Key takeaways

• Equities have remained resilient despite higher bond yields, with the strongest markets including those where yields rose the most – Korea, Japan and the US.
• The rise in US yields has been led mainly by real yields, suggesting inflation hasn’t been a key driver. The market is focused on stronger growth expectations and/or higher risk compensation.
• Global earnings forecasts have improved, especially in emerging markets, while earnings growth has outpaced market gains and made valuations more attractive.
• AI is increasingly both an equity and a credit story. The central issue is whether future cash flows can justify unprecedented capital spending, borrowing and off-balance-sheet commitments.
• High index concentration does not imply a narrow opportunity set. Energy, infrastructure, reshoring, defence, healthcare, critical materials and emerging-market reform may shape the next decade.

Emerging Markets lead again on earnings growth forecasts

A supportive fundamental backdrop

Equity markets have remained resilient as 10-year government bond yields have risen across most major markets. Notably, some of the strongest equity performance has occurred where yields increased most, including Korea, Japan and the US. This is consistent with the view that higher yields are, at least partly, reflecting improved growth expectations rather than a simple deterioration in financial conditions.
The earnings backdrop has also strengthened. Global forecasts have been revised upwards during 2026, with the largest upgrades in emerging markets. Because earnings growth has outpaced equity market appreciation, absolute valuations have become more attractive relative to their own history.

Breaking down YTD MSCI USA sector returns – Earnings growth dominates

What are bond markets signalling?

US 10 Year yields – Nominal and Real – inflation is not yet priced in

The bullish interpretation: stronger growth

Bond markets may be responding to stronger real activity: AI investment is driving a genuine capital-expenditure boom, productivity expectations are improving, corporate demand for capital is increasing, and nominal GDP growth remains robust. If nominal US GDP growth stays around 5–6%, a 5% 10-year Treasury yield need not be restrictive; historically, government yields have often remained close to or below nominal growth during sustained expansions.

• Earnings upgrades can offset part of the pressure from higher discount rates.
• Cyclicals, banks and industrial beneficiaries of investment spending may perform well.
• Market concentration could persist while perceived AI leaders continue to attract capital.

The bearish interpretation: a higher risk premium

Alternatively, yields may increasingly reflect concerns about fiscal sustainability, credit quality and growing Treasury supply. Total issuance of treasury notes and bonds has increased from $8.3trillion in 2016 to $32.8 trillion in the year to end August 2026. That’s an average of 14.7% increase in each of the last 10 years.* A rising term premium is more difficult for equities because it lifts discount rates without a matching improvement in earnings expectations. The tension is clear: yields behave as though nominal growth remains strong, while equity valuations imply capital remains abundant and relatively inexpensive. That combination may not be sustainable indefinitely. * https://fiscaldata.treasury.gov/datasets/monthly-statement-public-debt/summary-of-treasury-securities-outstanding

The late-1990s experience is relevant. When government bonds offered yields near 6%, they became a credible alternative to higher-risk growth assets. Today, future cash flows from long-duration growth companies must again be judged against a meaningful risk-free return.

AI is no longer just an equity theme – it’s a new debt cycle

The AI investment cycle is no longer solely an equity story. Hyperscalers have evolved from largely self-financing businesses into major borrowers as they fund multi-year data-centre programmes. According to the BIS**, hyperscaler bond issuance exceeded $100 billion in 2025.**https://www.bis.org/publications/qr-202603/financing-ai-infrastructure-boom-on-and-off-balance-sheet-borrowing   Capital is being directed towards data centres, power and transmission infrastructure, networking equipment and GPUs.

In the near term, this borrowing can stimulate activity by supporting construction, employment and equipment demand. However, it also transfers part of the AI thesis into credit markets.

Hyperscaler debt issuance and the share of supply across regions

The same research paper from Goldman Sachs indicates that Lower-rated credit spreads have widened, indicating uncertainty about whether future returns will justify the investment. It also forecasts the market expects $420 billion of new global Investment Grade debt issuance from hyperscalers in 2027. ***

*** https://finvaulta.com/research/goldman-sachs/an-update-on-ai-related-debt-issuance-2026-09-17

Off-balance-sheet commitments add complexity

A growing share of financing is being arranged through joint ventures and special-purpose vehicles that own data-centre assets. Private credit often funds these structures, supported by long-term purchase commitments from hyperscalers. Economically, the commitments can resemble debt even when the associated obligations do not sit directly on corporate balance sheets. The structures are not inherently unsound, but their rapid expansion is a cause for worry, particularly because off-balance-sheet financing often grows during periods of elevated optimism and weaker audit scrutiny.

The cash-flow assumption beneath the AI trade

Current hyperscaler valuations and financing plans rest on a powerful assumption: operating cash flows are expected to rise from roughly $600 billion in 2025 to about $2 trillion by 2030. If this does not materialise, enthusiasm could fade, credit spreads widen, and capital-expenditure plans could be delayed or cancelled, with knock-on consequences for US growth.

This cycle differs from the telecom bubble because investment is concentrated among a small number of large, profitable companies with established competitive advantages. That improves the credibility of the spending but does not remove risk. Concentration is itself a vulnerability: every bond, private-credit vehicle, data-centre loan and SPV relies, directly or indirectly, on a similar cash-flow outcome.

High concentration can obscure a broad opportunity set

The central lesson from 1999 is not simply that technology became overvalued. While markets focused on internet and TMT stocks, the foundations of the following decade were forming elsewhere: Asia was recovering from the 1997–98 financial crisis, Europe was preparing for a common currency, China was becoming a global manufacturing power, emerging markets were rebuilding, and oil was beginning the rally that preceded the commodity supercycle.

The strongest opportunities of the 2000s therefore extended well beyond avoiding the NASDAQ decline. They included emerging markets, commodities, energy, infrastructure, industrial development and companies benefiting from China’s growth. A concentrated index did not mean a concentrated global economy.

Beneath today’s dominant narrative

AI may transform productivity and leading technology companies may continue to generate substantial shareholder value. Yet an exclusive focus on AI risks overlooking other structural changes already under way:

• Power generation, grid investment and broader physical infrastructure renewal, driven by electrification, data centres and long-standing underinvestment.
• Industrial automation and reshoring as supply chains are reconfigured and governments pursue more active industrial policies.
• Defence, semiconductor, healthcare-security and critical-mineral spending, increasingly viewed through a geopolitical as well as an economic lens.
• Healthcare innovation and rising demand associated with ageing populations.
• Emerging-market reforms and shifts in regional economic leadership.

These are structural forces, not short-term narratives. As in 1999, some of the defining opportunities for the future may already be visible in areas receiving far less attention than the market’s dominant theme.

1999 spawned a tough decade for IT, but small caps thrived over the same period

Investment implications

Disclaimers

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