It no longer has the volatility appeal, it’s no longer the early trade, and short-term actions from Saylor expose the sensitivity of the market.

Crypto isn’t dead, but the investment pitch has changed over the past six months more than we believe some people appreciate.

AP

The market’s leadership remained heavily concentrated in AI beneficiaries. Micron crossed the $1 trillion market-cap threshold, while AMD and Broadcom advanced again. Dell was the standout, surging after lifting its annual sales outlook on the back of AI server demand as RetroTech continues its omeback.

Oil provided the other major support. Crude fell around 7% as hopes for a 60-day US-Iran truce extension gathered momentum, easing some of the inflation anxiety that had dominated the previous month. The energy sector lagged as a result. Lower oil gives equities breathing room, especially when the Fed is still more worried about inflation than growth. The problem is that the peace process remains incomplete. Mixed signals from both sides mean markets are pricing progress, not resolution.

The macro backdrop improved, but not enough to change the Fed story yet. Core PCE came in slightly softer than expected, giving equities a clean disinflation impulse for the first time in a while. Fed speakers remained firmly cautious, with several officials still openly discussing the possibility of hikes if inflation fails to cool.

Rates reflected that tension. Treasury yields moved lower on Iran optimism and softer inflation, but the curve itself was stable and demand at supply remained healthy. At the same time, options flow still showed traders paying for upside yield risk, with 10-year structures targeting levels above 5%. In FX, the dollar ended broadly flat as month-end support offset the risk-on selloff following positive Iran headlines. Spot markets still look ready to fade dollar strength on peace news, but options continue to price a more durable USD premium, especially in USD/JPY.

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

• “Earnings Season Takeaways”

• “Japan’s $73bn Speed Bump”

• “NFP Preview”

Earnings Season Takeaways

With the bulk of corporates now having reported for Q1, there’s enough data to get clean takeaways from a helicopter view rather than just at a company-specific level.

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AI has spent the past three years proving that it can write, summarise, and imitate. One of the next phases will be far more commercial: can it lift, sort, grasp, walk, inspect, and do it repeatedly enough to earn a line item in an operations budget? Of course, we’re talking about physical AI.

Nvidia’s (NVDA US) own definition is useful here. “Physical AI” is not just a humanoid that represents the science fiction future we imagined as children, but AI that can understand and interact with the physical world, spanning industrial manipulators, mobile robots, humanoids, and even robot-run infrastructure such as warehouses and factories. In that sense, physical AI is the attempt to turn intelligence into labour.

The installed base is already large before the humanoid dream fully arrives. The International Federation of Robotics says 542,000 industrial robots were installed globally in 2024, taking the worldwide operational stock to 4.664 million units. Physical AI is already underway. It began in factories, fulfilment centres, and logistics networks that already buy automation.

Amazon (AMZN US) is the clearest reminder that the “physical” part of AI need not look like a person to matter. In mid-2025, the company said it had deployed its one millionth robot across more than 300 facilities, making it the world’s largest operator of mobile robotics, while its new DeepFleet foundation model is designed to improve fleet travel time by 10%. Far from science fiction. Long before a humanoid folds your laundry, a more prosaic machine will probably move your parcel.

Humanoids, though, are where the imagination and the optionality sit, because the world is built to human dimensions. Apptronik says Apollo1 (a General Purpose Humanoid Robot) is designed to work in areas built for people, and Amazon made the same point about Agility’s Digit2: its size and shape are suited to buildings designed for humans. Figure’s 11‑month deployment at BMW’s Spartanburg plant gives the best recent evidence that this is moving, slowly, from concept to shift work: its Figure 023 robots ran 10-hour shifts, loaded more than 90,000 parts and contributed to the production of more than 30,000 X3 vehicles. GXO, meanwhile, says it has trialled three humanoid prototypes and was the first logistics provider to deploy such technology in a live operating facility.

This is the real split in the theme. The public sees the sci-fi skin, while corporates see another way to fill a repetitive task in a human-native space.

The Market Shift

This theme has plainly become louder over the past year. Investor interest in embodied AI accelerated meaningfully after Jensen Huang’s CES presentation on physical AI and robotics in 20254, adding that it was fielding questions daily from investors on how to express the theme in public markets. By January 2026, Arm Holdings (ARM US) had reorganised to create a dedicated Physical AI unit. In market terms, that is how a phrase becomes a sector. Humanoids are the next phase of the AI hype cycle, but turning viral machines into useful workers remains difficult and expensive.

The reason the fascination is not only promotional is that the underlying software stack has improved meaningfully. Nvidia’s Isaac GR00T N1, launched in March 2025, is presented as the first open humanoid robot foundation model and is paired with synthetic-data generation blueprints and a robotics physics engine. Figure’s Helix, unveiled in February 2025, is a vision-language-action model that combines perception, language and whole upper-body control, and Google DeepMind’s Gemini Robotics and Gemini Robotics‑ER extend Gemini 2.0 into robotic action, embodied reasoning and spatial understanding. In non-technical terms, the market hears that large-scale AI may now translate language and perception into motor control with fewer hand-coded rules and more generalisation.

Embodied AI may be a secular trend even while many of its listed beneficiaries still look, and are priced, like industrial or automation companies. The first money made in a theme is often made by the infrastructure.

The Economics of Embodied Labour

The long-run economic case for physical AI is not difficult to sketch. Start with labour. Labour shortages raise recruitment and operating costs, disrupt production, and can weaken growth and innovation. The UN’s latest population work points to a world that is ageing steadily, with the global population aged 65 and above projected to reach 2.2 billion by the late 2070s, surpassing the number of children under 18. Sure, we’re not looking at 2070 for this thesis to play out, but it goes to illustrate the direction of travel. GXO makes the same point from the warehouse floor, arguing that growth in the working-age population is slowing. This is the first durable pillar of the theme: in many rich economies, the question is whether there is enough labour in the right place, on the right shift, at the right cost.

The second pillar is that the human form can be economically convenient. Humans designed the world for the human body, so a humanoid can, in principle, operate without a full factory redesign. Mercedes-Benz said much the same when it announced its Apollo pilot, noting that humanoids could automate physically demanding, repetitive tasks in spaces designed for people, not robots. For a meaningful class of environments (brownfield logistics, general manufacturing, internal transport, tote handling, machine tending), the retrofit burden can be lower than many sceptics assume.

The third pillar is the cost curve, and here the market should watch what is already happening. Morgan Stanley estimates that the cost of a humanoid in a high-income country may fall to around $150,000 by 2028 (from $200,000 in 2024) and $50,000 by 2050, with lower-income supply chains potentially far below that. Meanwhile, Unitree’s G1 is currently listed at $13,500 on the company’s own shop page. Those are not like-for-like products in capability, of course, but the hardware price tag is coming down, especially at the lower and narrower end of the capability curve. When paired with software improvements, an absurd prototype becomes a tolerable capital request.

The fourth pillar is the financing model. In the latest IFR service-robot dataset, professional service robot sales reached almost 200,000 units, with transportation and logistics accounting for 102,925 units, or 52% of the market. This is already the most commercial part of the physical AI stack: mobile robots moving goods through warehouses, factories and hospitals. The category grew 14% year-on-year, while robots-as-a-service adoption in transportation and logistics rose 42%, with the broader RaaS fleet up 31%. The payment model turns robotics from a capex decision into an operating-cost decision, allowing the technology to get out of the demo room and into the P&L. Apptronik explicitly pitches Apollo through a RaaS lens, arguing that it can deliver ROI from the start and reduce total labour cost.

The fifth pillar is the learning flywheel. Nvidia says synthetic data, simulation and post-training are central to robot improvement, while Amazon’s DeepFleet shows that once large robotic fleets exist, software can extract additional efficiency from the installed base. This is what makes the sector potentially self-reinforcing. More deployments produce more data > more data produces better policies > better policies improve ROI > better ROI produces more deployments. The bridge years are unlikely to be cleanly autonomous. They will probably be messy, with narrow-task deployments, supervised autonomy, and staged roll-outs. But economically, that’s good enough. Markets rarely wait for perfection if acceptable productivity arrives first.

The Bottlenecks

“Bottlenecks” might be the most featured word in research this year. However, Dexterity remains the most underappreciated hurdle. Useful robot models must be general, interactive, and dexterous. Many everyday tasks still require fine motor skills that remain difficult for robots. One of the top hardware failure points in the field was the forearm, a subsystem constrained by tight packaging, dexterity demands and thermal limits. The machine can look splendid in a demo and still lose a shift to heat, cabling, or wrist complexity.

Battery life, payload, grip quality, and stability are equally unforgiving. Apptronik’s own specifications still centre on a four-hour battery pack and a 55-pound payload, while GXO says its field feedback has focused on battery life, ability to carry heavier loads, floor stability, dexterity, and integration with other automation. In other words, the three unlovely ingredients of industrial reality (uptime, safety, and interoperability) are still doing the vetoing.

Timing, then, is the issue. Morgan Stanley’s forecasts assume adoption remains relatively slow until the mid-2030s, with acceleration later in the decade, and it expects roughly 90% of humanoid use in 2050 to be industrial or commercial rather than domestic. Investors should think in layers: arms and AMRs are already commercial, humanoids in structured industrial settings are the emerging wedge, and the household generalist remains the expensive mirage that sells narrative before it sells units.

So, who are the beneficiaries in the short-term?

A Public-Markets Basket for Physical AI

To build a public-markets basket around physical AI today, we would avoid the temptation to bet everything on one future humanoid champion. Most of the marquee OEMs are still private, and the listed route is cleaner through the stack: compute, simulation, factory automation, motion control, machine vision, and precision components. Morgan Stanley’s “Humanoid 100” value-chain framing is the right instinct (more details of this further on). Deployed automation already exists, while the sexier part of the story is only just entering controlled commercial use. The best basket is therefore a barbell between AI infrastructure and industrial incumbency.

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In what has become a predictable start to these week-ahead notes, US equities extended their winning streak to eight weeks, the longest run since 2023. Improving signals out of US-Iran negotiations helped ease geopolitical risk that has been present in markets since Q1. Oil was lower on the week off due to that same sentiment, but feed-throughs to inflation are already causing problems elsewhere. US rates have pivoted from two cuts priced pre-war to a hike before the year is out. But then again, equities are higher still.

Nvidia (NVDA US) was last week’s main course, but sang a familiar tune of realised coming in below implied vol. We’d call it a non-event compared to NVDA of old. Off 4.5% from prior Friday’s close. As for the results themselves, the flagship of the AI chip trade beat headline expectations, lifted its dividend and announced an $80 billion buyback. The disappointment in price action did not spread across the entire complex (SMH +3.5% on the week), with Dell (DELL US) and Qualcomm (QCOM US) still posting strong gains, but it did reinforce the point that the market is becoming more selective. AI is still the anchor, but not every beat is enough anymore.

UBS noted that the S&P 500’s recent six-week advance was the narrowest in 35 years, which captures the tension well: the index keeps making progress, but its leadership structure looks fragile. Positioning in semis is quite something.

The most important macro development was expressed most cleanly in rates. Waller struck a hawkish tone and backed, removing the easing bias from the FOMC statement, joining other officials who have pushed back against the idea that policy is close to turning easier. The FOMC minutes showed a majority of officials believe a hike could be warranted if inflation persists. Longer-term inflation expectations were revised higher.

A well-received 20-year auction at 5.122% on Tuesday helped stabilise bond sentiment mid-week. UK 30-year gilts surged toward 6%, and German bund yields also rose, making this a coordinated global bond selloff, not a US-specific story (market memo: “Making Sense of Yields”). Japan’s 30-year exceeded 4%, quite the move from near-zero yields just six years ago.

In currency land, the dollar remained steady, with dips on positive Middle East headlines being bought, suggesting underlying demand remains intact. The dollar bid is increasingly tied to Fed repricing and energy dynamics rather than safe-haven demand.

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

• “Rates: Cuts Are Buried, But Hikes Look Too Certain”

• “Equities: Shrugging Off Yields, China’s Chips, and WHAM”

• “Commodities: Returning to an Old Favourtie”

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Rates: Cuts Are Buried, But Hikes Look Too Certain

Kevin Warsh was sworn in last week, but not into the environment markets once imagined when his name first moved into serious contention.

The original Warsh trade was straightforward. A Trump-aligned Fed governor with a public record of criticising the Fed for keeping policy too tight and with a more optimistic view on AI-driven productivity… it all looked like a clear dovish impulse.

That was then.

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Implied yields on G7 government debt with maturities beyond 10 years had climbed above 4.6% for the first time since 2004. The US 30-year Treasury is around 5.17%, the UK 30-year gilt touched 5.82%, and the Bank of Japan is being forced to consider whether market instability might require a slower pace of balance-sheet run-off.

Each country may have individual reasons adding to its bond selloff, but the selloff itself is global.

There is one main story driving this higher, a noisy one of war, oil, and inflation expectations. Markets now have the Fed on hold through 2026, and have shifted far enough to price a possible hike by January. Beneath that headline story, there are a few dynamics we think deserve more attention.

• The first is that hyperscalers are funding an AI buildout of extraordinary scale, and have increasingly leaned on debt markets to do it.

• The second is that a continued shift higher in rates changes the equity leadership map, making financials and banks a more natural home for risk than the most duration-sensitive parts of the market.

• The third is that the UK has its own idiosyncratic fiscal and political vulnerabilities, which give long-end gilts a higher beta to the global duration selloff than US Treasuries or most other G10 markets.

Not all rising yields are equal. A move driven by collapsing credit quality is one thing. A move driven by stronger nominal growth, higher real rates, and a fatter term premium is another.

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