Q3 Outlook for Traders: AI’s challenging growth math and a new era at the Fed

The bottom line: Total AI capital investment for 2026 is expected to come in over USD 800 billion and to continue growing for at least the next few years. For those investments to be justified, the companies making these titanic investments will need to enjoy revenues far exceeding those investment levels, year-in and year-out, with profit margins ideally approaching their very profitable, and often monopoly-driven existing business models. That’s hundreds of billions of additional after-tax profits beyond their baseline. Where is it to come from? Destroying incumbent companies? Replacing labor? In short, while it is clear that AI will prove a transformative technology in the long term, the pace of the spending and profitability in its deployment may be in for a reality check in the near term.

The Kevin Warsh Fed: a generational change.

It is important to emphasize that this outlook was written just before the first FOMC meeting of the US Federal Reserve on June 17, the first to be led by new Fed Chair Kevin Warsh. Ideologically, Warsh represents the largest break in Fed continuity since Ben Bernanke took over from Alan Greenspan back in 2006. Let’s recall that Warsh resigned from the Fed Board of Governors in early 2011 after becoming uncomfortable with the Fed’s direction, especially after QE2, the second round of quantitative easing, was announced in late 2010. That positioned him up as someone ideologically against what could be seen as an over-active Fed moving with radical measures to support the economy, including reliance on market confidence as a driver of growth.  He has also spoken in favor of reducing the Fed’s balance sheet and of less Fed transparency to avoid the central bank having to backtrack after making a commitment to future action, given that its economic forecasts have often proven wrong. Here are the massive problems and questions Warsh will face as he takes office as Fed Chair:

The growing emergency of financing the US national debt. The run rate of servicing the US national debt rose above the prior record of 3.15% of GDP in early 2026. The US Treasury and Fed will have to move to lower this cost – either by running the economy hot relative to the policy rate, lowering rates or through strong-arm measures forcing savers into buying treasuries or all of the above. In short, this is a Fed that can’t be meaningfully hawkish.

The nominal economy must continue growing faster than at least shorter to several-year treasury yields. This is almost inevitable in an economy with a heavy debt load unless the central bank is monetizing the debt (Warsh is supposedly against this!). It means that the Fed and Treasury will absolutely, quickly and reflexively have to respond with force on any economic softness, the risk of which is rising in Q3 and beyond. Warsh’s initial strong thoughts on Fed credibility might sound hawkish, but can markets and the Treasury afford that credibility?

“The stock market is the economy.” This has been an increasing refrain about the US economy since the global financial crisis. Not only are US Federal tax revenues very reliant on capital gains taxes from equity market gains, meaning that already massive federal deficits in good times can widen to staggering levels, but the wealth effect from strong equities drives confidence and spending from the wealthy, particularly retirees living on their portfolios. But constantly stimulating the economy and bailing out financial assets constantly with easy policy has also driven massive inequality, especially since the GFC. Treasury Secretary Bessent and Fed Chair Warsh have both talked about the need to boost main street and not Wall Street – but do they dare walk the walk and if so, how?

The need to support the Trump administration’s economic agenda. President Trump’s constant urgings for the Fed to cut rates aside, this is more about the overall US urgency to build economic supply chains that are less reliant on China, a national security imperative. This means that some sectors of the economy need subsidizing and perhaps a very low rate, while other sectors that enjoyed excessive accommodation in the past, are seen as not needing any support at all and whatever rate the free market can provide. This could create entirely new policy initiatives and special status for targeted parts of the economy.  

Bottom line: The Kevin Warsh Fed may have little room for maneuver during his time as Fed Chair, given the urgency of keeping the rising cost of US national debt from overwhelming policy priorities. These would largely be run by the Treasury, with the Fed acting as a necessary auxiliary. Whatever the market conditions, the Fed will have to remain generally on the accommodative side such that nominal growth outpaces US treasury yields. Most critically, whether it is the Fed or the Treasury or both acting in concert, the cost of servicing US debt must soon fall in real terms (as a % of GDP). Still, this Fed will mean a dramatic change of style and not necessarily a principle of bailing everything out all the time but a more targeted approach.

The ongoing geopolitical challenges and physical world limitations march on.

The Iran war that broke out at the tail end of February saw the greatest disruption of crude oil supplies into the global economy in history. It was our chief concern for the Q2 outlook, but even as shipping traffic through the Strait of Hormuz was largely halted for far longer than we believed the global economy could bear, crude oil prices failed to come untethered from historic ranges and stock market confidence revived quickly after the brief meltdown in March. The chief new development relative to past supply-side oil crises helped prevent this supply shock from sending crude oil prices to the extreme levels many, including ourselves, feared. This was China’s extraordinary drop in import demand as it drew on both its large strategic reserves, and its resilient energy complex, from vastly expanded coal production to a heavier mix of alternatives like solar. Its huge fleet of flex EVs, for example, were able to tap electricity rather than petrol.

Still, as we discuss below on the outlook for commodities, avoiding an energy market calamity as we transition into Q3 absolutely requires a rapid normalization of shipping flows through the Strait of Hormuz as inventory levels for crude oil and products are at extremely low levels even as prices collapsed in anticipation of a lasting ceasefire in June. That cease fire deal could prove fragile in Q3 and beyond, depending on the last bits of negotiation, especially the details of funds for Iran rebuilding, the status of Iran’s frozen assets, Iran’s highly enriched nuclear material, and whether Israel will stand down from further action against Hezbollah.

Bottom line: Besides crude oil (and natural gas), we remain very constructive on the outlook for nearly all physical commodities, whether critical minerals or more humdrum goods like copper and other industrial metals. The critical materials theme has been heavily covered over the last couple of quarters and we have already seen waves of speculation in the mining and processing outfits large and small in the space. That theme will continue for years as the US and other major economies build supply chains that are far less reliant on China’s dominant presence. Elsewhere, even if economic growth cools a bit and the pace of AI data center demand does likewise, there are secular trends that will continue to drive strong demand in the physical world: Q2 saw the wake-up moment for countries excessively reliant on crude oil and natural gas supplies that flow from the Persian Gulf. Not only will these countries scramble for new sources of fossil fuels, they will also look to build a less fossil-fuel reliant energy mix. And that means a doubling down on the trend toward electrification – meaning, in terms of basic materials, more demand for copper, lithium and other metals.

Implications for asset classes

Global equities and sectors: Our base case for equities is that the bull market may not end in Q3, but that we may begin a choppy topping formation that could result in a bigger market correction either late this year or early next. This market headwind will be driven by rising questions about the sustainability of AI spend rates in the “hero” sectors that have driven the most dramatic market-cap weighted market gains globally. Meanwhile, other sectors could shine, for example in materials, energy and even defense.

Fixed income: We are not looking for a great deal of dynamism in global yields. Global growth must continue at a strong nominal pace to keep economies running at least even with and increasingly ahead of real debt levels. The recent rate hike cycles for many central banks are likely already priced in and are unlikely to extend aggressively from here unless energy prices spike again. As noted above, the US Federal Reserve can’t turn meaningfully hawkish and if economic softness develops in Q3 may actually be in an easing cycle sooner rather than later.

Currencies: Long term USD bearish, but is Q3 perhaps too soon for the USD downtrend to return? The US is a few months of economic weakening away from needing to force financial repression-lite policies on the market to keep the US Treasury market liquid and orderly and to ensure the national debt can be serviced if it can’t lower rates first. While the argument from many sides has been that the US has the cleanest shirt in a dirty world when it comes to its overall imbalances, the scale of the US debt problem is unique in the world and the GFC, Covid pandemic and other mini-crises have trained US institutions to anticipate liquidity crises and intervene before they are allowed to fully develop. An easier Fed (again relative to whatever conditions prevail) keeps a lid on the US dollar.

Commodities – crude oil and precious metals: For crude oil, a successful reopening of the Strait of Hormuz could initially pressure prices as trapped crude and refined products return to the market, potentially pushing Brent towards the low USD 80s. However, we believe the market is underestimating the longer-term consequences of a disruption that has depleted commercial and strategic inventories.

Although reopening is largely priced in, the supply deficit created during the conflict will take time to reverse. Gulf production must be restarted, inventories rebuilt, and strategic petroleum reserves - particularly in the United States - replenished. Several Asian countries may also increase strategic stockpiles following the supply shock.

At the same time, lower energy prices could support demand, while much of the floating storage that helped cushion the market during the conflict has been exhausted. In effect, the market has borrowed barrels from the future. Rebuilding inventories and maintaining a geopolitical risk premium should help keep oil prices above pre-war levels for some time.

Gold: Long-term drivers return to center stage. Gold struggled during the Iran conflict as higher energy prices lifted inflation expectations, bond yields and the US dollar. As energy markets normalize, however, we expect investors to refocus on the structural drivers that have supported the bull market in recent years.

Central bank demand remains strong as reserve managers continue to diversify away from the dollar, while concerns about fiscal deficits and sovereign debt sustainability support demand for hard assets. A softer inflation outlook should also ease pressure on bond yields, creating a more favourable backdrop for bullion.

While short-term volatility may persist following gold’s recent correction, we believe the longer-term investment case remains intact. As the inflation shock from higher energy prices fades, investors are likely to refocus on gold’s role as a portfolio diversifier and hedge against fiscal and monetary uncertainty.