The page you were trying to view is not available for your role.
Summary
Despite recent market volatility, there are still reasons for optimism, with global growth holding up and the US consumer remaining resilient. However, as AI becomes an increasingly important driver of both economic growth and equity market returns, markets are becoming more concentrated, making diversification and a better understanding of where portfolio risks sit increasingly important.
This weekend, with the weather turning grey and cold, we retreated to the sofa to cheer ourselves up with a Disney film with the kids. The household lottery ended up with a firm favourite, and even having watched Frozen 2 something like 532 times already, it did the job well. After all, Disney films are designed with a fairly standard path: problems get solved, friends stick together, and in the end, things turn out better than the gloomy middle act suggests.
This is rarely the case in financial markets! After a few weeks of negative headlines, Friday’s price action felt choppy and we saw the VIX index start to creep up above 20 for the first time in several months. So, I spent some of the weekend asking a more Disney question: are there actually reasons for positivity?
Whistle While You Work: no need to batten down the hatches just yet
The past week has given us two decent reads on the state of the world, and neither is flashing red.
Let’s start with the IMF. For those who didn’t pick up the latest edition, the October World Economic Outlook nudged 2026 global growth up by 0.1% to 3.1%, with 2027 seen picking up to 3.4%. Despite an energy shock, conflict and trade tensions, the global economy has simply kept whistling while it works. Inflation is projected to rise to 4.7% this year, largely reflecting higher energy and food prices. Still, this is a forecast of economic growth rather than contraction.
The big banks dominant in the US retail space (JP Morgan, Wells Fargo and Bank of America) all told a similar story in their earnings reports. All three saw double digit increases in consumer related net income, while charge-off rates (where the bank assumes the loan/debt is worthless) were flat or falling on a year-on-year basis in all cases. So, this tells us that the US consumer, still the biggest driver of the US economy, is paying its bills.
Frozen? No, growth isn't slowing, it's moving
There was one section of the IMF WEO report I found quite interesting. In a bit of analysis they had done examining the relationship between countries’ level of AI-related trade, net energy imports and growth, there were very clear groups. In a piece of analysis examining the relationship between countries’ exposure to AI-related trade, their dependence on energy imports and growth, some very clear groups emerged. Countries more exposed to AI-related trade tended to see stronger growth revisions, while energy importers outside the technology value chain faced a much tougher outlook.
The implication is that the drivers of growth have been arguably getting narrower – at the moment with AI investment effectively offsetting drag from the energy supply shock. Given the strength of the AI dynamic, this on balance remains helpful for headline growth rates – although maybe it’s less reassuring when you consider how much of the headline now depends on one theme. The same is true of equity markets: apart from recent weakness, index level returns have been steady although more of its return is coming from a narrower set of companies tied to the same story.
How Far I'll Go: the benchmark moved; the managers didn't
We’ve spoken about this before, of course. But what has been notable in our recent conversations with fund managers is how many more of them are telling us their portfolios look increasingly different from their benchmarks, even though they haven't changed what they do.
As a handful of AI-linked names have grown to dominate the indices, a manager running the same disciplined, diversified process finds their tracking error rising without lifting a finger. In this world, relative performance numbers need more context than usual: underperforming a concentrated index is not necessarily the same as doing a bad job. Moreover, an investor who just ‘passively owns the market’ is making a much more specific bet than they were five years ago, whether they know it or not.
A Whole New World? What I'm watching this earnings season
So, what can we hope for as an indicator of better active manager performance? Well, we’ve gone through a few phases of the AI story. Phase 1 was tied directly to semiconductor and chip manufacturers like NVIDIA and SK Hynix. It feels like we’re mid Phase 2 in which slightly more tangential companies facilitating AI are able to benefit – think about industrial parts suppliers like Fastenal, providing more and more nuts, bolts and tools to people building data centres.
The next level would be to see AI showing up in the results of the ‘regular’ companies actually using it, helping them improve margins or increase revenues. That would be a whole new world for productivity, not just for chipmakers' order books.
The Bare Necessities: staying diversified
For most of the last two decades, owning the index was the neutral choice and concentration was the bet. Increasingly, that distinction is less clear. There are certainly reasons for positivity: growth is holding up, consumers are paying their bills, and AI may yet spread its benefits well beyond a handful of companies.
But if both economic growth and market returns are being driven by a narrower set of forces, diversification arguably matters more, not less. The decision isn't simply whether to be optimistic. It's understanding where the risks in a portfolio now sit, and making sure that today's winners haven't quietly become tomorrow's entire bet.
Key takeaways
- The economic backdrop remains resilient: Global growth is holding up despite geopolitical tensions, energy pressures and inflation, while US consumers continue to show resilience.
- AI is reshaping growth and markets: AI investment is supporting economic growth and market returns, but this means performance is increasingly reliant on a narrower group of companies and themes.
- Diversification matters more: As equity indices become more concentrated, passive exposure may represent a more specific investment bet than it once did, reinforcing the importance of understanding portfolio risk and maintaining diversification.
Sacha Chorley
Portfolio ManagerSacha is a portfolio manager of the Quilter Investors Cirilium and Creation Portfolios. Prior to joining Quilter Investors in 2011, Sacha worked at Broadstone with their team of economists before moving into asset allocation and fund manager research.
Sacha is a CFA charterholder and has also completed the Chartered Alternative Investment Analyst qualification. Sacha has a degree in Maths from the University of Bath.
