Currently, the biggest obstacle facing the markets is inflation. A lot is riding on whether the Middle East conflict escalates further or de-escalates, and on how far rising energy costs spill over to other prices.

There are optimistic and pessimistic scenarios for each of these, but bad news on inflation would lead central banks to further tighten monetary policy, push bond yields up further and could potentially trigger an equity market correction. A further risk is the ever-present geopolitical risks, which could erupt in several hotspots at any time.

Our market perspective this quarter is cautious. The market perspective shows where we see the balance of risks at present (but is not intended to be a short-term market forecast). A cautious perspective means we believe the downside risks currently outweigh the upside. For a further discussion of upside and downside risks, see Reasons to be optimistic and Reasons to be cautious sections of the report.

Hopes of an end to the Iran conflict in June proved premature. The fall in the oil price was short-lived and prices rose back to over $100 per barrel. Higher energy prices fed through to headline inflation and the US Federal Reserve (the Fed) and others raised interest rates to head off inflationary pressure. Bond yields soared and dominated the market narrative. Stock markets were not left unscathed, with the major indices roughly flat in the third quarter.

Of course, there are still important positives. One that is perhaps still underestimated is the resilience of the global economy. It is growing in sync with no major region in recession, which in itself is unusual. Unlike in previous cycles, consumer balance sheets are relatively strong and unemployment is low. Growth may not be very fast, but moderate growth is a good environment, perhaps even the optimum one, for corporate profits. Earnings growth at listed companies remains very strong in most stock markets.

The AI theme has remained dominant in the US in particular, even if the market has discriminated carefully between winners and losers, as the divergent performance of the “Magnificent 7” stocks over the past year demonstrates. There continue to be important growth opportunities in technology, even if a downturn in the AI narrative is possible. We return to the issue of whether AI is a bubble in the Tech & AI section.

How have the markets performed?

Reasons to be optimistic

• Core inflation well contained…so far: While rising oil prices have pushed up headline inflation in the leading economies, so far the second-round effects have been relatively limited, partly because labour markets are weaker. Central banks may therefore not need to hike interest rates as much as the markets are currently expecting. Headline inflation will in any event come down again next year, even if oil prices remain high. On top of this, a deal to reopen the Strait of Hormuz is possible – perhaps after the US mid-term Congressional elections – and would spark a bond market rally. Further out, an eventual return to rate cuts by central banks is not out of the question.
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• Resilient economies and strong earnings growth: It is a familiar refrain, but once again the global economy has demonstrated its resilience this year. Far from being dragged down by the conflicts in the Middle East, growth has actually picked up in many leading economies (indeed, stronger growth is probably one of the reasons behind the rise in bond yields). Growth rates remain moderate, which is typically the optimum backdrop for corporate profitability. Earnings growth of listed companies is exceptionally strong in most industries and countries: S&P 500 earnings, for example, are expected to grow 30% in 2026.
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• Growth opportunities in technology and AI: There are huge growth opportunities in agentic and physical AI, robotics and many other areas of technology. Could the technology spark off productivity gains and higher economic growth? While forecasts of 20% economic growth may be hype, the bar for AI to have a positive impact is actually low, since productivity has grown unusually slowly since the financial crisis of 2007-9. By challenging many incumbent businesses, AI will be a disruptive force in the economy. This in itself has the potential to boost growth and productivity, quite apart from any boost to productivity from the technology itself.

Reasons to be cautious

• Higher inflation, rate hikes and bond yields: The conflict in the Gulf has pushed up headline inflation around the world. With no signs of a resolution at present, central banks may be forced to continue raising interest rates to prevent higher inflation from becoming entrenched. The 10-year US Treasury yield has soared from 4.4% to 5.3% in the space of just three months primarily on concerns about inflation. AI-related bond issuance and stronger economic growth have probably also played a part. While it is impossible to pinpoint any one particular level of bond yields that will “crack” the stock markets (a 5% 10-year US Treasury yield was thought by some to be the critical level, but has not been so far), eventually a continuing rise in bond yields would take us into a 2022-type situation where rising bond yields drag down all financial assets.
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• Concentration in AI: Stock markets are concentrated in the AI theme. Nvidia alone accounts for 8% of the S&P, and the combined Magnificent 7, which all have important AI businesses, make up a third of the index. Anthropic and OpenAI’s Initial Public Offerings (IPOs) will exacerbate this concentration. Although there have been occasional flurries in other market sectors, none of them have been able to supplant technology and AI as the primary market driver for any length of time. Therefore, any disappointment in the AI narrative, whether relating to profitability, performance, adoption, government regulation or anything else, could spark a significant equity market downturn. Furthermore, as we pointed out last quarter, there is a further concentration at the macroeconomic level, as AI investment accounts for a significant proportion of economic growth in the US.
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• Ongoing geopolitical risks: In terms of its impact on oil supplies, the conflict in the Middle East has already reached an advanced stage of escalation, with both the Hormuz and Bab-el-Mandeb straits partially closed and attacks on Saudi Arabian oil facilities. A further escalation in the form of a return to an all-out war between the US and Iran is possible, but not the most likely scenario at present. Equally, however, no-one looks willing to go down the de-escalation path just yet. The other obvious geopolitical fault line runs through Taiwan in light of the critical importance of TSMC in the manufacture of the fastest AI chips. Any ratcheting up of tensions between China and Taiwan or, for example, an attempted blockade of the island could clearly have severe macroeconomic and market consequences. With geopolitics more unstable than for many decades, other geopolitical flashpoints could emerge at any time.
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What’s in store for the coming quarter?

Anthropic is expected to launch its IPO in the fourth quarter. This will give the market access to a pure play AI lab building the most advanced frontier models for the first time and provide much more public information on model adoption, customers and pricing and the business model generally. The market valuation is expected to be around $2 trillion, which would make it around the sixth-biggest company in the US. Anthropic’s close rival OpenAI has reportedly delayed its IPO until 2027. The IPO will likely attract very high demand and further increase market concentration in the AI theme.

Macroeconomically, the focus will be on inflation in the major economies and its consequences for monetary policy. Firstly, will energy prices continue to put upward pressure on headline inflation and secondly, will this supply shock lead to second-round effects that spill over into the rest of the economy? The Fed will want to see at least stable core inflation to hold off on another rate hike, and the European Central Bank (ECB) and Bank of England (BoE) also have their fingers on the trigger.

Tech & AI

Market review

It was a stronger quarter for the Magnificent 7 technology stocks. After lagging the Nasdaq index in the first half of 2026 (leading them to be rechristened “Lag 7” by some), all except Alphabet and Tesla were ahead of the index in the third quarter. There was a reshuffle of the performance hierarchy. Alphabet, which has been the best performer in recent quarters, was down slightly. The other hyperscalers (Amazon, Meta and Microsoft), had a better quarter, suggesting that the market has become more comfortable with their spending on AI infrastructure, probably because the market is starting to see that this investment is generating revenues. Meta and Microsoft recovered from a torrid first half with jumps of 29% and 37% respectively in their share prices. So far this year Apple and Nvidia are the best-performing stocks among the 7 tech giants, up 22%. This is interesting, as these two stocks are the most and least exposed to AI. Unlike the other constituents of the Mag 7, Apple has not spent heavily on AI infrastructure or models and remains a purveyor of consumer hardware. Meanwhile semiconductor stocks, which went on a tear in the first half before a correction in June and July, were fairly steady in the third quarter.

Is AI a bubble? Further thoughts

Because of its importance for investors, we return to this question again this quarter. There are at least two angles we can approach it from: firstly, is AI an investment bubble, and secondly, is AI a bubble in terms of inflated claims or expectations about what it will actually do and how widely it will be adopted? The two are interlinked to some degree, but it may be useful to think about them separately first of all.

1. Turning to the investment case first, we do not see AI as a stock market bubble, as we have discussed in recent quarters. The reason, at its simplest level, is because the AI boom is being led by the largest companies in the world who can afford the huge investment in AI infrastructure. Unlike many previous financial bubbles – such as the sub-prime mortgage bubble of the early 2000’s – the AI boom is not primarily founded on borrowing and leverage. Most AI investment is being carried out by the Magnificent 7, which are hugely profitable and are financing a substantial portion of this investment from their own free cash flow. Their borrowing and equity raising have increased and is high in absolute terms, but these companies still have low debt levels overall. Even much lower adoption and profitability of AI would not pose an existential threat to them. Moreover, AI use does not necessarily have to live up to the hype for the huge capital investment to pay off, since it will also entrench the tech giants’ dominant market position.
   
   In terms of listed stocks, the AI universe boils down to two main groups at the moment: the Magnificent 7/hyperscalers and semiconductor and related companies. The hyperscalers are building the infrastructure and the semiconductor companies are benefiting from that spending, which is why their share prices have soared over the past year. The investable universe will broaden when OpenAI and Anthropic, who are currently loss-making, list on the US stock market, and it is only then that investors will begin to have detailed information on the revenues being generated by the use of the models themselves. If there were a downturn in the AI narrative, it would clearly hit the share prices of AI-related stocks, but share price declines of 80% as in the dotcom bust or outright bankruptcies would be very unlikely, except for a small number of fringe players.
   
   Unlike in the dotcom era, the market has been very discriminating in distinguishing between AI winners and losers. Doubts about the huge capital investments by the hyperscalers and others have led many of these stocks to be punished by the markets at times over the past year. The recovery in some of these stocks this quarter has been due to greater visibility that their capital spending is translating into additional revenues. The valuations of the 7 biggest tech companies are certainly not in bubble territory, as with the exception of Tesla, their PEs are all close to or in some cases below the market average, reflecting their high profitability.
   
   We have already seen corrections in certain sectors of the market – for example, the pullback in chip stocks after their run-up in the first half of this year and weakness in many of the Magnificent 7 stocks at various times. This makes an across-the-board bursting of a technology bubble based on AI-specific news less likely. A more likely scenario would be a pullback in technology stocks as part of a general stock market correction. We can be fairly certain that there will be a market correction at some point in the future, and we do not need to believe in a tech/AI bubble to anticipate one. Indeed, if there were a market correction, technology stocks might even outperform other sectors, as their businesses might be seen as less cyclical.

2. Finally, is there a bubble in expectations about the impact of the technology? The answer is we don’t know. However, as we discussed last quarter, we can be fairly sure both that AI is an important technology and that there is hype in some of the claims and expectations surrounding it. We just do not know where and how much. There are clearly huge growth opportunities in AI and the winners will reap huge rewards from it. At the same time, it is certainly possible that there will be disappointments, and that this could spark a downturn in AI or technology stocks at some point. However, rather than speculating on this, a more likely scenario is a market correction for other reasons that pulls AI-related stocks down with it. That will happen sometime in the future irrespective of how the technology pans out.

Q2 results for the Tech Titans and selected highlights

• Sales at Nvidia, the world’s biggest company by market cap, rose 106% in the second quarter. The company says that demand for its chips continues to outpace supply, as it continues to ride the wave of capital expenditure on data centres and AI infrastructure by the other tech giants. Even if Nvidia’s market share of AI chips is inevitably declining slowly – from around 75% in 2023 to about 60% now – it is still dominant. The company has remained actively involved in providing finance for its customers to buy its chips, which has raised concerns about circularity. However, at the moment the strength of Nvidia’s balance sheet and relatively low leverage make the risks manageable. The stock advanced 14% between July and September and is up 22% in 2026 so far.
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• Alphabet published solid results for the second quarter, with revenues advancing 24% and operating income up 30%. Revenues in its cloud business, which accounts for 20% of overall revenues, jumped by over 80% on buoyant demand for AI infrastructure and solutions, suggesting that Alphabet is starting to see a return on its capital spending. The stock was off 4% in the third quarter. This was partly payback for the strong performance in 2025 (it is still up 40% year-on-year), but also reflects some concerns. Investors remain wary of its capital expenditure, estimated to be around $200bn this year, which turned quarterly free cash flow negative for the first time in its history. Google’s Gemini AI model is well behind the leading frontier models and its latest version has apparently been delayed. Finally, even though Search, which still accounts for around 50% of Alphabet’s revenues, is growing solidly, it is still not out of the woods when it comes to the potential threat from AI models.
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• Apple posted revenue growth of 16% year-on-year in the third quarter, with net income advancing 28%. Growth was led by iPhone sales, which rose 22%, while service revenue was up 12%. iPhones and other hardware account for three quarters of Apple’s revenues, with a quarter coming from services. Apple has pursued a different AI strategy to its fellow tech giants and has not invested heavily in data centres or developed its own AI models. However, its dominant position in the consumer hardware market means it can act as gatekeeper for how consumers use AI. Since it has not been engaged in the spending arms race of the hyperscalers, its cash flow remains as strong as ever, enabling it to continue large share buybacks. Apple stock was up 15% in the third quarter and has risen 22% in 2026 so far, making it the best-performing of the tech giants this year.
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• Microsoft’s second quarter results went some way to answering its critics. Revenue growth in the Azure cloud division picked up from 39% to 43%, suggesting that its capital investment is starting to bear fruit. Microsoft has loosened the relationship with OpenAI over the past year and is able to host a variety of third-party models in Azure, although OpenAI still accounts for 70% of its AI business. There was better news on Microsoft’s software business, where there have been concerns about exposure to AI disruption, as new Copilot contracts doubled compared with the prior quarter. The stock rebounded by 37% between June and September, but is still down slightly on a year ago.
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• Tesla’s revenues grew 26% to $28bn in Q2 as vehicle deliveries were ahead of expectations, but operating profit fell over 50% to just $0.4bn owing to rising costs. Free cash flow turned negative for the quarter due to higher capital spending. However, the company has no net debt and is therefore self-funding its expansion plans. Tesla’s capital spending is focused on autonomous driving, batteries, humanoid robots and AI data centres. It is also building its own chip manufacturing facility. Tesla is the market leader in physical AI, including self-driving technology, and projections of huge future growth in this market are the main support for Tesla’s ultra-high valuation. At present, the automotive business still accounts for just under three quarters of revenues. The stock price has been under pressure and is down 20% in the first nine months of the year.

Economic review

US

Economy strengthening

US GDP growth remained solid in the second quarter at 2.2% and forecasts for the third quarter are for an acceleration in the growth rate.

Job growth has recovered from around zero in 2025 to an average of 80,000 per month in 2026. Retail sales are growing robustly, helped by the tax rebates in Donald Trump’s signature One Big Beautiful Bill Act, and were up 6% year-on-year in August. The manufacturing sector has also firmed, with the ISM purchasing managers’ index remaining above the no change level of 50 throughout 2026, and standing at 54.6 in August. However, solid economic growth has not been reflected in consumer confidence, which has weakened in 2026, primarily due to concerns about inflation.

Higher oil prices pushed Consumer Price Index (CPI) inflation up to 3.4% in August. However, the spillover to other sectors has, so far, been limited, while the impact of tariffs appears to be fading. Core CPI inflation has actually fallen from a peak of 2.9% in May to 2.4% in August. However, the Federal Reserve’s preferred inflation measure, core PCE inflation, was 3.0% in August, still well above the Fed’s 2% target.

Europe  

Signs of a pickup in Germany

Higher energy prices pushed headline inflation up to 3.2% in August. As in the US, so far the knock-on effect to other sectors is limited and core inflation (excluding food and energy prices) was virtually unchanged at 2.4%, only marginally higher than 2.3% in August 2025. The closely watched rate of services inflation, often seen as an indicator of underlying inflation pressures, eased to 3%, its joint-lowest level this year.

GDP growth was a relatively robust 0.6% quarter-on-quarter between April and June following a flat first quarter and grew 1.2% year-on-year. Data for the manufacturing sector has strengthened in recent months, led by Germany. The eurozone manufacturing PMI has risen steadily this year to 52.7 in August, comfortably above the no growth threshold of 50, while the German PMI recorded its strongest month of growth since 2022. The upturn in the German industrial sector is confirmed by the closely watched ifo Business Confidence Index, which has recovered from a dip at the start of the Iran war and reached its highest level since 2023 in September.

Consumer data has been less strong but is consistent with slow but positive growth. Retail sales were up 0.6% year-on-year in July in real terms in the euro area, while the unemployment rate has been steady at between 6.2% and 6.4% since 2024.

UK

No longer an inflation outlier

In line with other Western countries, GDP growth was a little stronger in the first half of the year at 0.6% in the first quarter and 0.4% in the second, or an annualised rate of 2.1% in the first half of 2026. The manufacturing sector has also participated in the upturn seen globally this year. The S&P manufacturing PMI has been above 50 since the end of last year, although it has slipped back from a high of 53.9 in May to 51.7 in August.

The labour market is flat. Unemployment was 4.9% in the 3 months to July 2026, up slightly from 4.7% in the same period in 2025, while employment fell 0.3%. The consumer side of the economy has strengthened modestly. Retail sales were up 2.4% year-on-year in August in real terms and consumer confidence rose to its highest since the summer of 2024, possibly reflecting a “honeymoon” period for the new prime minister Andy Burnham.

Compared with other countries, the UK is no longer an outlier with stubbornly high inflation. The rise in oil prices has so far had a smaller impact than feared: headline CPI inflation stood at 3.1% in August (below the US and euro area), while core CPI has been steady at 2.6% for four months. A year ago core CPI was a full percentage point higher at 3.6%. The improvement is underlined by the continuing fall in services inflation to 3.4% in August, down from 4.7% a year ago. Wage growth has also slowed from over 5% a year ago to 3.5% in May to July 2026. This improving trend has allowed the Bank of England to remain on hold.

Asia

China continues to have a two-tier economy, improving data from Japan

The Chinese economy remains divided between a strong export sector and weak domestic demand, hobbled by the chronic malaise in the property market that has dragged on for five years. GDP growth was 4.3% in the second quarter, at the bottom end of the new lower 4.5% to 5% official growth target. Exports were up 25% year-on-year in dollar terms in August, while industrial production rose 5.2%, reflecting the strength in exports and the country’s investment in technology and AI. Domestic indicators were sluggish, however: retail sales were up just 0.4% year-on-year in August and fixed investment in the domestic economy fell 7.2% in the first eight months of the year (with investment in real estate down almost 20%). The authorities announced further measures to revitalise the property market at the end of August. So far, the interventions have not had the desired effect, however, as property sales and prices continue to fall. The State Council announced that it will take further steps to stimulate domestic demand at the end of September, but it remains to be seen if these are decisive enough to have a significant impact.

China’s surging exports are causing concern in Europe in particular, where there are fears that they could hollow out European industry, most notably the automotive sector. The EU is currently considering restrictions on Chinese imports to reduce its growing trade deficit with China. Meanwhile at the summit between Presidents Xi and Trump the two countries agreed to extend their trade truce by only 2 months to January 2027 and established a hotline to notify each other about AI safety incidents.

The Japanese economy continues to grow at a moderate pace, with GDP growing 1.4% annualised in the second quarter, following 1.8% growth in the first quarter. The September Tankan business confidence index rose to +24 from +22 in June, reaching its highest level since March 2018. Prime Minister Sanae’s fiscal stimulus should continue to support growth in the remainder of this year and into 2027. Core inflation excluding food and energy was 1.9% in August, not a high level compared to the US and Europe, but confirmation that the Japanese economy has escaped from deflation and is close to reaching a sustainable level of 2% inflation.

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Interest rate outlook

The US Federal Reserve (Fed) raised interest rates by 25bp to a target range of 3.75% to 4.0% at the September Federal Open Market Committee (FOMC) meeting. This was as much a response to the persistent overshoot in inflation as to any recent deterioration. Indeed, the effect of tariffs and rising oil prices has been weaker than expected so far. Chairman Kevin Warsh pointed to evidence that the economy has strengthened in recent months and argued that this indicates that policy is not restrictive. He described the hike as “removing a dose of accommodation”. The majority of the “dot plot” forecasts of FOMC members (except Warsh, who does not participate) are for one to at most two further hikes over the next year, but the market is pricing in three more 25bp rate hikes.

September’s rate hike reduced some of the uncertainty surrounding Warsh’s policies. Before becoming Fed chair he spoke about the possible disinflationary impact of AI, which appeared to chime with President Trump’s well-known preference for much lower interest rates. So there have been concerns he would be reluctant to incur the president’s wrath by raising interest rates if the inflation outlook warranted it. On top of this, Warsh’s opposition to forward guidance further raised uncertainty about what the Fed would do. This hike showed that he is willing to raise rates if necessary, though it remains to be seen if he can stomach a series of hikes if it looks necessary to return inflation to 2%, which he has said he is determined to achieve.

The European Central Bank (ECB) raised interest rates from 2.25% to 2.5% in September, in response to the pickup in euro area inflation in recent months. ECB President Lagarde has stated that the central bank will take a data-dependent and meeting-by-meeting approach to policy from here. Further rate hikes are possible but not certain.

The Bank of England (BoE) has been on hold this year while it assesses the impact of the energy price shock deriving from the Iran war. At the September Monetary Policy Committee meeting, the committee noted there has been little evidence so far of second-round effects, but described the inflation risks as tilted to the upside, which suggests that some easing in energy prices will be needed to prevent the Monetary Policy Committee (MPC) from raising rates at its next meeting in November. However, a large upward move in short-term interest rates over the next year looks unlikely.

The Bank of Japan (BoJ) raised interest rates to 1.25% in September, its third hike this year, continuing its policy normalisation from negative rates that prevailed until 2024. The BoJ has become more confident that underlying inflation is converging on a sustainable rate of 2% and the economy no longer needs exceptional monetary stimulus. The international dimension of the move was just as important. The US and Japan intervened jointly to support the yen in July and August when it fell to 40-year lows below 160 to the dollar. US Treasury Secretary Scott Bessent is believed to have put pressure on the Japanese authorities to speed up their monetary tightening in order to strengthen the yen. One of the reasons for the BoJ’s caution has been the opposition of the Takaichi government – which has a strongly reflationary agenda – to rapid rate hikes. A further hike is expected later this year or in early 2027.

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Currency themes and risks

The following themes are intended as food for thought and do not represent a formal currency forecast.

EUR/USD

Recent trend: down (stronger dollar)

Outlook: down

The dollar strengthened in September in the aftermath of the Fed rate hike, reaching its high for the year. The dollar has now recovered around a third of its losses in 2025. The rate hike boosted confidence in the Fed and US policymaking more generally. High energy prices will have a more adverse impact on the European economy than the US and suggest the US will maintain a clear lead in economic growth. Capital inflows into US stocks also remain very strong. A resolution of the Middle East conflict that led energy prices to fall back to pre-war levels – a distant prospect at present – could boost the euro.

GBP/USD

Recent trend: neutral

Outlook: neutral

Sterling rose in July and August, reaching highs of over 1.36. In line with other pairs, it weakened again in September as the dollar rose across the board and ended the quarter virtually unchanged. After the Fed rate hike, there is now a small rate differential in favour of the dollar, but this is not expected to widen over the coming months, and indeed may close if the Bank of England raises rates later this year. For now the US is growing more rapidly than the UK, but signs that the UK is getting to grips with its fiscal problems and lifting its growth and productivity performance – or signs of slower growth or inflation in the US – could boost sterling.

EUR/GBP

Recent trend: down (stronger sterling)

Outlook: down

The euro/sterling currency pair edged down in the third quarter, continuing its gradual decline this year. The euro benefited from the ECB raising interest rates, which enabled the euro to recover from its lows, but was not sufficient to break out of its downtrend. The two economies are growing at roughly the same rate (slightly faster in the UK) and the inflation performance has also largely converged. The two economies are roughly equally exposed to energy prices – both positively and negatively. An improvement in economic performance leading to stronger growth and lower inflation is perhaps marginally more likely in the UK, and would boost sterling. If the Bank of England carries out fewer than the three rate hikes currently anticipated by the markets, sterling could weaken.

Potential upside across asset classes

We have described our current market perspective as “cautious”. This means we believe the downside risks on the markets currently outweigh the upside risks. Nevertheless, there are potential sources of upside across several asset classes. Equity markets still offer important growth opportunities, while less risky assets, such as bonds and cash, may provide resilience in recognition of the background risks.

Bonds are the linchpin asset class to watch at the moment. Fears of rising inflation due to the oil price spike becoming entrenched have been reflected in rising bond yields, with high levels of government debt and possibly bond issuance by hyperscalers a contributing factor. A further rise in yields could drag down the stock markets. However, although it looks some way off at the time of writing, it is also worth considering a more positive scenario. Even if oil prices remain high, the one-off impact will begin to fade next year and, to date, the passthrough to other prices has been muted. If inflation eases in the US and elsewhere faster than expected, bonds could rally for the first time in many years, which would be positive for all financial assets.

In equities, AI remains the dominant theme. There will likely be some big winners in AI (some of whom may be the current tech giants), providing continued potential upside for technology stocks. With broad US and global indices increasingly concentrated in technology, other geographies, industries and small/medium caps may provide additional sources of upside and diversification. However, diversification within equities only offers limited protection in a market downturn.

Gold also continues to have potential supportive factors.  It rose in the third quarter, benefiting from the “debasement” trade (the argument that governments will be forced to debase their currencies to manage their huge debts). Gold will probably perform best if inflation continues to rise, but even if inflation is lower than expected it could gain some support from lower US interest rate expectations, potentially limiting the downside.

Cash may also provide diversification benefits in the current environment, especially given the volatility of bonds and gold.

Conclusion  

The world looks a little less comfortable than it did three months ago. The global economy has remained remarkably resilient and corporate earnings are strong, but higher energy prices, renewed inflation concerns and rising bond yields have changed the balance of risks. That is why our perspective has moved to cautious.

Cautious does not mean pessimistic, nor does it mean that we expect markets to fall. Much depends on what happens to inflation from here. If the effect of higher oil prices remains relatively contained, pressure on central banks and bond markets should eventually ease. If higher costs spread more widely through the economy, further rate rises and higher bond yields could put increasing pressure on markets.

For our families, the market is not the starting point. You are. We already know your circumstances, what you are trying to achieve and what is changing in your world. Our job is to decide whether what is happening in markets actually matters to you. Often it does not.

That is why the question we ask is not simply “What will markets do next?” but “Does anything that has changed affect what this family is trying to achieve?” Sometimes the answer will be yes. Often it will be no. Knowing the difference matters.

Our role is to understand the whole picture, challenge assumptions where necessary, and make sure that investment decisions remain connected to everything else. Markets will change, headlines will change, and occasionally the rocks in the road will get bigger. But unless the destination has changed, there is rarely a good reason to change direction simply because the road has become more difficult…

Mark Estcourt  

CEO

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