Investment Boom Yields Profits Windfall, Leaves Households Behind.
The build-out of artificial intelligence (AI) continues to elevate business investment to record growth levels and is powering recovery in broad economic growth. While this is resulting in soaring profits for the beneficiaries of AI-investment, it is also commanding a lot from capital markets to fund the build. Meanwhile very slow job growth, affordability concerns and higher borrowing costs have consumers feeling glum.
Policy Moving from Tailwind to Headwind for 2027.
Policy may remain an active source of volatility as the Treasury and Federal Reserve (Fed) are challenged by high inflation, bloated debt and deficits, and the AI investment boom. The dual support of fiscal and monetary policy has enabled markets since 2022, so the rate hike cycle and less fiscal impulse could pressure risk assets. Geopolitical risks also remain a source of inflation pressure as they create persistent supply chain strains.
Yields Remain Critical to Equities with Stocks Following Their Gyrations.
Yields peaked in early October, giving stocks a much-needed reprieve. Small caps were able to climb out of correction and the broadening trade that has defined much of this year resumed. We continue to watch yields closely as inflation concerns and the Fed’s reaction to higher prices look likely to dictate stocks direction for the foreseeable future. Many investors were watching earnings as the next catalyst for stocks but thus far, reactions to reports have been volatile – especially for tech and related sectors where estimates were sky high.
Fixed Income Finds its Footing.
Cyclical pressures from growth and inflation have been outweighed by cash moving into treasuries from the AI trade. Yields at 5%+ for Core bonds offer prospects for a positive return for bonds for the first time in years even if rate volatility were to reignite. The flight to quality paired with normalized liquidity in the municipal market led exempt bonds to recover much of the exaggerated September drawdown. Corporate credit spread widening has been heaviest in the lowest quality segment of the market.
