Why is the current macro environment favorable for risk assets?

Written by: arndxt_xo

Translated by: AididiaoJP, Foresight News

In a nutshell: I am bullish on risk assets in the short term, driven by AI capital expenditure, consumption led by the wealthy, and still relatively high nominal growth—all structurally favorable for corporate profits.

Put more simply: When borrowing costs go down, “risk assets” usually perform well.

But at the same time, I am deeply skeptical of the narrative we’re telling ourselves about what all this means for the next decade:

The sovereign debt problem cannot be solved without some combination of inflation, financial repression, or unexpected events.

Birth rates and demographics will invisibly cap real economic growth and quietly amplify political risk.

Asia, especially China, will increasingly become the key driver of both opportunity and tail risk.

So the trend continues—keep holding those profit engines. But building a portfolio requires recognizing that the path toward currency devaluation and demographic adjustment will be bumpy, not smooth sailing.

The Illusion of Consensus

If you only read the big institutions’ outlooks, you might think we live in the most perfect macro world:

Economic growth is “resilient,” inflation is gliding toward target, AI is a long-term tailwind, and Asia is the new diversification engine.

HSBC’s latest Q1 2026 outlook is a clear reflection of this consensus: Stay in the equity bull market, overweight tech and communication services, bet on AI winners and Asian markets, lock in investment-grade bond yields, and use alternatives and multi-asset strategies to smooth out volatility.

I actually partly agree with this view. But if you stop there, you miss the truly important story.

Beneath the surface, the reality is:

A profit cycle driven by AI capital expenditure, with an intensity far beyond what people imagine.

A partially broken monetary policy transmission mechanism, due to massive public debt piled up on private balance sheets.

Some structural ticking time bombs—sovereign debt, collapsing birth rates, geopolitical realignment—that don’t matter for this quarter but are crucial for what “risk assets” will mean a decade from now.

This article is my attempt to reconcile these two worlds: the shiny, easy-to-sell story of “resilience,” and the messy, path-dependent macro reality.

1. Market Consensus

Let’s start with the general view among institutional investors.

Their logic is simple:

The equity bull market continues, but with more volatility.

Diversify by sector: overweight tech and communication, but also allocate to utilities (electricity demand), industrials, and financials for value and diversification.

Use alternative investments and multi-asset strategies to cushion drawdowns—think gold, hedge funds, private credit/equity, infrastructure, and volatility strategies.

Focus on yield opportunities:

Since spreads are narrow, rotate from high-yield to investment-grade bonds.

Add EM hard currency corporate and local currency bonds for yield pickup and low stock correlation.

Use infrastructure and volatility strategies as yield sources that hedge inflation.

Make Asia a core of diversification:

Overweight China, Hong Kong, Japan, Singapore, Korea.

Focus on themes: the Asian data center boom, China’s innovation leaders, rising Asian corporate returns via buybacks/dividends/M&A, and high-quality Asian credit.

On fixed income, they’re clearly bullish on:

Global investment-grade corporates, for their higher spreads and a chance to lock in yields before policy rates fall.

Overweight EM local currency bonds, for yield, potential FX gains, and low equity correlation.

Slight underweight to global high yield, due to stretched valuations and idiosyncratic credit risk.

This is textbook “late cycle but not over” positioning: ride the trend, diversify, let Asia, AI, and yield strategies drive your portfolio.

I think this is broadly correct for the next 6–12 months. But the problem is that most macro analysis stops here, when the real risks are just beginning.

2. Cracks Beneath the Surface

Macro view:

US nominal spending growth is about 4–5%, directly supporting corporate revenues.

But the key is: who’s spending? Where’s the money coming from?

Simply talking about the falling savings rate (“the consumer is out of money”) misses the point. If wealthy households draw on deposits, add leverage, or cash out asset gains, they can keep spending even if wage growth slows and the job market softens. The portion of consumption exceeding income is supported by the balance sheet (wealth), not the income statement (current income).

This means a large share of marginal demand is coming from wealthy households with strong balance sheets, not broad-based real income growth.

That’s why the data looks so contradictory:

Overall consumption remains strong.

The labor market is gradually weakening, especially at the low end.

Inequality in income and assets is rising, reinforcing this pattern.

Here, I diverge from the mainstream “resilience” narrative. The macro aggregates look good because they are increasingly dominated by a small group at the top of the income, wealth, and capital access ladder.

For the stock market, this is still bullish (profits don’t care if revenue comes from one rich person or ten poor ones). But for social stability, politics, and long-term growth, it’s a slow-burning risk.

3. The Stimulus Effect of AI Capital Expenditure

The most underrated dynamic right now is AI capital expenditure and its impact on profits.

Simply put:

Investment spending is someone else’s income today.

The associated cost (depreciation) shows up gradually over coming years.

So when AI hyperscalers and related companies massively ramp up capex (say, +20%):

Revenues and profits get a major, front-loaded boost.

Depreciation rises slowly over time, roughly in line with inflation.

Data shows that, at any point, the best single explainer of profits is total investment minus capital consumption (depreciation).

This leads to a very simple, but consensus-defying conclusion: As long as the AI capex boom continues, it provides cyclical stimulus and maximizes corporate profits.

Don’t try to stand in front of this train.

This fits perfectly with HSBC’s overweight on tech and its “evolving AI ecosystem” theme—they’re essentially front-running the same profit logic, even if they phrase it differently.

What I’m more skeptical of is the long-term narrative:

I don’t believe AI capex alone will take us into a new era of 6% real GDP growth.

Once corporate free cash flow financing windows narrow and balance sheets saturate, capex will slow.

When depreciation eventually catches up, the “profit stimulus” effect will fade; we’ll revert to underlying trends of population growth + productivity, which aren’t high in developed markets.

So my view is:

Tactically: As long as total investment data keeps surging, stay bullish on AI capex beneficiaries (chips, data center infrastructure, grids, niche software, etc.).

Strategically: Treat this as a cyclical profit boom, not a permanent reset of trend growth rates.

4. Bonds, Liquidity, and a Half-Broken Transmission Mechanism

This gets a bit weird.

Historically, a 500-basis-point rate hike would crush net interest income for the private sector. But today, trillions in public debt sit as safe assets on private balance sheets, distorting this relationship:

Higher rates mean Treasury and reserve holders get more interest income.

Many corporates and households are on fixed-rate debt (especially mortgages).

End result: The private sector’s net interest burden hasn’t deteriorated as macro models predicted.

So we face:

A Fed caught in a bind: inflation still above target, but labor data softening.

A wildly volatile rates market: the best trade this year has been mean-reverting bonds—buy after panic selling, sell after sharp rallies—because the macro never resolves into a clear “big cut” or “hike again” trend.

On “liquidity,” my view is simple:

The Fed’s balance sheet is now more of a narrative tool; its net changes are too slow and small relative to the whole financial system to be an effective trading signal.

Real liquidity shifts happen on private sector balance sheets and in the repo market: who’s borrowing, who’s lending, and at what spreads.

5. Debt, Demographics, and China’s Long Shadow

Sovereign Debt: Endgame Known, Path Unknown

The global sovereign debt issue is the defining macro topic of our era, and everyone knows the “solution” is:

Use currency devaluation (inflation) to push the debt/GDP ratio back to manageable levels.

What’s uncertain is the path:

Orderly financial repression:

Keep nominal growth > nominal rates.

Tolerate inflation slightly above target.

Gradually erode the real debt burden.

Chaotic crisis events:

Markets panic over loss of fiscal control.

Term premium spikes suddenly.

Weaker sovereigns suffer currency crises.

Earlier this year, when Treasury yields surged over fiscal panic, we got a taste. HSBC notes that the “deteriorating fiscal trajectory” narrative peaks around budget debates, then fades as the Fed pivots to growth worries.

I think this drama is far from over.

Demographics: The Slow-Motion Macro Crisis

Global fertility rates have fallen below replacement, not just in Europe and East Asia, but also in Iran, Turkey, and now parts of Africa. This is a deeply consequential macro shock, hidden in demographic statistics.

Low fertility means:

Higher dependency ratios (more people to support per worker).

Lower long-term real economic growth potential.

Persistent social distribution pressures and political tension, as capital returns outpace wage growth.

Combine AI capex (a capital-deepening shock) with falling fertility (a labor supply shock), and you get a world where:

Capital owners thrive nominally.

Political systems get less stable.

Monetary policy is stuck: support growth, but if labor finally gains bargaining power, avoid triggering a wage-price spiral.

You’ll never see this on a 12-month institutional outlook slide, but for a 5–15 year asset allocation perspective, it’s absolutely crucial.

China: The Overlooked Key Variable

HSBC’s Asia view is bullish: positive on policy-driven innovation, AI/cloud potential, governance reform, higher corporate returns, cheap valuations, and the tailwind of regionwide rate cuts.

My view:

Over a 5–10 year horizon, the risk of zero allocation to China and North Asia is greater than moderate exposure.

Over 1–3 years, the main risk is not macro fundamentals, but policy and geopolitics (sanctions, export controls, capital flow restrictions).

You might consider allocating to China AI, semiconductors, data center infrastructure, and high-dividend, high-quality credit, but you must size positions according to explicit policy-risk budgets—not just past Sharpe ratios.