The sharp uplift in yields seen in fixed income markets, particularly at the ‘short end of the curve’, has been the most important shift in markets over recent weeks. It is possible to ‘over intellectualise’ these moves with different theories of inflation and/or concerns over the inability of elected officials to control budget deficits clouding the bigger picture. Whilst it is certainly true that inflation is higher than expected, that energy markets are somewhat dislocated, and that there is a lack of political consensus in some countries on how to balance competing demands on the public purse (UK, France), the bigger picture is that nominal GDP growth is exceptionally strong, particularly in the United States where it is above 6% (Source: CEIC, June 2026).
In our view it is this very strong nominal GDP growth rate, more than anything else, that is driving bond yields higher. Higher nominal GDP growth is also associated with higher earnings growth – very evident in the Q2 earnings season – and indeed, we would characterise the bond market as being behind the equity market in endogenising how strong the current growth environment is, rather than the other way round. We think it is likely, given rising earnings expectations including in Europe, that stock market analysts are lagging behind the strength of corporate operating momentum in their estimates.
Earnings expectations for 2025 and 2026 for the DJ Stoxx 600 Index
The key driver of strong and rising economic and earnings growth is an ‘investment supercycle’ that continues to gather momentum. A number of years ago we wrote about the impact that the sheer quantum of investment required to achieve ‘net zero’ by 2050 might have on the global balance between savings and investment, musing that this investment supercycle might end the era of ‘secular stagnation’. We also thought that energy and commodity markets were underinvested – following energy and commodity market ‘busts’ – and that this would add to investment need and that interest rates and yields would eventually normalise.
Since then, the world has seen unanticipated energy supply shocks from the Russian invasion of Ukraine and the conflict in the Middle East; the beginnings of ‘de-globalisation’ and an emphasis on national resilience; sharply higher defence spending; and the huge AI investment boom layered on top of ‘decarbonisation and electrification’, all of which have added to the investment supercycle. This investment drives a large demand shock that is pushing nominal GDP growth higher. Perhaps, in time, the extra supply from all of this new investment will be disinflationary, but for the moment the spend is demand, not supply, and this phasing matters. The sharp rise in investment demand is increasing the earnings and earnings growth rates of a wide range of industrial, material, and technology stocks whilst higher rates, yields and credit growth are benefiting the banking system.
European equities in the context of global trends
Source: Jupiter, August 2026
There is something else that is important for stock markets: the chart below shows index-linked gilts for the UK (i.e., real yields). The UK is shown because it is one of the oldest index-linked markets, pre-dating the US TIPS programme, and we’ve taken the series back as long as Bloomberg will allow. This series shows that real yields are only back to the levels immediately prior to the GFC, and this begs the question – what’s the anomalous time period: the current time, or the period 2008-2021 when the banking system was deleveraging, savings were in excess of investments and central banks were further suppressing yields through QE? Our view is that the period 2010-2021 is a separate era and this matters deeply for stock markets.
Yield on 10-year UK index-linked gilts (real yield)
In conjunction with our observations about the investment supercycle, the reversion in yields to more normal levels has significant implications for the patterns of performance and outperformance within stock markets. In the period 2010-2021, low levels of investment combined with deleveraging and ever lower rates/yields were a challenging environment for asset-heavy industrial & materials stocks (lower demand/earnings) but were great for many ‘quality growth’ sectors (lower cost of capital but little earnings impact). In the post-2021 period, however, the reverse is the case: higher investment combined with rising rates/yields is a great environment for asset-heavy stocks (higher demand/earnings) but is terrible for quality growth (higher cost of capital but little earnings impact). We think all of this will continue.
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