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- [00:00]
Narrator/Host
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- [00:19]
Interviewer/Host
Bloomberg Audio Studios Podcasts Radio News we begin this hour, stocks just edging lower with Marky Patel of All Springs Global Investments writing. We do not expect the stock market to broaden out materially in 2026. We think the strong sectors will continue to have high growth. Margie joins us now. And Margie, thank you so much for being with us. You really are answering the question that Matt was just asking, which is how much do you see this outperformance of the rest of the world, of the rest of the 493 really taking hold next year?
- [00:53]
Margie Patel
Well, I think for the rest of the world it's really sort of a catch up after a long period of underperformance. And I think that the US still has some of the best fundamentals of any country in the world. We have good really this year. We saw it in the third quarter. That should continue in the fourth and well into next year with the the tax treatment, lower withholding, higher refunds and the very favorable capital expenditure treatment in the new tax bill. So we think that the US Is going to be one of the better performing sectors next year in the world. Really?
- [01:25]
Interviewer/Host
And it does hinge in your view on AI remaining the dominant trade. How much is this on a currency adjusted basis versus overall in absolute terms?
- [01:36]
Margie Patel
Well, I think the, the artificial intelligence trade is going to continue, but really over the last few months we've already seen some erosion in the price earnings ratios of some of the leading companies in AI. So the market is already making an adjustment if we're looking at some moderation from the extremely high growth, which is probably likely, but still that says to me that's going to be one of the sectors that have well above average growth when you look at the whole economy. So we still think that's a great sector.
- [02:03]
Interviewer/Host 2
What kind of broadening out do we get in earnings, Margie, because we have the Mag 7 earnings though still, you know, massive double double digit gains slow down. And the rest of the S and P as least as the S&P493 starting to catch up to some extent, but it hasn't really been substantial. Does that change in 2026?
- [02:24]
Margie Patel
No, I don't think so. I think the same sectors that have been strong for this year and a couple of years before are going to continue to be strong. The other sectors That I think particularly for consumers may be rather disappointing. So we still think it'll technology industrials relating to the electrical grid and those will be the sectors and aerospace, defense will continue to be the strong sectors and really outperform those other sectors we've seen.
- [02:51]
Interviewer/Host 2
You know, year to date all of the GICS sectors on The S&P 500 are up, but real estate has barely budged. I wonder if that changes with interest rates coming down. Consumer staples is the second worst performer and energy oddly enough is the third worst performer I guess because of oil. Right, but we're going to need much energy to power these colossus data centers. Why doesn't it, why doesn't it pay off?
- [03:17]
Margie Patel
Well I think really when you look at the, at the data centers and the growth in power that we need in this country and other countries really is going to come from the gas side. So we think that gas will continue to be in strong demand and really detach from the price of oil. And if when you actually look at oil, although there seems to be a glut today, if you look down the road a year or two, it may look like that the countries producing oil have really been underinvesting. So we may have not today, not tomorrow, a year from now, have a big surprise to say, oh, we really need to invest more in oil. But we think the case for gas, especially in the U.S. the shale producers feeding into the electrical grid and the need for more power, it's really the only realistic source is going to make that sector very strong and really detached from what happens to the price of oil.
- [04:03]
Interviewer/Host
How much market is this really lean into the whole real world economy, the old world economy being dominant? We've seen that to some degree with the metal space so far this year. Do you expect that to continue next year?
- [04:16]
Margie Patel
Hmm, yes, I think so. And I think the US is going to continue to be one of the strongest economies, particularly because the fundamentals are really on our side. When you look at the emerging markets, a lot of them had a big comeback, but fundamentally their economies don't have what we need to really see the sort of sustainable growth. In the US it looks like we're on track to say 2 or maybe 3% next year, which would really put us near the high end of the range of sustainable growth around the world.
- [04:44]
Interviewer/Host
I know that back in the day, Margaret, you and I used to talk all the time about high yield bonds and investment grade bonds and how fixed income fit into a portfolio. Increasingly you've talked about how equities have been a better proposition for a risk on move and frankly for returns than bonds. Do you think that that's going to shift come 2026?
- [05:05]
Margie Patel
No, I think the bond market is as a place of very small risk and very moderate returns. So you'll get particularly in high yield, a little bit extra yield, maybe 2 percentage points, may percentage points more than the treasury yield. So say five and a half to six and three quarters, something like that. But you really can't look for much beyond that. If you look at the high yield market, a lot of the poor quality issues have been siphoned off gone into the loan market. So the US public high yield market has a default rate only about 2%. So it's actually quite, quite safe on a relative basis. And the defaults have been more on the private credit side which are more than twice that amount. And we think that will continue. And as I said, there's no room for capital appreciation because most bonds in the high yield universe are trading above their face value. So we can't have the old fashioned capital appreciation that we would talk about in years past. It just isn't. The math just isn't there.
- [06:00]
Interviewer/Host 2
Margie, I'm just an equity simpleton, so this is a little bit too much for me to understand. Why do we have credit metrics getting better and better? Torres and Slok put out a note about it today. And defaults falling at the same time as bankruptcies hit the highest level since just after the great financial crisis. How does that work out?
- [06:22]
Margie Patel
Well, because the public high yield market, number one, they have not gotten the poor quality issues they may have in other years because those have been siphoned off into the private credit market. So you just don't have those very vulnerable names. And secondly, during that period of zero interest rates, many high yield companies took advantage of that to restructure their balance sheet to pay off their bank lines to issue new debt at very, very low coupon rates. Pre refund issues that might be callable are coming due in a couple of years. So actually the high yield bond market as a whole has never had such a strong balance sheet overall. And secondly, the supply is really pretty modest compared to the insatiable demand for higher yielding securities. So we think the high yield market is as a little, I would say an island of tranquility, but it really looks pretty good. The only criticism is you aren't going to get those types of equity like returns that we've seen in other markets. Markets especially if the Fed is very much on even keel Relative stability. It'd be different case if the Fed were to slam on the brakes, jack up interest rates. But that doesn't look like that's on the horizon at all. So we think the high yield market for what it is is a modest yield, modest risk and some investors like that. And that's so for that it's a good sector.
- [07:39]
Interviewer/Host 2
What does this mean for private credit? Margie, as we go into 2026 and I see all of these non bank lenders and Blue Owl, Apollo, KKR, Blackstone underwater for 2025, they haven't performed for equity investors well and that reflects the.
- [07:59]
Margie Patel
Fact that many, many of transactions that were done were, were in the poor quality companies that really don't have the, the ability to improve their balance sheet, to raise their, their growth. And it was really just sort of a play on spreads of the cost of money versus what they get. And we think that's a market that is now larger than the US high yield market. It's more than doubled in the last five years. So it's really a case of that's where all the marginal dollars have flowed to and so that will be where the, the marginal risk will be. And I think that as we've seen when there are bankruptcies or blow ups in that market, it really hasn't washed over into the bank sector, hasn't washed over into the high yield market with spreads widening out because the market has distinguished those companies that are under pressure, got way too much money from the high yield. The it's more of a because of the better balance sheets and the credit outlook and moderate use of funds. When you look at high yield bonds, the purpose of why they're borrowing money more than more than half, maybe Even close to 3/4 of the last few years have been to refinance other debt so they aren't going crazy with paying themselves big dividends or to make acquisitions that will turn out to be too risky. So that's really that says it's a very attractive sector. Looking at the fundamentals really.
- [09:19]
Interviewer/Host
Margie Patel of Allspring Global Investments, wonderful to see you. Thank you so much for being with us.
- [09:23]
Narrator/Host
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