The global economy appears stable, irrespective of current conflicts in the Middle East and their associated effects on energy prices. This contrasts with the development of private consumption, which is under pressure. Tilmann Galler, Capital Market Strategist at J.P. Morgan Asset Management, points to a moderately rising inflation risk resulting from fiscal dominance. However, an inflation shock, such as in 2021 and 2022, is not predicted. Galler made these comments on the sidelines of the presentation of the “Guide to the Markets” for the third quarter of 2026.
Despite geopolitical uncertainties, further upside potential for equity markets is expected due to intact corporate earnings growth. According to Galler, high liquidity holdings do not represent a sensible investment strategy in this environment. The manufacturing sector contributes significantly to economic robustness. At the same time, the consequences of the Iranian conflict are more distinctly felt in private consumption.
Inequality and Inflationary Tendencies
Galler explained that increased energy costs have left households with less financial leeway for other consumption in recent months. In the USA, a gap has emerged between real disposable income and real consumer spending. This inequality manifests in wealthier households experiencing strong asset growth and expansive consumption, while lower-income households have had to accept restrictions.
This disparity carries a political component, as it can lead to dissatisfaction among broader sections of the population. Given the upcoming Mid-Terms elections, measures to dampen price increases, particularly for lower-income households, could be implemented in the USA. Already expansive government spending, further amplified by the Iran conflict, supports the economy but simultaneously increases inflation risks.
The current risk assessment differs significantly from the situation a few years ago. Although purchasing managers' indices and purchase prices are rising, the starting position is different from the inflation shock of 2021 and 2022. Back then, the labour market was characterised by high demand, whereas today it tends to be weaker. This changed inflation dynamic allows central banks to pursue a less restrictive interest rate policy. For the European Central Bank (ECB), Galler currently sees few reasons for another interest rate hike.
Technology and Market Selectivity
A key growth driver is the investment boom in the technology sector, particularly in artificial intelligence (AI). Galler highlighted that AI investments surpass the scale of previous technology cycles, such as personal computers or the internet. Growth is unevenly distributed within sectors. Communications and computer equipment, as well as semiconductors, are experiencing above-average development.
Sectors like software and media could be affected by disruption, as large model providers might undertake acquisitions there. The efficiency gains from AI are a central question. Initial rationalisation trends are already apparent, exemplified in the financial sector, where employment figures are declining. Earnings momentum in AI companies can be substantial.
- —The strength of the technology sector is no longer purely American; emerging markets, particularly China, are developing their own ecosystems.
- —Europe still lags significantly with an AI weighting of less than 15 percent of the total index.
- —In the USA and emerging markets, approximately half of the index weighting is already accounted for by AI.
- —The distribution of the AI pie, however, remains uncertain, which is reflected in the markets – the correlation within large hyperscalers has decreased.
Potential is still seen for equity markets, provided that earnings growth, which is expected to be 25 percent in the USA and even higher in emerging markets due to tech companies, remains intact. Bonds serve as hedges, while high cash holdings are not an alternative.
