Despite volatility beneath the surface, global share markets have pushed higher through 2026, with the artificial intelligence (AI) theme once again dominating the leaderboard. What has been dubbed the "toto trade" (truce on, truce off) as US-Iran negotiations swing in and out of view has done little to shake investor confidence. Part of the reason has been extraordinary corporate earnings. Second quarter earnings for the S&P 500 came in at close to 50% year-on-year growth versus initial 19% expectations, with Alphabet and Amazon doing much of the heavy lifting. Even stripping out one-off gains, underlying earnings growth of close to 30% marked the second consecutive quarter above 20%, with almost every sector delivering double-digit growth.

The scale of AI capital expenditure (Capex) by the hyperscalers is difficult to overstate. Aggregate spending by the largest cloud providers, which sat at around US$150 billion in 2022 before the release of ChatGPT, is on track to reach US$700-750 billion this year, with consensus for 2027 climbing above US$1 trillion. Amazon lifted its 2026 guidance by around 10% to US$220 billion, more than both Meta and Microsoft. Encouragingly, the returns look genuine. Microsoft's Azure business has surpassed US$100 billion in annual revenue and is generating better than 30% returns on data centre investment, with its shares posting its best trading day since 2008 on the result. 

July provided a useful reminder that leverage still matters. Situational Awareness, a highly-levered AI-focused hedge fund, was forced into a fire sale after a wave of margin calls, with Ken Griffin's Citadel picking up most of its equity holdings at a steep discount. At the same time the Kospi (Korea's benchmark index) has seen large daily swings, with July's volatility triggering widespread margin calls across retail investors and dragging down heavyweights such as SK Hynix and Samsung over 35% from their peaks. Encouragingly the pullback in AI-related stocks proved short-lived, with Citadel's deal sparking a sharp relief rally. Overall, this was viewed as a healthy correction that reset positioning without denting the fundamentals.

Valuations look reasonably full, though not extreme. The S&P 500 trades at around 20 times forward earnings, essentially unchanged from the start of the year, as earnings have kept pace with the rally. The bigger question is on the financing side. Credit spreads on the AI hyperscalers have widened and free cash flow is deteriorating as Capex scales up. The bond market is telling a more cautious story than equities, a divergence unlikely to last forever. For now, with most Capex still funded from operating cash flow and the earnings cycle still accelerating, the case for AI-exposed equities remains a constructive one into 2027.

Central banks have turned more hawkish even as headline inflation obliged. The latest US CPI print fell 0.4% month-on-month, the first outright decline since 2020, as de-escalating middle east tensions led to falling energy prices. Federal Reserve (Fed) officials pushed back firmly on any dovish reading, leaving the target range unchanged at 3.50-3.75% at their most recent meeting, with three of twelve members dissenting in favour of a 25bp hike. The European Central Bank also held at a 2.25% deposit rate, with markets now pricing a 50% chance of two hikes before year-end. The Fed arguably has an easier job in tightening, with ongoing economic expansion, a healthy labour market, and every major US bank beating earnings expectations. Australia moved the other way, with softer core inflation shifting pricing towards the Reserve Bank of Australia (RBA) staying on hold, a reminder that the same energy shock is landing on very different domestic starting points.

In New Zealand, the Reserve Bank (RBNZ) yielded to inflation risks and lifted the Official Cash Rate (OCR) to 2.50% from 2.25%, its first hike in more than three years, framed as removing accommodation rather than shifting to restrictive policy. Second-quarter inflation, released shortly after, rose 4.1% year-on-year, the fastest annual pace in more than two years. Fuel was the main driver, though inflation still printed at 2.9% excluding fuel. Working the other way, considerable spare capacity remains in the economy. The RBNZ's Kiwi-GDP Nowcast points to almost no Q2 growth, and house prices and rents have gone nowhere for a year. Encouragingly, business and consumer confidence have hit multi-month highs, alongside a notable pickup in dairy, meat and timber export values and visitor arrivals are almost back to pre-Covid levels.