Markets have not behaved as many investors expected at the start of the year. Expectations for central banks have shifted significantly, inflation has proved more persistent than anticipated, and long-term interest rates remain elevated. Nevertheless, the economy has continued to show remarkable resilience, while equity markets have not experienced the kind of correction that might be expected in a tighter monetary environment.
This combination invites a reassessment of some of the assumptions that have shaped markets in recent years.
In the first edition of The Market Edit | Beyond Consensus, Alessandro Tentori, market strategist, highlighted three issues worth watching closely until our next edition.
1. Oil: watching for signs that the shock is spreading
The first issue to watch is oil prices. For now, Tentori sees this as an external shock, driven primarily by supply. Its initial impact appears relatively clear: upward pressure on inflation and, potentially, weaker growth.
The challenge for central banks arises when that impact starts to spread through the broader economy.
Higher oil prices can have a direct impact on inflation and subsequently have indirect effects through higher production and transport cost. The key question will be whether second-round effects begin to emerge, for example through wages, the prices of other goods and services, or inflation expectations. That would mark a significant shift.
As long as the impact remains concentrated in the energy sector, central banks may choose to treat the shock as temporary and look through its immediate effects. If it begins to spread more broadly, however, the dilemma becomes much more complex: tightening monetary policy to contain inflation could weaken growth, while easing policy to support economic activity could fuel renewed price pressures.
What to watch: not only how oil prices evolve, but whether their impact begins to feed through to wages, inflation expectations and underlying prices.
2. AI and productivity: can the economy cope with higher interest rates?
The second question is, in some respects, the mirror image of the first. While oil represents a negative supply shock, a sustained AI-driven increase in productivity could provide a positive shock to growth.
Tentori points to the precedent of the 1990s. The spread of personal computers and the internet led to a significant increase in productivity in the United States and raised the economy’s potential growth rate.
The question now is whether AI can have a comparable effect. If companies are able to produce more with the same resources, the economy could grow faster without necessarily generating the same inflationary pressures. This would have another important consequence: interest rates that appear high relative to the levels seen over the past two decades could be more manageable if potential growth is also higher.
This hypothesis helps explain one of today’s apparent paradoxes: interest rates have risen considerably, yet economic activity has remained resilient.
It is still too early to measure the impact of AI on productivity with any precision. Rather than simply accepting the AI narrative at face value, Tentori therefore argues that it should be tested against the data as they emerge.
What to watch: productivity per hour worked, business investment, margins and earnings, as well as new estimates of potential growth from central banks.
3. Markets: distinguishing between high valuations and a bubble
The third issue is particularly relevant for equity markets.
The narrative around artificial intelligence has helped drive both growth expectations and the valuations of certain companies. This inevitably raises a question: are we in a bubble?
For now, Tentori’s answer is no.
His argument is that a financial bubble requires a significant disconnect between prices and fundamentals. In today’s market, many of the companies commanding the highest valuations are also delivering strong earnings growth and high margins.
That does not mean they are cheap. A company can be expensive without necessarily being in a bubble. The distinction matters. The risk would arise if prices continued to rise while fundamentals failed to keep pace, or if investors began buying simply because they expected to sell at a higher price later, regardless of earnings, margins or the economic outlook. This is why the AI narrative needs to be continually tested against the evidence.
What to watch: how earnings and margins evolve relative to valuations, as well as any signs that prices are beginning to become detached from companies’ underlying fundamentals.
A different backdrop: interest rates may stay higher for longer
All three issues share a common backdrop.
For years, markets became accustomed to an environment of structurally low interest rates, supported, among other factors, by central bank purchases, strong international demand for government debt and a negative correlation between bonds and equities. That backdrop has partly changed.
Governments still need to finance their deficits and issue debt, while many of today’s major bond buyers are more price-sensitive and must decide whether to allocate capital to government bonds, credit, equities or other assets.
This does not tell us exactly where long-term interest rates should settle. But it does raise a question that is likely to remain with us over the coming months: are we still waiting for a return to the world of low interest rates, or should we start to accept that a different equilibrium may be emerging?
That is precisely the purpose of The Market Edit | Beyond Consensus: not to add more noise to the market, but to identify the questions that are still worth asking.
