Estimated read time: 5 mins
Q3 Quarterly Report 2026
Competing for Capital
Competing for Capital
This has weighed on gold and other real assets, but equities have been resilient so far, as strength in a small group of mega-cap tech names has masked weakness across the rest of the market. In simple terms, two forces are reshaping the global economy: (i) an AI investment boom, and (ii) a shift in the global debt picture, with governments borrowing at levels once reserved for wartime and interest rates unlikely to return to the lows of the last decade. These two forces pull in different directions, but both are consuming capital on a scale we have not seen before, and investors are now being asked to fund them both at once.
This has weighed on gold and other real assets, but equities have been resilient so far, as strength in a small group of mega-cap tech names has masked weakness across the rest of the market. In simple terms, two forces are reshaping the global economy: (i) an AI investment boom, and (ii) a shift in the global debt picture, with governments borrowing at levels once reserved for wartime and interest rates unlikely to return to the lows of the last decade. These two forces pull in different directions, but both are consuming capital on a scale we have not seen before, and investors are now being asked to fund them both at once.
For equity investors, corporate earnings are the key variable. Investors will rationally pay more for companies generating strong earnings, and more again where those earnings are expected to grow. The logic is sound, but in practice, the price is determined by supply and demand, and demand does not always follow logic. Tesla is a useful example, as the stock currently trades at over 190 times next year's expected earnings despite earnings growth having stalled and early expectations of EV market dominance having proven overly ambitious.
For equity investors, corporate earnings are the key variable. Investors will rationally pay more for companies generating strong earnings, and more again where those earnings are expected to grow. The logic is sound, but in practice, the price is determined by supply and demand, and demand does not always follow logic. Tesla is a useful example, as the stock currently trades at over 190 times next year's expected earnings despite earnings growth having stalled and early expectations of EV market dominance having proven overly ambitious.
Sep
Aug
Jul
YTD
Equities
MSCI World
-1.2%
2.6%
0.5%
11.7%
S&P 500
-0.4%
2.7%
-0.1%
12.4%
EURO STOXX
-2.1%
0.9%
-0.2%
10.8%
Nikkei 225
1.1%
3.1%
-8.1%
34.2%
MSCI UK
-2.0%
0.0%
3.9%
9.6%
MSCI EM
-0.6%
3.4%
-3.1%
23.4%
MSCI China
-4.8%
-0.8%
8.4%
-15.4%
Government Bonds
US Treasuries
-2.2%
0.3%
-1.1%
-2.7%
EUR Sovereigns
-2.2%
-0.6%
-1.7%
-3.3%
Corporate Bonds
US High Grade
-2.6%
0.4%
-1.6%
-2.8%
EUR High Grade
-1.4%
-0.2%
-1.0%
-1.2%
Commodities
Commodity Index
4.8%
6.1%
12.6%
55.3%
Oil (Crude)
14.4%
-1.7%
22.3%
94.3%
Copper
1.1%
4.5%
3.6%
18.9%
Gold
-6.3%
9.5%
0.6%
-4.4%
Currencies
EUR/USD
-2.2%
1.0%
0.6%
-3.3%
EUR/GBP
-0.2%
0.2%
-0.8%
-2.1%
EUR/JPY
-3.8%
1.3%
-1.4%
-3.0%
Sep
Aug
Jul
YTD
MSCI World
-1.2%
2.6%
0.5%
11.7%
S&P 500
-0.4%
2.7%
-0.1%
12.4%
EURO STOXX
-2.1%
0.9%
-0.2%
10.8%
Nikkei 225
1.1%
3.1%
-8.1%
34.2%
MSCI UK
-2.0%
0.0%
3.9%
9.6%
MSCI EM
-0.6%
3.4%
-3.1%
23.4%
MSCI China
-4.8%
-0.8%
8.4%
-15.4%
Equities
A rational investor might short the stock, and many have tried. The problem is that sustained retail demand has kept the valuation elevated far longer than fundamentals would justify, and being right too early in markets can be just as costly as being wrong.
A rational investor might short the stock, and many have tried. The problem is that sustained retail demand has kept the valuation elevated far longer than fundamentals would justify, and being right too early in markets can be just as costly as being wrong.
Why Yields Are Rising
Why Yields Are Rising
The conflict in the Middle East has now entered its eighth month, pushing energy prices higher across the world. September’s U.S. inflation reading of 3.7%, up from 3.4%, showed that feeding through, with petrol accounting for more than half of the monthly rise and some spillover into services such as airfares and hotels. What matters for the bond market, however, is whether an energy shock turns into a wage and price spiral, and so far it has not. Core inflation is at 2.6%, wage growth is running at around 3% and falling behind prices rather than chasing them, and when the rise in U.S. yields is broken down into the part that compensates investors for inflation and the part that reflects real interest rates, it is real rates that have done almost all of the work. The physical oil picture is also better than the headlines suggest, with some estimates indicating 18 million barrels a day getting out of the Middle East against 23 million before the conflict, and China continuing to act as a deflationary force as it turns to the West for demand for its products.
The conflict in the Middle East has now entered its eighth month, pushing energy prices higher across the world. September’s U.S. inflation reading of 3.7%, up from 3.4%, showed that feeding through, with petrol accounting for more than half of the monthly rise and some spillover into services such as airfares and hotels. What matters for the bond market, however, is whether an energy shock turns into a wage and price spiral, and so far it has not. Core inflation is at 2.6%, wage growth is running at around 3% and falling behind prices rather than chasing them, and when the rise in U.S. yields is broken down into the part that compensates investors for inflation and the part that reflects real interest rates, it is real rates that have done almost all of the work. The physical oil picture is also better than the headlines suggest, with some estimates indicating 18 million barrels a day getting out of the Middle East against 23 million before the conflict, and China continuing to act as a deflationary force as it turns to the West for demand for its products.
Yields are rising instead because everyone wants to spend at once. The pandemic, the war in Ukraine and a U.S. administration that has questioned its long-standing alliances have left governments determined to rebuild the resilience of their own economies. That means spending on defence, on energy security and on bringing manufacturing home. The bond market is beginning to push back. The French budget negotiation is being conducted under open pressure from the bond market, while the U.S. is heading into midterm elections with neither party discussing the size of the deficit at all, which suggests the signal there will need to become louder before it is heard.
Yields are rising instead because everyone wants to spend at once. The pandemic, the war in Ukraine and a U.S. administration that has questioned its long-standing alliances have left governments determined to rebuild the resilience of their own economies. That means spending on defence, on energy security and on bringing manufacturing home. The bond market is beginning to push back. The French budget negotiation is being conducted under open pressure from the bond market, while the U.S. is heading into midterm elections with neither party discussing the size of the deficit at all, which suggests the signal there will need to become louder before it is heard.
Reducing debt relative to the size of the economy is politically difficult everywhere, as populations are frustrated by weak real wage growth, populist movements oppose spending restraint, and the more unsettled the world becomes, the more governments spend. Meanwhile, large companies are tapping the bond market at an unprecedented rate.
Reducing debt relative to the size of the economy is politically difficult everywhere, as populations are frustrated by weak real wage growth, populist movements oppose spending restraint, and the more unsettled the world becomes, the more governments spend. Meanwhile, large companies are tapping the bond market at an unprecedented rate.
A handful of firms have decided they are going to change the world with their AI build-out, and the scale of that investment has been a clear positive for economic growth. Microsoft, Alphabet, Meta and Amazon are expected to spend a combined $1 trillion on AI infrastructure in 2027. AI capex is adding around 1% a year to U.S. growth, roughly half of all real GDP growth. Here in Ireland, data centres now consume 23% of the country’s electricity, nearly as much as all households. This demand for capital is one reason the U.S. 10-year yield has reached its highest level since 2002.
A handful of firms have decided they are going to change the world with their AI build-out, and the scale of that investment has been a clear positive for economic growth. Microsoft, Alphabet, Meta and Amazon are expected to spend a combined $1 trillion on AI infrastructure in 2027. AI capex is adding around 1% a year to U.S. growth, roughly half of all real GDP growth. Here in Ireland, data centres now consume 23% of the country’s electricity, nearly as much as all households. This demand for capital is one reason the U.S. 10-year yield has reached its highest level since 2002.
Could yields keep rising from here? It is hard to see the U.S. 10-year sustaining a level much above 5% for a prolonged period without the economy showing the strain, with the housing market and the AI capital expenditure story the two most likely places for that strain to appear.
Could yields keep rising from here? It is hard to see the U.S. 10-year sustaining a level much above 5% for a prolonged period without the economy showing the strain, with the housing market and the AI capital expenditure story the two most likely places for that strain to appear.
AI Spending Concerns
AI Spending Concerns
AI Spending Concerns
What the spending is currently earning is the concern. Around 85% of total AI revenue is recycled capex, mainly flowing from the hyperscalers. Some of the hyperscalers’ own earnings are circular too, coming from marking up their stakes in private companies such as Anthropic and OpenAI as those companies are revalued in each funding round. The cost of renting the chips to produce the technology has been rising while the price users pay for tokens has roughly halved since May. The risk is that this build-out is increasingly being funded with debt. The hyperscalers have moved from $200 billion combined net cash to $200 billion net debt in three years, and their free cash flow has turned negative. Half the planned AI spending is expected to be borrowed, and Oracle, Meta and Alphabet have all issued 30-year bonds to fund AI investment, in some cases yielding less than 1% above U.S. Treasuries. Lenders are being asked to take on three decades of technology risk for a return just above government bonds. The danger is not that one company fails. It is that so much borrowing is tied to one theme that any wobble in AI would push up borrowing costs across the whole market.
What the spending is currently earning is the concern. Around 85% of total AI revenue is recycled capex, mainly flowing from the hyperscalers. Some of the hyperscalers’ own earnings are circular too, coming from marking up their stakes in private companies such as Anthropic and OpenAI as those companies are revalued in each funding round. The cost of renting the chips to produce the technology has been rising while the price users pay for tokens has roughly halved since May. The risk is that this build-out is increasingly being funded with debt. The hyperscalers have moved from $200 billion combined net cash to $200 billion net debt in three years, and their free cash flow has turned negative. Half the planned AI spending is expected to be borrowed, and Oracle, Meta and Alphabet have all issued 30-year bonds to fund AI investment, in some cases yielding less than 1% above U.S. Treasuries. Lenders are being asked to take on three decades of technology risk for a return just above government bonds. The danger is not that one company fails. It is that so much borrowing is tied to one theme that any wobble in AI would push up borrowing costs across the whole market.
History’s Lesson
History’s Lesson
History’s Lesson
We believe AI is revolutionary and will reshape how work gets done across most industries. Unlike the dot-com era, demand is growing rapidly, and the hyperscalers have delivered exceptional earnings from their core businesses. That earnings growth has brought valuations down even as their share prices have risen, leaving them trading on around 22x forward earnings as a group, nowhere near dot-com levels. But a revolutionary technology and a good investment are not the same thing. The railways, radio and the internet all changed the world, but in each case many of the companies that built the infrastructure failed, and the value was captured later by others. The main risk is not that AI fails to matter. It is that investors pay too much, too early, for returns that may belong to someone else.
We believe AI is revolutionary and will reshape how work gets done across most industries. Unlike the dot-com era, demand is growing rapidly, and the hyperscalers have delivered exceptional earnings from their core businesses. That earnings growth has brought valuations down even as their share prices have risen, leaving them trading on around 22x forward earnings as a group, nowhere near dot-com levels. But a revolutionary technology and a good investment are not the same thing. The railways, radio and the internet all changed the world, but in each case many of the companies that built the infrastructure failed, and the value was captured later by others. The main risk is not that AI fails to matter. It is that investors pay too much, too early, for returns that may belong to someone else.
What this means for your investments
What this means for your investments
What this means for your investments
Today’s yields are restoring the role of government bonds as portfolio insurance. AI is now so central to the U.S. economy that if the trade were to falter, it could tip the world’s leading economy into a recession. This would push central banks to cut rates, and from today’s starting yields government bonds could return around 10-15%. A global equity index fund today is over 70% invested in the U.S., and nearly a third of it sits in just ten stocks, most of them AI plays. Once you add the chipmakers, the cloud providers and data centre operators, AI-related businesses are over 50% of both the U.S. and emerging market benchmarks. AI does not diversify itself, as every part of the chain depends on the other parts continuing to spend.
Today’s yields are restoring the role of government bonds as portfolio insurance. AI is now so central to the U.S. economy that if the trade were to falter, it could tip the world’s leading economy into a recession. This would push central banks to cut rates, and from today’s starting yields government bonds could return around 10-15%. A global equity index fund today is over 70% invested in the U.S., and nearly a third of it sits in just ten stocks, most of them AI plays. Once you add the chipmakers, the cloud providers and data centre operators, AI-related businesses are over 50% of both the U.S. and emerging market benchmarks. AI does not diversify itself, as every part of the chain depends on the other parts continuing to spend.
Large parts of the market have been left behind. Traditional sectors such as banks, insurers and healthcare stand to benefit from AI productivity gains without having funded the build-out. Europe, the UK and parts of Asia continue to trade at a material discount to the U.S., as they have for over a decade, and there are important currency considerations. A faltering AI trade would mean heavy selling of dollar-denominated assets, and a weaker dollar would compound the moves for euro-based investors.
Large parts of the market have been left behind. Traditional sectors such as banks, insurers and healthcare stand to benefit from AI productivity gains without having funded the build-out. Europe, the UK and parts of Asia continue to trade at a material discount to the U.S., as they have for over a decade, and there are important currency considerations. A faltering AI trade would mean heavy selling of dollar-denominated assets, and a weaker dollar would compound the moves for euro-based investors.
None of this is an argument for stepping away from markets. An environment that never stands still is precisely why the principles for investing in it should stay constant. Diversification is a word that gets overused in investing, to the point of being boring, but the sense it carries has rarely mattered more. The answer to a concentrated market is genuine diversification across regions, sectors, styles, currencies and, where appropriate, defensive assets. This is how our portfolios are built, and why we are adding to government bonds. Where this is relevant to your own portfolio, we will be in touch next week.
None of this is an argument for stepping away from markets. An environment that never stands still is precisely why the principles for investing in it should stay constant. Diversification is a word that gets overused in investing, to the point of being boring, but the sense it carries has rarely mattered more. The answer to a concentrated market is genuine diversification across regions, sectors, styles, currencies and, where appropriate, defensive assets. This is how our portfolios are built, and why we are adding to government bonds. Where this is relevant to your own portfolio, we will be in touch next week.
Ciaran Carolan 02/11/2026
Ciaran Carolan 02/11/2026
At DFP, we offer financial management advice to individuals, charities, corporate partnerships and businesses, which is specifically designed around their individual circumstances.
Docal Ltd. t/a DFP Pension & Investment Consultants is regulated by the Central Bank of Ireland.
Registered Address: 1st Floor Quayside Business Park,
Mill Street, Dundalk, Co. Louth. Registered in Ireland, company registration number 390947
At DFP, we offer financial management advice to individuals, charities, corporate partnerships and businesses, which is specifically designed around their individual circumstances.
Docal Ltd. t/a DFP Pension & Investment Consultants is regulated by the Central Bank of Ireland.
Registered Address: 1st Floor Quayside Business Park,
Mill Street, Dundalk, Co. Louth. Registered in Ireland, company registration number 390947
At DFP, we offer financial management advice to individuals, charities, corporate partnerships and businesses, which is specifically designed around their individual circumstances.
Docal Ltd. t/a DFP Pension & Investment Consultants is regulated by the Central Bank of Ireland.
Registered Address: 1st Floor Quayside Business Park,
Mill Street, Dundalk, Co. Louth. Registered in Ireland, company registration number 390947