EquityMay 29, 20265 min readyoutu.be

Why investors keep buying stocks despite inflation and bond market fears | 28 May 2026 | Asset Allocator & FT Adviser

Host: Simoney Kyriakou, Editor of FT Adviser [00:00:00]
Guest: Joe Little, Chief Strategist at HSBC Asset Management [00:00:47]

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References

Original source (youtu.be)

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The Investor/Market Realities: Financial markets have consistently climbed a "wall of worry," setting fresh record highs following a sharp, sudden geopolitical shock observed in late February and early March 2026 [00:01:22]. Emerging markets are exhibiting significant strength across multiple asset classes, including stocks, bonds, and currencies, all operating within a remarkably low volatility environment [00:01:35].
The Economist Concerns: In contrast, economists remain highly anxious about a deeply complicated structural landscape [00:01:45]. This anxiety is driven by spiking oil and commodity prices, which historically serve as strong precursors to economic downturns or full-scale recessions [00:01:53]. Consequently, central banks are actively debating whether they must execute further interest rate hikes to combat resurgent inflation [00:02:09]. Joe Little analogizes this stark mental divide to the book phrase "men are from Mars and women are from Venus" [00:01:10].
The Underlying Drivers of Market Resilience:
- Stellar Corporate Profits: The primary reason markets have successfully decoupled from macro anxiety is exceptionally robust corporate earnings [00:02:34]. While heavily concentrated in the technology sector, this earnings strength has successfully spilled over into materials, financials, and ancillary infrastructure sectors tied to the artificial intelligence theme [00:02:41].
- Behaved Cost of Capital: Equities have remained insulated because long-term bond yields and the broader cost of capital have not behaved disruptively enough to act as a structural drag on corporate valuations [00:03:08]. Markets remain underpinned as long as the "bond vigilantes" do not return aggressively [00:03:16].
Historical Contrast (2025): This tension echoes the "Liberation Day tariffs" era of 2025, where intense policy and trade tariff uncertainty prevailed, but markets climbed the wall of worry because corporate profits showed strong momentum, broadening out beyond technology, while the Fed and other central banks slashed rates to provide an "oxygenating factor" for investment markets [00:04:04].

Historic Yield Milestones: UK Gilt yields have surged to their highest absolute levels since the formal establishment of the Bank of England's operational independence [00:05:42].
The Breakdown of Shorter-Term Projections: In January and February 2026, the broad market consensus anticipated one or two interest rate cuts from the Bank of England [00:06:06]. However, due to severe supply-side energy and commodity shocks exacerbated by the ongoing crisis in the Middle East [00:06:45], market expectations have drastically inverted to now pricing in three potential interest rate hikes [00:06:26]. Joe Little explicitly notes he would be surprised if all three hikes are actually delivered [00:06:36].
"Is 3% the New 2%?": The UK economy has remained structurally stuck at an inflation rate of 3% [00:07:11]. Structurally, if an outside observer from Mars looked strictly at the data, they would deduce an inflation target of 3% rather than the official 2% target [00:07:18]. This shifts the debate toward whether countries like the UK, Australia, and to some extent the United States are transitioning into a structurally higher, stickier inflation regime [00:07:35]. The UK looks particularly inflation-prone, complicated by debates surrounding its national debt position, poor productivity, and political sphere uncertainties [00:07:55].
The Gilt "Yield Beta" and Policy Caps: The UK bond market is highly sensitive to the global trajectory, particularly the upward movement of US Treasury yields driven by global inflation challenges [00:08:16]. However, Gilts are rising at a much faster velocity than Treasuries, displaying a high "yield beta" [00:08:46]. A distinct rule of thumb has emerged: for every 10 basis points of upward movement in US Treasury yields, UK Gilt yields move higher by approximately 15 basis points [00:08:59]. This highlights active "bond vigilantes" in a UK market that lacks a yield-capping policy framework—unlike Europe, where the ECB utilizes its Transmission Protection Instrument (TPI) to cap yields across the Eurozone [00:09:10].
Implications for Portfolios: While a rising cost of capital suppresses long-term economic growth and dampens "animal spirits" [00:10:15], the current setup presents unique advantages. Crucially, nobody in the UK funds themselves directly off 30-year Gilts, as borrowing tends to be positioned shorter on the curve [00:10:33]. Consequently, UK institutional defined-benefit pension schemes are running excellent surpluses due to these higher yields [00:10:07]. For investors with medium-to-long-term horizons, an upward-sloping yield curve where 10-year and 30-year bonds yield more than short-term instruments offers an attractive structural opportunity to compound at nearly 6% on ultra-long-term Gilts [00:11:24].

A Shift from 2025 Dynamics: Throughout 2023, 2024, and 2025, the market experienced immense AI momentum and a "broadening out" phase where a rising tide lifted all boats, supported by strong global growth, an easing inflationary environment, a weaker US dollar, and rate cuts [00:12:11]. In 2026, the return of geopolitical instability, rate hike anxieties, and a severe energy/commodity shock have significantly threatened the global GDP outlook [00:13:26]. While the US remains structurally energy independent, energy-import dependent regions like Europe, South Asia, and Southeast Asia face severe headwinds [00:13:39].
The Narrowing Bull Market: As investors search for highly resilient and reliable growth, the stock market rally has grown significantly narrower, dominated by few leaders and fewer followers at this juncture [00:14:02]. Broadening is required for a healthy, sustainable bull market [00:14:45]. Headline financial news has occasionally been dizzying, heavily dominated by a massive commodity spike in gold and silver during January and February 2026, occasionally obscuring underlying corporate results seasons [00:15:03].
Valuation Buffers and Global Tech Alternatives: Despite resurgent AI concentration, Joe Little notes that forward earnings multiples for the AI sector are rising but are not excessively overextended compared to prior historical peaks [00:15:59]. Furthermore, investors looking to play the AI megatrend at much lower entry multiples are finding strong opportunities in Asia Technology, specifically Taiwan and South Korea [00:16:09].
Emerging Markets and Non-Tech Strength: Broad emerging market indices are trading at highly attractive valuations—roughly 12 times forward earnings—offering blended exposure to both technology and materials/energy exporters (such as Latin America) [00:16:22]. Additionally, the most recent corporate earnings seasons demonstrate that non-tech sectors like industrials, banking, infrastructure, and utilities are continuing to deliver robust profit growth [00:16:51].
The Role of the US Dollar: A key variable to watch for the remainder of 2026 is the dollar's trajectory [00:17:14]. Notably, since the onset of the Middle East crisis, emerging market currencies have recovered against the US dollar at a surprisingly rapid pace [00:17:41]. If the dollar continues to show signs of structural weakening, it will provide substantial foundational support to international and emerging market equities [00:17:25].

Why investors keep buying stocks despite inflation and bond market fears | 28 May 2026 | Asset Allocator & FT Adviser

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References

Investing in a Divergent Economy | 1 Jun 2026 | Notes on the Week Ahead | David Kelly | J.P.Morgan

Falling Yields Reinforce Equity Market Resilience | June 1, 2026 | Professor Siegel Weekly Commentary | WisdomTree

RBI Needn’t Hike Rates; Must Nudge Capital Flows By Bearing Hedging Cos Of ECBs: Chetan Ahya | 2 Jun 2026 | CNBC-TV18

Why investors keep buying stocks despite inflation and bond market fears | 28 May 2026 | Asset Allocator & FT Adviser

[]

References

Investing in a Divergent Economy | 1 Jun 2026 | Notes on the Week Ahead | David Kelly | J.P.Morgan

Falling Yields Reinforce Equity Market Resilience | June 1, 2026 | Professor Siegel Weekly Commentary | WisdomTree

RBI Needn’t Hike Rates; Must Nudge Capital Flows By Bearing Hedging Cos Of ECBs: Chetan Ahya | 2 Jun 2026 | CNBC-TV18

2. Deep Dive: High Gilt Yields and the Changing Target Paradigm [00:05:37]

3. The AI Megatrend and Market Broadening in 2026 [00:12:05]

Finding Balance: Growth, Income and Liquidity | 1 Jun 2026 | Morgan Stanley

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References

Related nuggets

Investing in a Divergent Economy | 1 Jun 2026 | Notes on the Week Ahead | David Kelly | J.P.Morgan

Falling Yields Reinforce Equity Market Resilience | June 1, 2026 | Professor Siegel Weekly Commentary | WisdomTree

RBI Needn’t Hike Rates; Must Nudge Capital Flows By Bearing Hedging Cos Of ECBs: Chetan Ahya | 2 Jun 2026 | CNBC-TV18

[]

References

Related nuggets

Investing in a Divergent Economy | 1 Jun 2026 | Notes on the Week Ahead | David Kelly | J.P.Morgan

Falling Yields Reinforce Equity Market Resilience | June 1, 2026 | Professor Siegel Weekly Commentary | WisdomTree

RBI Needn’t Hike Rates; Must Nudge Capital Flows By Bearing Hedging Cos Of ECBs: Chetan Ahya | 2 Jun 2026 | CNBC-TV18

2. Deep Dive: High Gilt Yields and the Changing Target Paradigm [00:05:37]

3. The AI Megatrend and Market Broadening in 2026 [00:12:05]

Finding Balance: Growth, Income and Liquidity | 1 Jun 2026 | Morgan Stanley