Bloomberg Surveillance TV: October 7th, 2026

Alicia Levine · BNY Wealth

Stock-bond correlation broke in 2023; bonds can't reliably offset stock volatility in a rising-rate environment.

The stock-bond correlation has been broken since 2023, when the market came out of a zero-rate world. In a rate-rising environment, which she says is the current one, bonds are very hard to use as an offset to stock volatility.

“So the correlation has been broken for a while, and it's been broken really since 2023 when we came from a zero rate world. Very hard in a rate rising environment, which is what we're in for bonds to be the offset to stock volatility.”at 4:33

Alicia Levine · BNY Wealth

Clients should stay short-to-intermediate duration; going long needs a bet on Fed cuts from a weaker economy.

Going further out in duration requires betting that the Fed stops hiking and eventually cuts because something worse is happening in the economy. Her firm is positioned short-to-intermediate for clients, which has been a safer place to be. Nominal growth is running at 6.3%, the long end is under pressure, and the environment is not one to experiment with long duration.

“You have to bet that the fed is going to stop the hiking cycle and have to cut at some point because there's something worse in the economy. ... So we're in the short term to intermediate for our clients. It's been an okay place to be. It's a safer place to be.”at 4:57

Alicia Levine · BNY Wealth

Yields could easily reach 5.5%, a normalization consistent with 2.5% growth and 3% inflation.

She sees yields getting to 5.5%, which would be part of a normalization cycle in an economy growing about 2.5% with inflation around 3%. At that level bonds become a competitive alternative to stocks. She also notes that investors are comfortable lending to hyperscalers, which is a competing use of capital.

“I think we can easily see yields getting to five and a half percent here. That would be part of the normalization cycle in an economy that's growing two and a half percent with two and a half to 3% with inflation at 3%.”at 5:30

Mark Cabana · Bank of America Securities

The Fed faces hike or bond spike; it will use the front end, since the long end is hard to control.

The curve is bear steepening massively. The Fed's choices are to hike or let the bond market spike, with fiscal policy unlikely to help. The Fed controls the front end and can reverse overshoots there, but has little control over the long end, which can act like a wrecking ball and cause disorderly moves and excess tightening. He therefore thinks the Fed will rely on the front end and keep hikes on the table.

“The curve just bear steepens massively. And the choice that we think they face is literally hike or bond spike right now. Those are your two choices.”at 25:06

Mark Cabana · Bank of America Securities

The Fed's single rate tool works through interest-sensitive sectors, so 'two economies' pushback doesn't stop rates biting.

He hears the pushback that there are two economies, a traditional one and an AI one. But the Fed has one tool, the overnight rate, which affects housing, autos and consumer leverage. It does not hit the economy equally, but the tool has to work through interest-sensitive parts, so the AI economy does not escape the logic entirely.

“Well, they've got one tool. It's the overnight rate. And that does impact the housing sector, the auto sector, the consumer leverage sector. ... It doesn't hit the economy equally. It's not fair. But guess what? Life is not fair.”at 22:28

Mark Cabana · Bank of America Securities

Neutral rate is far higher than thought; rates keep rising until data softens or financial conditions tighten.

Markets are repricing the neutral rate after the Fed cut the anchor on forward guidance. Powell in April said policy was modestly restrictive, which implied cuts. Warsh at Jackson Hole would not call financial conditions restrictive, so the market asked how high rates can go. The 10-year is up about 115 basis points year to date, over half of it since Jackson Hole. Over half of clients say policy is accommodative, and equities are at highs and credit spreads tight. Inflation has been sticky because rates were not restrictive, so rates keep rising until macro data softens or financial conditions tighten.

“And I think what they should be taking from the market move is guess what? Neutral is probably a lot higher than you thought. And the reason inflation has been so sticky for so long is because rates were actually not restrictive. They were actually accommodative.”at 23:15

Mark Cabana · Bank of America Securities

Fed officials talking markets down is dangerous forward guidance that is steepening the curve.

He argues the Fed is guiding, despite Warsh saying he does not want to guide. The troika, including deputies, was talking the market down before payrolls and CPI, which was surprising. The market is pricing a terminal around 4.7%, close to 5% when they started talking it down, versus a median dot of 4.1% for the hiking cycle. He argues this guidance is deliberate and dangerous because it drives the curve steepening.

“You just can't change some of these... Some of the ways that these institutions operate, nor should you really. But, yeah, you may not like forward guidance. You're guiding, and that is dangerous because it's driving this curve steepening in my view.”at 26:48

Alicia Levine · BNY Wealth

Political pushback against data center build-out is the main threat to AI capex that funds S&P earnings.

The rapid AI build-out and its capex are funding S&P earnings, so it is a self-reinforcing circle. The thing that stops it is a slowdown in data center build-out, which is political across the spectrum. Governor races in states that might flip, such as Texas, could make slowing the data center build-out a campaign issue in 2028. That could be where a market rumble comes from, and she says the market is not yet pricing it in.

“What's at the heart of this? It's the rapidity of the AI build out. It's the CapEx spend. That CapEx spend is funding the earnings of the S and P. ... I think what stops it really is the slowdown in the data center build out. And that's political and it's political across the spectrum.”at 6:36

Olivia Wassenaar · Apollo Global Management

Demand for financing the AI build-out is strong; Apollo deployed about $20B this quarter with investment-grade partners.

Asked whether demand exists for the financing, she says it does. Apollo deployed about $20B in the last quarter, partnering with investment-grade companies such as Enbridge and Williams and investing in gas processing businesses like PGI. She frames this as part of the AI story and the power, grid and gas demand behind it.

“It is for sure. I look at what we've done in the last quarter. ... That's been partnering with investment grade companies like Enbridge, like Williams.”at 10:52

Olivia Wassenaar · Apollo Global Management

Underinvestment in energy supply is an underappreciated risk, with 2003 to 2008 a parallel to today.

Past investment cycles show that underinvestment is underappreciated. After the 1990s, oil and gas infrastructure and drilling were underinvested, and a demand shock in 2003 to 2008 found thin inventories. She sees real parallels today, which is what Apollo is focused on now. Apollo is in an all-above investment cycle across energy, infrastructure and the industrial economy.

“I mean, you can look at past investment cycles... 2003 to 2008, where we were coming out of, the nineties and underinvestment in oil and gas infrastructure and drilling. And all of a sudden, we had this demand shock... We had thin inventories.”at 11:07

Olivia Wassenaar · Apollo Global Management

Energy security now commands a premium, and moving energy has become more costly, with longer tanker routes.

There is a real premium for energy security, and Apollo is spending a lot of time on investments in economies around it. The cost of moving energy has risen, with insurance, security and longer tanker routes all adding to it. These factors have changed how she thinks about prices.

“I think what we're seeing right now is there's a real premium for energy security and really being able to invest in and around that theme. ... the cost of just moving these molecules has gone up.”at 13:38

Alicia Levine · BNY Wealth

Market leadership is narrowing to growth megacaps; the index holds up while small caps lag, and the bull market can continue.

Small caps are about 8% below their high and triple-C spreads are widening, while mega-cap growth stocks regained their footing after Jackson Hole, when Warsh turned hawkish. Owning the index or the QQQ or SPY is fine, and growth has carried the market for fifteen years. She argues the narrow leadership can persist, as the 2023 episode showed, when about 10 stocks led and the market kept rising until a manufacturing recovery broadened it. The broadening trade helped stock pickers but did not lift the index because capital rotated out of the top of the market. Earnings can keep the bull market intact.

“You started to see the small caps underperform, the mag seven got their footing, became a floor under those charts.”at 2:22

Alicia Levine · BNY Wealth

Bank stocks are pressured by a flattening yield curve, not by weak bank fundamentals.

Bank underperformance is not because banks lack resilience. Expectations for higher fed funds flatten the yield curve, and that margin pressure hits the area. The same logic hits cyclicals, which borrow, because their marginal cost of capital rises.

“Right? So you're seeing Bank stocks. You're seeing the bank stocks not because the banks aren't resilient because on the margin, if you're having a flattening of a yield curve because of expectations for higher fed funds rate, that's what's going to pressure that area as well.”at 3:08

Alicia Levine · BNY Wealth

A modest build-out slowdown would curb bubble fears and extend the AI trade's longevity.

Slowing the build-out a little makes it harder to raise capital, which increases concern over the trade and reduces the bubble-like feeling in markets. Returns on AI spending appear to be starting, which drove another leg higher in tech stocks after August earnings. The slowdown would affect earnings growth, which investors must watch, but a more measured pace helps the trade last.

“if you slow it down a little bit, prevent the concerns of a bubble. Right? Because then it becomes a little bit harder to raise the capital. ... If you slow it down a little bit, that actually helps the longevity of the trade.”at 7:48

Alicia Levine · BNY Wealth

No US recession is coming; the economy is strong, so an AI slowdown means a correction, not recession.

If the data center slowdown hits earnings, the result would look like a correction, which she calls viable because she does not see a recession. She describes the economy as really strong, with nominal growth running at 6.3%.

“That looks like a correction, which will be eminently viable because we don't see a recession here. We think the economy is really strong.”at 8:06

Olivia Wassenaar · Apollo Global Management

The grid is an underappreciated risk, so Apollo is investing in grid and power resiliency for AI-driven demand.

Apollo is focused on the grid and power build-out as underappreciated risks. The work includes domestic capacity for reshoring, grid resiliency and power supply resiliency. The power and grid buildout runs alongside the AI story, not just in it.

“We've been focused on the grid. Right? I mean, the grid is one of the underappreciated risks that we look at in the [AI] power build out today.”at 12:17

Olivia Wassenaar · Apollo Global Management

Natural gas will be used for a long time; it is not just a transition fuel, so gas infrastructure is needed.

Apollo is building out natural gas infrastructure, including investing in PGI, a gas processing platform in Western Canada, and partnering with investment-grade companies such as Enbridge and Williams. Gas demand is coming from power and AI, and the infrastructure around it needs to be in place. She argues gas is a long-term fuel, not a stopgap.

“We're gonna be using natural gas for a long time. This is not just a transition fuel. This is something more. And making sure that we've got really the infrastructure in and around it.”at 12:33

Olivia Wassenaar · Apollo Global Management

Financing creativity is fine; investors are flocking to better names in a flight to quality.

Creative financing is part of what Apollo does, with bespoke solutions for investment-grade companies. She sees a real flight to quality, with investors favoring better names and better opportunities in the current environment, so counterparty risk is not a concern for her.

“I do think you're seeing a real flight to quality though, looking at better names, better opportunities, particularly in an environment like this.”at 13:07

Olivia Wassenaar · Apollo Global Management

Solar and batteries are proven, quick to market and efficiently priced, so Apollo is underwriting them.

Apollo focuses on technologies that work, such as solar and batteries, which are quick to take to market and efficiently priced. Battery demand is becoming increasingly important as the power buildout grows. Apollo uses conservative assumptions on life cycle and pricing, and expects these choices to keep paying off.

“Solar, batteries, like, these are proven. These are quick to take to market. They are efficiently priced, and they're becoming increasingly reliant with sort of more battery demand.”at 15:26

Olivia Wassenaar · Apollo Global Management

Infrastructure is a great place to invest now, with inflation protection from passing through costs.

She sees infrastructure as a great place to invest right now. Inflation protection matters because investors can pass through some of the costs, which helps when the cost of capital is high. Jonathan Ferro adds that this is a fantastic time for infrastructure more broadly.

“Right now, think infrastructure is a great place to invest. ... If you think about inflation protection, as you think about, you know, as you think about the ability to pass through some of these costs.”at 16:04

Mark Cabana · Bank of America Securities

Higher rates are starting to bite, first in triple-C high yield and European bonds.

He sees early signs of rates biting in US high yield, especially triple-C credits, and in European bonds, with French protests also worth noting. Credit spreads are still tight. He calls this early-stage evidence, which is not enough to convince the Fed it has gone too far until macro data softens or financial conditions tighten more broadly.

“Again, you're seeing it in US high yield, triple Cs in particular. You're seeing it in European bonds, and there's different neutral rates in different parts of the world for various reasons.”at 24:23