Market Commentary | August 2026

Market Commentary – August 2026

All year the AI data center build out and the AI tech trade has been the biggest theme of the economy and the markets. It has contributed so much to economic growth where some economists estimate that up to 40% of GDP growth is related in some way to data center construction.¹ About half of the market cap of the S&P 500 touches the AI infrastructure ecosystem.² Earnings growth and profit margin expansion for companies in this index also have been hugely helped by companies benefiting from the massive capital spending in building out the compute power.

To quantify the extent at which the major hyperscalers (Microsoft, Meta, Google/Alphabet, Amazon and Oracle) are spending on GenAI, Nvidia, a major beneficiary of the spend, estimates that the top five companies will have CapEx of about $800 billion in 2026 and $1 trillion in 2027.³ Extending this out to 2032, Stijn Van Nieuwerburgh, a professor at Columbia Business School, estimates that the AI buildout will total about 3.5% of GDP.⁴ For comparison, the 1836-1841 development of canals got to around .75% of US GDP.⁵ The railroad build from 1870-1890 got to about 2.25% of US GDP.⁶ Electrification of the country from 1905-1925 was about .5% of GDP.⁷ Highway construction from 1956-1973 was about 1.1% of US GDP and was followed about 20 years later when a similar level of spend was done on telecom and fiber that delivered the digital roads for the internet.⁸

The first money tree for this huge spend was the cash flows of the hyperscalers. That has run out as free cash flow has sharply shrunk. The next money tree has been Wall Street where equity and debt deals are now taking place and where debt financing in particular could be in the hundreds of billions this year alone.⁹ Wall Street is even getting creative, as they always do, for better or worse, by declaring that semiconductors could even be considered worthy of inclusion in an asset backed security.

I’m highly confident in the incredible technological advancements that GenAI will bring and the productivity and efficiency gains we all will benefit from, as technology always has done in the history of mankind. The disruption concerns are completely understandable and for some worrisome, but we also don’t believe this time is different and over time it will create more new jobs we can’t even currently think of, than those that will get displaced. We also have community pushbacks nationally against the building of data centers that we have to watch as well. I bring this all up just to highlight the enormous reliance the economy and markets have right now on building data centers and the sustainability and trajectory we watch closely from here.

Notable in August too has been the continued rise in global interest rates. As of this writing on September 1^st, the US 10 yr yield stands at 4.77%.¹⁰ While up just a few basis points from July, it stood at 4.17% at the beginning of the year.¹¹ The 10 yr Japanese JGB yield, a major influencer of global interest rates, closed at 3% for the first time in 30 years.¹² That’s up from 2.07% this year.¹³ The UK and French 10 yr yields are at 18 year highs and the German 10 yr bund yield is at 15 year highs.¹⁴ Inflation worries continue to be a concern, especially with higher energy and food prices but inflation expectations in the TIPS market in the US and inflation linkers overseas have been more contained. That tells me there is another factor too contributing to the global rise in yields and selloff in bonds and that is growing concerns with excessive debts and deficits that the US, Japan, France and the UK all share. Germany’s debt situation is much better with a much lower debt to GDP ratio but spending there has really ramped up, particularly on defense.

In September, we expect an interest rate increase from the Bank of Japan and the European Central Bank while it’s about 50/50 that the Federal Reserve will do the same. Either way, I believe that the influence of central banks is much less relevant in the current cycle because longer term interest rates are really the cost of capital price setters right now.

If there is one thing that can upset the equity market apple cart it is a continued rise in long term interest rates as it’s “the most important price in the world” according to famed former hedge fund manager Stanley Druckenmiller expressed in a WSJ op-ed penned in August. Many companies borrow off the 5-10 yr Treasury yield and interest rates are the base line discount rate when discounting future cash flows. Something we are watching closely.

What can complicate the interest rate picture and the job of central banks in trying to contain inflation is the rise in commodity prices. The CRB index (Commodity Research Bureau), consisting of oil and gas, industrial metals, agriculture and precious metals, is up 37% year to date with most notable recently is the rise in ag prices.¹⁵ The Bloomberg Agriculture Index in particular rose 12.4% in August.¹⁶ With regards to oil prices, the Strait of Hormuz is still not fully open as the kinetic tit for tat continues with Iran. While a decent amount of supply is still getting through (debates to the extent of which), we are nowhere close to seeing the same level of transportation that occurred prior to March.

Positively, the US economy continues to grow about 2%, helped as stated by the data center construction but also upper income spend along with very high government spending as evidenced by the $2 trillion budget deficit.¹⁷ Manufacturing too, after contracting globally for about three years, is recovering. Some of that is a pull forward of ordering that began when the Middle East conflict started, some of it is just standard inventory restocking and some of it is a pull forward of shipping ahead of possible tariffs again. Housing continues to be the drag and spending from lower to middle income consumers are much more muted in their consumption relative to upper income consumers.

Earnings growth has been a bright spot but also as said, much is being driven by companies that are selling into the GenAI buildout. And we’re not just including tech related stuff but companies that make cement, steel, HVAC, gravel, electrical equipment. Companies that are benefiting from this span the globe.

Conclusion

We are at such an interesting moment in time with global influences that have large repercussions and we spend everyday monitoring the events and trying to figure out what it means and how best to position client portfolios. It’s a highly dynamic and volatile world but always is. Being humble in trying to figure it out is important but risk management remains vital to us as well and thus we’re always watching our backs from an investing standpoint.

Regardless of how all the above plays out, it remains essential that investors maintain adequate short-term liquidity to cover two to three years of spending needs. Knowing that near-term period is secured allows the rest of a portfolio to be viewed with a longer perspective, and a long-term horizon is always an investor’s best friend.

^1-17 Bloomberg

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