On the one hand, yields at current levels are starting to look appealing – an appeal that could encourage outflows from equities and inflows into safer bonds. On the other hand, investors are warming to the idea that we have now shifted to a structurally higher inflation regime – meaning that yields could continue to rise. That means it could be better to wait and see before moving capital into bonds.

Looking at equities, they have become materially cheaper today than at the start of the year or a year ago, despite the indices trading higher. The S&P 500’s forward P/E ratio, for example, has fallen to around 19–19.5x, from roughly 22x at the start of 2026 and around 23x a year ago. That translates into a forward earnings yield of about 5.2% today, versus roughly 4.5% at the start of the year and 4.4% a year ago.

There is a good reason for that: earnings expectations have risen faster than stock prices, allowing the market to absorb higher bond yields through significant multiple compression. That doesn’t make the S&P 500 outright cheap – valuations are now roughly around their 10-year average – but it does mean the market is considerably less stretched than it was a year ago, provided those strong earnings expectations hold.

Here, too, the choice is not straightforward. On the one hand, rising yields increase borrowing costs and weigh on profit expectations. On the other hand, earnings expectations remain strong enough to counter part – if not all – of those rising cost concerns. As such, the uncomfortable macroeconomic setup, combined with strong corporate results, is making investors hesitate.

Week ahead

Last week ended on a positive note despite volatility in energy prices and rising yields. The week was quiet from a data and event perspective, but saw a sharp intra-week selloff across bonds and a surge in global yields, with, however, a limited impact on major equity indices. The S&P 500 advanced around 1.2% last week, the Kospi added 2.70%, while the Nasdaq 100 rallied 3.25%. In Europe, the less technology-exposed Stoxx eked out a 0.50% advance, while the Hang Seng underperformed.

As hawkish Federal Reserve (Fed) – and other central bank – expectations gain ground, this week brings a relatively busy economic calendar, with the focus on the US labour market and inflation, and another important test for the AI trade with Micron earnings.

On Tuesday, the latest US JOLTS report will give us an update on labour demand and could influence expectations regarding how far the Fed will need to go with its renewed tightening cycle. On Wednesday, the latest US PCE inflation figures will be released alongside personal income and spending data, ADP employment numbers and the final estimate of second-quarter GDP.  And on Friday, US payrolls, unemployment and wage growth will be closely watched.

Looking back, the latest data suggested an improvement in the US jobs market, strong US growth – backed by massive AI investment and ample fiscal spending – and strong inflationary pressures, mostly coming from rising energy prices, although some could also be attributed to the strength of economic growth. As such, a combination of strong jobs and hot inflation could further boost Fed hike bets and push short-term yields higher. Yet note that the US yield curve has been flattening since the latest Fed decision. And the latter is somewhat comforting for equity investors, as longer-term yields matter more for borrowing costs than shorter-term ones.

In FX, the combination of hot inflation and strong jobs data could provide a solid basis for the US dollar to break important technical levels against the euro and sterling, potentially sending both EURUSD and Cable into a medium-term bearish consolidation zone and challenging the positive trend that has been building since Trump’s return to the White House. Softer inflation and jobs data, on the other hand, could cool hawkish Fed bets and give some relief to the pairs near critical technical support levels.

Here in Europe, euro-area countries will release their preliminary September inflation figures throughout the week, following the European Central Bank’s (ECB) latest rate hike and renewed pressure from energy prices. Hot figures would certainly boost ECB hawks – especially given that last week’s PMI data suggested surprisingly strong economic activity, offering the ECB room for further policy tightening.

Whether stronger ECB rate-hike expectations could translate into a stronger euro remains to be seen, however, as the US dollar will likely remain in the driver’s seat and changes in Fed expectations will continue to determine the direction of travel in the short run.

On the corporate agenda, the highlight of the week will be Micron’s quarterly results, due after the bell on Wednesday. As was the case for other memory chipmakers, expectations are extremely high. The company itself guided for around $50bn in quarterly revenue, an extraordinary 86% gross margin and roughly $31 in adjusted EPS.

Strong AI-driven demand for HBM and tight DRAM supply remain the core drivers, obviously, but the bar is so high that simply meeting – or even modestly beating – expectations may not trigger a rally, especially given that news that OpenAI has paused training of its most powerful AI models following a recent incident will certainly not help sentiment heading into the earnings.

Broadly, we have seen a limited post-earnings rally across the semiconductor sector this earnings season. TSMC, Samsung and AMD all delivered strong numbers and encouraging outlooks, but investors increasingly questioned whether exceptional growth rates and margins were already priced in, as questions emerge around the sustainability of AI spending – whether because models become too powerful and threaten humanity, because financing the additional spending becomes more expensive, or because natural resources such as water and electricity become barriers to AI expansion.

Anyway, strong earnings could help AI stocks resist the pressure from higher yields, but anything less than fantastic results could lead to disappointment and justify a rotation away from some of the sector’s previous winners and into the new ones: the users of AI.

Anyhow, there will be plenty to watch this week, but three questions will dominate: