Bonds likely to rebound; equities on borrowed time

We continue to think the AI rally is reaching its final stages, even if recent headwinds to equity markets owe more to surging government bond yields than a re-assessment of the prospects for tech firms. We judge that the bond market sell-off is somewhat overdone at this point. We expect government bonds to recover as and energy prices eventually fall back and central banks prove less hawkish than currently discounted in money markets. But we see a growing number of red flags in the US equity market which point to a downturn over the next year or so. While tech-heavy equity markets, such as those in the US, Korea, and Taiwan, may continue to outperform over the next few months, we expect them to underperform over a medium-term horizon as the AI boom comes to an end. The US dollar will probably remain on the front foot in the coming months, but we anticipate that a peak in the US stock market and slowdown in the US economy next year and into 2028 will eventually lead to a weaker greenback.