Market Matters- Growth is strong, but becoming expensive

• Growth remains resilient, but sustaining it is becoming more expensive. Corporate revenues and economic activity remain strong, while higher oil prices, bond yields and infrastructure costs are putting pressure on valuations and financing assumptions, particularly in US technology.
• Alphabet highlighted both the scale and the cost of AI demand. Its reported earnings were boosted by a $98 billion unrealised investment gain, while adjusted earnings were broadly in line with expectations. Google Cloud growth remained very strong, but negative free cash flow and planned capital expenditure of $195–205 billion increased scrutiny of future returns.
• The semiconductor cycle remains strong, but investor positioning is crowded. Forward revenues, earnings and margins remain exceptionally high, although demanding expectations and concentrated exposure contributed to a correction of more than 18% during July.
• Energy risk has increased across two important shipping routes. Restricted traffic through the Strait of Hormuz, alongside attacks on Saudi tankers and Red Sea oil infrastructure, has reduced the margin for further disruption. Europe may be especially exposed through higher natural-gas prices and relatively low storage levels.
• The investment outlook remains constructive, but greater selectivity is required. Improving UK and eurozone data support the growth outlook, while higher yields reflect resilient activity, energy pressures and rising AI-related borrowing. Current market weakness still looks more like rotation and discrimination within equities than a broad retreat from risk.