Despite rising energy prices caused by the conflict in Iran and the blockade of the Strait of Hormuz, U.S. growth has remained around 2% since the start of the year. This momentum has been driven primarily by investment in artificial intelligence and household consumption, which remain the economy’s two main drivers. By contrast, cyclical sectors such as residential investment continue to face pressure from high interest rates.

Several factors should be monitored closely. The AI-driven investment supercycle is exceptional and is therefore likely to moderate over time. While hyperscalers have substantially increased their investment plans, these increases partly reflect higher prices resulting from component shortages. As a result, the contribution of this investment to real, volume-based growth is likely to slow.

Inflation also remains a real problem, not only for the Fed, but also for households, whose real incomes are no longer growing. As a result, consumer spending has been supported by a sharp decline in the savings rate and, over the past two years, by favorable wealth effects among higher-income households. However, there are limits to how far the savings rate can fall.

The good news is that the U.S. labor market is showing signs of recovery. Wage growth remains weak, but job creation has picked up again after a period of disappointing data. Surveys also show an increase in companies’ hiring intentions. If this improvement continues, it should help boost household consumption.

Political dynamics are likely to remain a focus ahead of the midterm elections in early November. With the cost of living continuing to rank among voters’ main concerns, current expectations point to a possible change in control of the House, while the outlook for the Senate appears increasingly competitive. A more divided Congress could raise the risk of renewed debt-ceiling negotiations as early as next year.

The Eurozone has also proved resilient in the face of the energy shock. Excluding Ireland, where headline data can be significantly affected by the activities and accounting structures of multinational groups, growth held steady at 1.2% over the first two quarters of 2026, supported by exports and household consumption. This represents a solid outcome in the current European context.

The outlook is supported by several encouraging developments. Spain’s economy remains resilient, and labor markets continue to strengthen across several southern European countries. Germany is also re-emerging as an important source of momentum for the region: data suggest that the German stimulus plan is gathering pace, with stronger industrial orders supporting a more positive business outlook.

The euro area is not immune to uncertainty, and France remains a particular focus. While the election campaign is only just beginning, the fiscal challenges are significant. On the basis of unchanged policies, a major government report published in July 2026 projects that the budget deficit could reach 6.8% of GDP by 2030, with public debt rising above 130% of GDP.

Rising energy prices are also adding to inflationary pressures. However, conditions remain very different from those seen in 2021–2022: EU gas consumption is 20% below 2021 levels, LNG supplies have increased, and a milder-than-average winter is expected. So far, there is limited evidence that the shock is being transmitted persistently to wages or broader prices. That said, a prolonged period of elevated energy prices would increase the likelihood of broader second-round effects.

Since the start of the year, South Korea and Taiwan have benefited strongly from the boom in AI investment, with Taiwan recording particularly robust growth of more than 12%. This investment cycle is supporting exports, which represent a substantial share of both economies – around 70% in Taiwan and 45% in South Korea.

Japan’s economy recorded modest growth of 1.1% in the first half of the year. More recent business confidence surveys, however, point to a strengthening in activity. Wage growth has also remained steady, supporting household consumption and the gradual move away from deflation.

China’s outlook remains more mixed. Growth is holding in the 4–5% range, but underlying momentum remains weak. The real estate crisis is not over and continues to weigh on domestic demand, although exports and the technology sector remain strong. Fiscal policy is expected to provide greater support to demand over the remainder of the year.

Since the start of the year, long-term rates have risen sharply, returning to pre-2008 levels in the major economies. This trend primarily reflects the rise in short-term rates and expectations regarding monetary policy.

In our view, market expectations for further central-bank rate increases may be too aggressive, particularly if the energy shock proves temporary. Should oil and gas prices ease or economic growth slow, central banks could bring their tightening cycles to an end sooner than currently anticipated.

Accordingly, we see a broadly supportive backdrop across fixed-income markets, with a preference for Europe and investment-grade credit. While scope for further credit-spread tightening appears limited, carry remains attractive, with yields to maturity currently above 4% per year.

Equity markets have performed strongly since the start of the year, supported by substantial upward revisions to earnings-growth expectations, particularly in the technology sector. Earnings forecasts have also been revised higher more broadly in both the United States and Europe.

A continued improvement in the macroeconomic backdrop should remain supportive. However, the geopolitical environment calls for selectivity and a measured approach. Periods of market weakness may offer opportunities to gradually increase equity exposure.

Within equity allocations, we favor European equities, which trade at a discount of close to 25% relative to the U.S. market and therefore offer greater valuation support. We also favor emerging-market equities, where strong momentum is paired with attractive valuations. Japan and small-cap stocks are also areas of focus. We are more cautious on U.S. equities, where valuations remain elevated.