Increasing geopolitical fragmentation remains the dominant macro theme. Despite disruption to Gulf energy flows, the Russia-Ukraine war, rising fiscal pressures and ongoing supply-chain stress, developed-market growth has remained more resilient than expected<\/strong>, and risk assets continue to perform well. The global economy remains increasingly bifurcated between AI-driven investment strength and a consumer sector facing higher fuel, food, freight and borrowing costs<\/strong>.<\/p>\n\n\n\n Consensus expectations remain cautious. A recent survey of chief economists showed 94% expect higher inflation in H2, 89% expect slower growth, and 21% anticipate a recession. Energy and fertiliser supply disruptions remain the primary concern. AI optimism remains intact, but concerns are rising around implementation costs, infrastructure requirements and delayed productivity benefits.<\/p>\n\n\n\n The Gulf remains the key macro variable. Alternative export routes have reduced estimated supply disruption from roughly 20M b\/d at the peak of the Strait of Hormuz closure to around 7M b\/d, but global energy markets remain tight<\/strong>. Negotiations between the US and Iran continue, although no agreement has been finalised. Temporary mitigation measures, including strategic reserve releases and floating inventories, may begin to expire during the summer, creating upside risks for oil prices if negotiations fail. Even with a ceasefire framework, physical energy flows are unlikely to normalise immediately due to shipping, inventory, and infrastructure constraints.<\/p>\n\n\n\n US growth remains positive but increasingly dependent on technology investment. Q1 GDP was revised down to 1.6% annualised from 2.0%<\/strong>, while personal consumption was revised lower to 1.4%. Consumer spending rose 0.5% in April, but real spending increased only 0.1%, and personal income was flat. Inflation-adjusted disposable incomes have now declined for several consecutive months, pushing the savings rate to a near four-year low<\/strong>. Despite slower growth, corporate profits rose 3.3% QoQ and 17% YoY, the strongest annual increase since late 2021, reinforcing the divergence between corporate earnings and household conditions. New home sales fell 6.2% in April to 622K versus 660K expected, while claims rose to 215K. Richmond Fed manufacturing rose to 13 from 3, well above expectations. Excluding technology-related investment, domestic demand remains significantly weaker. The divergence between corporate and household outcomes continues to widen. Real wages have risen only 3% since 2019, while corporate profits have increased by roughly 50%, helping to explain resilient earnings, weak consumer sentiment, and persistent political dissatisfaction. Aggregate labour income growth remains near 3.5%, helping support consumption despite weaker real incomes and rising living costs. Hiring remains concentrated in healthcare, education and leisure-related sectors rather than broad-based cyclical expansion.<\/p>\n\n\n\n Inflation remains the primary policy constraint. Headline PCE rose to 3.8% YoY from 3.5%, while core PCE increased to 3.3% from 3.2%. France accelerated to 2.8%, Italy to 3.3% and Spain to 3.6%, with Eurozone inflation expected to move further above 3%. Inflation pressures are broadening beyond energy, with freight, trade frictions and AI-related investment contributing to cost pressures. Core services ex-housing inflation remains around 3.4% and has accelerated during 2026, reinforcing concerns that underlying inflation pressures remain inconsistent with the Fed’s target. Market pricing has shifted from anticipated easing toward a growing debate over whether policy rates may need to remain restrictive for longer or potentially move higher if inflation fails to moderate.<\/p>\n\n\n\n Europe remains weak. France contracted 0.1% QoQ in Q1, Germany grew 0.3%, and Italy grew 0.3%, although both Germany and Italy relied heavily on net exports while domestic demand remained subdued. Business and consumer confidence in France continues to deteriorate as higher energy costs weigh on demand, margins and pricing expectations. The German fiscal programme remains the primary potential support for regional growth, although implementation remains uneven. Canada entered a technical recession, with Q1 GDP contracting 0.1% annualised following a revised 1.0% contraction in Q4.<\/p>\n\n\n\n Asia remains highly divergent. Japan continues to show improving retail sales, industrial production and consumer confidence, while Tokyo CPI eased to 1.4%. China reported industrial profit growth of 18.2% YoY but continues to ease policy, allowing key lending rates to decline to record lows as growth momentum slows. Taiwan remains the clearest beneficiary of the AI cycle, with Q1 GDP growth of 14.6%, a 2026 GDP forecast of 9.6% and export growth projected at 39.8%, the strongest in 50 years. Australia also reported record data-centre investment of A$8.7B in Q1, nearly double Q4 levels, highlighting the scale of ongoing AI infrastructure spending.<\/p>\n\n\n\n The macro setup remains characterised by slowing growth, persistent inflation and increasing dispersion across regions and sectors. The key risk remains energy. A durable Gulf resolution would ease inflation pressures and support growth expectations, while prolonged disruption would likely produce a renewed inflation shock, tighter financial conditions and weaker global growth.<\/p>\n\n\n\n Attention now shifts to next week’s busy macroeconomic calendar that includes ISM Manufacturing, JOLTS job openings, ADP employment, ISM Services, and the May employment report. Consensus expects payroll growth to slow to approximately 100K, unemployment to remain at 4.3%, and wage growth to increase modestly to 0.3% m\/m. <\/p>\n\n\n\n Treasury markets posted their strongest week since the Iran conflict began<\/strong>, with the Bloomberg Treasury Index gaining roughly 0.7%. Yields declined across the curve<\/strong> as oil prices retreated on growing expectations of a U.S.-Iran ceasefire and eventual reopening of the Strait of Hormuz. The 2Y Treasury yield fell 6 bp to roughly 4.02%<\/strong>, the 5Y declined 8-9 bp to 4.10%, the 10Y fell 12 bp to 4.45%<\/strong>, and the 30Y declined 9 bp to 4.99%<\/strong>. Despite persistent hawkish Fed rhetoric, futures markets reduced pricing for additional tightening to roughly 15 bp over the next year as immediate energy-related inflation risks eased.<\/p>\n\n\n\n Inflation remained the dominant driver of rate pricing. The April PCE release reinforced concerns that underlying price pressures remain sticky, causing the 2s10s curve to briefly flatten to 42 bp<\/strong>, its flattest level since July 2025, before recovering toward 44 bp into the weekend. The 5s30s curve also compressed to 81 bp<\/strong>, the narrowest level since May 2025, before steepening again to 84.5 bp as investors continued to price in a prolonged higher-for-longer policy regime under incoming Fed Chair Kevin Warsh. Despite periodic discussion of additional tightening, markets continued to view the hurdle for Fed hikes as high<\/strong>, particularly as easing geopolitical risks and lower oil prices reduced immediate inflation concerns.<\/p>\n\n\n\n The bond market itself continues to perform part of the Fed’s tightening function. Since the start of the Iran conflict, rising term premium and higher long-end yields have delivered roughly 75 bp of additional tightening in financial conditions without direct action from the Federal Reserve. Structural concerns surrounding persistent fiscal deficits, elevated Treasury issuance, reduced central-bank demand, and continued AI-related capital spending remain important contributors to upward pressure on real yields. Many strategists now argue that elevated real yields, rather than inflation expectations alone, are the primary driver of higher long-end borrowing costs.<\/p>\n\n\n\n Treasury auctions provided further evidence of healthy demand for duration<\/strong> at current yield levels. The Treasury successfully sold $69B of 2Y notes, $70B of 5Y notes, and $44B of 7Y notes during the week. The 7Y auction was particularly strong, with indirect bidders taking 78.4% of the offering, signalling robust overseas demand despite yields remaining near cycle highs. The long end nevertheless underperformed the front end and belly, with the 30Y yield ending the week just below 5%, reflecting continued concerns around supply, deficits, and long-term inflation risks.<\/p>\n\n\n\n Positioning data highlighted a significant shift beneath the surface. CFTC data showed asset managers aggressively reducing Treasury futures longs, unwinding approximately $33.1M per basis point of duration exposure across the curve, while hedge funds covered sizeable 5Y short positions. At the same time, longer-term investors were reported buyers of Treasury funds, suggesting growing willingness to lock in yields near multi-year highs even as tactical investors reduced exposure<\/strong>. The Treasury basis trade also continued to contract from earlier record levels, reflecting reduced directional conviction across rates markets.<\/p>\n\n\n\n Geopolitical developments remain the most important near-term catalyst. Treasury yields and oil prices have moved largely in lockstep since late February<\/strong>, and some estimates suggest a full reopening of the Strait of Hormuz could lower 10Y yields by 10-15 bp as energy risk premia unwind. However, the broader debate has shifted beyond oil. While lower energy prices may provide short-term relief, investors remain focused on whether underlying inflation pressures, elevated term premia, and structural supply concerns will keep long-end yields higher than in previous cycles. As a result, rate markets continue to move away from pricing imminent easing and toward a prolonged higher-for-longer regime, even as Treasury valuations become increasingly attractive to long-term buyers.<\/p>\n\n\n\n <\/p>\n\n\n\n Credit markets remained well supported despite heavy issuance, with investors still prioritising all-in yield over spread valuation. US IG supply again exceeded expectations, led by Goldman Sachs\u2019 $9B deal, with National Australia Bank and Bank of Montreal also active. High-yield issuance closed May at $27B<\/strong>, down from April\u2019s surge but still consistent with healthy demand. Demand for quality credit remains global, with US, European and Asian buyers absorbing large volumes even as spreads sit near historically tight levels.<\/p>\n\n\n\n The main credit theme remains AI-related financing. Hyperscalers and AI infrastructure issuers are increasingly tapping every available funding channel, <\/strong>including IG, HY, loans, ABS, CMBS, private credit and foreign-currency markets. Apollo and Blackstone are working to bring additional investors into a $36B debt package for Anthropic, one of the largest private credit deals on record<\/strong>, to fund Google custom chips and accelerate compute capacity. Anthropic\u2019s revenue run-rate reportedly rose from $9B at the start of the year to $47B, but the company lacks hyperscaler-level FCF, making debt financing central to its capacity race.<\/p>\n\n\n\n AI capex is becoming a major concentration risk for credit. Hyperscalers are expected to spend ~$600B on AI capex this year<\/strong>, with data centres, chip finance and power now dominant themes across credit markets. Amazon\u2019s recent $37B bond deal reportedly drew $127B of demand<\/strong>, underscoring the strength of the bid, but investors are starting to impose issuer limits and aggregate exposure across public, private and multi-currency markets. Barclays noted that large investors increasingly treat public bonds, private credit, and structured exposures as a single AI risk bucket, which could eventually reduce appetite for incremental supply.<\/p>\n\n\n\n IG spreads remain extremely tight but technically supported. Some investors see scope for US corporate spreads to move into the 60s, levels last seen in the mid-1990s, driven by strong earnings, yield demand above 5%, and resilient bond performance even when equities react negatively to earnings misses. Large, high-quality issuers such as Microsoft trade at exceptionally tight levels, with 10Y credit spreads in the 30s<\/strong>. Long-end demand also remains strong from pensions and insurance buyers focused on entry yields of 5.5\u20135.7% rather than mark-to-market volatility.<\/p>\n\n\n\n High yield is more fragile beneath the surface. PIMCO warned that the market appears complacent, yet dispersion remains high. Overall HY yields are around 7.5%, yet more than half, possibly closer to 75%, trade at 5.5\u20136%, while roughly 25% trade above 10%. This bifurcation suggests headline spreads understate underlying stress and reinforces the need for issuer selection. Software loans are a specific pressure point, given large exposure in CLOs and BDCs and rising concern that AI could impair future repayment<\/strong> capacity for parts of the sector.<\/p>\n\n\n\n Macro spillover remains contained for now, but risks are asymmetric. Credit is still being driven more by earnings, issuance absorption and AI capex than by rates. The 10Y Treasury moved lower to 4.43%, with oil retreating to around $92\/bbl, easing some pressure on duration. However, higher oil prices remain a key risk of inflation, curve steepening, and lower real demand<\/strong>. A single Fed hike would likely be manageable, but tighter financing conditions combined with weaker growth would be more damaging, similar to late 2018. With AI now a major driver of growth, earnings, capex and issuance, credit market diversification is increasingly thinner than headline index metrics imply.<\/p>\n\n\n\n U.S. equities extended their advance, with the Dow +0.90%<\/strong>, S&P 500 +1.43%<\/strong>, Nasdaq +2.39%<\/strong>, and Russell 2000 +1.75%<\/strong>. The S&P 500 recorded its ninth consecutive weekly gain while the Nasdaq finished higher for the eighth week in the last nine, with both indices closing at fresh record highs. Leadership remained concentrated in growth, momentum, and AI-linked exposures<\/strong> as investors responded positively to easing geopolitical concerns, falling oil prices, lower yields, and another strong batch of technology earnings. Market breadth improved modestly, although performance remained heavily skewed toward large-cap growth and semiconductor-related beneficiaries.<\/p>\n\n\n\n Technology (+4.56%)<\/strong> was by far the strongest-performing sector, followed by consumer discretionary (+1.50%), materials (+1.20%), and industrials (+0.79%). Consumer staples (-3.24%), energy (-5.43%), utilities (-2.09%)<\/strong>, real estate (-1.36%), financials (-0.70%), healthcare (-0.28%), and communication services (+0.02%) lagged as investors rotated away from defensive sectors. Semiconductors continued to lead, with the Philadelphia Semiconductor Index (SOX) rising 5.1%, while memory stocks emerged as the week’s standout theme<\/strong>. Outside technology, strength was also evident across software, internet companies, airlines, cruise operators, trucking, logistics, copper, aluminium, and homebuilders, with the Homebuilders ETF (XHB) gaining 2.6%.<\/p>\n\n\n\n Momentum continued to dominate performance. The momentum factor<\/strong> (MTUM +4.0%<\/strong>) outperformed the S&P 500 for the fifth time in six weeks, underscoring continued concentration among leadership stocks<\/strong>. Microsoft (+7.6%)<\/strong> was among the largest contributors to index gains, while AI enthusiasm remained a powerful tailwind across the semiconductor and infrastructure ecosystem. Micron (+29.3%) surged following stronger-than-expected memory pricing trends<\/strong>, becoming the latest company to surpass a $1T market capitalisation. The AI narrative continued to broaden beyond valuation expansion and remained increasingly supported by earnings delivery. Strategists noted the current AI cycle resembles an earnings boom more than a speculative multiple-expansion bubble, with AI infrastructure spending translating into tangible revenue growth across semiconductors, servers, networking equipment, data centres, software, and cloud platforms. Software and hardware investment reached a record 4.9% of U.S. GDP during Q1, highlighting both the scale of the opportunity and the market’s growing dependence on continued AI-related capital expenditure.<\/p>\n\n\n\n The rally further increased market concentration. Semiconductor companies now represent approximately 18% of the S&P 500, the highest industry concentration on record<\/strong>. While AI demand continues to support earnings revisions and capital spending, the index’s growing dependence on a narrow group of AI beneficiaries makes broader market performance increasingly sensitive to any disappointment in demand, pricing, or investment activity. Investors also focused on the broader AI ecosystem after Anthropic reportedly raised $65B at a $965B valuation and generated approximately $45B in annual recurring revenue, exceeding OpenAI’s estimates. At the same time, concerns around rising AI infrastructure costs gained attention as enterprises increasingly monitor and manage token consumption, though there is little evidence yet that spending discipline is slowing AI adoption.<\/p>\n\n\n\n The concentration is becoming increasingly visible in index-level earnings data<\/strong>. According to FactSet, forward 12-month S&P 500 EPS estimates have risen 10.3% since the start of 2026, while forward sales-per-share estimates have increased only 4.7%, implying approximately 70 bps of forward margin expansion and pushing aggregate profit margins toward record highs. More importantly, the earnings revisions have been highly concentrated. Information technology and energy have accounted for the overwhelming majority of earnings upgrades, while more than 70% of the increase in 2026 S&P 500 EPS estimates has come from just six companies<\/strong>: Nvidia, Micron, Broadcom, SanDisk, Exxon, and Chevron.<\/p>\n\n\n\n The composition of those revisions is particularly important. A significant portion of the energy sector’s contribution appears linked to higher commodity prices following the conflict in Iran. Should oil prices normalise as geopolitical tensions ease, some of those earnings upgrades could reverse. This leaves semiconductors as the dominant source of structural earnings growth within the index<\/strong>. As a result, record S&P 500 profit margins are increasingly being driven by a narrow group of AI-related beneficiaries rather than broad-based corporate profitability.<\/p>\n\n\n\n Corporate earnings reinforced the constructive AI narrative. Software results helped alleviate concerns surrounding a potential “SaaSpocalypse”,<\/strong> with Snowflake (+48.4%)<\/strong> delivering one of the strongest earnings reactions of the year after forecasting 31% revenue growth driven by demand for AI-enabled data analytics. Dell (+42.6%)<\/strong> also surged after guiding fiscal-year revenue significantly above expectations on strength in AI-optimised server demand, including expectations for approximately $60B of AI server revenue by FY2027. Additional AI-related winners included NetApp (+25.1%), Dycom (+24.0%), Marvell (+4.4%), and Modine (+7.1%), which secured more than $4B of cooling-solution commitments from a major data-centre customer. Qualcomm (+5.4%) announced a new AI chip partnership with ByteDance, further highlighting the expansion of AI investment beyond the hyperscaler ecosystem.<\/p>\n\n\n\n Elsewhere, Ford (+16.8%)<\/strong> rallied on enthusiasm surrounding its battery strategy. Healthcare M&A remained active, with Eli Lilly (+3.8%) agreeing to acquire three vaccine companies for up to $3.8B. Caesars Entertainment (+2.0%) agreed to be acquired by Fertitta Entertainment for $31 per share, while IFF (+1.0%) announced the sale of its food ingredients business for approximately $3.8B.<\/p>\n\n\n\n Consumer-related earnings presented a more mixed picture. Positive surprises from Best Buy (+26.5%)<\/strong> and Kohl’s (+10.0%)<\/strong> suggested pockets of resilience remain, while weaker reactions in Gap (-9.6%) and American Eagle (-4.4%)<\/strong> highlighted ongoing pressure on lower-income consumers. Recent economic data also pointed to moderation in household spending, with real personal consumption growth slowing and the savings rate falling to its lowest level in four years. While the consumer remains supportive of overall economic growth, evidence of increasing strain continues to emerge beneath the surface.<\/p>\n\n\n\n Equity sentiment remains constructive, supported by falling geopolitical risk, resilient earnings, and continued AI-driven investment. However, leadership remains narrow, concentration risk continues to rise, and several strategists have highlighted increasingly stretched market conditions. The S&P 500 has advanced roughly 19% from its March lows in only 41 trading sessions, approaching historically rare two-standard-deviation rallies. Goldman Sachs raised its year-end S&P 500 target to 8,000<\/strong> from 7,600 during the week, joining several major strategists who have upgraded forecasts following stronger-than-expected earnings growth<\/strong> and continued AI-related investment.<\/p>\n\n\n\n Despite growing concerns about AI-related excesses, many investors argue the current cycle differs materially from the dot-com era. Rather than being driven primarily by multiple expansion, the rally is increasingly supported by rapid earnings growth across semiconductors, servers, networking equipment, software, cloud infrastructure, and data centres. In that sense, the current AI cycle increasingly resembles an earnings boom rather than a traditional valuation bubble. However, history suggests some of the most severe equity drawdowns emerge from earnings bubbles rather than valuation bubbles. Banks and homebuilders ahead of the Global Financial Crisis, commodity producers during prior supercycles, pandemic beneficiaries, and multiple semiconductor cycles all experienced periods in which surging profits kept valuations seemingly reasonable even as underlying fundamentals became increasingly vulnerable to reversal.<\/p>\n\n\n\n Semiconductor<\/strong> investors are particularly mindful of this history. The industry has experienced repeated boom-bust cycles over the last three decades<\/strong>, including the 1995 memory cycle, the 2000 telecom and internet buildout, the 2018 memory boom, and the post-pandemic electronics surge. In each case, shortages, pricing power, and aggressive capital spending drove earnings sharply higher before new capacity eventually pressured margins and profitability<\/strong>. The key question facing investors today is whether AI-driven semiconductor profits represent a durable structural shift in global computing demand or a period of supernormal profitability that will eventually attract competition, capacity expansion, and margin normalisation.<\/p>\n\n\n\n For now, the data remains supportive. AI adoption measures continue to trend higher, GPU rental rates remain firm, memory pricing remains favourable, enterprise AI spending continues to accelerate, and earnings revisions across much of the AI ecosystem remain overwhelmingly positive. Nevertheless, history suggests semiconductor cycles often peak well before analyst estimates begin to decline<\/strong>. While the AI investment boom shows little sign of slowing today, investors are increasingly debating whether the next major market risk will come from excessive valuations or from expectations for AI-driven earnings growth that ultimately prove difficult to sustain.<\/p>\n\n\n\n Next week, investors will monitor the final stages of earnings season, with results due from Hewlett Packard Enterprise, Palo Alto Networks, Ulta Beauty, Medtronic, Broadcom, CrowdStrike, Veeva Systems, and Lululemon Athletica. Structurally, for equities, leadership remains narrow, and valuations increasingly depend on continued execution from the largest growth companies.<\/p>\n","protected":false},"excerpt":{"rendered":" Macro Increasing geopolitical fragmentation remains the dominant macro theme. Despite disruption to Gulf energy flows, the Russia-Ukraine war, rising fiscal pressures and ongoing supply-chain stress, developed-market growth has remained more resilient than expected, and risk assets continue to perform well. The global economy remains increasingly bifurcated between AI-driven investment strength and a consumer sector facing […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1779","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"blocksy_meta":[],"yoast_head":"\n
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