Please see the below article from Tatton Investment Management discussing the latest market outlook, including resilient growth, strong earnings, geopolitical and inflation risks, bond yields and AI-related investment, received this morning – 01/09/2026
Tantrums and other 21st century resolution mechanisms
Last week saw little movement in the main asset classes, with equities a touch higher and the dollar recouping much of last week’s losses. Bond yields rose, mostly in shorter maturities. We open this week with higher energy prices (again) following a resumption of “kinetic” war in the Gulf and another push up in yields, enough to impair equity market confidence slightly.
Kevin Warsh’s Jackson Hole address emphasised returning inflation to target with “speed”, while unwinding some of the “debasement” talk that followed Bessent’s bond market intervention last week. Investors welcomed his apparent preference for the inflation mandate over the employment mandate. Short yields ticked up on the prospect of a September hike; large caps rose while small caps, more exposed to interest costs, fell — not what President Trump wanted after “firing” Jerome Powell. Warsh said nothing on the Fed’s bond holdings; a task force’s recommendations will “come later” and won’t affect the September or November FOMC meetings.
Growth remains resilient while inflation edges back from levels that might force further hikes. Headline inflation is still elevated by the Iran conflict’s fuel price jump — in the UK, regulated energy prices rise 4% from October, softened only by a temporary VAT cut. But secondary effects are milder than feared: developed-world core inflation is now around 2.4%, a “miss” versus the 2% target no worse than the 1997-2019 average.
Given the past decade’s shocks, this resilience is remarkable. One reason: household and corporate debt has fallen substantially relative to economic size, even as government debt rose to fill the demand gap. That balance is now shifting — the private sector has stopped saving and is spending heavily on AI- and defence-related investment, a drive likely to be long-lived if bumpy. Growth keeps surprising to the upside: Germany’s Q2 GDP was revised up to 1% year-on-year, with confidence measures beating forecasts too.
So what could go wrong? Governments could lose faith in the system, try to protect weaker areas, or simply make mistakes. Bessent has promised a fiscal plan to cut the deficit and intervened in bond markets, warning of a US “Doom Loop”. Monday’s “Project Outcast” tariffs on Iran’s trading partners are not that plan — they will be smaller and, by design, less sustainable than 2025’s “Liberation Day” tariffs. The real risk is that Republicans facing the mid-terms resist the squeeze needed to make any plan work.
Elsewhere, Trump’s trade belligerence towards Canada — encouraged by Commerce Secretary Lutnick — looks resolvable despite unsettling swing-state voters on both sides of the border. Putin-aligned voices have floated “tactical nuclear” rhetoric over Ukraine, but such threats have surfaced before without escalation; brinkmanship raises both the perceived risk and the incentive to de-escalate. Geopolitics rarely moves markets as much as headlines suggest, and stated intentions rarely match outcomes.
Back to School Outlook 2026 – overview
Economic conditions remain supportive heading into autumn. Despite geopolitical noise, global growth and corporate profits have been strong in 2026, powering investment returns, and we expect that strength to continue into 2027, driven mainly by private sector investment.
Clients remain worried — about a tech bubble, an inflation surge, and UK wealth taxes. These concerns are reasonable but have persisted for most of the year without derailing markets, which have stayed resilient on the back of strong corporate profit growth.
Middle East tensions are a continuing risk to the medium-term outlook, with markets oscillating between calm and concern over oil and gas supplies through the Strait of Hormuz. Tighter supply has been offset by weaker global oil demand, particularly from China, and both sides retain strong incentives for a lasting ceasefire. Investors have grown somewhat numb to the back-and-forth, though continued disruption into winter would hurt more, especially in Europe.
Business sentiment is strong almost everywhere, with manufacturing rebounding as AI infrastructure spending offsets higher energy costs. Government and defence spending, particularly in Europe, add further support. Households — especially lower earners — remain squeezed and confidence is subdued, though employment has held up and feared AI-related job losses haven’t materialised.
Core inflation remains well contained, easing pressure on central banks to raise rates and supporting markets. AI infrastructure spending, fuelled by intense hyperscaler capital raising, should keep powering growth and earnings. But strong hyperscaler bond issuance is crowding out other borrowers, pushing up yields for lower-rated credit and government debt — a dynamic that, usefully, keeps the broader economy from overheating even as capital demand stays high.
Investment may be concentrated in a handful of large tech firms, but corporate profits are much more broadly spread and look healthy, suggesting growth is well founded and likely to continue, all else being equal.
Regional outlook summary
US
US corporate earnings remain strong, driven by AI infrastructure spending, though gains are skewed — non-tech firms face rising borrowing costs from hyperscaler demand. Consumers have stayed resilient to oil prices. Tariffs have eased, though a combative stance towards Canada may resurface ahead of midterms. Fed policy remains the bigger driver; a cut looks more likely than a hike, though Warsh’s plan to reduce central bank liquidity is a bigger risk.
UK
UK growth has surprised positively, led by strong private investment despite gloomy sentiment surveys. Valuations remain cheap versus the US, attracting private equity interest. Persistently high gilt yields — a structural issue — limit fiscal room, constraining PM Burnham’s spending plans. Contained core inflation helps, but gilts stay vulnerable to volatile international flows.
Europe
Growth expectations have eased slightly as the defence-spending boost matures, though earnings, especially banks’, have surprised positively. Low gas storage leaves Europe exposed if the Iran conflict disrupts supply into winter. Domestic politics, notably France’s 2027 election, is a bigger threat than tension with Washington.
Japan
The investment case remains strong on low labour costs and improved corporate governance, but persistent yen weakness — despite a large current account surplus — is a growing concern. Coordinated intervention has had limited lasting effect. A stronger yen could trigger self-reinforcing capital repatriation by Japanese investors.
China
China remains the outlier, with deflationary pressure from overproduction and weak consumer demand. Fiscal policy has tightened rather than eased, hurting profits. Late-August hints of easing offer hope, though seasonal spending patterns may explain much of it. US trade tensions add risk ahead of midterms.
Emerging Markets
EM equity performance has been dominated by AI-linked chip stocks (TSMC, Samsung, SK Hynix), masking weakness in China and India. Broader EM performance hinges on easing energy prices and a genuine Chinese policy pivot.
Asset classes
Equities
Strong corporate earnings should keep supporting stock prices into next year, with margins especially strong in US tech names driving the AI buildout. Earnings growth has outpaced share prices for AI firms this year, so valuations have fallen despite healthy returns — arguing against a classic bubble, even if some gains (like Amazon’s and Alphabet’s from AI investment stakes) look somewhat circular. Fundamentals remain strong, and downside looks limited while that continues.
One risk is currency volatility: growing foreign ownership of equities means exchange-rate swings could raise perceived risk and prompt selling, though we see this as unlikely.
The bigger risk is bonds. Historically high real yields make equities look less attractive by comparison — valuations aren’t cheap once adjusted for that. Capital hasn’t yet rotated out of stocks, as holders remain entrenched, but rising yields could change that. The equity outlook ultimately hinges on the bond outlook.
Bonds
Shorter-dated yields broadly match the medium-term growth and inflation outlook, but longer-dated yields have risen further than expected. Investors are effectively paid more than the economy’s likely return just for holding government debt, even as growth stays decent and inflation falls.
The problem is capital demand: indebted governments compete with AI firms racing to raise debt, and supply keeps outrunning demand. Yields likely won’t fall until investment returns drop below borrowing costs.
The UK is a concern, but France and the US worry us more — both have high debt and rising deficits with little will to fix them, risking a vicious fiscal-premium cycle. Bond vigilantes could emerge anywhere given ample supply; a US “Liz Truss moment” would hit markets harder than the UK’s in 2022.
That isn’t our base case — selling bonds amid falling inflation looks unattractive. The outlook stays mixed, with pockets of attractive return for diversified portfolios.
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Marcus Blenkinsop
1st September 2026