Monthly Review – October 2026
OUR PERSPECTIVE – THE PRICE OF SECURITY
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.” ~ Benjamin Graham, The Intelligent Investor
Artificial Intelligence, or Super Intelligence as some call it, may transform the global economy. But as history has proven, technological revolutions and investment returns are not the same thing. We saw some of this in October. The price you pay matters for future returns.
Beneath spectacular US corporate profits lies an uncomfortable story of dependency and concentration. Goldman Sachs estimated that the ten largest contributors would generate 68% of third-quarter S&P 500 earnings growth, with two companies, Micron and Nvidia, accounting for more than one-third. These are real profits, not accounting fraud. But they are overwhelmingly profits earned by selling the infrastructure for an AI revolution whose ultimate economic returns remain uncertain. Nvidia and Micron fell 11% and 17% respectively in October.
Capital expenditure by the five largest AI spenders is expected to reach $803-828 billion in 2026. This expenditure becomes revenues and profits for semiconductor manufacturers and equipment suppliers today. For the buyers, much of the cost is capitalised and depreciated over future years. In effect, we are celebrating these earnings today, ignoring the cost which will arrive tomorrow.
Then comes the financing question. The cash demands of data centres, chips and electricity infrastructure are rising faster than internally generated cash for several Hyperscalers. A case in point is Meta: once seen as a free cash flow machine, announcing plans to raise up to $97.5bn in fresh equity capital. Increasingly, debt markets, private credit and external investors must bridge the gap. These are formidable businesses with substantial revenues, but the economics become less forgiving when funding costs rise, equipment becomes obsolete faster than anticipated, or customer demand disappoints. A capital-spending boom can turn into an earnings headwind remarkably quickly.
October’s technology sell-off was therefore more than a bout of nerves. It was the market beginning to distinguish earnings growth from cash generation, and technological promise from return on invested capital. Nor is inflation irrelevant: even robust nominal earnings can disappoint in real terms, while higher interest rates reduce the valuations investors are willing to pay. The comparison with the late 1990s is not that AI is imaginary, but that a real revolution can coexist with excessive expectations.
We remain constructive on productivity and on the power, cooling and electrification infrastructure enabling AI. October’s correction may create selective opportunities. But price, balance-sheet strength and free cash flow must govern investment decisions.
Our Permanent Portfolio framework is designed around four economic regimes, understanding that no asset alone guarantees protection; the objective is resilience, capital preservation and participation without dependence on a single narrative.
The greatest risk today may not be missing the AI revolution. It may be paying for tomorrow’s profits twice.
Capitalisation is an accounting practice whereby expenditure on long-term assets, such as data centres and computing infrastructure, is recorded on the balance sheet rather than immediately recognised as an expense. The cost is subsequently charged against earnings through depreciation over the asset’s estimated useful life. Consequently, substantial capital expenditure can reduce cash flow today while affecting reported profits gradually over future years.
Market Review
Deflationary Boom Assets
(Equities, Corporate Bonds, EMD)
Global equities declined 1.58% (USD) in October, although still 11.13% higher YTD. A pronounced rotation favoured Value (+2.63% in USD terms) over Growth (-3.50%), as investors questioned elevated technology valuations, funding needs and the profitability of AI-related capital expenditure. Nasdaq fell 5.28%, whilst UK equities gained 2.33% (in USD terms). Emerging Markets (-7.76% in USD) suffered, particularly semiconductor-heavy Taiwan and South Korea. Corporate bonds proved resilient, with US investment-grade credit gaining 2.16%, although spreads on AI-exposed issuers faced increasing pressure.
Deflationary Bust Assets
(Government Bonds)
Government bonds rallied as investors sought safety amid deteriorating risk sentiment. US Treasuries gained 2.36%, UK Gilts 1.61%, and European government bonds 0.98%. Ten-year US Treasury yields declined approximately 35bps to 4.94%, despite robust US third-quarter GDP growth of 3.4% annualised and September PCE inflation accelerating to 3.6%. The Federal Reserve maintained rates at 3.75–4.00%, although two officials, Governor Lisa Cook and Cleveland Fed President Beth Hammack, favoured further tightening. The bond rally reflected declining real yields and heightened uncertainty rather than a decisive improvement in the inflation outlook.
Inflationary Boom Assets
(Commodities & Managed Futures)
Energy markets were October’s standout performer. Brent crude surged 13.63%, taking YTD gains to an extraordinary 93.33%, as renewed disruptions around the Strait of Hormuz intensified supply concerns. Copper gained 1.50%, although broader industrial metals declined 1.97%, reflecting uncertainty over global industrial demand. Managed Futures delivered mixed results, with the SG Trend Index gaining 1.14%, while the broader SG CTA Index declined marginally (-0.16%). Both nevertheless retain substantial double-digit YTD gains.
Inflationary Bust Assets
(Precious Metals & Inflation-Linked Bonds)
Precious metals suffered significant losses despite heightened geopolitical uncertainty. Gold declined 6.80%, whilst the broader precious metals index fell 9.00%, as weakening momentum, possible liquidity-driven selling and the prospect of further Fed tightening outweighed the support from lower real yields. Conversely, US TIPS gained 2.61% and UK inflation-linked Gilts 2.32%, benefiting from falling real yields. US ten-year breakeven inflation remained broadly unchanged around 2.34%, suggesting that declining real yields, rather than falling inflation expectations, drove the government bond rally.
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Important information
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About this document:
This document sets out the views of Shard Capital Partners LLP’s investment team as of 31 October 2026. These views may change without notice. Portfolios we manage may be positioned in line with these views, but individual portfolios will vary depending on each client’s objectives and circumstances. Companies are mentioned to illustrate market themes; this is not a recommendation to buy, sell or hold any of them.
This is not independent investment research. That means it is not covered by the rules that apply to independent research, including the restriction on dealing before publication. Our own conflicts of interest and personal dealing policies still apply to everyone at Shard.
Risks:
- The value of investments, and any income from them, can go down as well as up. You may get back less than you put in.
- Past performance is not a reliable guide to future returns.
- Changes in exchange rates can affect the value of overseas investments, particularly where currency exposure is not hedged.
- Emerging market investments can be more volatile and less liquid, and carry greater political and economic risk.
- Bond values fall when interest rates rise, and bond issuers may fail to make payments. Commodities and alternative strategies can be highly volatile.
- This document does not take your personal circumstances into account and is not a personal recommendation. If you are unsure whether an investment is right for you, please seek advice.
General:
We take reasonable care to make sure this document is accurate at the time of publication, but it is for information only and is not an offer to buy or sell any investment. We do not accept liability for losses arising from relying on it, except where the law or FCA rules do not allow us to exclude it.