Please see the below article from Tatton Investment Management received this morning – 03/08/2026
Learn to make your mind up
We open this week in a positive frame following a week where multi-asset portfolios will have shown either small losses or, more likely, small gains. Diversification proved its worth as bonds, currencies and many high-profile stocks were volatile.
UK equities were a bright spot: the FTSE 100 and the smaller-cap 250 both made new all-time highs, while gilt yields end the week a little lower. Andy Burnham appears to have regained some fiscal credibility, though Capital Economics reckons funding the spending promises implies another £65bn of tax rises – equivalent to Reeves’ first budget move.
The US earnings season is a month old and improving as it goes. Expected Q2 2026 earnings per share growth for the index has risen from 22.3% on 1 July to 27% now. Six of the Magnificent Seven have reported, with Nvidia still to come in the final weeks. Signals on the AI build-out – how the investment is performing, how much more is coming, and who can fund it most cheaply – have been mixed, which is why a previously homogenous group is now showing wide dispersion in share prices. Credit quality remains exceptional, however: the main six sit well above the BBB average rating for corporates generally, leaving considerable room to leverage up before downgrade risk bites. Chip stocks rode the volatility hardest – South Korea’s SK Hynix was down over 25% from the previous week’s close by Wednesday, then rallied more than 35% off that low to finish mathematically unchanged.
Trump has announced of another pause but the Middle East conflict continues to expand rather than resolve, with US missiles hitting Iraqi territory and Ukraine striking Iranian ships in the Caspian Sea. Crude oil prices remain high, but reserves of diesel and other refined products are tight and prices are back at March highs – yet markets have become steadily less sensitive to the news flow.
July’s round of policy meetings ended with no change anywhere. The Bank of England held, with Andrew Bailey striking a dovish tone despite three of nine votes for a rise. The Federal Open Market Committee also held, with three voters seeking a hike and no reference to changing inflation conditions. Kevin Warsh, in his second press conference, was deliberately unhelpful: he declined to shed light on the decision-making process and told markets to make up their own minds. Longer yields rose sharply and the dollar weakened – which we read less as a hawkish signal and more as investors pricing the extra risk of holding long-dated bonds without forward guidance. Jackson Hole on 27-29 August is his opportunity to explain why a little less jawboning is a good thing. What ultimately matters is the Fed’s commitment to the 2% inflation target, not any single policy move.
Growing pains in corporate credit
Corporate credit spreads – the gap between corporate and government bond yields – have widened over recent weeks in both the US and Europe. The move is small and follows a long compression that took spreads to historic lows, but it has been enough to make some investors nervous. Rising spreads are usually associated with weaker growth or recession; we think this move may be something different.
Two things argue against complacency. Higher government bond yields mean total debt costs have risen faster than spreads themselves, and the aggregate figure is skewed by who is borrowing: the biggest, best-rated companies are the ones raising billions for AI infrastructure, and their favourable rates hold the average down even as others pay more. Other signals look more worrying. Credit default swaps on hyperscaler bonds have risen
sharply over the past month, with Oracle hardest hit after S&P Global cut its rating to just above junk. Fitch has also raised its forecast for European loan defaults in 2026, citing “idiosyncratic pressures”.
The unusual feature here is that global growth looks solid – employment is resilient and corporate earnings growth has been strong. AI investment is the driving force, and rapid AI adoption inevitably creates winners and losers. That means more individual defaults even while the aggregate economy is healthy, which is precisely the point Fitch made: greater differentiation between companies, not broad deterioration. Alongside that sits a second story – uncertainty over which AI companies actually come out on top, echoing the recent semiconductor sell-off.
Neither looks systemic today, but either could become so if credit problems tighten financial conditions more broadly. The main risk would be a central bank hike arriving at the same time as spreads widen for unrelated reasons. Kevin Warsh has suggested naturally tighter financial conditions may reduce the need for rate rises, but other Fed officials have sounded more hawkish on the back of strong US growth. For now, wider spreads look like growing pains from AI development rather than the start of a credit crunch.
Who’s afraid of consumer confidence?
US consumer confidence fell again in the Conference Board’s latest survey, extending a long downward trend even as growth data stays strong. The gap between hard data and soft sentiment has become wide enough that many now question whether confidence figures tell us anything at all. We think that is an overreaction: they may not tell us what they used to, but they still tell us something.
There are really two questions – whether the surveys are accurate, and whether consumers genuinely are more pessimistic. Ruchir Sharma, writing in the Financial Times this week, points to falling response rates, political polarisation and social media; Kyla Scanlon’s “vibecession” captures the same idea. The University of Michigan survey has faced particular criticism over its 2024 switch to online-only collection, which some argue increased negative bias and oversampled Democrat voters. Defenders note that online responses correlate well with the old phone data – but as Ryan Cummings and Ernie Tedeschi have pointed out, correlation still allows one series to be materially more skewed than the other.
The debate is mostly American, but the trend is not. French and German consumers have been hit harder than Americans since the pandemic, despite weaker underlying growth in Europe and Japan. A large part of the disconnect is inequality: growth in profits and living standards has been concentrated in the biggest companies and richest households. That is the K-shaped economy, and persistent weakness in consumer confidence is evidence for it – markets began 2026 expecting a rotation away from big tech and AI owners towards more traditional sectors, and confidence data suggests growth is still concentrated at the top.
The broader point is that a correlation breaking down does not make an indicator broken; it means reading it more carefully. The Conference Board survey is more sensitive to job availability, the Michigan survey to the cost of living – which explains their divergence through the post-pandemic inflation period. Interestingly, Michigan has picked up slightly from historic lows while the Conference Board keeps falling, hinting that consumers feel fragile but are less troubled by inflation than headlines suggest. If so, a Federal Reserve rate rise could be what breaks that fragile confidence.
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Alexander James Roberts
03/08/2026