Competition for Capital

Two themes dominate investor conversations: the impact of AI and the rise in interest rates, linked as demand for capital from both the private and public sectors increases. A surge in capex spending to fund AI infrastructure has eaten into free cash flow and forced companies to raise more in debt and equity markets, while government borrowing needs have increased as priorities shift towards critical infrastructure, energy security and defense, with energy-driven inflation also pushing policy rates higher. The combination has pushed up the cost of capital, following a near-record period of equity outperformance relative to bonds over 10-year holding periods, leaving equity risk premia back at late-1990s levels. Nominal GDP and profit growth remain strong and earnings have been the main driver of equity returns over the past 18 months in all regions;