What to watch in the week ahead

• US payrolls rose by 162,000 in August, far above expectations. Combined with recent inflation data and a more hawkish tone from Fed Chair Kevin Warsh, the report has shifted our base case to two 25bps Fed rate hikes in 2026. This week's inflation data will show whether price pressures are firm enough to sustain that path.
• Eurozone headline inflation accelerated in August, but core and services inflation eased. Investors will assess whether the ECB signals that an expected September rate increase will be followed by an extended pause. We remain Attractive on Eurozone equities.
• Broadcom raised its outlook for AI-chip revenue, which followed strong results from NVIDIA. Oracle's results this week will offer a further test of cloud demand and AI infrastructure spending. We think investors should retain exposure to AI while diversifying across the wider value chain.

Will inflation temper the Fed's hawkish turn?
The strength of the US employment report released on Friday far surpassed expectations, pointing to an acceleration in hiring. Nonfarm payrolls rose by 162,000 in August, compared with consensus expectations of 55,000, while private payrolls increased by 127,000. Positive revisions added 55,000 jobs to prior months, lifting the three-month average increase in private employment to 75,000, above estimates of the 0-60,000 breakeven range needed to keep unemployment stable. With the labor market resilient, the report strengthens the case for the Fed to focus more fully on inflation.

Attention will now turn to Friday's consumer price index release for August, along with producer prices released earlier in the week. Investors will assess whether the releases show enough moderation in underlying price pressures to temper the Fed's hawkish turn. Softer inflation through autumn could reduce the urgency for rate increases. Even so, the burden of proof has shifted: After the latest jobs report, the Fed has greater scope to tighten unless inflation improves clearly and at sufficient speed.

Having projected the Fed would remain on hold this year, we now expect two hikes, in September and December. This does not, however, change our positive outlook for markets. The same forces contributing to a more hawkish Fed, including resilient employment, solid economic activity, AI-related capital spending, and broad earnings growth, are also supporting the equity outlook. Two rate hikes should have only a modest effect on growth, and we continue to position for gains in equities. Higher yields may create near-term volatility, particularly in rate-sensitive areas, but a Fed responding to economic strength is different from one tightening into weak growth.

Will the ECB signal that its hiking cycle will be limited?
Inflation fears intensified in Europe last week amid rising energy prices as the conflict in the Middle East dragged on. The price of European gas reached its highest level since January 2023 and has more than doubled from a year ago. Eurozone inflation accelerated to 3.3% in August from 2.9% in July, driven almost entirely by higher energy costs. Markets responded by fully pricing a 25-basis-point European Central Bank rate increase in September, while rising global yields added to pressure on European equities. But the underlying inflation picture was more encouraging. Core inflation eased to 2.4% from 2.5%, while services inflation slowed to 3.0% from 3.3%, suggesting that the rise in headline inflation has not yet broadened into a generalized acceleration in domestic prices. Activity data were also constructive, with the Eurozone manufacturing PMI rising to 52.7, its highest reading since May 2022.

This week the key event for Europe is the ECB's policy meeting, with expectations for a 25bps increase to 2.50% on Thursday. Investors will focus less on the expected increase than on whether the ECB presents it as a limited response to higher energy-driven inflation or the start of a more extended tightening cycle.

Our base case is for a rate increase at this week's ECB meeting, followed by an extended pause. We expect inflation to recede in 2027, allowing the ECB eventually to reverse this year's increases. We do not believe the expected hike marks the beginning of an extended tightening cycle that will undermine the European equity outlook. Improving industrial activity, stronger earnings, and reasonable valuations support further gains, and we remain Attractive on Eurozone equities. We favor sectors and markets with the greatest exposure to the cyclical recovery, earnings improvement, and structural investment, including industrials, banks, information technology, consumer discretionary, and health care.

Can AI infrastructure spending sustain market confidence?
Broadcom provided further evidence last week that demand for AI infrastructure remains robust, raising its forecast for AI-chip revenue in the fiscal year ending October 2027 to about USD 115bn from more than USD 100bn previously. The company expects the figure to roughly double to USD 230bn in fiscal 2028, while third-quarter AI-chip revenue more than tripled to USD 16.7bn. The update followed strong results from NVIDIA the previous week and helped technology shares start the week on a firmer footing. The tech-heavy Kospi index was up 4.6% on Monday.

Attention now turns to Oracle's results on Thursday. As a major provider of cloud computing capacity used for AI workloads, the company offers a useful read on demand for AI infrastructure. In its prior quarter, Oracle reported that cloud infrastructure revenue rose 93% year over year. Without taking a view on individual securities, investors will look to the release for evidence that cloud growth remains strong and that the scale, financing, and economics of the data center buildout continue to support confidence.

Our base case of robust AI investment, broader earnings growth, and resilient economic activity supports further equity market gains. Global AI-related capital expenditure is expected to reach around USD 900bn in 2026 and about USD 1.2tr in 2027, with the opportunity extending beyond the largest technology companies into semiconductors and hardware, software, power infrastructure, utilities, and industrials. However, increasing competition and uncertainty over which companies will ultimately capture the returns from this investment reinforce the importance of selectivity and diversification. We think investors should retain exposure to the principal drivers of the AI cycle while broadening equity allocations and adding exposure to the power, resources, and infrastructure required to support the buildout. Capital preservation strategies can also help investors remain invested where concentration or drawdown risk is elevated.