The end of the second quarter saw a strong rebound in AI stocks, particularly in the semiconductor sector and other hardware manufacturers, which are the primary beneficiaries and absorbers of the rampant capital spending on data center capacity. However, the next quarter, or the one after, may see a slowdown in these AI-related stocks as the market begins to question the sustainability of projected growth rates in the long term. This could translate into increased volatility and sharp fluctuations in the stock market. Meanwhile, this quarter's report focuses on the impending new era at the Federal Reserve with Kevin Warsh taking the helm, and whether vital metals and other commodities will continue to present promising opportunities for traders .

The complex growth calculations of artificial intelligence: Will the third quarter see a "crash" in expectations?

The end of the second quarter saw SpaceX's successful initial public offering, making Elon Musk the world's first trillionaire, at least on paper, in the days following the company's offering of a small stake to raise a staggering $87.5 billion. SpaceX occupies a somewhat unusual position within the artificial intelligence ecosystem; its marketing narrative combines its unparalleled ability to launch payloads into space at a pace unmatched by any other company with the notion that AI data centers cannot scale satisfactorily on Earth and therefore must be permanently based in space .

According to this marketing strategy, the combination of the cold of outer space (provided it is shielded from sunlight and capable of solving critical engineering problems) and the constant availability of intense solar power will create a massive market for artificial intelligence worth tens of trillions. Meanwhile, the company is losing millions on its terrestrial data centers and leasing its capacity to other AI companies like Anthropic, seemingly unable to find a more profitable use for its own capabilities .

Despite the successful and profitable launches of SpaceX and its Starlink service, the challenges facing their current AI businesses, which remain largely confined to Earth, are resonating elsewhere. The current accelerated pace and future spending plans of cloud computing giants Oracle, Meta, Amazon, Microsoft, and Google have continued and even intensified in recent months. This has had multiple impacts on the market :

• Headwinds for tech giants as free cash flow turns negative: These giants have other lines of business; for example, Google and Amazon offer hosting services and see strong demand for components like chips, which they sell to their own data centers and others. However, the scale of their spending has been so enormous that free cash flow has turned noticeably negative in some cases, particularly for Amazon and Oracle .
• Exceptional growth and expanding profit margins are key hardware bottlenecks, particularly in memory and hard drives: as of mid-June, when this report was written, more than half of the 40 semiconductor stocks listed on the widely followed SOX index had gained more than 100% since the start of 2026. The outlook continues to suggest that hardware manufacturers, especially memory and hard drive makers, will maintain and even enhance their pricing power. While valuations may seem reasonable in many cases if the forecasts hold true, any shift in the landscape could trigger sharp sell-offs. These companies will be highly sensitive to their quarterly results and to any hint of reduced capital expenditure plans by cloud computing giants .
• The anticipated disruption for software consulting firms and other companies: The key word here is "anticipated." We've seen sharp declines in the valuations of many consulting firms, particularly Software as a Service (SaaS) companies, before any concrete evidence of actual disruption appeared in their earnings reports. In some cases, the market has experienced sharp swings in both directions. Take Snowflake, for example. The company went from suffering a significant valuation decline to more than doubling to a multi-year high in the second quarter, once the market realized it was leveraging artificial intelligence to drive new demand for its products. Many cybersecurity stocks followed suit. They were initially penalized by disruption fears, then surged on concerns that agent-based AI tools could exploit vulnerabilities in mainstream software, thus spurring new cybersecurity spending. In short, we are still in the early stages of understanding the magnitude and patterns of this disruption across the software sector and other industries .

Chart: The "Big Five" cloud computing giants versus the Philadelphia Semiconductor Index (SOX)

The chart below shows an equally weighted index of the top five data center giants (Google, Meta, Amazon, Microsoft, and Oracle) relative to a value of 100 on September 1, 2025—about a week before Oracle announced its massive capacity-building spending plans. The blue curve represents the 40-member Philadelphia Semiconductor Index (SOX) , more than half of which had risen by over 100% from the beginning of the year through mid-June 2026. This shows that the companies that spent the most on enhancing their data center capabilities (even with Google's strong performance) underperformed compared to the hardware component manufacturers that absorb most of this spending, particularly in the memory and storage sectors . ( It's worth noting that leading storage companies not included in the SOX index rose by about 300%, while flash memory maker SanDisk jumped by 750% through mid-June.)

Source: Bloomberg and Microsoft Excel

In short , total AI investments are projected to exceed $800 billion by 2026, with continued growth expected for at least the next few years. For these investments to be justified, the companies pouring in such vast sums will need to generate revenues significantly exceeding these expenditures year after year, with profit margins approaching their current highly profitable and often monopolistic business models. That's hundreds of billions of dollars in additional net profit (after taxes) above the current baseline. Where will it come from? Will it be the destruction of existing companies? Or the displacement of workers? In short, while AI is clearly poised to prove a transformative technology in the long run, the pace of spending and the profitability of its deployment may face a harsh realization in the near term .

A Federal Reserve led by Kevin Warsh: A historic generational shift

It is important to emphasize that these projections were formulated ahead of the Federal Open Market Committee meeting on June 17, the first meeting under the leadership of the new Federal Reserve Chairman, Kevin Warsh. Ideologically, Warsh represents the biggest break in the continuity of the Federal Reserve's monetary policy since Ben Bernanke took over from Alan Greenspan in 2006 .

Let's remember that Warsh resigned from the Federal Reserve Board of Governors in early 2011 after becoming uncomfortable with the bank's direction, particularly after the announcement of the second round of quantitative easing in late 2010. This stance cemented his image as an ideological opponent of what could be considered an overly active Fed that intervened with radical measures to support the economy, including relying on market confidence as an engine of growth. He also spoke in favor of shrinking the Fed's balance sheet and reducing transparency levels to prevent the central bank from backtracking on its future commitments, given that its economic forecasts often proved inaccurate .

The following are the serious problems and questions that Warsh will face upon assuming his position :

• The escalating crisis of financing the US national debt: The US national debt service ratio is projected to surpass the previous record of 3.15% of GDP in early 2026. The Treasury and the Federal Reserve will have to act to reduce this cost; either by allowing the economy to grow at a rate exceeding the benchmark interest rate, by lowering interest rates, by implementing aggressive measures that force savers to buy Treasury bonds, or by a combination of these measures. In short, the Federal Reserve does not have the luxury of being effectively hawkish .
• The inevitability of nominal economic growth outpacing Treasury yields is almost inevitable in a heavily indebted economy, unless the central bank monetizes the debt (something Warsh presumably opposes!). This means the Federal Reserve and the Treasury will be forced, almost reflexively, to intervene aggressively at the first sign of economic weakness—a risk that will likely increase in the third quarter and beyond. Warsh’s initial, hawkish views on central bank credibility may seem extreme, but can the markets and the Treasury afford the cost of such credibility?
• “ The stock market is the economy ” : This phrase has become increasingly common regarding the US economy since the global financial crisis. Not only does US federal tax revenue rely heavily on capital gains taxes from stock market gains, meaning that the already massive federal deficit could expand to staggering levels in good times, but the “wealth effect” created by the strength of the stock market also boosts confidence and spending among the wealthy, particularly retirees who live off the returns from their investment portfolios. However, the continuous stimulus of the economy and the ongoing bailout of financial assets through accommodative policies have also dramatically deepened inequality, especially since the global financial crisis. Treasury Secretary Bessent and Federal Reserve Chairman Warsh have spoken about the need to support the real economy (Main Street) and not Wall Street , but will they dare to translate words into action? And if so, how?
• The need to support the Trump administration’s economic agenda: Beyond President Trump’s persistent demands for the Federal Reserve to lower interest rates, the issue is more about the urgent American need to build economic supply chains less dependent on China, a matter directly related to national security. This means that some sectors of the economy require support and very low interest rates, while others that have benefited from excessive easing in the past are seen as not needing any support and should be left to whatever interest rate the free market determines. This could create entirely new policy initiatives and special status for targeted parts of the economy .

In short, the Federal Reserve under Kevin Warsh may find itself with very little room to maneuver during his tenure, given the urgent need to curb the soaring costs of the U.S. national debt and prevent them from dominating policy priorities. This process will be largely managed by the Treasury Department, with the Fed playing a necessary supporting role. Whatever market conditions, the Fed will generally have to remain on the accommodative side to ensure that nominal growth outpaces U.S. Treasury yields. Crucially, whether the Fed, the Treasury, or both coordinate their efforts, the cost of servicing the U.S. debt must soon fall in real terms (as a percentage of GDP). However, this Fed will signify a fundamental shift in approach; it will not necessarily mean intervening to bail everything out all the time, but rather adopting a more targeted and selective approach .

Chart: Spot price of gold quoted in US dollars

Gold peaked at just under $5,600 an ounce earlier this year, in a remarkable rally fueled in part by a weak US dollar until mid-January. Since early 2024, gold has been on a near-continuous upward trajectory, breaking through long-term resistance above $2,000 an ounce. We are now witnessing a significant consolidation in gold prices, a move that may persist for some time in the near term after bottoming out above $4,000 an ounce in the second quarter. However, given our outlook that policymakers will need to keep nominal economic growth faster than key interest rates, resulting in a weak real interest rate environment, gold remains a cornerstone of investment portfolios for the coming years. Its long-term upside potential far outweighs its downside potential, as fiat currencies continue to depreciate to offset the real burden of sovereign and private debt through inflation .

Source: Bloomberg

Ongoing geopolitical challenges and limited resources in the real world

The Iran war that erupted in late February caused the biggest disruption to the global economy's crude oil supply in history. It was our main concern for the outlook for the second quarter, but even with shipping through the Strait of Hormuz halted for much longer than we thought the global economy could withstand, crude oil prices failed to break out of their historical ranges and equity markets quickly regained confidence after the brief crash in March .

A key new development, compared to previous oil crises linked to the supply side, helped prevent this shock from pushing crude oil prices to the extreme levels many, including ourselves, feared. This development was the exceptionally low demand from China for imports. China drew on its vast strategic reserves and its flexible energy mix, ranging from a massive expansion in coal production to a heavy reliance on alternatives like solar power. For example, its large fleet of electric vehicles was able to run on electricity instead of gasoline .

However, as we discuss below regarding the commodities outlook, averting an energy market catastrophe as we move into the third quarter inevitably requires a rapid return to normal shipping flows through the Strait of Hormuz, given that crude oil and refined product inventories have reached extremely low levels, even with the price collapse anticipated in anticipation of a permanent ceasefire in June. This ceasefire agreement may prove fragile in the third quarter and beyond, depending on the final touches of the negotiations, particularly the details of Iranian reconstruction funds, the status of frozen Iranian assets, Iran’s highly enriched nuclear material, and whether Israel will refrain from further action against Hezbollah .

In short, aside from crude oil (and natural gas), we remain very bullish on the prospects for virtually all physical commodities, whether they are biomass or more traditional commodities like copper and other industrial metals. Biomass has been heavily covered over the past two quarters, and we have already seen waves of speculation in large and small mining and processing companies in this sector. This trend will continue for years as the US and other major economies build supply chains less reliant on Chinese dominance. Furthermore, even if economic growth slows slightly and the pace of demand for AI data centers eases, there are structural trends that will continue to drive strong real-world demand. The second quarter saw a wake-up call for countries overly dependent on crude oil and natural gas supplies flowing from the Persian Gulf. These countries will not only actively seek new sources of fossil fuels but will also look to build a less fossil-fueled energy mix. This means a doubling down on electrification, which, in terms of basic materials, translates into increased demand for copper, lithium, and other metals .

Implications for asset classes

Global Equities and Sectors: Our baseline scenario for equities is that the bull market may not end in the third quarter, but we may begin to see a consolidation top that could trigger a larger market correction either later this year or early next year. This market headwind will be driven by growing questions about the sustainability of AI spending rates in the leading sectors that have driven the most dramatic gains for global market capitalization-weighted indices. Meanwhile, other sectors, such as basic materials, energy, and even defense, may shine .

Fixed income: We do not expect much dynamism in global returns. Global growth must remain strong in nominal terms to keep economies stable and gradually outpacing real debt levels. The recent interest rate hikes by many central banks have likely already been priced in by the market, and a more aggressive continuation from here is unlikely unless energy prices experience another surge. As noted above, the US Federal Reserve cannot afford to adopt a significantly hawkish stance, and if any economic weakness emerges in the third quarter, it may find itself on an easing cycle sooner rather than later .

Currencies: We maintain a bearish outlook on the US dollar over the long term, but is the third quarter too early for a dollar reversal? The US is just a few months away from needing to impose mild monetary tightening policies on the market to maintain liquidity and order in the US Treasury bond market and ensure the sustainability of the national debt if interest rate cuts prove impossible. While many argue that the US has the "cleanest shirt in a dirty world" when it comes to its overall imbalances, the scale of the US debt problem is unique globally. The global financial crisis, the COVID-19 pandemic, and other smaller crises have trained US institutions to anticipate liquidity crises and intervene before they fully escalate. A more accommodative Federal Reserve (given the prevailing circumstances) would likely curb the dollar's appreciation .

Basic commodities (crude oil and precious metals)

• Crude Oil: A successful reopening of the Strait of Hormuz could initially put downward pressure on prices as stranded oil and refined products return to the market, potentially pushing Brent crude closer to $80. However, we believe the market is underestimating the long-term consequences of a disruption that has depleted commercial and strategic stockpiles. While the reopening is largely priced in, filling the supply gap created during the conflict will take time. Gulf production must be restarted, inventories replenished, and strategic petroleum reserves, particularly in the United States, replenished. Several Asian countries may also increase their strategic reserves following the supply shock. Meanwhile, lower energy prices may support demand levels, while most of the floating storage that helped protect the market during the conflict has been exhausted, meaning the market has borrowed barrels from the future. Rebuilding inventories and maintaining the geopolitical risk premium should keep oil prices above pre-war levels for some time .
• Gold (Long-Term Drivers Return to the Forefront): Gold faced challenges during the Iran conflict, as high energy prices fueled inflation expectations, bond yields, and the US dollar. With energy markets normalizing, we expect investors to refocus on the structural drivers that underpinned the recent bull market. Central bank demand remains strong as reserve managers continue to diversify away from the dollar, while concerns about fiscal deficits and sovereign debt sustainability support demand for tangible assets. A decline in inflation expectations should ease pressure on bond yields, creating a more favorable backdrop for the precious metal. While short-term volatility may persist following gold's recent correction, the long-term investment case remains robust. As the inflation shock from higher energy prices fades, investors are likely to refocus on gold's role as a portfolio diversifier and hedge against fiscal and monetary uncertainty .

-I finish-

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