Three Core Convictions in Global Markets

Over time, this reduced appetite for US dollars will likely bleed into lower US Treasury holdings by foreign investors—including sovereign reserve managers—given that yields on Treasuries are less attractive compared to other sovereign debt options after accounting for FX hedging costs.

2. Steeper Developed Market Yield Curves

In the United States, federal government deficits of 6%–8% of GDP are likely each year for the next decade. For non-US NATO members across Europe and for Canada, military and related infrastructure spending will increase over time toward 5% of GDP, funded by larger fiscal deficits. And in Japan, the Liberal Democratic Party campaigned on a platform of reducing consumption taxes, which will mean larger budget deficits. As developed economy governments demand ever increasing amounts of funding to sustain fiscal commitments, I expect investors to demand higher yields to account for greater worries over debt sustainability and increased fear that governments will at some point seek to stimulate higher inflation to devalue their accumulated debt.

3. Stronger Relative Performance of Non-US Equity Markets

American exceptionalism has been the defining theme of global equity markets for nearly two decades. From 2008 to 2024, the S&P 500 Index delivered far higher returns than other key market indices globally (Exhibit 2). This outperformance was driven by multiple factors including stronger earnings growth, valuation expansion, and a strengthening US dollar. But that gap is narrowing: Total returns and annualized returns have improved across non-US markets over the past year and a half.

If I am correct about prospects for a weakening US dollar, currency translation effects will lift returns on non-US assets. At the same time, given elevated US valuation levels, higher discount rates driven by steeper developed market yield curves would have a more negative effect on US equities than those in non-US markets with less demanding valuations.

AI Juggernaut Continues to Drive Risk-Asset Prices

Alongside these market shifts, the AI investment boom warrants closer attention—both for its scale and for the questions it leaves unanswered.

US hyperscaler capex is expected to exceed ~$750 billion in 2026, an increase of over 80% from 2025. What concerns me most about the sustainability of the AI investment boom is the murkiness of the roadmap to an attractive return on invested capital (ROIC). With cumulative AI investment estimated at $5 trillion–$10 trillion between 2026 and 2030, hyperscalers’ ability to achieve shareholder-friendly ROIC levels appears increasingly questionable. The suppliers to these companies also face challenges as they debate the sustainability of volume, pricing, and margins on goods they supply to the AI value chain. With share prices for some AI-related companies up 1,000% or more since the beginning of 2025, the expectations required to warrant current valuations are increasingly demanding, even if one assumes high gross margins and long, productive asset lives—both of which seem unrealistic given the pace of obsolescence in the tech industry.

As worrisome is the potential commoditization of AI over time. While some users may be willing to pay a premium for market-leading options, I expect cost and baseline dependability to drive adoption for most of the world’s businesses and consumers. If that is the case, fast followers that invest a fraction of the capex of market leaders could be in a better position to win market share by offering lower cost, slightly less advanced AI tools.

This is not to say that there are no winners. Hardware suppliers in Taiwan, South Korea, Japan, and the United States are benefiting significantly from the AI arms race, enjoying explosive sales growth and expanding margins—and rewarding investors handsomely. However, my biggest concern is sustainability. With the Philadelphia Stock Exchange Semiconductor Index (SOX) up over 100% year-to-date through late June and a trailing price-to-earnings ratio exceeding 60x, according to Bloomberg, it appears the market is pricing in an excessively optimistic scenario.

The macro backdrop, the three core convictions previously outlined, and the evolving influence of AI paint a picture of a world in transition—one in which the opportunities are real but unevenly distributed. Next, we take a deeper dive into major economic regions and identify where these forces converge and diverge in ways that matter most for portfolio construction.