Credit Markets, Earnings and AI: Three Forces Shaping Today's Market: Insights from Jurrien Timmer - October 26, 2026

A shift from rate scares to growth scares

The cost-of-capital story hasn't changed much, but its composition has, in his view. As the rate side of his heat map cooled from very red to less red, the credit side began to turn red, which he interpreted as the bond market beginning to regulate how much capital the AI build-out can absorb. He described this as reassuring rather than alarming, noting that the bond market can help determine when enough capital has been raised. That perspective is echoed in the behaviour of real rates. With the recent move driven by real rates rather than inflation expectations, real rates have moved above the economy's speed limit, defined as the combination of labour-force growth and productivity growth that sits near 2.2% potential GDP. That's typically the point where questions about growth and fiscal sustainability can start to surface, he noted. As an example, he pointed to France, where weak growth and rising yields have made debt a more pressing issue.

Why the midterms matter more than usual

A midterm election would normally be a non-event for markets. This time may be different. A large enough blue wave could flip some governorships and potentially slow the data-centre build-out, which in turn could prompt the credit market to question whether spending has gone too far. The Goldman Sachs AI basket is already down 22% from its highs and sitting at support, a level he finds interesting given how much may hinge on the outcome. The set-up cuts both ways. Should the blue wave turn out to be more of a ripple, he noted that markets could rally sharply within a week. In his view, it's unusual to see markets so focused on the result of a midterm election.

A tug-of-war between earnings and the cost of capital

Against that backdrop, earnings remain an important counterweight to higher rates. Bull markets can end through recession or through sharply rising rates that earnings fail to offset, and today's environment looks different from 2022, when the S&P 500 fell 28% and the price-to-earnings (P/E) ratio dropped 33%. For now, the numerator is winning. Earnings are growing 30% to 40% even as a higher discount rate weighs on valuations. He compared the dynamic to the 1994 Greenspan cycle and the late-2014-to-early-2016 period, when solid earnings left markets treading water. The trajectory of AI-related capital spending remains an important variable. If data-centre spending slows, earnings growth could decelerate and pressure from the denominator could become more significant. He described the current backdrop as an echo of 2022 that would look very different without the support of strong earnings growth. At the same time, he sees nothing wrong with a market taking a pause. By his measure, markets have gone roughly nowhere since early June.

Diversification within the index, and the case for commodities

Beneath the surface, breadth is improving. The share of advancing names has climbed from 43% to 60% as the equal-weighted index catches up to a cap-weighted index that remains only a couple of percentage points below its high. Looking at correlations, he pointed to the non-AI half of the S&P 500 as a genuine diversifier. The ex-AI basket runs 62% correlated to long bonds but only 23% correlated to the index itself. The discussion around diversification extends beyond equities. He highlighted commodities as one example of an asset class that has recently exhibited negative correlation characteristics. Using the period from April 2025 through today, he noted that the Bloomberg Commodity Index delivered returns that were competitive with several major equity leaders while remaining negatively correlated, a combination he described as remarkable. In his view, the appeal is tied to geopolitics as much as inflation. He noted that the ninth Brent contract has risen steadily to about U.S.$92, roughly U.S.$7 above where it sat when the Iran conflict began. Natural resources, he added, have become increasingly strategic for countries seeking to reduce dependence on others.

Bonds as insurance investors are paid to hold

While commodities have attracted attention, bonds remain an important part of the diversification discussion. Correlations between stocks and bonds remain positive but are becoming less so, dragged down by the AI-versus-non-AI performance gap. Higher yields have historically made bonds more correlated to equities, since Treasury bonds become stronger competition for stocks as the risk-free rate climbs. The current period, in his view, is one of those stretches where the correlation can shift as the market swings from rate fears to growth fears. Over time, he believes that correlation could move back into positive territory. In the meantime, bonds yielding 5% offer a generous real yield, meaning investors are compensated while they wait, regardless of whether the insurance ultimately pays off. He contrasted that with 2021, when that same insurance was more expensive and ultimately proved ineffective.

What the Federal Reserve is weighing

The debate around growth, inflation and capital costs also feeds into expectations for monetary policy. At the time of the discussion, markets were pricing in little expectation of a rate hike. Still, he framed the broader path as the Federal Reserve (the Fed) potentially undoing last year's cuts rather than starting a new hiking cycle. He argued that the three insurance cuts implemented last year ultimately appeared unnecessary once AI job-displacement fears faded and the Iran conflict pushed inflation back into a 3-handle. In that context, two additional moves would effectively reverse those cuts. The market, he noted, is giving the Fed the flexibility to wait. The scale of the AI investment cycle remains central to the story. Roughly half a trillion dollars of AI-related capital is expected to be raised this year, with similar sums possible in the years ahead. Investment-grade hyperscalers can absorb wider spreads and still remain profitable, he explained, but once borrowing costs reach certain levels, issuing equity may become the more practical route. In that context, he suggested the Anthropic initial public offering could serve as an important test of investor appetite for equity versus debt financing.

Conclusion: A market taking a breath