There are some signs of over-exuberance in AI, but US growth is proving resilient – which is positive for equities.

Johanna Kyrklund, Group Chief Investment Officer, reflects on three risks that cloud the horizon as prevailing trends in markets become extended.

As we head into the final quarter of this year, it’s instructive to look back over the trends that have unfolded as we expected, and those that have come as a surprise.

US economic growth has held up well, as we anticipated, and this underpins our positive view on equities. Some recent labour market data has been soft, but wage growth is still solid and the level of layoffs is low. We continue to view the risk of US recession as being low. As we’ve said before, expansionary fiscal and monetary policies are supportive of equities, as long as the bond market is stable (more on this later).

Gold has been our preferred choice of diversifier and this is another trend that is playing out as anticipated. Gold offers protection against concerns over government debt sustainability and central bank independence.

We also expected a broadening out of equity returns and, while the US remains dominant in technology, we have seen markets outside the US attract attention due to their relative value, such as China for example, which has been the best performing market this year. Geographical diversification has been helpful this year.

So for now the “populist playbook” is intact. Benefit from higher nominal growth by owning equities and own gold as the diversifier. However, we need to recognise that some of these trends are now extended and there are a few clouds on the horizon:

First, the equity market is becoming increasingly bifurcated into AI winners and losers and we are seeing some signs of froth in the market. The AI bulls will point to unprecedented capital spending. At the same time, even AI leaders are talking about bubbles, technology is now 40% of the S&P 500 and a rising share of AI capex is debt-funded.

We have repeatedly argued that this risk needs to be managed at stock level and our stockpickers still like the hyperscalers while monitoring the capex binge closely for any signs of deterioration in returns. This vigilance is particularly warranted given the high weight of some of these stocks in the index. I know I am biased, but I am concerned about passive exposures to this space given the high level of stock specific risk.

Second, I am concerned about the extent to which President Trump may be undermining the independence of the Federal Reserve. The Fed has recently turned more dovish, cutting interest rates in September and signalling more cuts to come. Trump has made no secret of his desire for lower rates, and it could be that monetary policy is eased beyond what is warranted by economic conditions. The risk is that this stokes inflation in 2026, especially as companies will also be passing on the cost of tariffs to the consumer

The third worry is the sustainability of government debt. So far, the overall level of yields has been contained but we are seeing some signs of increased volatility at the longer end of yield curves in countries such as France, the UK and Japan.

In France, yields for some French corporates have fallen below those for French sovereign bonds. It’s a sign of the times that luxury goods group LVMH is seen as a safer bet than the French government. We need to continue to monitor the impact of populist policies on bond markets, particularly if inflation picks up again in 2026.

Investing is never easy, and there are signs of over-exuberance in AI, but we stay constructive on equities as we expect growth to be positive and interest rates, for now, are low. 

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