US economy: Consumers spend more and get less
Amid sharply increased energy prices, consumer outlays in the US are expected to rise in the second quarter of the year. At the same time, however, estimated price‑adjusted consumption is actually shrinking. This decline is currently quite moderate. US households are currently benefiting from a positive wealth effect and tax refunds, enabling them to offset a considerable part of the financial strain caused by higher energy bills.
The limited demand destruction caused by increased payments for gasoline, in particular, increases the risk that the inflation surge could become more permanent. This is because indirect price increases related to higher energy costs will be easier to implement. More conventional second‑round effects resulting from higher wage demands and inflation expectations are currently rare. In particular, the US labour market seems to have cooled sufficiently to make achieving wage increases difficult.
The current balance between limited demand destruction due to higher energy prices – which is associated with rising inflation risks – and limited risks of notable wage increases keeps the second‑round effects of the energy price surge in check. This argues for monetary policy to abandon rate cuts in the coming months, while also refraining from rate hikes.
We see an increasing risk that the Fed will not be able to resume rate cuts in the second half of the year, as set out in its latest Summary of Economic Projections (SEP), released at the March FOMC meeting, which is in line with our own forecast of a rate cut at the September FOMC meeting.
US-China relations: summit outcome and market implications
Against this macroeconomic backdrop, geopolitical developments have also influenced market sentiment. The meeting with the two presidents on 14 May did not deliver many positive surprises to the market, but maintenance of the status quo is helping investors to put their concerns about US–China relations behind them.
According to some optimistic media headlines, US‑listed Chinese stocks had a brief rally the night before US President Trump and Chinese President Xi met. However, stocks fell in the two subsequent days as trades unwound.
The conversations between the two presidents helped to extend the trade truce, as both agreed to establish a negotiation framework with common goals, but we have not seen meaningful progress in other areas. In its read‑out of the meetings, the US highlighted China’s intention to keep the Strait of Hormuz open, although there was less emphasis on the China side. On the other hand, China delivered a strong statement to the US on the ‘red line’ regarding Taiwan, although it was not featured in the US communication.
On a more positive note, Trump mentioned in a media interview that China will purchase 200 planes and is willing to buy more energy from the US. Despite an earlier media report that ten Chinese firms have been granted licences to buy H200 chips, Trump subsequently mentioned that China has not allowed its companies to buy them, because the government wants to develop its own domestic chips.
This is one of the more important takeaways, in our view, since some investors in the Chinese market were previously concerned that approval of the US chip purchase could stall the technology localisation theme, where semiconductor stocks have rallied hard in view of the government’s goal to be more self‑reliant.
Although the summit was largely a neutral event, it is helping investors to put their concerns about China–US relations behind them and focus on other topics. In the near term, stock opportunities remain in the Chinese market across various themes. The momentum in artificial intelligence infrastructure stocks will likely continue. Meanwhile, we expect a strong rebound in the humanoid robotics stocks, as the market has once again raised its expectations about shipment.
Semiconductors in 2026: strong performance, bubble debate and risk
These developments feed into a broader market debate around technology leadership. 2026 is increasingly defined by one central question: ‘Do you hold exposure to semiconductors (i.e. semis)?’ When reviewing any active strategy or index, those showing year‑to‑date returns that exceed 15% are likely driven by semiconductor performance, regardless of their stated investment approach. This holds true across both developed and emerging market equities. The determining factor is semiconductor exposure.
Hence, after seeing gains that exceeded 100% in the semiconductor sector, the critical question is whether the sector is in a bubble or not. A 100% increase alone does not signal a peak, particularly given the shifts in the return patterns of leading sectors since 1950.
Furthermore, assessing a simple bubble score based on sentiment surveys, the VIX volatility index, semiconductor momentum, and the relative performance of defensive sectors, only two out of five indicators suggest bubble‑like conditions.
The greatest risk for semiconductors may well be sustained strong performance without a correction over the next six months. A 10%–20% pullback in the sector would help rebalance investor sentiment and mitigate bubble concerns. For now, there is insufficient evidence to conclude that the semiconductor rally reflects a bubble, despite significant gains.
What this means for investors
Markets are being shaped by limited demand destruction rather than accelerating growth. In the US, higher energy prices are lifting nominal consumer spending while real consumption is declining slightly, as temporary financial buffers help households absorb higher costs, keeping inflation risks elevated and reducing the scope for near‑term policy easing.
Geopolitically, the maintenance of the status quo between the US and China has helped investors put concerns about bilateral relations behind them and refocus on domestic and sector‑specific themes.
Within equities, semiconductor performance remains a key driver of returns, with strong gains prompting valuation debate but insufficient evidence to conclude that the rally reflects a bubble.