A (3:56)

Right.

C (3:56)

Like you have economists expecting the Fed to continue easing rates into next year. We have the one big beautiful bill act that could lower corporate taxes and deregulation is continue to be a priority in the US And I think this combination, you know, monetary easing, fiscal stimulus, deregulation, and that combination rarely occurs outside of a recession. And I think this creates an environment that supports valuation, which is, by the way, like why we recommend an overweight position in US equities, even if absolute and relative valuation look elevated.

B (4:33)

Got it. So if I'm hearing you right, what I think you're saying is that comparisons to some bubbles of the past don't necessarily stack up because profitability is better. There aren't excesses in the system, monetary policy might be on the path that's more accommodative. And so when compared against all of that, the valuations actually don't look that bad.

C (4:57)

Exactly.

B (4:58)

Got it. And sticking with the equity markets, then another common question is it's related to AI, but it's around this idea that a small set of companies have really been driving most of the growth in the market recently. And it would be better or healthier if the equity market were to perform across a wider set of companies and names, particularly in mid and small cap companies. Is that something that we see on the horizon?

C (5:33)

Yes, we are expecting US Stock earnings to broaden out here. And it's one of the reasons why U.S. equity strategy team has upgraded small caps and now prefer it over large caps. And I think all of this comes from the fact that we are in a new bull market. I think we have a very early cycle earnings recovery here. I mean, as discussed before, the macro environment is supportive. And like Fed rate cuts over the next 12 months, growth positive tax and regulatory Policies that don't just support valuations, they also act as a tailwind to earnings. And I think on top of that, leaner cost structures, improving earnings revisions, AI driven efficiency gains, they all support a broad based earnings upturn. And our US equity strategy team do see above consensus 2026 earnings growth at sort of 17%. The only other region where we have earnings growth above consensus in 2026 is Japan. For both Europe and EM, we are below which drive out equal weight and slight underweight position in those two indices respectively.

B (6:46)

Got it. And so since we can't seem to get away from talking about AI and how it's influencing markets, the other common question we get here is around debt issuance related to AI. So our colleagues put together a report from earlier this year talking about the potential for nearly $3 trillion of AI related CapEx spending over the next few years. And we think about half of that is going to have to be debt financed. That seems to be a lot of debt, a lot of potential bonds that might be issued into the market. Are credit investors supposed to be concerned about that?

C (7:23)

We really can't get away from AI as a topic and I think this will continue because AI related capex is a long term trend with much of the capex still really ahead. And I think this goes to your question because this really means that we expect nearly another 3 trillion of data center related CapEx from here to 2028. You know, while half of the spend will come from operating cash flows of hyperscalers, it still leaves a financing gap of around one and a half trillion which needs to be sourced through various credit channels. Now part of it will be via private credit, part of it would be via asset backed securities, part of but some of it would also be via the US investment grade corporate credit bond space through add in financing for a faster M and a cycle. We forecast around 1 trillion in net investment grade bond issuance, you know, up 60% from this year. And I think given this technical backdrop, even though credit fundamentals should stay fine, we have double downgraded US investment grade corporate credit to underweight within our cross asset allocation.

B (8:32)

Got it. So the fundamentals are fine, but it's just a lot of debt to consume over the next year. And so somewhat strangely you might expect high yield corporate bonds to actually do better.

C (8:43)

Yes, because I think high yield doesn't really see the same headwind from the technical side of things. And on the fundamentals front our credit team actually has default rates coming down over the next 12 months which again I think supports high yield much better than investment grade.

B (9:00)

So before we wrap up moving away from the equity markets, let's talk about foreign exchange. The US dollar spent much of last year weakening, and that's a call that our team was early to eventually became a consensus call. It was premised on the idea that the US was going to experience growth weakness, that there would also be these questions among investors about the role of the dollar in the world as the US was raising trade barriers. It seemed to work out pretty well going into 2026 though I think there's some more questions amongst our investors about whether or not that trend could continue. Where do we land?

C (9:39)

I think in the first half of next year that downward pressure on the dollar should still persist. And as you said, we've had a very differentiated view for most of this year. Expecting the dollar to weaken in the first half versus G10 currencies and several things drive this. There is a pot higher dollar negative risk premium driven by I think like near term worries about the US labor markets in the short term and as investors I think debate the likely composition of the FOMC next year. Also, you know, compression in US versus rest of the world rate differentials should reduce FX hedging costs, which also adds incentive for hedging activity and dollar selling. All of this means that we see downward pressure on the dollar persisting in the first half of euro dollar at 123 and dollar JPY at 140 by the end of first half 2026.

B (10:41)

All right, well that's a pretty good survey about what clients care about and what our view is. So Serena, thanks for taking the time to talk with me today and thank.

C (10:49)

You for inviting me to the show.

B (10:50)

Today and to our audience. Thanks for listening. If you enjoy thoughts on the market, please leave us a review and share the podcast. We want everyone to listen.

C (11:00)

The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.