Staying Selective
This leads to our second takeaway: remain selective within AI and monitor where value is being created. Dispersion is widening, with firms linked to scarce AI bottlenecks—such as power, semiconductors, and data‑center infrastructure—outpacing those further downstream. Meanwhile, hyperscalers are depleting cash reserves and increasingly turning to debt. U.S. investment‑grade bond issuance by hyperscalers has surpassed $100 billion this year, more than double the 2025 total. Higher interest rates, growing financing demands, and sizable AI IPOs could further strain investor appetite, while cheaper, open‑source models are undermining the economics of frontier‑model developers. We look past the AI model race to the scarce resources that underpin the build‑out.
Our third lesson: markets have shown remarkable resilience despite geopolitical shocks—but that is no cause for complacency. Geopolitical fragmentation intensifies scarcity and reinforces our higher‑for‑longer outlook, although easing tensions could alleviate some yield pressure. The Strait of Hormuz remains partially closed, constraining a vital corridor for global energy supplies, and U.S.–Canada trade tensions have flared again. Nations and companies are pursuing resilience by reshuffling suppliers, production, and trade routes. Yet adaptation can postpone or relocate where risks emerge, creating new winners and losers.
Our Bottom Line
Higher rates, the AI expansion, and geopolitical fragmentation are together shaping the new economic regime. We maintain a pro‑risk stance with an overweight to U.S. equities, while favoring durable income and companies positioned around scarcity.
