Kings, Emperors and now Presidents have form when it comes to falling out with Popes!
Probably the second-worst decision made this year by the current US president was to have a very public spat with Pope Leo; the US has about 70 million Catholics. The worst decision is likely to be the Iranian war.
Trump has some vague objectives but is now threatened with recession, inflation and an Iranian regime with greater conviction of their Hormuz chokehold on the global economy. A nuclear-armed Iran may have been deferred but the end point is likely to be inferior to the Obama-led agreement in 2015 (which took 4 years).
The silver lining is that the war to date is likely to deter future American aggression abroad with perhaps an exception for Cuba as a face-saving exercise. The US electorate is strongly against the war and the mid-terms are likely to see a weakening of Trump's position.
JD Vance is almost certainly against the war but was sent in to negotiate. Tellingly, he is no longer favourite to be the Republican candidate in the next election. But he has the power to initiate proceedings to invoke the 25th Amendment that would remove Trump due to insanity. A messiah complex usually meets this bar! However, my working assumption is that the chaos continues with Trump at the helm.
Despite non-stop chaos and crises for the last 25 years, stock markets – globally – have erratically headed higher. Events impact emotions, which impact markets in the short term. Revenues and profits, when they rise, make assets cheaper and surreptitiously push share prices up in the medium term. The latter is much easier to forecast than second guessing other investors’ emotional states.
I talk a lot about the US because they have the largest share of global markets – about 50%. When I started in the industry the UK's share of global stock markets was 20%, compared to 3.6% today. Interestingly our MPs’ pension fund has just 1.3% in UK shares!
In my view a significant determinant of portfolio returns in 2026 will be predicated on American earnings (profit) growth; current estimates are close to a heady 20%. Shares will either go up or they will get a lot cheaper. A continuation of the Iran war could dampen this outlook but if some sort of peace prevails, then the focus will return to company results and the economy which, so far, has been very resilient.
I often discuss the technology sector and AI when talking with investors about their portfolios. But in recent weeks I think I have discerned a potential tipping point in terms of the next chapter in this compelling story. At some point during the first quarter, the ability of AI to self-correct (eliminate hallucinations) has dramatically improved. As a consequence, company usage of AI has started to gain significant momentum. Consumers often expect technology for free (Google search, social media, etc) but companies are happy to spend and spend big, once the technology is good enough: it is now. The results season starting at the end of April might provide hints of this tipping point.
Encouraging news is that technology share valuations – profits versus share prices –
are lower than I can recall for many years. The shares in these tech firms no longer trade at a premium to the market, despite much higher revenue growth than the market average. This appears anomalous.
Turning specifically to AI, I am wary about anecdotes, but here are a few:
- just last weekend I chatted with a friend for a 30-mile journey in New Jersey while his Tesla drove us in 'hurry' mode, weaving in and out of traffic on the interstate.
- I speak to gardeners of all ages who are solving interminable horticultural problems by photographing issues and asking their AI for advice.
- Last Sunday was the Beijing half marathon, with participation from both robots and humans. The winner, in a world-record time, was a robot. (50min, 26sec)
But it is companies where the AI gold lies. They have the opportunity to increase productivity and reduce costs. Just a 1% reduction in costs has a magnified impact on profits.
Drawing all this together, a prolonged war/Hormuz closure could cause significant economic damage and higher inflation. But on the flip side, a dissipation of conflict and an opening of the strait is likely to lead to a focus on other themes, where there is much to savour.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
