As we reach half-time (in the year!), markets in the US took a little breather on Friday. No, not hangovers after their win against Bosnia-Herzegovina in the World Cup (not sure the same will be true should England manage to win on Sunday night). But of course, they are celebrating the 250th anniversary of the founding of the country. Congratulations to our American friends and contacts.
Markets did their thing too with the Dow Jones Industrial Average reaching a record high on Thursday before closing for the bank holiday. They have had a good week in general, although the pressure that exists seems to be mainly on the tech sector again with those Value stocks looking favoured. That’s the advantage of a diversified portfolio even if the split isn’t even to cause another war of independence!
Another ‘You Might Find this Interesting but don’t blame me if not’ Article
I found the following from Cranley Macfarlane at Church House Investment Management [Ed – that’s a great name although he does sound a bit like an exclusive golf club (sorry Cranley!)] that examines some of the issues with the tech sector.
The AI arms race – Scream if you want to go faster!!
At times the AI arms race seems like the Waltzer at a fairground. As the ride spins faster and faster everyone is screaming, some through fear, some through excitement but no one can get off.
The amount of money that has been committed by companies as they seek to be the winners is astonishing. Google, Microsoft, Amazon and Meta (Facebook) are planning to spend $725bn on AI infrastructure in 2026, up +77% from 2025 and triple what was spent in 2024. This is before the investments they have made into AI companies directly.
But it is not the sheer volume of cash being spent, rather the circular structure of the financing that is worrying. The web of deals gets pretty complex and includes the incumbent hyperscalers mentioned above, the AI ‘start-ups’ that are now among the largest companies in the world (OpenAI, Anthropic), and the hardware companies, such as Nvidia. TS Lombard has calculated that as much as 85% of the AI ecosystem’s revenues comes from this capex recycling.
Such circular deals need not be a problem so long as the companies can continue to meet their commitments. Indeed, some in the AI industry say that this is the only way to finance a technological revolution at the speed with which it is being done. Although they would say that, wouldn’t they? Either way, it certainly allows a level of investment that outstrips the more traditional sources of equity and debt markets.
That’s not to say they haven’t accessed those traditional markets too. Google has raised $75bn in equity financing and $30bn in debt in recent months. Oracle has increased its debt by 50% to $156bn also. And into this environment we have possibly the three largest IPOs ever taking place in a matter of months: SpaceX, Anthropic and OpenAI.
SpaceX: To infinity and beyond?
SpaceX floated 5% of its shares a fortnight ago raising $86bn and leaving Elon Musk in control of 85% of the company valued at $1.8tn. At that point the shares were trading at more than 100 times last year’s sales. While space is infinite and SpaceX has significant first mover advantage in both its launch and satellite capabilities, that remains a punchy valuation.
Will Elon Musk one day repeat what Scott McNealy, CEO of Sun Microsystems, said in the wake of the dotcom crash to those investors who had purchased shares in his company at their peak?
“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate…Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
Of course, it is true that in the technology sector valuations are much higher than other sectors of the stock market, justified by higher margins and impressive growth rates. But the circular nature of the sector’s financing reduces the margin of safety. What happens when one company delays their capex because of supply constraints? Most likely we would be looking at a correction rather than a bust. But one need only look back at the sub-prime crisis in 2008, or the collapse of Long-Term Capital Management in the late 1990s, to see that the knock-on effects can be brutal and unforeseen.
* Sun Microsystems was a tech hardware company that designed and manufactured its own entire computer ecosystem, from chips, to workstations to software. Their shares peaked at a price of $64 in September 2000 (a multiple of 10x sales). The shares bottomed in October 2002 at $3. While the share price was boosted by a 1-for-4 stock split in 2007, the company was acquired by Oracle in 2010 for $9.50 per share – or $2.375 when adjusted for the stock split.
The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.
Please also note that the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.
There is still opportunity in the sector of course, but as I say every week – diversify and take the human biases out of the equation by using independent investment manager, just as you all do!
Market Commentary
Lothar Mentel and team have prepared the usual Tatton Weekly covering the following topics, and with a cartoon that certain makes a point [Ed –“groan!”]:
- Much appreciated slowing down – Lots of noise with little market response, but even a boring week in summer can offer valuable insights into the direction of the year’s market dynamics.
- June Asset Returns Review – A news heavy June didn’t move markets much but may well have consolidated what has been a gangbusters first half of 2026 for investors.
- European cars still stalling – Europe’s car manufactures are struggling against cut price competition from China – is Chinese over production being price-dumped here or have the Europeans been complacent?
And the ‘Week in Markets’ is brought to you by a new contributor (I think) Aviva. It says it’s a two-minute read so if you ae dashing off somewhere it will be ideal. Just follow the link:
Bean Watching the Football?
On Monday night, Brazil played Japan in the World Cup round of 32 (don’t worry, this isn’t a match report). The pundit team were talking about how different the two countries were; “Samba vs Samurai”. On the surface, you can see why.
But have you ever wondered why Brazilian Jiu-Jitsu exists? Unlikely as it seems, Brazil and Japan have more than a century of joint economic and cultural history. Today, there are 2 million people of Japanese descent living in Brazil – the largest population outside of Japan.
But the biggest legacy is a bean:
Soybeans are the most versatile bean in the world – used as food for animals and humans but also processed into biodiesel, industrial lubricants and even Crayola crayons!
And Brazil is the undeniable champion when it comes to production; growing almost half of the world’s soy. It’s Brazil’s biggest export product.
Source: US Department of Agriculture
Yet soybeans aren’t even native to South America …
In 1908, 781 Japanese immigrants arrived in Sao Paulo, tempted by the wages on offer in the Brazilian coffee fields and leaving their overcrowded home islands. Over the next twenty years, 100,000 more followed. And hidden in suitcases and pockets were things that were important to them from home – including soybeans.
For the first couple of generations, these beans were used for small-scale farming; just enough to make sauce or tofu for the family. Then, in 1973, Richard Nixon banned the US from exporting soybeans. At this time, industrialised Japan imported almost ALL of its soybeans from the US, so this caused an immediate food crisis.
The Japanese expats suggested that the solution lay in South America; so, the Japanese and Brazilian governments teamed up to solve the problem. Billions of dollars and five years later, they had created a new soybean version which was resilient enough to be grown in the area around Brasilia, previously deemed unproductive.
Source: Wikimedia Commons
In 1970 Brazil grew less than 2 million tonnes of soy. This year, the Cerrado region above will produce 180 million tonnes.
So, sure, samba and samurai culture seem like opposites. But mash them together and you get one of the biggest agriculture markets in the world … what an argument for the unexpected impact of diversification!
Fun Fact from Quartet Investment
Studies have found that national stock markets can fall by around 0.3–0.5% on the day after a country’s elimination from the World Cup, suggesting investor sentiment can be affected by sporting disappointment, even when there is no economic reason for markets to move.
I’m hoping for a surge in the markets next week – at least in the hospitality sector!
Miscellaneous
The price of gold has fallen below $4,000 for the first time since 6 November 2025 as the prospect of higher US interest rates rises. Gold prices fell 11.7% during June, dipping below $4,000 in the process. Gold has sold off this year as inflation has risen, exacerbated by the conflict in the Middle East, prompting some to question whether gold still acts as an inflation hedge. “Gold is often considered to be a haven in troubled times, but what many people don’t realise is that its price can still drop in a falling market,” said Dan Coatsworth, head of markets at AJ Bell. “Investors often sell what they can in the face of trouble, and gold is a liquid asset.” “Recently, gold has become increasingly sensitive to the same oil-price and inflation dynamics affecting broader markets, meaning its behaviour may be more correlated with other assets than investors have come to expect,” Matt Bance, solutions strategist and portfolio manager at investment manager T. Rowe Price, told MoneyWeek.
Worryingly, almost 10% of under-30s opt out of their workplace pension scheme under auto enrolment. The number of people opting out of their auto-enrolment (AE) pension has reached 500,000 a year, analysis of Department for Work and Pensions (DWP) figures by Lubbock Fine Wealth Management has shown. If you know anyone doing this, please implore them to think carefully. I know times are hard, but they may well regret missing the growth on the earliest years’ money.
More than three fifths (61 per cent) of retirees who withdrew tax-free cash from their pension pots ahead of the Budget last year regret doing so, research from Quilter has shown.
England faces Mexico in the wee hours of Monday and the Pimms is already flowing strongly this at Wimbledon. The England men’s cricket team takes on India at Old Trafford on Saturday, and the women play Australia in the T20 World Cup final tomorrow. And it’s the British Grand Prix at Silverstone tomorrow too. Everywhere you look, there’s sport (sorry to any of you not supporting any England team – I suspect there are a few!) so I’m off to wear out my remote control trying to watch as much of it as I can on television and I hope to catch you next time.