Please see the below article from Tatton Investment Management discussing inflation pressures, rising bond yields, and growing AI-driven capital demand, alongside fiscal and China growth concerns, received this morning – 26/05/2026.
Assuming growth will win
Global stocks and bonds have moved higher again after ending last week positively. Non-US markets led the gains and have maintained the outperformance at the start of this week. Bond markets were stronger, helped by falling energy prices following the progress towards peace around Iran and weaker economic data. Nevertheless, a sense of fragility remains. US tech stocks underperformed for the first time since March — despite Nvidia posting an eye-watering 85% revenue jump and one of the largest corporate payouts ever.
The good news was priced in, a pattern Nvidia shareholders are all too familiar with: the chipmaker’s share price usually drifts after earnings before rebuilding momentum ahead of the next announcement, the classic ‘buy the rumour, sell the fact’.
More broadly, tech companies are competing for capital. Big tech companies are increasingly issuing equity to fund the AI investment spree, not just bonds. That’s squeezing the cash once used for buybacks. The most striking example is SpaceX’s upcoming IPO, seeking to raise around $75bn at a valuation of up to $1.75tn — remarkable for a company generating just $19bn in revenue with modest growth.
OpenAI and Anthropic are expected to follow, and analysts estimate that we could see around $210bn of fresh equity added to the market. We haven’t seen such intense capital demand, relative to market size, since the dotcom bubble. Even if you believe these companies’ profit potential, equity issuance makes the balance of buyers and sellers more challenging.
AI’s demand for energy and materials is also boosting inflation. Even new Fed chair Warsh — a firm believer in AI productivity — will have a hard time arguing for lower rates in this environment. Betting markets now suggest a US rate rise is more likely than a cut before year-end.
Inflation has bumped up bond yields (see below), which are weighing on equity valuations. But higher yields are increasingly attractive for long-term investors. Even UK gilt auctions are being met with strong demand, and calmer bond markets are already giving UK equities a lift.
Long-maturity bonds suffer from fiscal risk
Bond investors have had a rough time. The oil shock raised inflation and interest rate expectations, triggering a sell-off in government bonds. Long-term yields were hit hardest, despite the fact that energy prices aren’t expected to remain elevated over the long run.
The ‘term premium’ (the extra return investors demand for lending over the long term) has risen. That doesn’t make much sense from a growth perspective (long-term real yields should reflect growth) or an inflation perspective (high inflation won’t last for 20 years).
One factor is the AI capex spree sapping capital from markets. Another is that the Iran war is a fiscal risk — forcing governments to spend when debt and deficits are already high. That makes bond investors nervous about government finances.
UK gilts have fared worst. Structural issues — a higher share of inflation-linked bonds, skewed long-term issuance, and the Bank of England still selling bonds from its QE stockpile — make gilts uniquely vulnerable. Political uncertainty around a potential Labour leadership change has rattled traders further, though recent gilt auctions suggest bond managers do see value.
High bond yields are attractive for investors. Barring an outright default, buying long-term gilts can lock in strong returns for decades. UK growth is holding up, inflation undershot in April, and the BoE is set to end net bond sales later this year. Unfortunately, most investors expect more volatility first — and may wait for yields to rise further before committing.
Meanwhile, higher bond yields aren’t tempting equity investors. US retail investors remain entrenched in stocks, buoyed by strong tech earnings and price momentum. A meaningful rotation back into bonds will likely need a credible threat to corporate earnings growth — something that’s been conspicuously absent in the US, even amid tariffs, AI disruption, and geopolitical shocks. But even without that rotation, strong returns are available for bond investors.
China stalls again
China’s economy stumbled in April, with retail sales growth slowing to just 0.2% year-on-year – far short of the 2% forecast and the weakest reading since 2022. Industrial production rose 4.1%, but that was well below the 6% expected. Most alarming was fixed asset investment, which fell 1.6% from the start of 2026 to April, against expectations of 1.7% growth.
The National Bureau of Statistics blamed “complex and severe” international conditions, referencing higher oil prices from the US and Israel’s war on Iran. Until now, China’s ample oil reserves and export bans made the economy look surprisingly resilient – but the oil shock is now clearly hitting.
The government must do more to hit growth targets, but investors shouldn’t overreact. China’s growth data follows a well-established seasonal pattern: heavy stimulus at the start of the year, a step-back in the middle quarters, then renewed support heading into year-end. A degree of softness in April is not unusual.
There is a deeper structural concern, however. Beijing’s policy toolkit is built for boosting production and exports, rather than domestic consumption. That’s a key reason the post-property-collapse slump has lasted so long. Consumption measures tend not to last: the consumer goods trade-in subsidy has been scaled back, electric vehicle incentives have expired, and the People’s Bank of China is tightening liquidity.
The export focus is also a diplomatic problem. China’s record $1.19tn trade surplus in 2025 is not only angering Donald Trump; it’s stoking friction with the EU and even ASEAN neighbours.
Tech is the one bright spot, with Chinese chipmaker stocks surging again this week, propelled by Beijing’s investment in chip self-sufficiency. If policymakers can pair that pro-tech drive with a more serious commitment to boosting consumption, they could address both China’s diplomatic tensions and its domestic growth problem.
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Alexander James Roberts
26/05/2026