Bond markets: the real story of August

The yield on the 30-year US Treasury touched 5.34% in the week to 21 August, its highest level since 2007.² The US bond market has now been in a six-year drawdown, the longest in history, and the national debt has grown by $450 billion since 1 July alone, on track to cross $40 trillion.¹ Treasury Secretary Scott Bessent responded by doubling the Treasury's bond buyback programme, but the programme is a fraction of the $32 trillion Treasury market, and the initial yield relief was mostly given back within days — a signal more than a solution.² UK gilts have moved in sympathy, with the 10-year yield rising to around 5.05%, driven more by these international forces than anything happening domestically.²

OpesFidelio's investment committee reflects this caution in its own asset allocation: government bonds and high yield both carry a negative outlook currently, alongside commercial and residential property.⁴ On the positive side of the ledger, the committee remains constructive on equities in the UK, Europe, Asia ex-China and India — and notably negative on US equities specifically, a more cautious stance than the market's own record highs might suggest.⁴

The Middle East: another de-escalation, but not fully retired as a risk

Brent Crude touched $100 a barrel in July before pulling back to trade under $90 in early August as fresh de-escalation signals emerged, and markets have shaken off the swings far more easily than earlier in the year.² That said, the risk isn't fully off the table — analysts have been actively debating whether Iran's leadership could still seek to escalate the conflict to raise the economic cost for the US.³ For now markets are looking through the headlines, but the on-off pattern hasn't definitively ended.

The AI trade cools — and the market broadens

Semiconductor stocks (the SOXX index) fell 21% in July and memory-chip stocks (DRAM) fell 32%, an echo, in Charlie Bilello's words, of the run-up in tech stocks in early 2000.¹ South Korea's Kospi — more than half-weighted to Samsung and SK Hynix — posted its worst monthly return since 2008, though it remains up close to 30% for the year. US large-cap growth stocks have badly lagged value and small-caps YTD (roughly +6% vs +23-24%), on pace for the biggest growth-to-value gap on record.¹

None of this means the AI infrastructure build-out is slowing — Amazon, Google, Microsoft and Meta spent a combined $165 billion on capex in Q2, up 87% year-on-year, and data-centre-related investment contributed more to US GDP growth last quarter than any other category.¹ It's a rotation in where returns are coming from, not a retreat from the theme, and it's exactly why OpesFidelio's committee describes markets as becoming "less reliant on a small number of companies to generate returns" — AI remains a strong long-term theme, but investors are increasingly looking at financials, industrials, healthcare and infrastructure too.⁴ Consistent with that shift, the committee has been trimming the growth-heavy Rathbone Global Opportunities fund in favour of the more value-oriented M&G Global Strategic Value.⁴

A record season, and a US growth story built to last

Q2 delivered the strongest US earnings growth since the 2021 pandemic recovery, and profit margins spiked to a record 16.7%.¹ As Evelyn Partners' Daniel Casali frames it, the US economy — marking its 250th anniversary this year — continues to benefit from deep capital markets, heavy R&D investment and an unmatched capacity to adapt to technological shifts, from industrialisation to the internet to AI.⁸ US GDP is forecast to grow around 2.3% annually through 2027, comfortably ahead of the UK, Eurozone and Japan.⁸

Europe had a quietly strong season of its own — Q2 earnings-per-share growth was the strongest in nearly four years — and its edge is valuation and concentration: the region trades on a forward P/E of 14.9x against the US's 20x, with technology just 8% of the European index versus 38% in the US.⁵

Diversification earning its keep

In the week ending 31 July, the main UK stock index hit an all-time high the very same week the US tech-heavy index fell into correction territory — a real-time example of diversification at work. The UK's minimal AI exposure has earned it the nickname the "anti-tech index," with financials and energy doing the heavy lifting instead.⁶ On the continent, a case is building for what's being called "European exceptionalism": champions like ASML in semiconductor equipment, banks benefiting from higher rates, and a wave of German-led defence and infrastructure spending.⁷

Politically, new PM Andy Burnham and chancellor John Healey have been given breathing space by decent data — UK GDP grew 0.4% in Q2, making the UK the fastest-growing G7 economy in H1.³ The Bank of England held rates at 3.75% in July, but the real test is the Budget on 28 October, where tax rises look increasingly likely.²

Quietly the story of the year

The MSCI Emerging Markets index was up 20% YTD as of late July, outperforming developed markets, with Casali pointing to TSMC, Samsung and SK Hynix — now around 30% of the EM index — driving consensus forecasts of 62% EM earnings growth this year.⁸

Where we go from here

Markets head into the autumn balancing a record-breaking earnings backdrop against a bond market sending a more cautious signal than equities are. Encouragingly, the US labour market still looks solid — jobless claims are at their lowest since January 2024, and the current economic expansion, now 74 months old, already exceeds the post-1949 average.¹ Combined with OpesFidelio's own committee positioning — cautious on US equities and government bonds specifically, constructive on the UK, Europe, Asia ex-China and India — the picture argues for the same conclusion from a different angle: the broadening out of returns beyond a handful of mega-cap US names looks like the healthier and more durable story right now.