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Thought of the day

Global equities are on track to post a second week of declines. Escalating US-Iran tensions have sent Brent crude oil above USD 100/bbl, stoking inflation fears, and higher AI capex has intensified investor worries over hyperscalers’ returns on investment. The 10-year US Treasury yield has risen to 4.7%—the highest level since January 2025.

Alphabet’s shares fell over 7% on Thursday after it again raised its estimates for 2026 capital spending to USD 195-205bn, while its free cash flow for the second quarter fell into negative territory for the first time in the company’s history.

Sentiment was also dented by further escalation in the Middle East. The Iran-aligned Houthis attacked vessels in the Red Sea, disrupting another vital waterway for global energy supplies. President Donald Trump vowed “major military punishment” for both Iran and the Houthis if there were more attacks on shipping. And the US and Iran continue to exchange strikes. The latest data showed a decline in loading activity within the Gulf, with volumes falling to 2.5 million barrels per day (mbpd) over the past seven days, compared with 6mbpd over the past 30 days. Floating storage of tankers in the Gulf has started to increase again—reaching 80-90 million barrels, up from 35-40 million barrels two weeks ago—as the number of tankers crossing the Strait of Hormuz has fallen. For comparison, over 180 million barrels of oil were stranded in the Gulf in early May at the height of the war.

The risk of further escalation is elevated, and a retest of oil price highs from earlier this year cannot be ruled out should military actions intensify, including strikes on energy infrastructure. In our base case, we expect energy flows through the Strait to recover over time, even if they are unlikely to reach pre-conflict levels, as mounting economic pressures on both sides should lead to mutual interest in re-establishing shipping. Prolonged disruption of energy supplies would add further pressure on US household budgets when affordability is already a key concern, while reduced or minimal income from oil exports could impede the Iranian government’s ability to provide vital goods to its population.

This means that inflationary pressure should subside as the year progresses, and that an aggressive tightening cycle remains unlikely in the near term, in our view. The US June consumer price index showed that monthly underlying inflation, which excludes volatile items like energy and food, fell for the first time since 2020. This supports our view that Fed policy is already sufficiently restrictive and that inflation should continue to trend lower without the need for a meaningful further increase in rates.

On AI, earnings from Microsoft, Meta, and Amazon next week will provide further insights into hyperscalers’ capex commitments and the durability of their revenue growth. Still, limited visibility on capex beyond 2027 amid greater investor demand for spending discipline could continue to weigh on investors’ risk appetite, despite solid AI demand.

For well-diversified, long-term investors, staying invested remains the most effective strategy to navigate current uncertainty. Given robust earnings growth and an improving cyclical backdrop, we see attractive equity opportunities across sectors and regions, and we think investors should broaden exposure to capture a wider range of growth drivers. We also expect bond yields to fall, and believe quality fixed income offers an appealing combination of income, diversification, and medium-term return potential.

Investors looking for ways to further boost the resilience of their portfolios can consider capital preservation strategies, broad exposure to commodities, and allocations to alternatives such as hedge funds.

Capital preservation strategies: Given the constructive outlook in the medium term and uncertainty in the near term, investors can manage downside risk by combining diversified core equity exposure with capital preservation strategies designed to limit losses while retaining participation in further gains. This may be particularly relevant for investors with concentrated portfolios, near-term spending needs, or lower tolerance for drawdowns. In fact, relatively low implied volatility—especially in US, Eurozone, and Swiss equity indices—can make capital preservation strategies more attractive.

Broad commodities: Renewed disruption of energy flows strengthens the case for broad commodity exposure as both a source of return and an inflation hedge. Energy can help buffer portfolios if shipping or production disruptions persist, industrial metals should stay supported by investment in AI and electrification, and agricultural commodities have upside potential given El Niño-related risks. While gold’s near-term outlook is more challenging, we continue to view it as a useful strategic diversifier. Investors can consider an active approach, as commodity leadership may rotate amid shifts in geopolitical conditions, inventories, and demand expectations.

Hedge funds: Hedge funds delivered a strong first half of 2026, with HFR data showing the strongest 1H performance in five years. Elevated stock-level dispersion and sharp swings across rates, commodities, and currencies created opportunities that flexible, unconstrained managers were well positioned to exploit. In fact, we think the need for diversification and alpha generation adds to the appeal of hedge funds, and investors with the appropriate risk profile should consider hedge fund exposure within their broader set of portfolio building blocks. At present, we favor low-net equity hedge, merger arbitrage, discretionary macro, multi-strategy platforms, and selective Asia-focused allocations.

Of course, investors should ensure they have the ability and willingness to tolerate risks related to alternative and structured investments, including but not limited to illiquidity and complexity.