By Chris Iggo, Chair of the Investment Institute and CIO for AXA IM Core, BNP Paribas Asset Management, Daniel Morris, Chief Market Strategist, Co-Head of the Investment Insights Centre and Ecaterina Bigos, Chief Investment Officer, Asia ex-Japan, AXA IM Core (part of BNP Paribas Asset Management)
Key points
- Federal Reserve policy rate rises
- US data centre construction drives revival
- Bonds opportunities amid rising yields
Facing the rate threat
Equity markets enter September with a strong earnings tailwind behind them. Results for the second quarter earnings season showed strong growth across most markets and sectors. Earnings-per-share estimates for 2026 have been revised upwards. But now markets face the prospect of rising US interest rates. The discussion is now focused on how many times the US Federal Reserve may hike interest rates this year instead of whether it will hike at all. US inflation remains well above target and new Fed Chair Kevin Warsh has vowed to bring it back down. Any increase in the fed funds rate will likely be a headwind for equities as financing costs rise. A key factor will be how far and how quickly rates do rise. Fortunately, anything like the 2022-2023 cycle, when rates rose over 500 basis points, is not in the cards. A modest increase in the policy rate should ultimately be digestible as long as growth remains resilient.
The data centre advantage
Surging US data centre construction is driving a broad revival across tangible, heavy industry sectors, contrasting sharply with East Asia’s artificial intelligence boom. In Taiwan, South Korea, and Japan, the AI narrative is primarily confined to advanced hardware manufacturing. While highly lucrative, this tech-heavy model creates a concentrated economic footprint, with limited spillover to other sectors. In contrast, building out the physical infrastructure for US data centres triggers a powerful multiplier effect across traditional domestic industries. Worldwide, there are approximately 13,385 centres, with some 4,400 in the US. The next largest is the UK, with an estimated 550.1
In the US, the core construction of datacentres is almost entirely domestic. The avid demand for power has revitalised the energy sector, prompting investments in grid infrastructure, nuclear energy power, and renewable energy deployment. This buildout requires extensive civil engineering, physical security installation, and regional utility expansions. It creates demand for heavy electrical equipment manufacturing alongside structural steel production and widespread construction engineering demand. Consequently, while Asia powers AI through microchips, the US buildout acts as a catalyst for a broader industrial renaissance, lifting manufacturing, energy, and industrial sectors across the domestic economy.
The convertible option
Bond yields’ upward momentum continues to co-exist with strong equity market performance. This suggests shares will continue to outperform bonds. But within the fixed income space, all is not lost. Investors have opportunities to potentially benefit from equity-like factors within a fixed income portfolio. High yield bonds are one example with index level credit spreads at 260 basis points in the US market and slightly higher in Europe. Over a typical three-year maturity horizon, that is a potentially additional compound return of more than 8% compared to government bonds. Floating-rate securities can also be attractive in this environment, particularly if central banks do nudge rates higher. An asset class that can benefit from both higher yields and a bullish equity environment is convertible bonds. Some securities in that universe pay variable interest rates. Investors benefit from bond-like returns with the option of converting to equity if the stock price of the issuing company rises. Convertibles are somewhat complex but provide a potentially interesting return profile in today’s environment. So far in 2026, returns from a US dollar-denominated global index significantly exceeded most fixed income assets and compare favourably with many equity market returns.
Implementation ideas
Disruptive technologies in US and emerging markets
Rationale: The AI boom has the power to transform business operations and employment, while delivering innovative, beneficial new products and services across the world economy. As more powerful applications are developed, investment opportunities in AI infrastructure, the value chain and in downstream applications will be abundant. The unrealised potential of the technology should underpin continued strong capital expenditure and potentially profitable investment opportunities.
European equities
Rationale: Strategic areas of focus related to achieving more economic autonomy will continue to underpin investment opportunities in European equities in 2026. Spending on defence, digital infrastructure and green technologies are prioritised across Europe and will be supported by both national and European Union-wide initiatives over many years. There will be multiplier effects from this across numerous sectors, and with European equities trading on lower valuations than in the US or Japan, in our view the potential opportunities in European equities are clear.
US high yield
Rationale: Credit conditions remain benign – global growth has withstood the energy shock, and corporate earnings growth remains solid. Rising interest rates have pushed yields higher and the Federal Reserve has ruled out any chance of rate cuts this year as inflation remains above 2.0%. This is likely to underpin attractive credit market yields levels. Despite increased investment-grade corporate bond issuance, high yield markets continue to benefit from improved credit quality and positive technical and cash-flow dynamics. Yields above 7% are attractive and income return from US high yield has exceeded 4.2% so far in 2026. Focused credit selection and discretionary use of leverage can potentially improve total return relative to indices in this market segment.
Asset Class Summary Views
Opinions draw on investment team views and are not intended as asset allocation advice.
| Rates | ||
| US Treasuries | = | Elevated forward expectations reflect the risk of higher rates in coming months if data continues to surprise |
| Euro – Core Govt. | = | Yields have stabilised at a higher level with the ECB pricing two rate hikes this year |
| Euro – Govt Spreads | = | Limited fiscal response to Iran crisis so far with Italy and Spain in better financial position than in 2022 |
| UK Gilts | + | Continued underperformance on overdone inflation and fiscal concerns. Political risk may keep long-term gilt yields elevated but market rate expectations look too aggressive |
| JGBs | = | Bank of Japan cautious on rates hikes in crisis environment |
| Inflation | + | Inflation carry will be elevated through the summer; short-duration strategies potentially effective |
| Credit | ||
| USD Investment Grade | = | Spreads wider than pre-Iran crisis but subject to rates and growth risks. Short duration preferred |
| Euro Investment Grade | = | Yield buyers support positive technical backdrop but relative value worsening again as spreads tighten |
| GBP Investment Grade | + | Attractive yields for long-term sterling investors but gilts an ongoing source of volatility |
| USD High Yield | + | Income attractive with market shaking off earlier concerns about software exposure |
| Euro High Yield | + | Yields close to 6% provide attractive relative value opportunities versus investment grade |
| EM Hard Currency | = | Solid performance since March with attractive yields but macro risks remain |
| EM Local Currency | + | Scope for local rate cuts once energy outlook becomes clearer |
| Equities | ||
| US | + | Strong earnings growth and upward revisions continue to support US equities, particularly the technology sector, which has undergone a meaningful derating |
| Eurozone | + | Supported by improving business activity; EPS revisions are also positive across a broad range of sectors – not just energy – narrowing the gap with the US |
| UK | = | Higher interest rates remain a drag on growth momentum. Defensive sectors are likely to fare better, while the commodities sector is also supported |
| Japan | = | Fiscal expansion should support domestic demand sectors but valuations have re-rated. Persistent yen weakness is a support |
| China | – | Tech hardware continues to be strong but consumer trends remain broadly lacklustre and progress on anti-involution appears to be slowing |
| Global Emerging Markets | = | Earnings momentum remains good on semiconductor and memory stocks, benefiting Korea and Taiwan, and the excess leverage in the space has been mostly cleared |
| Investment Themes* | + | Long-term positive on AI buildout, grid electrification and carbon transition strategies |
* BNP Paribas Asset Management has identified several themes, supported by megatrends, that companies are tapping into which we believe are best placed to navigate the evolving global economy: Automation & Digitalisation, Consumer Trends & Longevity, the Energy Transition as well as Biodiversity & Natural Capital; source: BNP Paribas Asset Management.
[1] Statista: https://www.statista.com/statistics/1228433/data-centers-worldwide-by-country/.
