Bank Stocks Surge as AI Hype Fades; Are Inflation-Proof Bonds the Next Big Trade?

Inflation-Proofing Your Portfolio: Are TIPS the Answer?

With inflation remaining a persistent worry, finding assets that can protect purchasing power is crucial. The latest data showed that wholesale prices in the US were flat in July, a positive sign, but the overall rate remains elevated. In this environment, Treasury Inflation-Protected Securities (TIPS) are presenting a compelling case, offering returns above inflation at levels not seen for many years.

The Opportunity in Real Yields

Previously, buying protection against inflation often meant accepting a lower return. That has now changed. TIPS, which are government bonds that adjust their value based on inflation, are offering attractive 'real yields'—the return you get after inflation is accounted for.

• The 30-year TIPS now provides a real yield of around 3%.
• A five-year TIPS offers a real yield of over 2.1%.

This makes them a powerful alternative to a stock market with high valuations and a volatile traditional bond market. For a 30-year TIPS to beat a regular Treasury bond, inflation only needs to average around 2.2% over the long term. With the most recent July inflation figure at 3.4%, there is a significant buffer that could favour TIPS.

Navigating the Risks: Interest Rates and Market Forces

Despite the opportunity, these bonds are not without risk. Longer-dated bonds are sensitive to sharp increases in interest rates, which can cause their market price to fall. During past periods of sudden rate spikes, TIPS with maturities of 10 years or more have seen their value drop by as much as 41%.

Furthermore, the enormous US Treasury market is currently trying to absorb huge amounts of new debt from government spending and corporate borrowing for AI investment. A recent auction for 30-year government bonds cleared at a yield of 5.216%, the highest since 2001. This shows that buyers are demanding higher returns to take on the flood of new debt, putting pressure on all bond prices. At the same time, demand from foreign buyers has fallen over the last decade, adding another layer of pressure.

A Prudent Strategy

For investors considering TIPS, especially those near or in retirement, financial experts suggest focusing on short- to medium-term maturities. Building a 'TIPS ladder'—where you buy bonds that mature in different years—can be a smart way to lock in today's high real yields without being exposed to decades of interest-rate risk. Holding them within a tax-efficient account like an ISA or SIPP can also be beneficial, as both the interest and inflation adjustments are taxed.

Market Shifts as Tech and Banks Vie for Attention

The market's obsession with artificial intelligence may be waning, as investors are rediscovering the appeal of the financial sector. Banking stocks, long considered unexciting, are now significantly outperforming the wider market, which has been propelled to record highs by a narrow group of tech giants. While the S&P 500 has surpassed the 7,800 mark for the first time, indices like the Dow Jones are showing signs of weakness, highlighting a split in market performance.

The Surprising Rise of Banking Stocks

The KBW Bank Index has surged an impressive 18%, putting it on track to beat the S&P 500 for the third consecutive year. Over the last three months, financials have been the second-best performing sector in the entire S&P 500. There are two main drivers behind this revival:

• AI Second-Order Effects: Banks are benefiting directly from the AI boom by financing the huge capital expenditure tech companies need for things like new data centres.
• Rising Interest Rates: A steepening Treasury yield curve—where long-term interest rates are higher than short-term ones—widens banks' profit margins, as they can charge more for long-term loans than they pay out on customer deposits.

This renewed interest is clear, with investors pouring an additional $3.4 billion into the main financial sector ETF ($XLF) in July alone. Globally, the trend is also visible, with online-only 'neobank' Nubank recently becoming the largest financial institution in Brazil after a record-breaking quarter.

Are Financials Overheated?

The rally has pushed valuations to levels not seen since just before the 2008 financial crisis. The KBW Bank Index now trades at 2.4 times its tangible book value, a key measure of worth. This suggests that while the sector's fundamentals have improved, the easy money may have already been made. Some analysts are now warning that a potential economic slowdown could hurt the sector's performance, making the current high valuations a point of concern.

Private Equity Sees Value in Software

While some tech stocks have cooled, private equity firms are sniffing for bargains. Business software company Workday saw its shares leap nearly 18% after reports emerged that private equity giant Silver Lake has been in talks to take the company private, marking its biggest one-day gain in a decade. This move highlights a growing counter-trend: as public markets punish software companies over fears AI will disrupt them, buyout firms see an opportunity to acquire profitable businesses at a discount.

AI's Next Chapter: IPOs and Investor Scrutiny

The artificial intelligence sector continues to evolve at a rapid pace. AI startup Anthropic has reportedly started early-stage discussions with potential investors ahead of a much-anticipated initial public offering. In a sign of the sector's high-stakes nature, key competitor OpenAI announced the departure of its revenue chief after less than a year. Meanwhile, enterprise AI firm Databricks underlined the immense capital flowing into the space by closing a $5 billion funding round that values the company at $190 billion. However, some seasoned investors like Steve Eisman, famous from "The Big Short," are voicing caution, warning that the entire AI boom has an "Achilles' heel" due to its dependence on the success of just two firms: OpenAI and Anthropic.

Global Trade Under Pressure

Beneath the market's daily movements, significant shifts in global trade are creating new risks and challenges. From a government crackdown on tariff dodging to chaos in the shipping industry and escalating geopolitical tensions, supply chains are under strain.

Washington's Crackdown on Tariff Dodgers

The White House has announced plans to use artificial intelligence to combat 'transshipping'—a practice where goods from a country like China are routed through a third country to avoid US tariffs. A new report claims this practice may have cost the US around $60 billion in lost tariff revenue last year. Adding teeth to this tougher stance, a federal trade court recently upheld the removal of the "de minimis" loophole, which had previously allowed goods valued under $800 to be imported into the US tax-free. This signals a tougher stance on trade policy that could shape future negotiations.

New Sanctions Threaten Oil Supply

The US government has signalled it will apply "economic isolation of a kind that has never been seen before" against Iran. This comes alongside an indefinite naval blockade of Iranian ports, which could severely disrupt global oil supplies and push prices higher. Brent crude oil is already trading near $88 a barrel, reflecting the increased geopolitical risk for a market already up over 30% in the last year.

Shipping Disruptions and Supply Chain Bright Spots

Leading global shipping firms like Maersk and Hapag-Lloyd are warning of rising prices and significant disruptions. Port congestion and unbalanced trade flows are creating logistical chaos. These snags could force major retailers to build up inventory ahead of the holiday season, squeezing their profit margins. However, there are some signs of easing pressure, with India reportedly receiving bids for fertilizer that were 12% lower than in June, suggesting that supply crunches in some specific sectors are beginning to fade.

Corporate Corner: Key Company Movements

Ackman Overhauls Portfolio, Dumps Hertz

High-profile investor Bill Ackman has conducted a major overhaul of his Pershing Square fund. After selling his Netflix stake at a significant loss in 2022, he has re-invested, stating that the streaming giant has now "effectively won the streaming wars." In a major bet on consumer payments and financial data, he has also taken new positions in Visa, Mastercard, S&P Global, and Intercontinental Exchange. Conversely, Pershing Square's sale of its stake in car rental firm Hertz sent its shares tumbling over 16%.

Reddit Joins the S&P 500

Social media site Reddit is set to join the prestigious S&P 500 index on 18 August, replacing AvalonBay Communities. The move, which sent its shares up 11% in after-hours trading, means that every index fund tracking the S&P 500 will now be required to buy its stock, creating significant demand.

Takeover Talk Swirls

Beyond the tech sector, takeover speculation is heating up. Fast-food chain Wendy's saw its shares jump over 14% following reports that Nelson Peltz's activist Trian Fund Management was assembling a bid to take the company private. Wendy's has stated it would "thoroughly review any proposal" from the fund.

Apple Expands US Manufacturing

Apple CEO Tim Cook recently opened a new manufacturing facility in Houston, Texas, which will produce the company's Mac Mini computers. The move was framed as part of a push to bring advanced manufacturing back to the United States, with Apple reportedly spending hundreds of millions of dollars on the new site.

Applied Materials Beats Forecasts but Shares Fall

In a sign of just how high expectations are for AI-related companies, chip equipment maker Applied Materials saw its shares fall 5% despite reporting record quarterly revenue of $9.12 billion. Even with guidance for 51% year-on-year growth in the next quarter, investors were seemingly spooked by commentary on profit margins, demonstrating that even a stellar performance is not always enough in this market.

IBM and OpenAI Team Up

In a bid to boost its business, tech giant IBM is partnering with OpenAI. The plan is for IBM's large consulting workforce to be trained on selling and implementing OpenAI's artificial intelligence tools for corporate clients. The move comes as IBM recently cut its own revenue forecast for 2026.

Brinker Focuses on Value

The CEO of Brinker International, owner of the Chili's restaurant chain, credited a popular value deal for its recent success. The company's $10.99 meal offer has been central to its strategy of increasing sales by getting more customers through the door, rather than by raising prices.

Earnings Lifted by One-Off Tariff Refunds

Investors should look closely at recent corporate earnings reports, as not all profits are created equal. Over 40 companies in the S&P 500, including giants like Apple and Nike, have received a combined $9.6 billion in government tariff refunds. While these payouts boost the bottom line, they are a one-time event and do not reflect genuine operational growth. Scrutinising company results to separate these windfalls from true performance is essential.

Gold Hits a Technical Wall

Gold has rallied more than 9% in the past two weeks, helped by a weaker US dollar and expectations that the Federal Reserve will hold off on another rate hike in September. Despite this positive momentum, the precious metal is struggling to break through its 200-day moving average, a key technical level watched by traders. A sustained move above this line would be needed to confirm a broader recovery.

Crypto & Digital Assets: Audits, Delays, and Adoption

The cryptocurrency world is facing a series of tests that could shape its future. From long-awaited financial audits to new regulatory lawsuits and mainstream adoption signals, the industry is navigating a complex landscape.

Tether Aims for Legitimacy with First Full Audit

In a landmark moment for the stablecoin market, Tether has undergone its first-ever full independent audit, conducted by major accounting firm KPMG. The firm issued an unqualified "clean" opinion on Tether's 2025 financial statements, a significant step up from the less rigorous 'attestations' it previously published. The audit confirmed Tether's reserves of $180 billion comfortably exceeded its liabilities by over $6.8 billion, a key factor for the stability of the entire crypto ecosystem.

Regulatory Headwinds and Delays

The push for clear crypto rules in the US is facing significant setbacks. The Securities and Exchange Commission (SEC) has reportedly delayed its proposed 'innovation exemption' for digital assets and cancelled a planned meeting on crypto fundraising rules. At the same time, the major CLARITY Act for crypto regulation has stalled in the Senate. This lack of clear guidance from Washington continues to create uncertainty. Further, index provider MSCI is considering a rule change that could see it exclude non-operating holding companies like bitcoin-hoarder Strategy from its global indexes.

Market Movers & Shakers

Several events are influencing sentiment across the digital asset space:

• Mainstream Adoption: Fintech banking app Chime is exploring adding stablecoin wallets, another sign that digital dollars are moving into mainstream finance.
• Exchange Struggles: The Winklevoss twins' crypto exchange, Gemini, posted its fourth consecutive quarterly loss, with assets on its platform shrinking by 54% as customers withdraw funds.
• Cramer Sells Bitcoin: Prominent TV personality Jim Cramer announced he sold his Bitcoin holdings, citing fears that quantum computers could break its encryption. Given his track record is often viewed by traders as a contrary indicator, the market saw a slight rise following his announcement.
• Launchpad Competition Heats Up: Pump.fun, a platform for launching new crypto tokens, has seen its market dominance shrink significantly as new competitors attract volume.

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NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).