View From The Top: Neither irrational nor exuberant

View from the very top: Scepticism in any bull market is both normal and healthy. Investors have legitimate concerns and it is only rational for these risks to be reflected in current asset price valuations. The direction of travel for interest rates arguably matters more than anything else, for this could impact not only current economic growth and corporate earnings momentum but also the durability of the ongoing AI investment cycle. We’ve moved beyond the phase of blind enthusiasm for AI. The pending initial public offering of shares in Anthropic may prove to be the ultimate barometer for the AI boom. At the same time, investors are having to contend with a Federal Reserve committed to further monetary tightening, the ongoing risks of energy supply shocks and still-elevated geopolitical uncertainties. With investors neither irrational nor exuberant, clear opportunities will emerge. Stay nimble and diversified.

Asset Allocation:

Equities: A ~10% gain in the MSCI World Index year-to-date masks considerable underlying dispersion. Fewer than 30% of the Index’s members are outperforming year-to-date and equal-weighted indices are ahead of their market-cap weighted counterparts (data per Bloomberg). More defensive sectors such as consumer staples and healthcare have assumed market leadership, replacing tech and industrial AI proxies. Throughout 2026, the ‘Magnificent Seven’ group has underperformed. Truly active managers should be flourishing in these conditions. With the market set to enjoy a third consecutive quarter of at least 20% year-on-year earnings growth, businesses that are enjoying ongoing earnings momentum should continue to benefit. Bloomberg consensus calls for around 15% year-on-year earnings growth for the MSCI World Index in 2027.

Fixed income/ Credit: The third quarter was the worst for bonds since 2024, with the yield on ten-year US Treasuries reaching its highest since 2002. Extreme pessimism has since led to an inevitable reversal. Even if there is clear scope for tactical bond market rallies, the direction of travel looks clear. Bonds in the western world could be set for a structural bear market given ongoing AI spend, rising fiscal deficits, growing geopolitical risks and their related inflationary impact. At the same time, it is important to recognise that over 80% of global fixed income now yields more than 3% (compared to a figure of just 12% in 2012, per Bloomberg), implying that there exist meaningful alternatives to cash – and even some equities – at the short-end of the curve. We would seek to avoid duration and riskier (high yield) credit.

Currencies: The Dollar Index stands at close to a 52-week high, reversing much of the weakness in the currency seen in 2025. Stronger economic growth and fewer fiscal concerns relative to the Eurozone explain why the Euro is at a 17-month low relative to the Dollar. The trend of a stronger Dollar (and Swiss Franc, Japanese Yen) relative to the Euro could endure, although we remain mindful of mean reversion across the FX space.

Gold: The 25%+ drop in the gold price from its January peak represents a potential opportunity. Gold’s lack of yield in a higher rate world provides an explanation for its underperformance, even though central banks have continued to make gold purchases (per recent World Gold Council data). The precious metal remains both a crucial portfolio diversifier and a hedge against macro instabilities.

Alternative assets: Hard assets perform another important role in portfolio diversification, in our view. Not only do they offer some income-generating characteristics, but they can also provide resilience in the face of uncertainty. It is important, however, to remain selective across this asset class. We favour uncorrelated strategies with a quality bias.

“Irrational exuberance” was the term used by Alan Greenspan, then Chair of the Federal Reserve, to warn about rising stock market valuations during the mid-1990s dotcom boom. Parallels have been made between that period and the bubble presently building in artificial intelligence. However, the current behaviour of investors appears to us as neither irrational nor exuberant. Scepticism and pullbacks in any bull market are normal and should be considered healthy. They also create opportunities.

The ongoing equity market rally celebrated its fourth anniversary last month. Since its October 2022 low, the MSCI World Index has annualised over 20% returns. ChatGPT will turn four at the end of November. In the period since its commercial launch, the Bloomberg Magnificent Seven Index has delivered greater than 40% annualised returns. These are impressive figures. Elevated starting points naturally imply lower future returns. The bar has been set.

These returns are even more remarkable given that equities have been range-bound for the last six months (the MSCI World Index has traded in a band between 4647 and 5034 since the start of May). This is despite the fact that economic and corporate health remain robust.

Second quarter US GDP growth was recently revised up from 1.5% to 2.2%, and the first read from the Bureau of Economic Analysis for third quarter growth suggests an acceleration to a 3.4% annualised rate. The IMF’s October World Economic Outlook also saw upward revisions to global GDP assumptions, with 2027’s estimate for 3.4% growth representing an improvement versus 2026’s 3.1% forecast. Both the S&P 500 Index and the MSCI World Index are on track to record their third consecutive quarter of 20%+ year-on-year earnings growth.

So why are investors not more exuberant? Put simply, they have concerns that are legitimate. Many are interlinked, but centre around the direction of travel for interest rates. Specifically, they relate to potential AI infrastructure over-build and how it is funded, growing fiscal deficits and ongoing geopolitical uncertainties. Recent unrest in Europe and pending US mid-term elections are also unhelpful. Against this background, it is only rational for these risks to be reflected in current asset price valuations.

Begin with artificial intelligence. That investors are starting to question the visibility of the AI investment boom should come as no surprise – especially given that widespread productivity gains remain elusive, large language models continue to hallucinate and agents have started to go rogue. Even if AI may be ‘the future’, the cost of funding the infrastructure build-out is very much a matter for the present. Higher rates matter since they not only increase debt servicing costs but also have an impact on implied (discounted free cash flow) valuations. Around 75% of all AI build will be debt funded, according to JPMorgan.

Against this background, we’ve moved beyond the phase of blind enthusiasm for AI to a market that has begun to differentiate between players, business models, and financial approaches. Investors are increasingly cognizant of the complex web of loans, ownership stakes, lease commitments and contractual obligations linking various players (businesses such as CoreWeave look particularly exposed). They also want to see evidence that their investments are paying off. After all, 3.6% of US GDP will end up being committed to AI in the decade through to 2033, significantly more than that spent on railroads or telco fibre (2.2% and 1.1% respectively, according to Columbia University research).

The pending initial public offering of shares in Anthropic may be the ultimate barometer for the AI boom. Anthropic’s S1 regulatory filing talks about how AI will “revolutionise every field of human endeavour” but also warns about possible extinction risks to humanity. Extraordinary growth potential needs to be balanced against the uncertainty of demand. It is a naturally polarising debate. Even if Anthropic is successful in raising a mooted $100bn of new capital (with an implied valuation for the business of at least $1.5tr), not every AI business will likely enjoy the same access to capital markets. If the market is unable to absorb the new equity raised by Anthropic, then it could mark a potential tipping point.

Many investors, companies and policymakers have a vested interest in keeping the AI boom going. Consider that the global AI ecosystem currently accounts for around one-third of all global investment and c50% of world trade, according to calculations by Oxford Economics and Alpine Macro. Were investment to stop (or even builds to be delayed), then there would be a clear impact to the broader economy, for near-term GDP growth relies heavily on ongoing data centre investment.

The role the Fed plays clearly matters. It has a delicate balancing act to maintain. Greenspan’s ‘irrational exuberance’ comment was intended to take some of the air out of the dotcom bubble without bursting it. Current Fed Chair Kevin Warsh may need to do the same at some stage. The US central bank will likely draw comfort from the fact that inflation expectations remain anchored even though headline inflation prints are simply not good enough for a central bank committed to a 2.0% target.

Three main factors – higher oil, the impact of tariffs and the shortage of memory chips for AI – explain why headline US inflation stands at 3.7%, and producer prices (input costs) are running at their highest since 2022. However, wages are growing more slowly than inflation (at only 3.0%), while underlying metrics are closer to the Fed’s stated objective. On a 3-month rolling average basis, core PCE (personal consumption expenditures) inflation is already below 2.0%.

These dynamics afford the Fed some flexibility, hence its current message of gradual, further hikes. Fed fund futures discount at least two 25 basis-point rate increases over the next 12 months. Might Warsh be following Greenspan’s mid-90s playbook, with the view that incrementally tighter monetary policy allows the AI spending cycle to endure?

The answer to this question lies in drawing a distinction over whether and when supply shocks risk becoming more permanent. Oil has moved from its 2026 low of ~$56 per barrel in July to ~$110/barrel currently. With ongoing elevated tensions in the Middle East, there is a clear risk of a persistent energy shock enduring, with elevated diesel, freight and insurance persisting into next year. With the US mid-term elections soon behind us, conflict in the Middle East may re-escalate. This would clearly not be helpful for risky assets. It could also complicate the Fed’s decision making.

It rarely pays to attempt to pre-empt political outcomes. Both the Brexit vote and Trump 1.0 a decade ago represent classic case studies, and the recent Brazilian election result serves as a healthy reminder. In practice, markets tend to shrug off the impact of new political incumbents reasonably quickly, even if the effect on different sectors of the economy is much more nuanced.

The bigger issue – and again with interest rate implications – is that almost every developed world country is having to face up to the harsh reality of too much debt and not enough growth. Recent unrest across Europe highlights the challenge: heavily indebted governments have limited room to respond when weak growth collides with public dissatisfaction over living standards and public services. No political party wants to cut expenditure or raise taxes, exacerbating the problem. The OECD notes that government spending as a percentage of GDP is already at a record across its members. A reckoning will need to occur at some stage.

Neither a US fiscal crisis nor inflation expectations getting out of control look to be immediate risks. Bond market contagion in the Eurozone does not appear to be metastasising at present. Cognisance of these risks perhaps provides another explanation for the current lack of irrational exuberance. This is a good thing. If markets can continue to climb their metaphorical walls of worry, then the rally can endure. At the very least, it pays to stay nimble and opportunistic.

Alexander Gunz