Monday Digest

Posted 10 August 2026

Regaining confidence after July’s drought

Stocks and bond prices are heading higher as the week starts, with US employment data showing enough softness to reduce inflation pressures, diminishing the chances of rate rises.

Another Iran “deal” buoyed markets last week, with Iran and Oman reportedly agreeing a new shipping route through the Strait of Hormuz. This weekend’s Houthi attacks have pushed oil back up somewhat, but the signs of Iran’s willingness to seek a truce should continue to ease the pressure. The Strait is, in Trump’s words, ‘sort of open’. But with each new back and forth, the market impacts dampen.

If the Iran news was more of the same, the US and Japan’s joint intervention to support the yen was a new dawn. It’s the first such coordination in nearly 30 years and feels reminiscent of the 1985 Plaza Accord.

For Japan, it points to higher interest rates ahead. Japan has high inflation, strong growth and a large current account surplus. It’s unlikely the US would step in without some understanding that the BoJ will address those. It could also encourage Japanese investors to bring capital home, boosting the yen further.

The yen-tervention is also a decent chunk of dollar and euro liquidity injected into global markets – though we should be wary of further currency volatility.

Liquidity is improving and corporate earnings are strong, easing equity valuations even as prices rise. The catch is real bond yields, still at their highest since the turn of the century, which make equities look less cheap by comparison. We doubt this reflects bond markets’ growth optimism; more likely, intense capital demand from governments and AI companies is outpacing bond supply.

The risk is high yields luring investors out of stocks, but that’s not our base case. With improving liquidity, falling volatility and a rebuilding of ‘long’ positions (following July’s shakeout), the good mood should last all summer. Let’s hope it’s a long one.

July asset returns review
July was a difficult month for global investors, as stocks and bonds sold off together while volatility rose sharply. Global equities lost 1.3% in sterling terms and bond prices fell 1%, as yields rose. The disintegration of the US-Iran ceasefire dominated the first half of the month. Brent crude peaked above $100 a barrel before falling back, but still finished 18.9% higher in sterling terms, with broader commodities up 11%.

Equities had other problems too. Investors doubted the sustainability of AI-related earnings growth – despite a strong reporting season – and grew anxious about AI infrastructure spending. Previously buoyant chip manufacturers were hit hardest. Large US tech stocks fell 4.5% in sterling terms and the S&P 500 fell 1.4%. Emerging markets dropped 4.4%, dragged down by TSMC, Samsung and SK Hynix, even though China, the biggest EM region, outperformed every other major market with a 5.5% gain.

A fall in growth stocks should be good for bondholders, as bond yields should track growth expectations, but that didn’t hold. Long-term yields spiked, first on energy prices and then after a poorly received press conference from Federal Reserve Chair Kevin Warsh. Long-term real yields reached around 3.5%, the highest in over 20 years. We suspect the bond-equity disconnect comes from buyers in each asset class becoming entrenched, with risk premia rising in both. UK gilts were the most sensitive, as usual – a structural feature more than an opinion on Andy Burnham’s spending plans.

In contrast, UK stocks were among the best performers, gaining 3.6%, thanks to energy companies and minimal tech presence. European stocks slid 0.8% and Japanese stocks 0.4%. On the last day of the month, coordinated intervention to support the yen injected substantial dollar and euro liquidity – a potent remedy for July’s volatility. Sure enough, markets have looked more positive in early August.

US earnings flatter to deceive
US company earnings look phenomenal: S&P 500 firms have just reported 47.4% year-on-year growth for the second quarter, the strongest since the post-Covid rebound in 2021. Looking closer, though, shows those numbers are a little artificial.

The bulk of that growth came from the ‘Magnificent Seven’ tech firms, but not from revenue or margins. Under US accounting rules, shareholdings in other companies must be marked to fair value, so gains for those shares show up as profit even if those gains aren’t crystallised. Amazon, Alphabet and Microsoft are all major private shareholders in Anthropic and OpenAI, and their stakes delivered enormous gains. Amazon alone reported a $53.4bn pre-tax gain, mostly from Anthropic. Alphabet also benefited from its $94.1bn stake in the now-public SpaceX. Those gains cover the period till the end of June – since which time SpaceX’s shares have fallen substantially.

These results feed the ‘circular financing’ narrative that led to AI bubble talk earlier this year: AI earnings rising because AI share prices are rising.
Even so, the underlying earnings are strong. Strip out Alphabet and Amazon’s investment gains, and S&P 500 earnings still grew 29% – below the headline figure, but well above the 24% analysts had expected, and still the best quarter since 2021. Growth was also more broadly spread across sectors than the headlines suggest.

Not every distortion flatters earnings either: Intel’s government stake sits on its balance sheet as a liability, so a rising share price actually weakens its reported earnings.

We think markets are reading this sensibly. AI-related shares are still below their May levels, so valuations have got cheaper even as earnings power ahead. That is hardly bubble behaviour. And last week’s tech rally owed more to solid earnings, falling oil prices and central bank intervention supporting the yen than to misplaced earnings excitement. Investors seem healthily sceptical of AI valuations, yet unable to ignore that underlying earnings remain genuinely strong.

Important Information This material has been written by Tatton Investment Management and is for information purposes only and must not be considered as financial advice. We always recommend that investors seek financial advice before making any financial decisions. The value of investments can go down as well as up, and investors may get back less than originally invested. All calls to and from our landlines and mobiles are recorded to meet regulatory requirements.