Jeremy Richardson - Senior Portfolio Manager, Global Equities, RBC Global Asset Management (UK) Limited

Hello. This is Jeremy Richardson from the RBC Global Equity team here with another update. We've come a long way over the course of the last three years. On an annualised basis, almost three years of 20% growth on the trot. That's being supported at the moment by incredibly strong earnings growth. We've seen the sort of earnings growth that you wouldn't normally associate with companies other than actually in the strong recovery after recession. Of course, we haven't really had a recession, so what's driving this?

Well, it's the AI CapEx wave, which is dominating the narrative in markets and continues to do so as we head through into the third quarter and into 2027, with expectations of CapEx being pencilled in even higher. That's being reflected in earnings estimates, with semiconductors and technology companies at the forefront. How is the market responding to this? Well, interestingly enough, although the market seems to be in a consolidating mood at the moment, we're actually seeing the valuation of the market, expressed in terms of PE multiples, actually decline. We've gone from over 20 times earnings for the next 12 months to just below 18 times.

That's kind of interesting because it kind of suggests that the market has got some other things on its mind other than the astonishingly good earnings growth that continues to be driving company forecasts higher. What could those things be? A couple of things come to mind. The first of which, obviously, is the continued high price of energy. This is at risk of putting companies' margins under pressure, and it is something that company management teams are having to think very carefully about, particularly now that it looks as though the situation regarding the Strait of Hormuz is unlikely to be resolved before the end of the calendar year, meaning this is something that is going to be weighing on forecasts and companies' own budgets for 2027.

The second thing that we have to consider also is what's going on with interest rates. With US 10-year yields knocking on 5% and yields rising really around the world, it is giving investors an alternative to invest in, which is cash. Cash, often seen as a lower-risk play, can give a reasonable rate of return now with relatively low risk associated with it, meaning now that equities, and bonds too, have got real competition. Of course, the final thing is, of course, the earnings outlook for companies themselves. We have to acknowledge that a large part of that earnings trajectory is forecast on the continued growth in CapEx, which is really supported by two very dominant private large language model companies, both of whom are expected to be coming to market in the next few months' time.

Until they do that, as public investors, we lack a certain degree of transparency about their business models, how they may develop, and their plans for the future. Public investors will be wanting to see, and looking forward to see, everything that they are going to be sharing with regard to their forecasts and plans for the future. Perhaps the thing that we're not really focusing on as public investors as much as we perhaps should do, and where there may be an opportunity, is actually what AI does for non-technology companies. This, I think, will be an increasingly important narrative as we head through into 2027 because if the market is going to continue to move forward and, more importantly, broaden out, then it's going to be some of the efficiency and productivity benefits from the AI technology feeding out into industrial and non-technology companies that may be the missing piece that will positively surprise the market from here.

I hope that's been of interest, and I look forward to catching up with you again soon.