Mid-Year Outlook 2026

Staying Defensive After an AI-Driven First Half

With the exception of energy, every outperforming investment theme this year has been driven, directly or indirectly, by AI and the associated wave of capital expenditure. Combined CAPEX spend of AI hyperscalers’ (Amazon, Google, Meta, Microsoft and Oracle) this year is approaching $800BN billion in aggregate, or 40% of revenue, which will surpass that of the oil industry during the shale boom in the 2010s and the telecoms industry during the dotcom bubble in the 1990s (source).

We are in uncharted territory, and it very much feels like a bubble. Current valuations across semiconductor, memory and semiconductor equipment companies have expanded sharply, despite exceptionally strong earnings growth. We maintain our defensive stance. However, we could easily be wrong because AI productivity benefits are real, the demand is increasing exponentially, and big tech firms are generating plenty of cash with relatively low, albeit gradually increasing, debt levels.

Overall we are underperforming this year given our ultra-defensive stance.

Themes YTD

AI, Quantum and Data

The theme is driven by the hyperscalers’ spend on datacentres. Some semiconductors and semicap equipment stocks have retuned >50% YTD, and memory stocks’ are in triple digits given the widely acknowledged shortages. More recently the rally has recently reversed with double-digit falls in stock prices in July. Valuations of our VC quantum fund holdings have gone up significantly, but it’s worth remembering that they are not marked-to-market on a daily basis.

Infrastructure

Energy and digital infrastructure delivered double-digit returns. Energy infrastructure performance has largely reflected changing expectations surrounding tensions in Iran. We have written specifically on this topic and have taken some money off the energy sector earlier in the year. Digital infrastructure, as the AI theme, is driven by the hyperscalers’ spend. More recently we have seen some stock corrections in the IT infrastructure.

Security and safety

Broadly the theme has benefited from cybersecurity concerns, as many companies are feeling vulnerable to sophisticated attacks with the help of AI agents. We were focusing more on the defence sector, which has underperformed this year. We have recently taken profits from the European defence companies, which have done phenomenally well over the last two years.

Fintech

Fintech is one theme which has underperformed for most this year as cryptocurrencies such as Bitcoin and Ethereum are down 27-38%. Interestingly, both bounced back 9-17% since early July when AI-related themes started to underperform. This demonstrates the continued diversification benefits in the midst of rising cross-asset correlations.

Gold and Inflation

Gold has not had a good year so far, contrary to our expectation. As the war in Iran has flared, gold did not provide the hedge as the stock market crashed. In fact, the opposite happened with stock market roaring ahead and gold down YTD. We have earlier noticed this unusual behaviour and suggested that it was related to profit taking after gold’s incredible multi-year run. Our Inflation Buster portfolio which relies heavily on gold has consequently underperformed.

Emerging markets

Most gains in the 1H 2026 are due to chip making, specifically memory in Korea and TSMC in Taiwan. Like other AI-related themes, EM has sold off since the beginning of July. We have a significant exposure to Brazil, which has delivered weaker, but still double-digit returns.

Multi-asset strategy portfolio

Our multi-asset strategy portfolio has underperformed and is down 0.2% in 2026YTD, which is not a great result considering equities are up almost 11% and bonds only slightly negative. This is not surprising given our ultra-defensive stance with the preference for gold and CHF, both of which have declined by single-digit percentages.

Our equities selection is up 3%, because we have a big exposure to Europe, which has underperformed US, and not enough in emerging markets which have outperformed. We also had a negative contribution from commodities, as everything we hold – gold, uranium and crypto have declined. On the bright side the value of our venture capital holdings has gone up significantly, somewhat offsetting this.

Changes to the portfolio

We have slightly reduced our gold exposure and instead increased allocation to US and emerging market equities and UK corporate bonds. We have taken some profits from the Energy and Defence sub-themes earlier in the year, and increased exposure to Tech, Consumer Brands, and multi-asset High Income, BRICs and European portfolios, while reducing Inflation Buster and Safety & Security themes.

Expectations for 2H

The second half could prove to be the mirror image of the first. We do not believe in further upside in tech hardware and semiconductor equities where following gains of more than 50%, valuations now appear to discount a very optimistic scenario. Nor in further upside in defence and energy themes, where we feel sentiment has long since peaked.

European equities could take over the lead again, driven by more defensive sectors which were left behind, such as healthcare and consumer, where European companies are strong. Cryptocurrencies could also recover following their recent correction as it has previously done after deep sell offs. Gold should stabilise as profit taking is mostly done and the structural demand drivers are still intact; and we still like our CHF exposure in line with our broad defensive stance.

While near-term market leadership may have been taken over by the AI-related themes, we continue to believe that disciplined diversification, valuation awareness and active risk management remain the most reliable drivers of long-term investment returns. Our portfolios remain positioned accordingly.

Disclosure

This article represents my personal opinion and is provided for information purposes only. Its content is not intended to be an investment advice, or a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. I use information sources which I believe to be reliable, but their accuracy cannot be guaranteed. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors and, if in doubt, an investor should seek advice from a qualified investment advisor. I am a managing partner of Quantum Exponential, a specialist VC fund.