Q4 2026
The Short and Long
CIO Introduction
The CIO team focuses on identifying the developments that genuinely change the investment landscape and finding opportunities that volatility and uncertainty may create. Our job is to separate signals from noise and seek resilient portfolios grounded in fundamentals.
The fourth quarter will test that discipline again. The U.S. midterm elections and two live Fed meetings before year-end will generate plenty of noise on their own. Central bank decisions in Europe and Japan, the ongoing wars in Iran and Ukraine, trade agreements and tariffs, and Brazil’s October election will add to it.
As we enter the final stretch of 2026, five core convictions guide our positioning:
- Growth remains resilient and economic expansion should continue.
We expect continued growth, while inflation and labor-market conditions keep pressure on policymakers to tighten. Good growth does not guarantee easy markets, but it gives investors a reason to stay invested. - AI is broadening, not ending.
The next phase will increasingly focus on who monetizes AI and who benefits from the enormous investment required to build and deploy it. We will focus on companies that can convert investment into stronger businesses and higher earnings. - Higher rates change the portfolio math.
Bonds still have a role, but investors should not assume duration will automatically provide either strong returns or hedging from equity volatility. The investment environment has changed, and portfolios need to reflect it. - Diversification needs to diversify.
Owning more assets is not enough. We want exposures with genuinely different economic and market sensitivities, including commodities. - Static portfolios are increasingly inadequate.
Markets, policy, correlations and opportunities change. Portfolios should change with them.
Macro Overview and Focuses for Q4
The last mile on inflation is proving the hardest.
The inflation narrative shifted sharply during 2026. Investors began the year expecting inflation to moderate enough for most major central banks to cut rates. We disagreed and argued elevated underlying inflation could constrain central banks’ ability to ease policy. The Iran war then produced an energy shock that pushed prices sharply higher and raised fears of a renewed inflationary surge.
We look beyond both headline and core inflation rates and assess the breadth, momentum, and distribution of price changes. The Fed uses a similar approach with Chairman Kevin Warsh stating in his Jackson Hole speech, “To try to gauge underlying inflation, I find it instructive to disaggregate the 199 individual components of the PCE price measure.”
Using Warsh’s version of this breadth indicator, 52% of goods and services in the Personal Consumption Expenditures (PCE) basket showed 12-month price increases above 3% in August (Figure 1). This is well above the average of 32% in the two decades that preceded the Covid pandemic1. We constructed a similar metric for the Eurozone and observed that the share of Consumer Price Index (CPI) components with price increases above 3% in August 2026 was more than double the average share before the pandemic (Figure 2).
Investment Themes and Opportunities
Core theme: The AI cycle is evolving and so are the potential investment opportunities
The AI investment cycle continues to strengthen, but the return on each incremental dollar faces greater scrutiny. Higher interest rates raise the hurdle for long-duration projects, while capable open-weight models, regulatory pressure, and rising infrastructure costs intensify competition.
Market concentration has increased the AI exposure embedded in portfolios. Technology companies alone now represent roughly 40% of the S&P 500’s market value, twice their 2022 share, and drive 53% of expected 2026 earnings growth. Many of these AI-related companies have also issued upwards of $200bn in combined investment-grade debt to finance the next phase of AI investment.
Theme: Staying invested in semiconductors and hyperscalers
Rising noise and regulatory scrutiny has prompted investors to ask whether they should rotate or diversify away from AI exposure. We do not rotate for rotation’s sake or diversify simply to add diversification.
We continue to favor diversified semiconductor exposure as a core holding and a key pillar of our U.S. large cap overweight. We also favor hyperscalers, which enter the next phase from a position of strength. Their vertical integration across large language models (LLMs), compute infrastructure (data centers), and chips strengthen their competitive advantage.
Semiconductor demand remains strong and continues to outpace near-term supply, but markets have already rewarded many of the most visible beneficiaries. As a result, we expect the outsized returns of these AI-spending beneficiaries delivered in recent years to narrow from here.
We believe semiconductors across compute, memory, and networking remain core components and potential beneficiaries of the AI capex buildout for years to come. They will also likely remain at the center of future technological waves, as they have been for prior ones, which their long-term earnings growth reflects (see full report). However, investors have likely captured the “easy” gains from this infrastructure cycle. The next phase demands a more granular investment approach, a key tenet of our Physical AI supply chain theme we discuss below.
Theme: Re-underwriting differentiated exposure to AI
As the AI investment cycle matures, we expect greater dispersion between winners and losers. Key vulnerabilities include software providers without proprietary data moats, hardware providers unable to defend margins as technologies and supplies evolve, and legacy businesses at risk of disintermediation by autonomous agents. We navigate this growing dispersion through high-conviction exposure to Physical AI and Cybersecurity.
We believe a compelling, relatively nascent area of opportunity within the AI cycle is its deployment into the physical economy.
Companies operating across heavy physical industries, such as manufacturing, logistics, agriculture, and transportation, stand to benefit substantially from embedding AI into their operations, much in the same way the services sector is already seeing productivity gains from AI assistants. For instance, AI/autonomous systems remain a minority: 90% of tasks in manufacturing are still done by pre-programmed robots.
This transition will require significant capital allocation toward industrial automation, autonomous robotics, edge sensors, industrial software, and advanced machinery, creating a durable tailwind to profit growth for the enablers of these technologies.
Risks on our radar
We enter the final quarter of 2026 with a crowded risk calendar.
- U.S. midterm elections. A new Congress could set different paths for fiscal, trade, and regulatory policy.
- Geopolitics beyond the U.S. Energy infrastructure in the Middle East remains fragile, Brazil holds a closely contested general election, and a busy slate of European elections follows in 2027. Leadership changes may shift policy paths globally as well as in the U.S.
- Long-term rates. We watch Treasury auction demand and the 10-year yield as it tests new thresholds. A disorderly move higher could pressure equity multiples and rate-sensitive assets.
- Broadening inflation. Inflation that spreads beyond energy and food could force more aggressive tightening and a stagflationary environment, which challenges both equities and bonds.
- AI financing and IPO supply. Circular financing, capital spending plans, and a heavy pipeline of large AI listings could test investor appetite and absorb capital from existing holdings.
See our Short and Long quarterly report for more details