Please see the below article from Tatton Investment Management discussing calm equity markets, AI-related earnings, stronger UK growth, yen intervention, and concerns over the sustainability of US margin expansion, received this morning – 17/08/2026.
Hot weather, chilled markets
Equity markets had another decent week, led by US tech stocks and AI-related earnings. Sentiment, more than fundamentals, explains the shift from July’s volatility to August’s calm: markets have stayed liquid through the summer lull, and leveraged retail investors were flushed out during July’s chip-stock sell-off. Worries are still there, in the main because long bond yields are slowly rising and unresponsive to the slow decline in global core inflation.
Two stories drove last week’s AI outperformance. The FT reported that Anthropic is seeking a $2 trillion IPO valuation, likely in October, beating SpaceX’s record. Meanwhile, CoreWeave’s Q2 results beat revenue forecasts, even as losses widened on higher capital spending. CoreWeave shares jumped 19%. Where investors punished the AI hyperscalers for similar spending last month, they now reward it. We think that’s down to improved liquidity, partly from the US-Japan yen intervention, which has lowered volatility and made investors more comfortable holding risk assets.
UK markets didn’t share the optimism, despite stronger-than-expected growth in June and surprisingly strong growth for Q2 of 1.7% (when annualised) which was powered, encouragingly, by business investment. Some commentators dismissed this as a one-off rebound, but we’d note the UK’s data has outpaced its narrative for a while now. Indeed, growth may be too strong, widening the trade deficit. Overall, though, the news is positive – activity looks reasonably well supported. 2026 is on course to exceed growth of 1.5% despite the extreme heat probably having shaved a few tenths of a percentage point from the total.
Risks remain despite the good mood. The IEA raised its 2026 oil shortfall estimate this week. Markets have grown numb to such warnings, but the underlying situation hasn’t gone away. Numbness cuts both ways: it could also blunt any relief rally if oil supplies improved. The next real test is Jackson Hole later this month, where new Fed Chair Kevin Warsh may signal how he plans to wean markets off central bank liquidity. Given that liquidity is currently buoying investor sentiment, his comments will matter a great deal.
Do currency interventions work?
August’s yen intervention was historic – the first joint US-Japan effort to support the currency in nearly 30 years, forced by the yen’s persistent slide against the dollar. The yen has already unwound some of its gains, so we’ve been looking at past interventions to gauge how long this one might last.
Currency intervention really only began with the 1971 Nixon shock (currencies weren’t free-floating before) and the IMF has allowed it since to counter “disorderly conditions”. The US, unhappy with its trade deficit against G5 nations, struck the 1985 Plaza Accord to weaken the dollar. The plan worked so well that the 1987 Louvre Accord was needed to stop the dollar’s slide, but Louvre couldn’t stop the yen’s rise.
Investors didn’t believe the Bank of Japan could control exchange rates, so piled into Japanese bonds, compressing yields and eventually inflating Japan’s equity bubble, whose collapse triggered Japan’s Lost Decades. It’s a reminder that standing in the way of structural imbalances is exceptionally hard, and can bring serious unintended consequences.
The problem now is yen weakness. Japan’s record current account surplus makes the currency look cheap, but investors won’t buy it, partly because Japanese holders of foreign assets prefer to reinvest abroad rather than repatriate their income. For the intervention to mark a turning point, Japanese investors need to start buying yen-denominated assets. Strong Japanese equities and more attractive bond yields should help, though only if yields elsewhere stop looking better.
The US, meanwhile, wants a weaker dollar over the long term, but Japan’s experience shows intervention cannot beat investor demand. We suspect this month’s action was more uncoordinated skin-saving than strategy – though the scale of the imbalance means it could yet force more coordinated policy, and perhaps a new Plaza Accord, in the weeks ahead.
Beware US margin expansion
US earnings growth looks strong, but the composition of that growth matters too. S&P 500 companies are expected to post around 24% earnings growth in 2026, yet only 9.6 percentage points of that comes from revenue growth. The rest is margin expansion and, as an AllianceBernstein research paper argued last month, margin growth is a less sustainable profit driver than rising sales.
Higher revenues reflect genuine demand and grow the overall pie; margin gains take a larger slice of the pie. They often stem from efficiencies or one-off benefits that are harder to repeat, and history shows strong margin growth tends to be followed by compression. Revenue growth itself boosts margins, and index-level margin growth can sometimes just result from share price gains for the higher-margin companies. But neither of those factors fully explain what’s happening now: broad-based margin expansion at the operating level too.
It might sound odd to complain about profitable companies. Corporate efficiency has long underpinned US outperformance – and we’ve argued that margin expansion is central to Japan’s recent positivity, for example. The difference is that US margins are already historically high and can’t expand indefinitely. High margins attract competition, as we’re already seeing among AI chipmakers, where booming profitability is drawing in new entrants and supply capacity.
There are reasons margins could stay elevated longer than usual, particularly if AI genuinely lifts productivity across the economy – though we’re still waiting for firm evidence of that. Big tech’s enormous AI infrastructure spending, aimed at fending off competitors, also blunts the usual competitive pressure on margins.
But politics are also a constraint. Companies that grow profits by squeezing customers or suppliers attract regulatory and public hostility. Affordability is already a major issue ahead of the US midterms, so unpopular datacentre-driven margin growth looks vulnerable. One way or another, companies cannot keep expanding their profit margins forever.
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Marcus Blenkinsop
17th August 2026