CPI and the AI Trade

Microsoft

Across the shows: 8 speakers in other episodes, 5 bullish and 1 bearish calls, past 30 days

• Ted Mortonson · BairdBullish

  Microsoft's upcoming report should be strong on Azure, Copilot and free cash flow.

  Ted says free cash flow is what matters for the Magnificent Seven now, and Microsoft is doing better than peers. He argues it can't spend on infrastructure at the same pace, so its report should be unusually good on Azure and Copilot. He points to free cash flow of about $25 billion a quarter.

  “And Microsoft is doing better than the others... So you're gonna see them have an unbelievably good report on Azure and Copilot as well as their free cash flowing around 25,000,000,000 a quarter.”at 44:46

Apple

Across the shows: 17 speakers in other episodes, 6 bullish and 6 bearish calls, past 30 days

• Ted Mortonson · BairdBullish

  Apple's roughly $30 billion of free cash flow explains why its stock rises every day.

  Ted explains Apple's steady stock gains by its cash generation. He cites about $30 billion of free cash flow as the reason it is up every day, which points to a favourable view of the stock's fundamentals.

  “Same thing with Apple. The reason why Apple is up every single day is 30,000,000,000 of free cash flow.”at 45:04

Salesforce

Across the shows: 4 speakers in other episodes, 3 bullish and 0 bearish calls, past 30 days

• Ted Mortonson · BairdBullish

  Salesforce is a long-term winner from enterprise AI adoption and will help fuel the AI revolution.

  Ted includes Salesforce (CRM) with Microsoft and ServiceNow as names that look strong over the long term on enterprise AI adoption. He argues they will fuel the AI revolution, which supports a bullish view on enterprise software.

  “Take Microsoft, ServiceNow, CRM. Those are the names that if you really look long term on the enterprise adoption of AI, those are three companies that gonna... Are going to fuel the AI revolution.”at 45:50

ServiceNow

• Ted Mortonson · BairdBullish

  ServiceNow is a long-term winner from enterprise AI adoption and will help fuel the AI revolution.

  Ted names ServiceNow with Microsoft and Salesforce as companies that will benefit over the long term from enterprise adoption of AI. He argues they will fuel the AI revolution, and he favours software names as the next leg after infrastructure.

  “Take Microsoft, ServiceNow, CRM. Those are the names that if you really look long term on the enterprise adoption of AI, those are three companies that gonna... Are going to fuel the AI revolution.”at 45:50

US inflation

• Eric Winograd · AllianceBernstein

  Expects inflation to settle at 2%–2.5% over time; 3% is too high but livable.

  AllianceBernstein has long forecast inflation between 2% and 2.5%, above the pre-pandemic 1.5%–2% range. He thinks 3% is too high, but 2%–2.5% is something people can live with over time and is not disruptive.

  “So in our forecasts for a long time now, we've argued that inflation is gonna be between two and two and a half percent. Remember pre pandemic, it was running between one and a half and 2%. ... I think 3% is too high. But I think that between two and two and a half is something that people can live with over time.”at 2:32

• Eric Winograd · AllianceBernstein

  Expects supply shocks driving inflation to fade in coming months, though the Iran war could prolong them.

  He expects the supply shocks behind recent inflation to fade within months. But they are driven by non-economic events, so if the Iran war persists or accelerates, or escalates after the midterms, they could last longer. He says supply shocks cannot be reliably forecast.

  “So we expect that they will fade in the coming months, but, you know, again, the supply shocks are often driven by non economic variables. And so if the war in Iran persists or accelerates...”at 3:09

• Eric Winograd · AllianceBernstein

  Short-term inflation expectations are rising, stretching the definition of 'temporary' inflation and potentially giving the Fed pause.

  Five- and ten-year expectations look fine, but one-year expectations in the New York Fed and University of Michigan surveys have risen over recent months. That suggests households and businesses now think the price shock may last more than a year, which stretches the meaning of temporary and could make the Fed pause.

  “There has been, though, over the past few months, march up in short term inflation expectations. The New York Fed survey of one year inflation expectations is marching higher.”at 3:32

• David Rosenberg · Rosenberg Research

  Wage settlements near 3.5% and decelerating nominal wages show labor slack, so inflation is not sustained.

  Collective bargaining agreements now carry annualized wage increases of about 3.5%, roughly half the 2021–2022 pace. Nominal wages are decelerating, which signals slack building in the labor market. Without wage-price pressure, inflation cannot be sustained, unlike in 2021–2022.

  “collective bargaining agreements are containing annualized wage increases of around three and a half percent. That is that is not inflationary.”at 13:38

• Jim Bianco · Bianco Research, L.L.C.

  Expects US inflation stuck near 3%, as goods inflation has flipped from deflation to nearly 2%.

  Goods inflation averaged minus half a percent from China's WTO entry in 2001 to 2020, and is now nearly 2%. He attributes this to deglobalization, tariffs, wars and chronic supply chain problems. He does not expect goods deflation to return, so disinflation will be hard.

  “I think we're stuck in a three ish and percent inflation world. We're not going up. But ... goods inflation stuff was deflationary. It's minus half percent. Now it's nearly 2% inflation on goods.”at 19:01

• David Rosenberg · Rosenberg Research

  Core goods disinflation is real: core goods CPI is 0.7% year over year, down from 1.5%.

  Through August, core goods CPI was running at 0.7% year over year, versus 1.5% a year earlier. This measure has no hedonic adjustments or imputations, so it reflects what consumers can see and touch. He sees this as evidence that goods inflation is easing.

  “we are seeing disinflation in core goods... through August, the year over year trend in core goods CPI was running at 0.7%. And this doesn't have hedonics or imputations... A year ago, it was 1.5%.”at 19:47

• David Rosenberg · Rosenberg Research

  Without four shocks in six years, US core and headline inflation would be below 2%.

  He lists four shocks in six years: COVID with fiscal stimulus, Russia-Ukraine, tariffs and the current Iran-related energy shock. His analysis finds that absent these, core and headline inflation would be south of 2%. Once the shocks fade, as tariff effects did, inflation should gravitate toward 2%.

  “We ran the analysis, and we found that absent the four shocks we've had in the past six years, core and headline inflation today would be south of 2%.”at 31:04

• David Rosenberg · Rosenberg Research

  BLS shelter measurement makes US inflation look higher than actual rent and home-price trends would.

  The way BLS measures shelter is out of line with what shelter costs are doing, since rents and home prices are deflating. Because of that treatment, US inflation numbers look higher than in many other countries, where shelter is measured differently.

  “the way we measure shelter is completely out of line with what shelter costs are doing. ... The way that it's treated by the BLS makes the inflation numbers in The United States look higher than does in many other countries in the world.”at 32:56

• Rob Sockin · PGIM

  Inflation is broad-based and will stay high, not just an AI story; energy is also elevated.

  His view rests on above-trend growth, a stable labor market and broad-based inflation. Core CPI came in at 0.3%, in line with his forecast. AI is part of the story, but counting the items with elevated inflation shows it is not only AI; high energy prices are a major factor.

  “inflation is gonna stay high. Growth's above trend, the labor market's stable, Inflation is broad based.”at 35:40

• Rob Sockin · PGIM

  US inflation is broad-based across many items, not just an AI story; energy is also driving it.

  Rob says AI is part of the inflation story but not the main driver. He points to the number of items running at elevated inflation rates, and says high energy prices are also a major contributor.

  “I think AI is part of the story. But if you look at just the number of items that are running with elevated inflation rates, it's not just an AI story. It's high energy.”at 36:09

US rates & the Fed

• Eric Winograd · AllianceBernstein

  Fed's base case is a December hike, not October; the CPI print is not hot enough for October.

  Fed officials including Williams, Bowman and Jefferson have signaled one more hike is appropriate but more time is needed. Their forward guidance points toward December rather than October. He does not think this print is hot enough to force an October move, though he cannot rule it out.

  “most of it seems to point toward December rather than October. That's still our base case. I don't think this print is hot enough to push them to move in October.”at 8:37

• David Rosenberg · Rosenberg Research

  Hot CPI doesn't put the Fed back in play for next meeting but raises December hike odds.

  Rosenberg sees the market reaction as outsized, since 0.3% core CPI was only slightly above the 0.2% consensus. He doesn't think the print puts the Fed back in play for the next meeting. It does probably raise the odds of a December move. His underlying view on inflation is unchanged.

  “I think it's an outsized reaction. I don't think this puts the Fed back in play, for the next meeting, but it probably raises the odds for December.”at 22:50

• David Rosenberg · Rosenberg Research

  Warsh's Fed rhetoric ignores housing, citing AI eight times at Jackson Hole while housing is mentioned once.

  He criticizes Warsh's Jackson Hole speech for calling the economy resilient while mentioning AI eight times and housing once. Home prices are deflating, yet housing gets little attention. He also notes the Fed's new focus is the PCE deflator rather than CPI.

  “I roll my eyes a lot at the stuff that [Warsh] talks about the economy. He basically at Jackson Hole talked about how the economy is resilient and strong and solid, and then goes on to mention AI eight times. Mentions housing once.”at 25:31

• Jim Bianco · Bianco Research, L.L.C.

  Fed looks more politicized than in years, with rate decisions shaped by the midterm calendar.

  Street research argues the Fed will skip October because it is a week before the midterms, and openly describes this as a political decision. He says that makes the Fed more politicized than it has been in a long time.

  “I've read a lot of street research and their argument is it's a week before the midterms. Yeah. So they're openly saying, we're going to make a political decision. And so the Fed seems to be more politicized than we've seen in a long time because of this.”at 27:50

• Rob Sockin · PGIM

  Keeps the Fed hike call; more hikes than base case possible, though October is not sealed.

  PGIM's hike call rests on sticky inflation, above-trend growth and a stable labor market. Today's data supports that view. The print does not seal an October hike, but the firm likes its call and sees more hikes than the base case as possible.

  “It doesn't seal the deal that October is gonna happen, but we like our call here. And if anything, it could be more hikes than what we have in the base case.”at 35:53

• Rob Sockin · PGIM

  Fed will hike at the October meeting; skipping before midterms would look political.

  Rob expects a hike because the data universe is still hot, with a stable labour market and sticky inflation. Earlier softer signals such as downward inflation revisions and a weak jobs report were not the right signal, in his view. He also says Warsh has signalled a hawkish path since midsummer and the Fed already began hiking in September. Skipping in October would look more political, given the message that inflation is a big problem.

  “It's really gonna come down to does the Fed wanna hike with the type of data universe we've seen up to this point? We think they will.”at 37:20

Emerging markets

• Ernesto Revilla · Citigroup

  Latin America's rightward political shift is structural, not cyclical, boosting investor sentiment.

  Most Latin American elections since late 2025 have moved right, which Ernesto says has meaningfully improved investor sentiment and business-friendly policy outlooks. He weighs whether this is cyclical or establishment-driven and concludes it is structural.

  “The political pendulum, Tom, has changed from left to right in most of the region... We think it's the latter.”at 50:30

• Ernesto Revilla · Citigroup

  Brazil's frontrunner has a strong economic team, but asset prices have already priced it in; fiscal reform must follow.

  Ernesto says the frontrunner is the big favourite to win and has Congress on his side. He argues he will still need a large fiscal reform and regulatory overhaul. He notes his economic team looks strong and that asset prices have moved a lot to reflect this, so the next leg depends on execution.

  “He's the big favorite to win the election... but he will have to do a big fiscal reform and the regulation. So far, it seems that it's in his plans... and asset prices have reflected that. They have moved quite a lot.”at 51:41

• Ernesto Revilla · Citigroup

  Latin America is a good diversifier: far from conflict, with strong commodities and a weak dollar.

  Ernesto says Latin America is far from the Middle East and Russia-Ukraine conflicts, so it is a good place to hide and diversify. He adds that strong commodity prices and a weak dollar are global tailwinds. He also flags local El Niño risk and higher long-term rates as current shocks the region must weather.

  “The global tailwinds are still there. First, Latin America is far away from conflict. So, it's a good place to hide and to diversify. Then you have a strong commodities, a weak dollar, the political cycle”at 52:32

• Ernesto Revilla · Citigroup

  Violence is real, but large parts of Mexico's economy, export sectors and cities are doing well.

  Ernesto acknowledges that organised crime is a major concern that has spread across Latin America and has moved into the legitimate economy. He argues the myth is that the violence swamps everything. He points to highly productive export-oriented sectors and safe cities such as Mexico City.

  “Big organized crime has diversified out of criminal activities into the real economic activity. So, it's a concern. But I would say the myth is that there's a huge swaths of economic activity and regions in Mexico that are doing very well.”at 54:39

• Ernesto Revilla · Citigroup

  Chile's reform stall is an implementation risk; growth is weak this year with recovery expected next year.

  Chile has strong macro fundamentals, investment-grade status and very strong fiscal policy, and it has already made a market-friendly political transition. President Kast is struggling to enact his reform agenda, which is the implementation risk. Chile is growing very little this year, but Ernesto expects a recovery next year.

  “But now president [Kast] is having trouble enacting his reform agenda... Chile is growing very little this year, but we expect a recovery the next year.”at 55:28

US Treasuries & yields

• David Rosenberg · Rosenberg Research

  Raised bond allocation to 30%; likes current nominal and real yields despite the hot CPI.

  His firm has just raised its bond allocation to 30%. He says yields look attractive both nominal and real, and he is not swayed by today's CPI number. This is a view on fixed income relative to real assets and residential property.

  “But, you know, we just raised actually our allocation to bonds to 30%. So we like these yields both normal and real where they are right now, notwithstanding today's CPI number.”at 12:09

• Jim Bianco · Bianco Research, L.L.C.

  Long yields rose despite 175bp of cuts, showing the market sees Fed policy as too easy.

  From 2024 to 2026 the Fed cut 175 basis points over six meetings, yet the 10-year yield rose 130 basis points. That is the first time in 50 years an extended easing cycle produced higher long-term rates. He reads this as the market saying policy is too easy.

  “from twenty twenty four to 2026, the Fed cut rates 175 basis points in six meetings, and the ten year yield went up 130 basis points. It's first time in fifty years that we've seen an extended rate cutting cycle produce higher long term rates.”at 18:37

• Rob Sockin · PGIM

  If the Fed skips a hike, long-end yields could jump as markets doubt inflation control.

  Rob argues the market has priced in a hike after hot inflation data. If the Fed does not hike at this meeting, he expects a large response at the long end of the curve. Investors would then become more concerned that inflation is not being brought under control.

  “And you might get a pretty big response on the long end of the yield curve if they don't hike at this meeting that markets are gonna get more concerned that they're not gonna get inflation under control.”at 38:41

Tariffs & trade policy

• David Rosenberg · Rosenberg Research

  Only about 25% of the tariff shock reached final inflation, far below what was expected.

  After 'Liberation Day' the US tariff rate rose from about 2% to 15%, and forecasters expected core goods inflation to reach 4%–4.5%. Core goods inflation barely got above 2% and has since fallen to 0.7%. He attributes the shortfall to a weak labor market limiting firms' ability to pass costs on, and says only about 25% of the tariff shock reached final inflation.

  “So the question becomes, who ate that inflation from the tariffs? ... Only 25% of that tariff shock, okay, made its way through to final inflation, and that was not expected at the beginning.”at 20:57

• Jim Bianco · Bianco Research, L.L.C.

  Tariffs are a policy choice keeping inflation above 2% for 66 months; the US won't stop them.

  The San Francisco Fed study implied that ending tariffs would end goods inflation, but he rejects that because tariffs are a deliberate policy choice. Core PCE is about 1.8%, and tariff-driven goods price increases have kept inflation above 2% for 66 months.

  “No, we don't wanna stop the tariffs. That's our policy choice. ... And that's been the big push up that's been keeping inflation for sixty six months above 2%.”at 21:47

• Ernesto Revilla · Citigroup

  Mexico is now the US's top trading partner and is well positioned to benefit despite the noise.

  Ernesto says Mexico has overtaken China and Canada as the main US trading partner. Trade has kept rising over the past decade despite the NAFTA renegotiation into USMCA and the political noise, and he says the data show this.

  “It is amazing how Mexico has surpassed China and Canada to be the main trading partner of The US. And even in the last ten years, that trade has only increased despite the noise... So Mexico is ideally positioned to benefit.”at 53:41

US consumer

• Eric Winograd · AllianceBernstein

  US consumer is two economies: top earners carry spending while paycheck earners are losing ground.

  Aggregate spending looks resilient because investors, helped by strong markets, treat higher prices as an inconvenience. Paycheck-to-paycheck households are in a different position, since real average hourly earnings are negative. Citing Moody's Zandi, the top 10% of earners account for more than 50% of consumption.

  “The investor class, people who are invested in markets, look, higher prices are an inconvenience, but they aren't really a problem because the market has been so strong. If you are paycheck to paycheck, however, the situation is very different.”at 4:27

• Rob Sockin · PGIM

  The consumer backdrop is strong; volatile retail sales data likely means payback, not weakness.

  Rob says retail sales should not face much pressure because the consumer is coming off a very strong run rate. He notes the monthly data are volatile, so payback is possible, but the trend shows strong growth and a strong consumer backdrop.

  “I think for retail sales, I don't think there's a lot of pressure there because we're coming off a very strong run rate for the consumer.”at 36:57

China's economy

• David Rosenberg · Rosenberg Research

  China's excess capacity exports disinflation globally, offset by energy-driven price effects.

  China is battling excess capacity and a deflationary, disinflationary situation at home. That is being exported to the rest of the world, though the effect is offset by what is happening on the energy side. Disentangling these forces is needed to read global inflation.

  “They're battling excess capacity and deflationary, disinflationary situation, domestically. The extent to which that's being exported to the rest of the world is, of course, being offset by what's happening on the energy side.”at 15:22

• Rob Sockin · PGIM

  China's export machine is resilient, finding markets beyond the US and gaining share despite tariffs.

  Expectations were that high US tariffs would slow China's economy. Rob says China has instead been an adaptable export machine that has found export markets beyond the US and grown its market share.

  “...what we've seen is an incredibly resilient, adaptable export machine from China... they've been able to find export markets even beyond The US and grow their market share.”at 39:16

US growth & recession risk

• Jim Bianco · Bianco Research, L.L.C.

  Nominal GDP near 5% is normal; slowing to that level would not damage stocks, as zero rates were abnormal.

  He sees a longer-run nominal GDP average near 5%, composed of roughly 3% inflation and 2% growth, as normal. He doesn't think pulling it down to around 5% or 4.8% would hurt the stock market. Markets anchored to 2010–2020 zero rates wrongly treat 5% as crushing.

  “I was thinking more of, like, a longer run average of around five ish or so... What's the damage to the stock market if we pull it down to five ish or 4.8? Nothing. ... Zero was abnormal.”at 29:01

• David Rosenberg · Rosenberg Research

  Not a boom: about 2% real growth, flat employment and falling real wages; nominal GDP is mostly prices.

  Real growth is about 2% and the rest of nominal GDP is inflation. Roughly 70% of nominal GDP comes from prices and costs, against a historical norm of half. Employment has barely grown over the past year and real wages are contracting, so this is a lopsided economy rather than a boom.

  “This is not a boom economy. Okay? We have 2% real, and the rest is nominal. ... when basically 70% of the nominal GDP is coming from prices and costs and 30% is coming from real economic activity.”at 30:17

US stock market outlook

• David Rosenberg · Rosenberg Research

  Market imbalances and concentration are the widest in 40 years; ten stocks exceed 40% of the market.

  He won't call it a bubble, but he has not seen such widespread imbalances in 40 years. Ten companies make up more than 40% of market cap, against under 30% in the late 1990s. The gap between personal and corporate income is unprecedented, and he expects mean reversion.

  “I won't call it a bubble, okay? ... But I am gonna say that in my forty years in the business, I have not seen such widespread imbalances, divergences and extremes... where 10 companies comprise more than 40% of the market cap.”at 33:57

• Ted Mortonson · Baird

  Money is rotating from semiconductors and infrastructure into software as chips weaken and investors turn defensive.

  The semiconductor index has been weak for several days after a large run; Ted cites a gain of 87% (as he put it). He sees interest in moving from infrastructure names into software, and he names Microsoft, ServiceNow and Salesforce as the software beneficiaries.

  “Where I'm seeing some interest in rotation is going from infrastructure into software.”at 45:45

Commodities (broad)

• David Rosenberg · Rosenberg Research

  Hard assets such as base metals, pipelines and gold beat residential property as real-asset holdings.

  Real assets like base metals, pipelines and energy infrastructure are driven by future supply and demand curves rather than interest rates. He adds gold to that list. He thinks residential property is a poor place to be right now, so the hard-asset alternative is more attractive.

  “principally base metals, pipelines. So a lot of energy infrastructure. That's not really an interest rate story... purely based on future expected supply and demand curves... I should throw gold in there as well.”at 11:50

US housing

• David Rosenberg · Rosenberg Research

  Home prices are cracking, down 7.5% year over year; rent deflation has not yet reached CPI.

  Home prices are down 7.5% year over year and existing home sales prices fell for three months. Rents and home prices are deflating, but that is not yet filtering into CPI shelter due to the lag in how BLS measures shelter. Residential property is not a good place to be.

  “I mean, home prices are deflated. [You know] home prices are down seven and a half percent year over year. Home prices are cracking.”at 25:46

AI chips & semiconductors

• Ted Mortonson · Baird

  AI chip demand is historic; suppliers are booking into 2029 and 2030, a demand-supply imbalance never seen before.

  Ted cites recent reports from ASML, Samsung and Micron as evidence. Each is booking orders into 2029 and 2030, which he reads as demand far outrunning supply, a metric he says he has never seen.

  “The demand is historic. I mean, you look at ASML's report, look at Samsung's report, look at Micron's report. Now they're booking into '29 and '30. So we've never seen this kind of demand versus supply metric ever.”at 41:49

AI infrastructure & data centers

• Ted Mortonson · Baird

  The AI infrastructure build is inflating chip and memory costs near term, though it is positive long term.

  Across many conference calls, GPUs and raw semiconductors are up 15 to 20% and memory is up triple digits. Ted says an unused old GPU is rising in price by almost 20%, showing compute is scarce. He sees this as a near-term inflation problem and a near-term profit squeeze, while the long-term build is very positive.

  “I'm on so many conference calls and every single conference calls GPUs or raw semis are up 15 to 20%. Memory is up triple digits.”at 42:33

IPOs, M&A & deal activity

• Ted Mortonson · Baird

  AI mega-fundraising is stretching debt markets; the equity IPO window must stay open for OpenAI and Anthropic.

  Over $250 billion of AI-related funding has been raised or proposed in three weeks, which Ted says is stretching debt markets. He argues the equity capital markets must stay open to fund names like OpenAI and Anthropic. He notes three major tech companies have postponed IPOs in the last three weeks, so that window has closed somewhat.

  “So it is stretched. But more importantly, the equity capital markets to fuel this growth have to stay open. And that window has to be wide open for the names like OpenAI and Anthropic and others.”at 43:11

AI regulation & safety

• Ted Mortonson · Baird

  Restricting AI development would disadvantage the US defense industry against China; the genie is out.

  Ted argues AI is already out of the bottle. If the US restricted AI development, its defense industrial base would fall behind China. He uses this to argue against limits on AI in the defense context.

  “The genie is out of the bottle. And if we would ever restrict AI development, we're putting our defense industry complex at a huge disadvantage versus China.”at 46:28