This bull market is about to turn four, and it still shows no sign of exhaustion. Earnings keep broadening, the AI investment cycle keeps compounding, and global economic growth and inflation have settled into a genuine goldilocks mix: not too hot nor cold.
In June, we trimmed into strength and called it a pause. In August, we added the risk back: equities higher, emerging markets (EM) restored in certain portolios, Europe's underweight narrower. The case for owning risk is intact; so is the case for discipline, as bond yields drift toward levels that leave less room for surprises.
1. Equities: a larger overweight, after AI correction
The early summer pause was more specific than plain profit-taking. AI infrastructure stocks sold off hard over the summer, and because emerging markets carry heavy exposure to that theme through the memory and chip supply chain, EM absorbed much of the damage. The correction has largely run its course, and AI infrastructure looks interesting again, not merely cheaper. In August we added back to equities and, in certain portfolios, restored our emerging markets weight to its pre-summer level. Owning risk, this year, has meant stepping out of strength as well as back into it.
2. The backdrop: broad-based earnings, a goldilocks economy
Earnings keep broadening. US profits are on track for 30 percent growth this year, and the gains are no longer confined to a handful of AI names: cyclicals, financials and industrials are all contributing, and revision ratios sit comfortably above their long-run average. Economic growth remains resilient and inflation contained, despite a wall of AI-related capital spending. We remain overweight equities relative to fixed income, by a wider margin than two months ago.
3. Regional positioning: emerging markets overweight, Europe's underweight narrowed
August's regional moves largely restored rather than extended our positioning. Emerging markets are overweight and remain, in our view, the best and cheapest way to own the AI theme: EM earnings growth continues to outpace developed markets, and valuations still sit at a meaningful discount to the US. Europe's underweight also narrowed. Earnings there were never truly disappointing, but growth snapped back into double digits in the second quarter, and that improvement, not a change in narrative, is what moved us. The US remains our anchor and the centre of the AI theme, held close to neutral rather than expressed as a regional call.
4. The rotation: broader than just value versus growth
The rotation that started last year keeps widening. Across sectors, rising yields keep pushing money into financials, energy and industrials at the expense of the most expensive, long-duration growth names. Inside technology, the same logic applies: cheaper, cash-generative AI infrastructure and semiconductor names have outperformed secular growth stories whose cash flows sit further out, since distant cash flows are worth more when rates are low and less with the ten-year near 4.7 percent.
5. Fixed income: attractive credit yields, still avoiding duration
Our positioning is unchanged, and rising yields have reinforced it. We remain overweight high yield: corporate fundamentals are healthy, defaults are low, and the extra yield is attractive even as issuance, much of it AI-related, has picked up. We remain underweight government bonds. The risk is asymmetric: with the ten-year already near its highest level in almost two years, a further push toward 5 percent would hurt duration more than any plausible rally would help it.
6. The risks: AI's financing needs, hawkish central banks, and the 5% line
Three risks deserve attention into year-end. The AI build-out's financing gap is now measured in the trillions, an increasing share bridged by private credit rather than public markets, and demand for hyperscaler bonds has visibly cooled since summer. Central banks are the second risk: several developed-market policymakers now lean hawkish, and further hikes would tighten conditions faster than earnings can absorb. The third, related risk is the ten-year yield itself: a decisive break above 5 percent has historically hurt the highest-multiple growth companies, and it's the risk we're watching most closely.
Going into year-end, the posture is the one we described in January: curiosity, not caution for its own sake. Earnings are genuinely broadening, the goldilocks backdrop is holding, and we've added to risk accordingly. But a bull market this mature, is one to enjoy with both eyes open. We are positioned for more upside and watching the bond yield trend as closely as the earnings momentum.
