A market that punishes narrative and rewards fundamentals: our current market view
Constructive over three months, watchful beyond. How we read the current environment across markets, valuations, funding conditions and exits, and why we believe now is a good time to invest in European technology.
A two-sided market, not a one-sided bubble
The current market is unusual. Equities are near record levels, credit spreads remain tight and volatility is low. At the same time, the 30-year US Treasury yield has moved above 5%, its highest level since 2007 (Source: US Treasury / Trading Economics, September 2026). These signals are not necessarily contradictory. Earnings are still growing and the IPO window is open for a small number of premium assets. But higher long-term rates are raising the bar for valuations, particularly where expectations are already high.
AI is at the centre of this tension. Investment in AI infrastructure has reached extraordinary levels, while valuations across parts of the ecosystem leave little margin for error. At the same time, profitable, growing software companies outside AI have been de-rated.
We therefore see the current environment less as a broad market bubble and more as a rolling correction within the market. Capital is moving from narrative to fundamentals. Companies that can demonstrate demand, margins and a credible path to cash generation are being rewarded, while those relying primarily on future expectations face greater scrutiny. For us, this means staying constructive in the near term while remaining watchful beyond the next few months. The opportunity is not to predict the next market move, but to be selective about where we put capital.
That reading is reinforced by how this cycle is performing relative to earlier ones. Although the AI era is less than three years old, the median IRR of AI-era venture funds is tracking closer to the strong early performance of the 2010s software-as-a-service cycle than to the dot-com era of the 1990s and 2000s, even if it falls slightly short of the exceptional early returns of COVID-era vintages, which benefited from the exuberance of late 2020 through 2021. Faster revenue growth and stronger early performance than prior cycles indicates that the broader AI market is less likely to be in a bubble than some current comparisons suggest, even though parts of the ecosystem are clearly priced for very high expectations (Source: Hamilton Lane, 2026 Market Overview).
Cost of capital sets the pace, not the technology
The AI investment cycle is enormous. Around $1 trillion is expected to be invested across the AI ecosystem in 2026, with infrastructure spending on a scale comparable with other major technology and infrastructure build-outs. (Source: Goldman Sachs Global Investment Research.)
As noted above, long-term borrowing costs are at their highest level since 2007. At the same time, AI infrastructure investment is increasingly being financed through a combination of equity and debt. This makes the cost and timing of capital an increasingly important part of the equation.
The key question is therefore not whether there is demand for AI. There clearly is. The question is whether the economics of that demand can support the amount of capital being deployed, particularly as the cost of capital rises.
This is where we expect the market to become increasingly disciplined. AI companies will need to show what their economics look like in numbers: utilisation, revenue, margins, useful asset life and the relationship between infrastructure costs and customer demand.
We see the same principle across technology. The market is increasingly distinguishing between growth that requires ever more capital and growth that can translate into durable economics. That shift creates both pressure and opportunity across the venture ecosystem.
Liquidity comes from acting, not from waiting
The IPO market has reopened, but liquidity remains selective. Public-market activity has reached strong levels, yet a large share of that activity remains concentrated in a relatively small number of companies rather than representing a broad reopening of the exit market.
The same pattern is visible in European venture. Funding volumes remain high, but capital is becoming increasingly concentrated: 73% of European AI funding has gone to just 38 companies (Source: 2026 European AI Economy Report, HumanX and Crunchbase). For the rest of the market, the opportunity set has narrowed rather than widened.
At the same time, the valuation gap between European and US private rounds remains significant. European rounds can still trade at a 30–50% discount to comparable US rounds, although that gap narrows to around 15–20% for top-tier seed and Series A companies. (Source: PitchBook Q2 2026 European VC Valuations.) At the growth stage, the discount is essentially unchanged.
This tells us two things. First, capital is available, but investors are becoming much more selective about where they deploy it. Second, Europe's valuation advantage has not disappeared, even as the strongest European companies increasingly attract global capital.
For investors, this makes active portfolio management more important. Liquidity windows can open quickly and close quickly. Realised proceeds are ultimately more valuable than paper gains, and we continue to look for opportunities to convert strong outcomes into liquidity when the market provides the opportunity.
But a selective exit market does not mean that investors should simply wait. Venture is a long-duration asset class. The relevant question is where attractive businesses can be built and funded today, and which companies can continue to compound through the next market cycle.
Why now is a good time to invest in European technology
There are four reasons we see the current environment as attractive for disciplined technology investors.
1. Entry price is the variable we can control
We cannot control interest rates, public-market sentiment or when the next IPO window opens. We can control the price at which we invest.
The current valuation pressure is concentrated at the upper end of the market, while significant valuation differences remain between Europe and the US. That creates opportunities to invest where expectations and entry prices are more grounded in fundamentals.
The principle applies across stages: attractive entry points create more room for companies to execute, compound and grow into their valuations, regardless of whether the eventual exit is through an IPO, M&A or a secondary transaction.
2. Durable returns are built where technology becomes a defensible business
The long-term opportunity in AI is not limited to infrastructure or frontier models. The more durable value creation may happen where technology is converted into proprietary and defensible businesses.
That can come from proprietary data, regulatory access, hardware integration, distribution or deep integration into customer processes.
This matters across the investment cycle. Infrastructure creates the underlying capacity, but durable enterprise value is ultimately created by businesses that turn technology into differentiated products, recurring revenue and defensible market positions.
3. Europe is moving from discount to advantage
Europe's traditional disadvantages in technology remain real in some areas, particularly around capital markets and scale. But the continent also has structural strengths that are increasingly relevant.
Europe combines deep scientific and engineering talent with established industrial ecosystems and expertise in areas such as robotics, health, industrial technology, energy and defence.
As data, compute and supply chains become increasingly strategic, these capabilities can become advantages rather than simply characteristics of the European market.
The remaining valuation gap adds another dimension. European companies do not need to be cheaper simply because they are European, but the difference in entry valuations can provide additional room for value creation when companies succeed and attract global capital.
4. Capital deployed today is investing for the next market cycle
The most important point is the investment horizon. Capital deployed today is not being invested for the IPO window of 2026 or 2027. It is being invested into companies that will mature through the next market cycle. That applies whether we are backing a company at an early stage or investing later in its development. This is a general observation about typical venture holding periods and is not a projection or forecast for any specific redalpine fund.
That changes how we should think about the current environment. The relevant question is not whether the IPO market is open today. It is whether the companies we back now can build enduring businesses and emerge stronger from the next few years of market discipline.
The conclusion
The market is becoming more selective. Valuations are being tested, the cost of capital is higher, and investors are demanding more evidence that growth can translate into durable economics.
We see that as an opportunity rather than a reason to wait. We cannot control when markets reopen, where interest rates go or how investors feel six months from now. We can control where we invest, the price we pay and the quality of the businesses we back.
For us, that means being selective across stages: looking for strong fundamentals, genuine technological differentiation and the potential to build enduring businesses, while remaining disciplined on entry price and active on liquidity. The goal is not to predict the next market move, but to invest through it.
We remain constructive over the next three months and watchful beyond. In a market that is increasingly rewarding fundamentals over narrative, we believe the opportunity lies in continuing to build, back and support companies that can compound through the cycle.
Important Notice
This article is issued for general information purposes only and does not constitute, and should not be construed as, investment, legal, tax or other advice, or an offer, invitation or recommendation to subscribe for, purchase, or otherwise acquire interests in any fund, vehicle or investment product managed, advised or offered by redalpine or its affiliates. It should not be relied upon in connection with any investment decision.
The views, opinions and estimates expressed in this article are those of redalpine as at 22.09.2026 and are subject to change without notice. They do not constitute a forecast or projection of future events or performance, and there can be no assurance that any view expressed will prove correct. Market and industry data cited in this newsletter is drawn from third-party sources believed to be reliable but has not been independently verified by redalpine.
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