Q4 2026 Outlook: The Bond Squeeze

Key Takeaways

• The paradigm for analyzing the AI trade is changing from “supply constraint” to a “demand projection” regime.
• While the overall AI macrotrend continues, the AI 1.0 trade (semiconductors) has performed significantly better than the AI 2.0 trade (supporting industries). Thus, memory companies, neoclouds, independent power producers (IPPs) and IT consulting firms have been punished.
• Higher Treasury yields are making bonds more attractive and putting pressure on other investments like stocks, even as economic fundamentals remain relatively healthy.
• Persistent government deficits reinforce the long-term case for gold and other real assets, despite near-term market volatility.

The AI trade is entering a new phase as the framework for evaluating it is changing. As computing capacity grows, the focus is shifting from supply constraints to projecting demand. This creates new opportunities for investors to assess the scale and sustainability of AI growth, while drawing greater attention to valuations and competitive dynamics.

At the same time, higher Treasury yields are changing the investment landscape. Bonds are becoming more attractive, as pressure mounts on stocks, private credit and other investments, even as the broader economic outlook remains healthy. These developments reinforce the importance of balancing near-term market dynamics with the structural trends we believe will shape the next decade.

Where We See Opportunity

• Stay invested in AI, but recognize the changing landscape. The shift toward modeling AI demand offers a framework for assessing growth potential, while uneven performance across the space calls for greater attention to valuations and competitive positioning.
• Look beyond public markets for AI opportunities. Private companies are capturing a growing share of AI innovation and investment, particularly as companies remain private for longer.
• Reconsider fixed income as yields become more attractive. Higher 10-year Treasury yields are making bonds more competitive with equities and private credit. Stronger economic growth, rather than inflation or credit concerns, is driving yields higher.
• Maintain exposure to real assets. The persistent U.S. fiscal deficit supports our structural preference for gold and other real assets, while attractive valuations and shareholder distributions support opportunities in energy equities.
• Remain constructive on bitcoin and India. Both remain key structural themes, with India's more attractive valuations presenting opportunities despite recent headwinds.

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