Well, the bubble has burst, the euphoria is over, and the reliance we placed on one man to deliver for us now seems misplaced. Should we give him more time? Should we look elsewhere?
I am of course talking about Thomas Tuchel Elon Musk and his SpaceX IPO which has retreated more rapidly than the English football team after going 1-0 up [Ed – that deserves a yellow card!].
But let’s remember that form is temporary and class is permanent. In Meta’s first day trading shares opened at $42.05. Despite massive hype, the stock struggled post-IPO, taking 14 months to recover its initial offering price as public markets adjusted to its mobile transition. It surged to all-time highs around $790, propelled by massive ad revenue and heavy investments in AI infrastructure. The stock trades around the range $635, representing a massive premium over its original IPO price.
We wait to see if Messers Musk or Tuchel manage the same bouncebackability!
The Week in Retrospect
Taking his morning cappuccino is Lothar Mentel and the team at Tatton Investment Management with the latest Tatton Weekly covering the following:
- AI froth coming off – Investors remain preoccupied with oil, inflation and AI, but are still undecided about how those themes will play out. Markets trade back and forth in the meantime, but AI ‘growth forever’ enthusiasm is once again waning.
- Markets’ guardrails for Burnham – Despite conspicuous timing, the drop in UK bond yields was not about the reaction to Shabana Mahmood’s reported appointment as Chancellor – but it shows bond vigilantes will keep constraining the government.
- National Artificial Intelligence – The regulatory battle over AI is hotting up, but markets do not see it as a threat for AI investments, yet.
In their latest Weekly Digest, Head of Market Analysis at Rathbones, John Wyn-Evans looks at why quarterly corporate reporting season sends markets into overdrive, and why investors should try not to be deafened by the noise. Earnings momentum has been strong, helped by the once-in-a-generation AI investment boom, with profit upgrades running at levels rarely seen in the past decade. But the picture isn’t without risks. He explores why AI-related capital spending could prove hard to sustain, why chipmakers may still face volatile share prices even as profits surge, and why markets are likely to keep testing whether the boom has further to run. The bigger picture remains encouraging, with global earnings growth forecast to stay positive, but an AI shock or a more conventional economic slowdown could still upset the rosy scenario.
Q2 2026 Investment Review from Rathbones
The half-time whistle has been blown on the year and to give and overview of what happened and take a look at what might yet are the team to Rathbones.
2026 has seen several highs in artificial intelligence (AI) stocks, driven by soaring capital expenditure and positive earnings revisions. Developments in the AI race, including ties with governments, have intensified. On the other hand, the Iran war has also seen several revisions to the fragile ‘ceasefires’ that don’t seem to be progressing. The three Fed rate cuts priced in for this year seem to have been quashed. Overall, we remain optimistic but increasingly cautious as markets move further into mature territory.
The oil price spike has eased in recent months, with prices currently trading at c.$78, down from a high of c.$114 earlier in the year. There appears to be significant miscommunication and a lack of agreement between the US and Iran. This has had a lasting effect on flows through the Strait of Hormuz and on market certainty. Both nations are fighting hard for their terms, so a resolution seems unlikely soon. As a team, we are working around this issue as much as possible by ensuring client portfolios have limited exposure to companies affected by issues in the Strait and by topping up oil companies benefiting from the spikes and volatility.
Valuations, particularly in US equities, remain elevated but are supported by robust earnings growth. Importantly, forecasts continue to be revised upwards, helping markets “grow into” these valuations. After a brief period of negative job reports, the US is back in positive territory. Job vacancies are now above pre-COVID levels, and private payrolls have generally been strong. It is very rare for the market to peak whilst EPS revisions and employment trends are positive, which is why we believe there is further to go. While AI-related investment is creating powerful tailwinds across sectors, it is also contributing to unusually strong near-term profit growth, which may not persist.
Markets
The US remains the largest contributor to global stock performance. It accounts for c.60% of global market capitalisation, so, as expected, our largest allocation is to the US. Despite inflation concerns, the lack of priced-in rate cuts, and an ongoing war, US equities have remained resilient. The data centre build-out in the US is being fuelled by lower energy prices and looser regulations, which are further boosting stock prices. We retain medium-term conviction in the energy, infrastructure, and technology sectors.
The UK prime minister’s resignation had been speculated for some time. When it happened in June, the markets reacted very mildly. However, the bigger concern for UK investors is the next government’s fiscal discipline, taxation, and who the next Chancellor might be. The Bank of England maintained its cautious stance, holding interest rates in June despite surprisingly low inflation, which supports expectations of further easing later.
Europe has been among the hardest hit by Middle East-driven volatility, due to its heavy reliance on imported oil. The ECB also unexpectedly raised rates by 25 basis points in June, citing inflation pressures resulting from the energy shock. However, defence spending remains ongoing, with defence and industrial companies becoming major beneficiaries of the increased expenditure mandated by NATO.
Asia and Emerging Markets have become some of the most intriguing markets. With their economies finally rebounding after the pandemic, and their 3 trillion-dollar companies – SK Hynix, Samsung, and TSMC leading the way for the region, these markets have become attractive for investment. Moving away from Europe and increasing exposure to Emerging Markets has proven a successful strategy for portfolios.
As yields have started to rise, with the 10-year gilt yield approaching 5%, prices have fallen. This follows a reduced likelihood of a rate cut and potential inflationary pressures. However, this presents an opportunity to shift into longer-duration fixed income, which should offer better returns for client portfolios.
UNDERLYING PERFORMANCE AS OF 1ST APRIL TO 30TH JUNE
| Top 5 Performers | 3m % |
|---|---|
| LAM Research | +98.0 |
| Innodata | +95.1 |
| ASML | +43.6 |
| GE Vernova | +32.0 |
| Novo Nordisk | +30.2 |
| Top 5 Underperformers | 3m % |
|---|---|
| Boston Scientific | -33.2 |
| Zoetis | -32.8 |
| CME | -24.9 |
| Netflix | -24.8 |
| BAE Systems | -18.7 |
TOP FIVE RISERS
As technology companies’ capital expenditure has continued to rise, the top performers in the AI trade were LAM Research, Innodata, and ASML. All three companies contribute in different ways to the AI sector and its advancement. LAM Research is a memory chip manufacturer that has seen strong demand due to recent data-centre buildouts. Innodata had a strong quarter, raising full-year revenue growth guidance to 40%, supported by strong engagement with US tech giants. ASML continues to be a market leader in lithography, an essential part of chipmaking and a critical part of the AI story.
Energy infrastructure and power have been identified as key factors in the ongoing data centre build-out. There is real concern about whether they can operate on the existing power infrastructure. Therefore, companies such as GE Vernova, which builds infrastructure to build and transmit electricity, have been profiting from the power shortage and responding to rising demand.
Novo Nordisk has seen a positive turnaround in its share price, driven by stronger-than-expected uptake of the oral Wegovy pills. Management has also improved its guidance following higher GLP-1 sales. This has remained a conviction of ours during downturns, so we are pleased to see investor sentiment improving.
TOP FIVE FALLERS
Healthcare sector returns have been flat year to date. Boston Scientific was a recent purchase for us following a period of share price weakness, which we believe is oversold. The company has a strong market share in the med-tech sector and consistently innovates in cardio-vascular equipment. Zoetis, on the other hand, has been sold due to a lack of confidence in its management and consistently disappointing results. They lowered their full-year 2026 revenue guidance and face intensifying competition from generics.
CME’s share performance was driven by concerns about industry competition. Recent regulatory approvals could threaten CME’s dominant position in futures trading. However, we believe that strong revenue, upwardly adjusted EPS figures, and a dominant market position keep the company attractive.
Although Netflix is a leader in its sector, it has seen its full-year guidance disappoint. Investors were expecting a more upbeat outlook given the strong quarter, hence the stock sold off. However, Netflix offers a compelling investment case due to its global leadership in streaming, strong subscriber growth, expanding advertising business, and increasing profitability.
After a major defence rally, BAE Systems was among the companies whose share prices dropped, primarily due to profit-taking. It had been one of the strongest names in the industry since the war in Ukraine and the rise in defence spending. The valuation had become quite high, making it difficult for the market to push the stock higher, despite a positive trading update. We retain our conviction in the stock, as BAE Systems has a record order backlog of over £80bn, providing over a decade of revenue visibility, bolstered by rising global defence spending.
OUTLOOK
The outlook for the remainder of the year remains cautiously optimistic for markets, supported by strong earnings growth, healthy employment trends, and ongoing investment in AI infrastructure. While valuations, especially in the US, stay high, companies continue to deliver results that justify much of that optimism. Historically, it is rare for markets to peak while earnings revisions and labour market data stay positive, which suggests there could still be further upside.
However, risks are mounting as we move later into the cycle. Ongoing uncertainty surrounding Iran and the Strait of Hormuz continues to create volatility in energy markets, while expectations for interest rate cuts have been pushed further out. We have sought to manage these risks through selective positioning, limiting exposure to businesses most vulnerable to supply-chain disruption and maintaining allocations to areas that can benefit from a higher oil-price environment.
Portfolio diversification remains crucial. We continue to favour long-term themes such as AI, digital infrastructure and energy, while increasingly focusing on second- and third-order beneficiaries rather than the most crowded areas of the market. Although short-term headlines and geopolitical developments may create periods of volatility, our emphasis remains on identifying high-quality businesses with durable growth prospects and on positioning portfolios to benefit from long-term opportunities, rather than reacting to short-term market noise.
Budget Watch
I know it seems early but with a new incumbent, all eyes are now on the Autumn Budget, which is expected to take place in October. Little has been confirmed about what it will contain, but a handful of taxes are in the spotlight. Meanwhile, savers and investors are awaiting several confirmed changes announced by the previous Labour government. The Following is from Jemma Slingo at Fidelity International.
What we know already
Some major changes to saving, investing and passing on wealth were announced in last year’s Autumn Budget – and the one before that. The new rules are due to come into force in 2027 and 2028.
- IHT on pensions. From 6 April 2027, most unused pensions will be included in your estate for inheritance tax (IHT) purposes. This marks a major shift in retirement and estate planning, given pensions have long been one of the most tax-efficient ways to pass on wealth. The change was announced in the Autumn Budget 2024.
- ISA reform. From 6 April 2027, the cash ISA allowance is due to fall from £20,000 to £12,000 for under-65s. The overall ISA allowance will remain at £20,000. To avoid people bypassing the new cap, uninvested cash in a stocks & shares ISA will be taxed at 22% and investors will be unable to hold 100% of their investment portfolio in money market funds. These changes were announced in the Autumn Budget 2025.
- High Value Council Tax Surcharge. A new surcharge for residential properties in England worth more than £2m is due to take effect from April 2028. The annual charge is expected to range from £2,500 to £7,000, depending on the property’s value. It was announced in the Autumn Budget 2025.
Areas to watch
The government has not published its Budget plans and no further tax changes have been confirmed. However, several areas have featured in speeches and wider policy discussions.
- Land and property tax. Mr Burnham has previously argued that the UK’s property tax system is outdated and has expressed support for a land value tax. Unlike council tax or stamp duty, this tax would be levied on the value of the land itself, rather than the buildings standing on it. No detailed proposal has been published and it is unclear whether any reforms would feature in this year’s Budget.
- CGT changes. There has been discussion about whether capital gains should be taxed more like to earnings. While no specific policy has been announced, capital gains tax (CGT) is one of several areas commentators have highlighted as a possible candidate for reform.
- Inheritance tax. Mr Burnham has previously spoken about reforming inheritance tax, (IHT) including replacing the current system with a broader levy on estates. However, no detailed proposals have been published and it is not known whether inheritance tax will feature in the Budget.
- Income tax, VAT and National Insurance. The government has indicated it does not intend to increase the main rates of income tax, VAT or National Insurance, although – as with all Budget measures – no announcements have yet been made.
- Triple lock. The State Pension is unlikely to see major changes in this year’s Budget. Mr Burnham has publicly pledged to maintain the “triple lock”, under which the State Pension rises each year by the highest of inflation, average earnings growth or 2.5%.
Bigger-than-usual Budget?
The Autumn Budget is expected to take place in October. Some reports have suggested it could be combined with a wider spending review, potentially making it a more significant event than usual. However, no timetable has been confirmed and it remains unclear whether such large event could be organised by late this year.
What’s in a Name?
Twenty years ago, Pluto stopped being defined as a planet (boooo!) says Ben Kumar at 7IM.
To be defined as a planet, an object must*
- Orbit the Sun
- Have enough mass to be round,
- Have “cleared its neighbourhood” of other debris.
Unfortunately, Pluto doesn’t pass number 3 – there are at least four similar sized objects (and maybe up to 1000) all living in the same postcode. So, we’d either have to call them ALL planets (difficult for the My Very Excellent Mothermnemonic), or Pluto had to get downgraded … Now, obviously, Pluto doesn’t care. In physics, it doesn’t matter what we call something – Pluto just keeps spinning**.
But in investing, definitions DO matter.
An index is a collection of rules: “if thing X has properties a, b & c, then define it as Y.”
Which means definitions can be dangerous things. In bond world, any company that slips below a BBB rating is defined as “high yield”. So, every “investment grade” passive fund has to sell it.
Or look at the disagreements about ESG ratings of companies – is Meta (Facebook) really GOOD because it doesn’t drill for oil or make weapons? Or is it really BAD due to data protection issues and social harms?
Or take one we’ve been banging on about for years. South Korea.
In 2009, South Korea got the reverse-Pluto treatment from FTSE Russell when it was redefined as a Developed Market. MSCI looked at the same country and disagreed. Seventeen years later, they still disagree.
Source: FactSet, GBP, 30/06/2006 – 30/06/2026. Past performance is not a guide to future performance
Most of the time, that hasn’t mattered too much – whether you’d have bought FTSE or MSCI for your EM exposure, you’d have ended up in about the same place …
… Not anymore.
The South Korean stock market rally over the last year (driven by its defence companies & chipmakers) has meant that the MSCI Emerging Market index has beaten the FTSE by more than 20%! All because of a definition difference.
Planets don’t care what they’re called. But when it comes to investing, a different definition can mean a very different portfolio …
* https://science.nasa.gov/solar-system/planets/what-is-a-planet/#h-the-new-definition-of-planet
**The opposite way to Earth, if you’re interested, so the sun rises in the west.
Things To Think About
Mike Bell, CFA Head of Market Strategy at RBC BlueBay Asset Management raised the following thought-provoking article this week:
Is our current form of democracy able to withstand our demographics? I think this is one of the most interesting and important questions for modern political thought. This chart from the UK’s OBR shows the problem for the public finances of an ageing population.
You would expect to pay in while you work and take out from the system when you retire but as the ratio of pensioners to workers increases the public finances will deteriorate if pension and healthcare entitlements stay the same.
If you’re wondering why welfare spending increase with age it’s because the state pension makes up a very large and growing proportion of the welfare bill (personally I don’t think the state pension should be classified as welfare as most people assume welfare is benefits not the state pension).
The table below shows projected UK government spending, per year, from the OBR. It breaks down spending and how spending on the state pension is set to grow as the population ages.
Also worth noting that public sector pensions are a tiny proportion of state spending and that it’s state pensions for the rest of us that are the problem. This is not just a British problem, it’s a problem for many ageing economies. But as the ratio of pensioners to workers increases it also becomes harder and harder for any politician to do anything about this.
What do you think the solution might be?
Miscellaneous
Hundreds of thousands more pensioners look set to pay income tax than the government previously estimated, according to new HMRC figures, reports MoneyWeek. Since freezing the thresholds in 2021, more people – especially pensioners – have been caught by the income tax net. The tax allowance was set at £12,570 in 2021/22. Since then, three million more people over 65 are due to pay tax and for the first time, more than 10 million people in this age group will be liable. Department for Work and Pensions (DWP) figures suggest around 12.2 million people in the UK are receiving a state pension, meaning more than seven in 10 pensioners are now taxpayers, with an extra million expected by 2030-31.
It’s not just us in the UK with pensioner issues of course. David E. Rovella at Bloomberg reports: “More likely coming as grim affirmation rather than breaking news, three new reports this week show how Americans are having a harder time saving for retirement because of rising living costs. Indeed, more and more data indicate the promise of a comfortable retirement by 65 is fast becoming fantasy for many. And for those hoping to lean on social safety net programs, think again. The Social Security trust fund is projected to be depleted by 2032, which absent any government action (and amid a national debt headed for $40 trillion) would mean significant cuts to promised benefits”.
Morningstar says that with the arrival of Andy Burnham in Downing Street, and the former Manchester mayor expected to pick a new economic team, taxation is back in the spotlight. While the new regime’s policies are subject to intense speculation—which taxes will rise and whether the state pension triple lock will be maintained—one area is ripe for reform, experts say: property taxation. Stamp duty, a key property tax, has long been the subject of criticism. Successive UK governments have become “addicted to what is probably the UK’s worst tax,” says Dan Neidle, founding director of Tax Policy Associates. “Each increase [to stamp duty] damages growth, jobs and happiness, but still raises additional tax.” While Andy Burnham hasn’t recently taken a clear position on stamp duty, he in 2010 decried it as “a tax on the aspirations of young people.” With Burnham understood to have been critical of the Labour Party’s previous failure to be bold, it’s possible there will be an early “emergency budget” in the style of the fiscal statement delivered in July 2015 by the new majority Conservative government. Burnham has already said he wishes to look at income tax, capital gains tax, and potentially also a “national care levy” to pay for social care. Against that backdrop, changes to stamp duty could be on the agenda.
Phew! After that I’m going for a sit down and a cup of warm chicory drink. The fact that it coincides with all day coverage of the 154th Open Golf championship is neither here nor there. I will be careful in taking my steps to get to the sofa!
I hope to catch you next time.