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Introduction: separating signal from noise
Robert: Hello, I'm Robert Sears, Chief Investment Officer at Rathbones.
One of the biggest challenges for investors today is separating signal from noise. Every day brings a new market narrative, whether that relates to interest rates, artificial intelligence, elections, tariffs, geopolitics or market volatility. Most dominate attention briefly before being replaced by the next concern.
As investors, our job is not to predict every headline. Instead, it is to identify the forces reshaping economies, markets and investment opportunities over many years to come.
Looking across 2026 so far, I believe three themes stand out. First, the AI revolution continues to drive one of the largest investment cycles we have seen in decades. Second, geopolitics has returned as a major market influence in a more fragmented and increasingly multipolar world. Third, we continue to adapt to a different investment regime, one where inflation and interest rates may settle at structurally higher levels than investors have become accustomed to over the previous 40 years.
Today I want to show you four charts that illustrate these themes and explain not only what has happened in markets this year but, more importantly, how we are positioning portfolios for the years ahead.
Artificial intelligence and the investment cycle
The first theme is artificial intelligence.
Much of the market discussion focuses on a handful of technology companies and their share prices. However, the bigger story is what is happening in the real economy. The scale of capital being invested into AI infrastructure, data centres, semiconductors, power generation and digital networks is extraordinary.
Companies are not simply talking about AI, they are spending on it. That spending is creating demand across the economy, from chip manufacturers and software developers to industrial businesses building the infrastructure required to support this transition.
Looking back in 10 years' time, I suspect we will see this period not simply as an AI story, but as a major global productivity and capital investment cycle.
The scale of spending also suggests that AI could fuel one of the largest boom-and-bust investment cycles of our lifetimes. History teaches us that every transformative technology follows a similar pattern, whether railways, electricity or the internet. Each changed the world, but each also experienced periods when investment and enthusiasm ran ahead of reality.
Importantly, something has changed this year. Markets are beginning to move from enthusiasm to evidence. The first phase of a technological revolution rewards participation. Simply being associated with AI was often enough to attract investor attention.
The next phase is different. Investors are becoming increasingly selective. They want to know which companies can convert investment into earnings, which business models can generate sustainable returns and which competitive advantages can endure.
The key question is no longer who is investing in AI. It is increasingly becoming who will make money from AI.
The opportunity remains enormous, but discipline is becoming more important. As valuations become increasingly stretched in some areas of the market, expectations become harder to meet. The challenge is not whether to participate, but how to participate while maintaining resilient portfolios when markets inevitably move to extremes.
Earnings remain the anchor for markets
One of the most underappreciated features of this year is that equity markets have not risen solely because of optimism. They have also been supported by earnings.
The chart we are examining shows how much of equity market performance has been driven by earnings growth versus multiple expansion. As we can see, earnings have been the dominant contributor.
Despite concerns around geopolitics, inflation and interest rates, many companies have continued to deliver resilient profits. Ultimately, market returns can only travel so far ahead of earnings.
Artificial intelligence has certainly played a role in driving growth, but so too have resilient consumers, improving productivity and strong corporate balance sheets.
This is particularly relevant in a higher-interest-rate environment. When discount rates rise, investors become less willing to pay for distant promises. Near-term earnings, cash generation and balance-sheet strength matter more.
The message is simple: markets may occasionally become distracted by narratives, but over the long term earnings remain the anchor. Today, that anchor remains reasonably firm.
Geopolitics in a multipolar world
Another defining theme of the year is the return of geopolitics as a major market influence.
For much of the past 30 years, investors operated in a world characterised by globalisation, expanding trade and relatively stable international relationships. That environment is changing.
Oil prices provide a useful lens through which to view this shift because they are one of the fastest channels through which geopolitical events affect inflation, consumer confidence, corporate margins and central bank expectations.
Recent tensions involving Iran and disruptions to global trade routes demonstrate how geopolitical developments can quickly influence markets. However, Iran is only one example of a much broader shift.
Investors increasingly operate in a world shaped by strategic competition, energy security, supply-chain resilience and rising defence spending. We now live in a more multipolar world where geopolitical developments are likely to create more frequent bouts of volatility.
That does not mean investors should react to every headline. Quite the opposite. Portfolios should be resilient enough to absorb these developments without requiring constant repositioning.
The objective is not to predict geopolitical events. The objective is to ensure portfolios can withstand them.
A new regime for inflation and interest rates
The final chart may be the most important. It examines interest-rate cycles since the Second World War.
The three decades after the war were characterised by rising inflation and rising interest rates. By contrast, much of the last 40 years was defined by falling inflation, declining interest rates and globalisation acting as a powerful disinflationary force.
Many investors have come to regard that environment as normal. History suggests it may have been exceptional.
Today we face a different set of forces. Governments are spending more, defence expenditure is increasing, supply chains are becoming less efficient but more resilient, the energy transition requires substantial investment and labour markets remain tight in many economies.
These developments have the potential to create inflationary pressure, at least until the productivity benefits of AI spread more widely across the economy.
This does not mean inflation will remain permanently high, nor does it mean interest rates will continue rising indefinitely. However, it does suggest that inflation risk may remain structurally higher than investors experienced during much of the previous four decades.
If that proves correct, interest rates may also settle at higher levels than many investors have become accustomed to since the global financial crisis.
For investors, that means valuations matter more, income becomes more valuable, the cost of capital becomes more important and diversification takes on greater significance.
Building resilient portfolios for the future
Everything we have discussed today points to the same conclusion: the future is uncertain, even when the underlying themes are becoming clearer.
Artificial intelligence will continue to reshape economies. Geopolitical tensions are unlikely to disappear. Inflation risks are likely to remain higher than many investors became used to during the previous investment regime.
What we cannot know is precisely how these forces will interact over the next six months or the next year.
That uncertainty is precisely why diversification exists.
At Rathbones, our approach is not to build portfolios around a single economic forecast. Instead, we seek to construct portfolios capable of succeeding across a range of possible outcomes.
In practice, that means combining quality businesses with durable earnings, exposure to long-term growth themes, thoughtful diversification across asset classes and geographies, valuation discipline and alternative sources of return where appropriate.
The objective is not prediction. The objective is resilience.
Closing remarks
The headlines will change. Market leadership will change. Even the dominant themes we have discussed today will change.
However, one principle endures. Wealth is built by remaining focused on the signal while others are distracted by the noise.
The greatest force in investing is not prediction. It is compounding.
Our role is to identify the long-term trends that matter, build resilient portfolios around them and stay invested long enough for compounding to do its work.
That is how we invest at Rathbones. Thank you.
