BLOGThe Bird's Eye View
Timely Perspectives, Unconventional Thinking
We’re excited to share timely market insights, thoughtful perspectives and expert commentary as part of our commitment to providing modern investment solutions to modern challenges.
BLOGThe Bird's Eye View
Timely Perspectives, Unconventional Thinking
We’re excited to share timely market insights, thoughtful perspectives and expert commentary as part of our commitment to providing modern investment solutions to modern challenges.
The S&P 500 Index and the Nasdaq Composite Index established new record highs earlier this week despite such persistent headwinds as higher interest rates and oil near $100 a barrel. The surge has been driven by the familiar cohort of tech companies involved with the buildout of artificial intelligence (AI).1
Stock valuations are being powered by 2026 and 2027 earnings expectations that have continued to drift higher as analysts bake forecasts for higher margins into their models. Consensus estimates call for operating margins to top 20% in 2026 and 2027, up from the mid-teens in 2025. We see a number of variables supporting this trend.2
Fiscal deficits. Public sector deficits translate into private sector income, and the current 6% deficit—which is consistent with the bottom quartile of deficits historically—has been a reliable source of support for corporate revenues and margins.3
Low household savings rates. Disposable income that is spent rather than saved typically funnels into corporate coffers. Like the deficit, household savings levels also sit within the bottom quartile on a historical basis.4
High levels of private investment. Private investment as a percentage of gross domestic product (GDP) has already exceeded dot-com levels in 2026 and continues rising from there.5 AI-related investment alone is projected to exceed $1 trillion globally in 2026 and reach many multiples of that figure in the coming years.6
To us, current dynamics are reminiscent of the late-1990s. Risk perception remains limited, though rapidly narrowing trading breadth suggests that losers are outnumbering winners in the current market. Combined with attractive fundamentals and earnings momentum, we believe this has presented opportunities outside the AI boom for fundamental investors.
US real gross domestic product (GDP) growth for the first half of 2026 was revised higher, driven by business investment and consumer spending.1 We are also seeing improving growth in most parts of the world outside of the Middle East, where GDP growth estimates have returned to levels from before the outbreak of war in Iran.2 This growth has been supported by robust technology production, broadening service sector activity and non-technology manufacturing as economies have adjusted to energy supply shocks caused by the war by sourcing crude oil from other regions, drawing on strategic and commercial inventories, and some demand destruction and substitution.
While Gulf oil exports have picked up on rerouting efforts and increasing dark transits, energy prices remain elevated reflecting refining disruptions, constrained natural gas supplies and threats to infrastructure.3 This, along with resilient growth, is pushing inflation above target in much of the world, and many central banks have tightened monetary policy in response. Markets are pricing an aggressive, sustained rate hiking cycle that implies a large increase in “neutral” real yields, which we believe may be too much for some economies.4
Markets are pricing an aggressive, sustained rate hiking cycle that implies a large increase in “neutral” real yields.
Long-term sovereign yields have reached multi-decade highs, reflecting market pricing for higher policy rates, record corporate bond issuance and growing sovereign debt.5 Higher yields will exacerbate fiscal challenges, and we believe this will become more evident as countries draft 2027 budgets in the coming months. For the US, while Congress has funded the government through December 11, reaching a compromise on appropriations for the remainder of fiscal 2027 could result in more spending from already elevated levels.