View From The Top: Off to the moon

View from the very top: Optimism abounds. Track earnings upgrades, record new allocations to equities and excitement around a swathe of pending mega stock market flotations and it would be easy to forget that there is an unresolved conflict in the Middle East, US inflation running ahead of wage growth for the first time in three years and longer-dated bond yields marking two-decade highs in many developed nations. Resilience can often be confused with complacency. Calling market peaks is inevitably hard. Participants very rarely see them coming. When markets do come back down to earth, it may be painful, particularly given the monetary and fiscal constraints policymakers currently face. In a deglobalised and more uncertain world, diversification both across and within asset classes remains the most desirable form of defence.

Asset Allocation:

Equities: Global markets continue to make new highs. These are encouragingly being driven more by rising earnings estimates (as opposed to multiple expansion), supportive to the sustainability of the rally. The just-ended earnings season in the US was the strongest in five years, with all 11 sectors of the S&P 500 Index enjoying upgrades, according to Bloomberg. While the bar is inevitably set higher for the next quarter, we believe that this is a market that can continue to benefit stock pickers. Our strategy is to seek to avoid the most crowded segments of the market (particularly around the AI trade and in the context of the pending flotation of SpaceX) and focus on more interesting niches, particularly small caps and regions ex-US.

Fixed income/ Credit: Government bond yields globally continue to go higher. Debt with maturities of 10 years or more across the G7 is yielding more than at any time since 2004, according to Bloomberg. The threat of inflation looks like a problem that is will not to dissipate any time soon, exacerbated by geopolitics and demographics. These dynamics explain why we have only highly selective exposure across the credit spectrum. On the private side, defaults have remained relatively limited, but we believe that the cycle is still in an early innings, while a more fragile economy would create additional pressure.

Currencies: The DXY Dollar Index enjoyed a strong May, driven by rising US bond yields, and reversing its underperformance in April. The Index is now positive for the year and may continue to see gains in the second half of 2026, particularly if upward pressure on US Treasury yields persists. We continue to believe that major currencies mean revert over time.

Gold: The price of gold may be almost flat year-to-date but needs to be seen in the context of a more than doubling in the price of the precious metal over the last five years. Gold, for us, continues to be a core portfolio asset, acting as both a crucial diversifier and as a hedge. In a world where fiscal and monetary debasement may only grow, gold may become even more crucial.

Alternative assets: Hard assets should be well-positioned to benefit in periods of regime change and uncertainty (as well as those of higher inflation). Alternative assets can exhibit resilience as well as offering both portfolio diversification and income-generating characteristics. We favour selective investments, particularly in uncorrelated strategies.

The global stock rally powers on. It may soon be about to go stratospheric. ‘Off to the moon’ is modern slang for something experiencing a massive, rapid upward trajectory. The term can also mean a wild, exhilarating adventure. Buckle up for the ride. However, as any budding astronaut knows, when back in orbit, the laws of gravity do exist. What goes up, must come down.

It seems like there is an unshakeable optimism in stocks. The MSCI World Index is almost 10% higher since Iran closed the Strait of Hormuz in early March. Fund managers last month made a record (dating back to 2001) increase in their equity allocations relative to the prior period, according to the latest Bank of America survey. Capital continues to chase the AI trade, while market participants appear of the view that the Middle East conflict will not do lasting damage.

Of course, being an optimist has been the right strategy for most of the recent past. Put another way, why not bet on Hormuz reopening and the AI boom continuing, rather than taking the other side of the trade – and worrying about the threat of inflation plus rising debt servicing costs? Cynics might argue that apparent equity market ‘resilience’ is, instead, a combination of complacency and ignorance. When there is so much positivity, it inevitably becomes harder to identify the source of incremental gains.

Despite everything, however, the US economy remains in robust health. The Atlanta Fed’s latest estimate for second quarter GDP assumes 3.8% annualised growth, well ahead of long-term trend levels. The economy is being powered by a combination of fiscal easing (from the One Big Beautiful Bill Act) and the AI boom leading to a massive surge in infrastructure investment. Americans keep on spending, with retail sales having grown for three consecutive months and the latest report highlighting growth in 9 of the 13 categories monitored. It probably helps that the unemployment rate has not exceeded 4.5% for the last 10 months.

The current situation may not last forever, especially given rising costs and deteriorating confidence. Gas (petrol) prices now exceed $4/gallon in every US state and cost more than $5/gallon in 11 of them. Little surprise, then, that recent surveys – from both the Conference Board and the University of Michigan – are sending the same signal: consumers are downgrading their economic views as war-driven shocks start to weigh on household budgets. It’s worse in other parts of the world too, where there is a higher dependence on imported energy. Over 1bn barrels of oil, or c4%of global output, have been cumulatively lost since the Middle Eastern conflict. No surprise then that European economic growth is its weakest in three years (all statistics courtesy of Bloomberg).

Nonetheless, there is certainly a ‘feel’ to markets a bit like the early 2000s, which your author is old enough to remember (he was then a sell-side analyst writing on European dotcom stocks). Acronyms are abundant: TINA, GOAT, FOMO, YOLO. If you were not aware, then any of ‘there is no alternative’, the ‘greatest [market] of all time’, ‘fear of missing out’ and ‘you only live once’ can be applied to explain current equity market dynamics. To throw in another acronym, then consider that mega IPOs often may mark market tops.

The hubris attached to the pending initial public offering of SpaceX has certain parallels with the dotcom era. It’s not just the prospectus of Elon Musk’s business that makes for eyebrow-raising reading – it says, for example, that the business will “extend the light of consciousness to the stars” – but the implied valuation. The press has reported a planned equity raise of potentially $75bn, suggesting SpaceX could be worth up to $2tr, making it the largest IPO in history. This price would imply a multiple of over 90 times trailing revenues. When Meta and Google listed – both of which were then growing more quickly than SpaceX is now – their historic sales multiples were 28 times and 10 times respectively (all data per the Financial Times).

Calling market peaks is inevitably hard. Participants very rarely see them coming. Increased crowding into certain segments of the markets only exacerbates the risks of a sudden reversal. Even the bulls probably recognise that 2026’s equity market rally does rest on an increasingly stretched assumption: that already rich valuations can continue to rise despite higher borrowing costs and persistently elevated energy prices.

Furthermore, as we noted in our opening paragraph, the laws of gravity do exist. What goes up, must come down – eventually. Consider what might happen were Hormuz to remain shut all summer. The threats to the global economy will only intensify if war does not wind down. Wonder also about the impact were the AI boom to disappoint, even just slightly. Bottlenecks are building and great results from corporates seem no longer good enough – they now need to be truly excellent.

It is at least fortuitous that monetary policy remains relatively loose. Tighter policy would make investors more sensitive, particularly in the event of any adverse news. At least one interest rate hike is priced in the US before year-end (according to Bloomberg). For the first time in three years, wage growth in America is lagging inflation, removing a cushion that has insulated many consumers. Affordability remains a major issue, ahead of US mid-term elections in November.

New Fed Chair Kevin Warsh begins his tenure with the uncomfortable fact that inflation has run above the Central Bank’s target for the last five years. The most recent print showed a rate of 3.8% at a headline level and 2.8% underlying, the highest since 2023. Project one year out and the news does not look encouraging: the New York Fed’s latest survey suggests inflation could be at 3.6%, while respondents to the University of Michigan’s study call for a 4.8% rate. Enough shocks in short succession (first the COVID pandemic, then the Russia-Ukraine war, and now the Middle East conflict) mean that consumers may start pricing further disruptions to come, anchoring higher future expectations. Fighting inflation is a marathon, not a sprint.

With hindsight, the Fed’s interest rate reductions last year into a perceived weakening labour market may have left monetary policy too loose. Now, the onus is on tighter policy. Of course, higher rates do not derail bull markets per se, as long as the economy and corporate earnings growth remain robust. Perhaps the bigger issue is higher bond yields. Government bond yields across the G7 for debt that matures in ten years or more are at their highest since 2004, according to Bloomberg.

Higher bond yields do not exist in isolation. They have an impact on equity markets and consumers. Not only do they influence a company’s cost of capital, but the yield on 10-year US Treasury debt is used as benchmark for lending rates across the country. As we highlighted last month, with a growing disconnect between extended equities and bonds, the key debate moves to being one about how long investors in the former can shrug off gloom in the latter.

Even if it remains an unfashionable topic for discussion, the uncomfortable reality is that the world – not just the United States – has too much debt, too little fiscal discipline and limited political desire to address either. Governments that are addicted to large fiscal deficits need to accept the risk of higher rates for longer. A combination of increased defence spending, a push towards energy independence, the need to fund ageing populations and the unpopularity of tax increases imply deficits are headed only one way. A reckoning can be delayed, but it can’t be denied.

Take this to its logical conclusion and the result is not encouraging: the toolkit available for when inevitable exogenous shocks arise is emptier. Further fiscal largesse may trigger a painful bond market response. At the same time, with shrinking balance sheets, Central Banks have ceased to be a buyer of last resort for government debt. Whether there is a return to quantitative easing remains to be seen. Perhaps we all do need an exit strategy – maybe to the moon with Musk – in these uncertain times. A more pragmatic response might be to recognise that in an increasingly deglobalised world, diversification across asset classes represents the best form of defence.

Alexander Gunz, Fund Manager