Markets Update August 2026 - AI Investments Drive Profits—and Interest Rates

Strong earnings growth, driven largely by the AI boom, remains the main pillar supporting the stock markets, which continue to show resilience despite their already very strong performance since the beginning of the year. The growth momentum of corporate earnings—even when adjusted for one-time items—is at a multi-year high and is becoming increasingly broad-based. At the same time, well-filled order books ensure a high degree of earnings certainty and point to a continuation of the positive trend.

It is striking that the AI boom has entered a new phase. While the enormous investments could previously be financed largely from the hyperscalers’ operating cash flows, debt and equity—as well as, increasingly, “creative” financing structures—are gaining in importance. Thanks to their strong balance sheets and high credit ratings, the necessary capital mobilization should proceed smoothly for the time being, ensuring that the medium-term financing of the AI boom remains secure.

However, this is increasingly giving rise to an undesirable side effect: The rising capital requirements of companies—which are often high-credit-quality—are colliding with the equally rapidly growing financing needs of governments, which must issue more and more bonds to cover high and still-rising deficits. Companies and governments are thus increasingly competing for the same capital. The resulting upward pressure on nominal and real interest rates is a logical consequence. Especially at the long end of the yield curve, yields have now reached levels not seen in decades.

Since the high demand for capital from companies and governments is likely to persist for the time being, a rapid easing of interest rate pressure. At the same time, a further rapid rise in interest rates appears increasingly unlikely. The now historically high real interest rates are creating attractive valuations in the bond market and are likely to gradually attract additional investor interest.

In a normal economic environment, such restrictive interest rates would be a significant drag on the stock markets. Currently, however, the negative impact of interest rates is more than offset by exceptionally strong earnings momentum. As long as this strong earnings momentum persists, the interest rate environment is likely to remain a drag, but it is not expected to call into question the positive performance of the stock markets for the time being.