Macro Pulse Episode 37

Hello and welcome to Macro Pulse. The three big themes driving markets in the second half of 2026 are US economic and market resilience, the AI capex cycle, and geopolitical instability in the Middle East. This week we will discuss each of these three drivers and what it means for the local economy.

But let’s start with the US and look at the most recent economic data points. The monthly PMI and ISM indices remain well above 50 and rising, which implies that economic activity in the US should remain strong over the coming months. This is further confirmed by robust labor data points, like job openings and jobless claims trending lower, and US household consumption data has also been strong, with US growth indicators resilient and inflation data still uncomfortably high. A growing number of US Fed officials believe it may be appropriate to increase rates later this year. During the most recent FOMC meeting, three members voted to hike interest rates while nine still voted to keep rates on hold, and the new Fed chair, Kevin Warsh, deliberately gave little forward guidance to markets, as he wants investors to price in the next move not from forward guidance but from macro data. Markets felt that Warsh was not bold enough against inflation, and less Fed guidance implies more volatility around monetary policy setting. As a result, long-dated bond yields rose and the US bond curve steepened. So while higher bond yields may become a headwind for equity markets, the second quarter earnings season has kicked off very strong, pushing the S&P 500 to new all-time highs.

And this takes us now to the second driver, which is the AI capex cycle and the concerns around the return on invested AI capital. Hyperscalers came under pressure in June and July, but strong second quarter earnings results proved those concerns to be unfounded. Hyperscalers like Google, Microsoft, and Amazon all reported strong cloud revenues of above 40% year-over-year, and their estimates of future AI capex increased by more than their earlier estimates, which means that the demand for semiconductors remains strong. So semiconductor companies, which sold off in July, recovered over the last few weeks because of this higher-than-expected hyperscaler spending. So while the AI trade remains in place and continues to drive markets, the recent Q2 earnings results suggest that the US corporate environment remains broadly positive, with more than two-thirds of S&P 500 companies having reported second quarter earnings. 67% of those have beaten earnings growth estimates, which is well above the historical average. The median earnings growth now stands at 13%, and earnings for the next 12 months have been revised up again for the fifth consecutive quarter.

Finally, despite the recent de-escalation, the Middle East conflict continues to be a source of uncertainty. We expect the price of oil to remain mostly in the $75 to $95 band. But with rising pressure stemming from falling global oil inventories, we don’t expect the Middle East conflict to get out of control, but also don’t see an easy path to a peace deal. The 14-point memorandum of understanding that was signed in June will hold as the framework for future negotiations, but there will be periods of escalation and de-escalation as we go through the negotiations. So with economic data resilient in the US, the AI capex cycle intact, and Middle East tensions de-escalating, markets are back in risk-on mode. The S&P 500 reached new record highs, emerging markets are recovering, and even South African listed equities are on the rise again. Now, we don’t expect the US resilience to last over the rest of the year — there will be some softening. If the price of oil remains in our range, inflation will start to roll over and economic activity in the US may peak soon, which will mean that markets may start to price in fewer Fed rate hikes than currently anticipated. This may lead to lower US real rates, a softer US dollar, and upward pressure on industrial commodity prices, and these dynamics will all benefit South Africa.

So the upside potential for SA equities is rising. SA equity valuations already discount a lot of bad news, and growth prospects for the country are expected to be very weak. So low inflation and SARB rate cuts next year, potentially combined with a reformist local government election outcome, could act as a catalyst to unlock some of the value in SA over the next 12 months. However, in the short term, cyclical headwinds like high fuel prices, high inflation, higher policy rates, and election uncertainty may limit that upside. That’s all for this week. Thank you for watching.