Inflation is rising. Is growth still holding up?

Nowhere is that tension more apparent than in the US. Gasoline prices have remained above USD 4 per gallon for almost half a year, diesel prices have risen sharply, and the midterm elections are approaching. These higher energy costs are becoming more visible to households at a time when Donald Trump’s approval ratings have declined.

The US Federal Reserve's (Fed’s) next meeting comes just six days before the elections. Recent inflation data strengthen the argument for further rate hikes, although the Fed has historically been cautious about making major policy changes immediately before elections. Fed Chair Kevin Warsh has also emphasised that the broader inflation trend matters more than individual data releases. Markets therefore expect the Fed to hold rates in October’s meeting, but we believe we’ll likely see another increase in December.

We also expect the European Central Bank and Bank of England to raise rates before year-end. While the timing and circumstances may differ, there is a common thread: resilient growth is giving central banks greater scope to tackle inflation through higher rates. 

Higher borrowing costs also matter for one of the biggest investment themes of recent years. Shortly after the IMF warned about increasingly debt-financed AI infrastructure investment and rising global bond yields, AI-related equities came under pressure. Investors are paying closer attention to whether future revenues can justify the scale and financing of today's investment.

Technology shares fell across major markets, particularly in South Korea's KOSPI, which has substantial technology and semiconductor exposure, before recovering somewhat. US semiconductor stocks also declined. In contrast to Wall Street, European equity markets, with considerably less exposure to technology, edged higher.

We continue to believe that AI has substantial long-term potential. Recent volatility is a reminder, however, that high expectations leave less room for disappointment. Early third-quarter results from US banks and technology companies such as ASML have so far supported a broadly healthy earnings picture. The rest of earnings season will provide a more demanding test of whether profits can continue to support current valuations.

With market gains still concentrated among a relatively small group of companies, the largest technology businesses have little room to disappoint. Their results will help determine whether last week’s volatility was a temporary setback or the beginning of a broader reassessment.