Schroders Investment Chief Investment Officer Johanna Kyrklund has expressed the view that loose fiscal policy, the AI boom, expanding defense spending, and supply chain security demands are together driving nominal economic growth higher, creating a broadly favorable environment for equities, while the current economic cycle remains strong, but risks are steadily accumulating, with energy prices and bond yields being the two key indicators to watch closely.
Johanna Kyrklund noted that the Iran conflict has lasted longer than expected, offshore crude inventories and strategic reserve buffers are essentially depleted, and energy prices face sustained upside risk, which will complicate monetary policy for central banks, making it necessary to continuously monitor crude oil, refined products, and natural gas prices.
Bond yields, meanwhile, represent the ultimate constraint on this equity bull market. Johanna Kyrklund divides the impact of bond yields on stocks into two phases: the current period is in the first phase, where rising yields raise the hurdle rate for equity returns and drive up corporate financing costs, with some AI data center financing yields already reaching 10%; however, stock-bond valuation models have not yet flashed warning signals, the credit fundamentals of large cloud service providers remain solid, and the market still underestimates the long-term benefits of AI, with leading cloud providers and frontier AI labs posting rapid revenue growth.
The second phase would involve a bond sell-off triggered by market concerns over debt sustainability, which has not yet been reached. The rise in bond yields this summer mainly reflects adjustments in interest rate expectations, not disorderly bond markets.
Over the medium to long term, population aging will continue to push up government fiscal spending; if inflation exceeds expectations and triggers an interest rate shock, or if the economy slows markedly, debt risks will be exposed.
Johanna Kyrklund believes that the support for equities from higher nominal growth can still offset bond market risks, and on allocation, stocks are preferred over bonds at this stage; but as yields rise, the appeal of bonds increases, and stocks will need to deliver stronger returns to maintain their relative advantage.
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