What does an investment strategist do? It is not an old profession and the analogy to military strategists is entirely misleading. At its most basic level, an investment strategist is someone with a view on financial asset returns, and at the start of the year, that job looked relatively straightforward. Despite our long-term capital market assumptions (10 years) showing equity returns around 3% p.a., we expected a stronger backdrop in 2026. In a simple 2 x 2 macro framework with rising and falling growth and inflation, we saw 2026 as falling in the benign quadrant of falling inflation and rising or high growth. Thematically, markets were in the middle of several durable capex trends, like AI and rearmament. Geopolitically, too, the Busan meeting between President Trump and President Xi Jinping in October heralded a period of G2 stability. All this amounted to a relatively constructive environment for risk assets.
Fast forward four months and the picture is one of serious cognitive dissonance. On one hand, the AI theme is accelerating. Earnings expectations for S&P 500 in 2026 have risen sharply since March, primarily led by a tiny number of AI beneficiaries. Payrolls ex healthcare and education and ex-government (3MoM) bottomed out in October, indicating a possible stabilisation in employment trends. Yet one can overstate the health of the US economy. Conference Board consumer confidence is well below the average since 1967.
The S&P 500 equal weight as of writing is still below its late February peak, and companies exposed to the bulk of the US consumer, like Whirlpool and Shake Shack are all doing poorly. Meanwhile, oil inventories have fallen from under 8.4 billion barrels, to below 7.9 billion barrels, close to system maintenance levels of around 7.6bn due to the war in the Strait of Hormuz. Analysts say further depletion could begin to disrupt the real economy in ways markets have yet to price. The US consumer stays afloat for now because $47 billion of tax refunds and $63bn of tax relief have so far offset the $25bn hit from higher gasoline prices, all of which could run till September.
Sahil Mahtani, Director, Investment Institute: “Markets are simultaneously pricing accelerating AI optimism and a potentially serious energy shock. Putting all this together, we could be heading for a very good environment for risk assets, or an utterly terrible one.”
While our indicators are currently projecting a reflationary macro environment—which would underpin a positive equities view—this ultimately depends on technology and geopolitical inflections that are fairly opaque. In some cases, they depend on decisions by leaders that have not been made, and that the leaders themselves might be undecided upon. Yet putting shape on ambiguity and opacity is part of the investment strategist’s challenge—waiting until everything is clear helps no one. Start with AI. Why is the theme accelerating? Essentially, we have had the second technological leap in the last 12 months; there is now a shortage of key AI inputs expectations are rising for growing usage and monetisation, and favourable unit economics sooner than later.
The first technological leap was the wave of reasoning models that came out in 2025 (e.g. o3/o4-mini in April 2025 and Claude Opus 4.5 in November 2025), and the broader acceleration that was triggered towards the commercial use of inference time compute scaling (i.e. inference as opposed to training and “scaling” as in performance improves as the model is given more computing resources).
The second leap, this time in early 2026, was around agentic AI. Markets began to realise that agents multiply inference demand, creating bottlenecks across the AI supply chain, from graphic processing units (GPU) to data centres. Specifically, token usage accelerated at the same time as pricing power improved across parts of the ecosystem — reflected indirectly in a roughly 70% increase in the spot price of Nvidia H100 GPUs in the on-demand market from April onwards. This reinforced expectations that monetisation and favourable unit economics may arrive sooner than previously assumed. Mahtani: “The bullish case for AI is that demand for compute continues to arrive along with positive unit economics. The inflection since March is why markets have become increasingly optimistic about the sustainability of AI spending.”
Will this continue? It certainly could. We have a transformative new technology that needs a lot of capital to fuel it. It’s not obviously a bubble—yet. Bottlenecks in supply are normal in any product buildout—indeed they are part of the way the price mechanism resolves scarcity. At the same time, in our view, it is too early to extrapolate from the on-demand price action to say that token prices will sustainably increase enough to create a durable inflection in AI unit economics—as researchers at Goldman Sachs have suggested. In previous technological revolutions, maturity and expansion usually coincide with falling unit prices, and AI is likely to be no different. We think the market is broadly right to be cautious on the price action among AI-exposed names even if one is broadly bullish on AI usage and utility.
The Strait of Hormuz is the other question mark. On some level this is a geopolitical tail risk that will clear one way or another—at some point the costs of continued closure are so high that there will be a resolution. That is more knowable than what the resolution is. There are many unknowns--no one knows how stable the Iranian government really is, how its population will react after a prolonged ceasefire and hyperinflation, how long Western public opinion will tolerate the status quo, whether Israel escalates, or how the UAE, Saudi Arabia, Turkey, or China may change their stance.
For now, we can say that even if the Strait of Hormuz reopens in the summer, normalisation will not be instantaneous. A substantial regularisation in tanker positioning and refinery restarts may only happen by late 2026. That means the macro effect of a reopening is in some ways more ambiguous than the status quo.
Mahtani: “Markets appear to be treating the Hormuz disruption as temporary rather than systemic. But even if the Strait of Hormuz reopens, supply chains, inventories and refinery activity may take much longer to normalise.”
A reopening would remove the worst left-tail scenario for risk assets, but the lagged effect of product shortages, inventory depletion and demand destruction could still make the coming phase feel like a squeeze on real activity.
“Our baseline remains that equities can do well in a reflationary environment, especially if AI spending continues to seem sustainable. But that view now carries more fragility than it did at the start of the year. The market’s leadership is narrow, the consumer economy is softer than the headline indices suggest, and the energy shock has not yet fully passed through the system. It seems unlikely that the impact of this oil shock will be so limited for equity markets,” Mahtani concluded.