Financial markets have been a study of contrasts this year. On the one hand, high levels of deficit spending in the western economies have contributed to deteriorating government balance sheets, stubborn inflation and rising interest rates. These factors are beginning to weigh on the bond market. On the other hand, strong corporate earnings growth, driven in part by the surge in AI investment activity, has propelled equity markets to new highs.
Led by the United States, debt funding is reaching new heights. The cumulative debt in the U.S. has surpassed US$40 trillion and is growing rapidly. France, the United Kingdom and Canada are also funding increased deficits as no governing politician in the western world wants to face the wrath of voters by increasing taxes or cutting spending. As a result, the yield on 10-year U.S. Treasury bonds recently eclipsed 5.5%, which is widely considered a warning sign to financial markets. For the first time in memory, there are growing doubts about the quality of America’s fiscal outlook. As bond yields rise, so do the interest rates charged for loans throughout the credit world. It appears that the era of low interest rates is gone for the foreseeable future. Higher bond yields and increased interest rates will, at some point, attract investment away from the equity market.
In the equity markets, earnings momentum is strong and has been the primary driver behind overall returns. Led by the performance of the Energy, Information Technology and Materials sectors, overall earnings are expected to increase an eye-popping 33% this year. However, there are two distinct factors driving this performance: the war in Iran which has driven up energy prices, and the massive spending by the Technology sector on AI. Both these momentum driven factors give us cause for concern. First, elevated energy prices are temporary and will correct once the conflict in the Persian Gulf has abated. Second, the massive capital expenditure on AI has yet to demonstrate that it will yield satisfactory returns.
Equity market valuations are currently divided between the highly priced momentum driven sectors mentioned above, and the fundamentally sound sectors which create value over time. Meanwhile, rising interest rates, deteriorating western balance sheets, and uneven corporate earnings growth are creating a financial market cocktail that we have not experienced before. We will continue to monitor your portfolio carefully, to manage risk, protect your capital, and seek steady returns from our diversified portfolios.
Third Quarter 2026
Financial markets have been a study of contrasts this year. On the one hand, high levels of deficit spending in the western economies have contributed to deteriorating government balance sheets, stubborn inflation and rising interest rates. These factors are beginning to weigh on the bond market. On the other hand, strong corporate earnings growth, driven in part by the surge in AI investment activity, has propelled equity markets to new highs.
Led by the United States, debt funding is reaching new heights. The cumulative debt in the U.S. has surpassed US$40 trillion and is growing rapidly. France, the United Kingdom and Canada are also funding increased deficits as no governing politician in the western world wants to face the wrath of voters by increasing taxes or cutting spending. As a result, the yield on 10-year U.S. Treasury bonds recently eclipsed 5.5%, which is widely considered a warning sign to financial markets. For the first time in memory, there are growing doubts about the quality of America’s fiscal outlook. As bond yields rise, so do the interest rates charged for loans throughout the credit world. It appears that the era of low interest rates is gone for the foreseeable future. Higher bond yields and increased interest rates will, at some point, attract investment away from the equity market.
In the equity markets, earnings momentum is strong and has been the primary driver behind overall returns. Led by the performance of the Energy, Information Technology and Materials sectors, overall earnings are expected to increase an eye-popping 33% this year. However, there are two distinct factors driving this performance: the war in Iran which has driven up energy prices, and the massive spending by the Technology sector on AI. Both these momentum driven factors give us cause for concern. First, elevated energy prices are temporary and will correct once the conflict in the Persian Gulf has abated. Second, the massive capital expenditure on AI has yet to demonstrate that it will yield satisfactory returns.
Equity market valuations are currently divided between the highly priced momentum driven sectors mentioned above, and the fundamentally sound sectors which create value over time. Meanwhile, rising interest rates, deteriorating western balance sheets, and uneven corporate earnings growth are creating a financial market cocktail that we have not experienced before. We will continue to monitor your portfolio carefully, to manage risk, protect your capital, and seek steady returns from our diversified portfolios.