Market Uncertainty Ahead of the Midterms

Peter Tchir · Academy Securities

Investors are growing nervous about AI debt and equity issuance, and bond spreads are widening in response.

Tchir sees rising nervousness about the volume of debt and potentially equity being issued to fund AI buildout. He cites recent pushback in fixed income markets and widening spreads, which he reads as investors charging issuers more for the financing.

“I think increasingly people are getting nervous about the amount of debt that's being issued and potentially equity that's coming out for this. So you've seen [some] pushback recently in the fixed income markets. You're seeing the spreads widen out.”at 2:04

Peter Tchir · Academy Securities

Policy is inconsistent: pro-data-center rhetoric clashes with aluminum tariffs that raise data center costs.

Tchir did not expect data center pushback across the country to emerge so quickly. He points to inconsistency in policy: one official champions data center and AI buildout while tariffs on aluminum from Canada and other countries raise data center construction costs. He sees this as growing pains in the US push to build out the sector.

“One day you have Besson saying how important it is to build out data centers and AI, and at the same time then we're tariffing aluminum from Canada and other countries, and aluminum is making the cost of the data centers go higher.”at 4:39

Peter Tchir · Academy Securities

Bond yields will struggle to fall further while oil and diesel prices keep rising.

Yields had decoupled from oil recently, with Treasuries rallying during AI compute worries. Tchir says it will be hard for yields to go much lower if oil keeps rising, especially diesel. He sees the first sign of markets pricing an economic slowdown if spending on AI and high oil prices persist, though he does not expect it to become the core trade.

“I think it's gonna be hard for bond yields to go much lower if oil prices keep going up and, you know, particularly diesel prices.”at 5:39

Ella Gude · BNY Advisors

Higher yields make bonds more interesting; BNY is increasing fixed income after running underweights.

BNY had been underweight bonds because of inflation concerns, and those concerns still apply. What has changed is the price, meaning yield levels, which makes bonds more attractive in both credit and core. With 5% yields, Ella sees bonds as an area to increase in client portfolios, paid to take chips off the table as uncertainty rises late in the cycle. Core bonds and local EM are also attractive.

“what's changed the price, the price has changed or the level of yields, if you like, has changed. So all of a sudden bonds do become more interesting here, whether it's in a credit space or in core space.”at 30:44

Peter Tchir · Academy Securities

Earnings give only temporary relief; investors increasingly doubt AI spending delivers real savings or returns.

Investors price in strong earnings, but Tchir thinks that is only temporary relief. Nobody knows what AI will look like in three to five years, and more people are questioning whether corporations that spend on AI are actually saving much money. He notes this is the first real pushback he has seen, with even Elon Musk pushing back on parts of the narrative.

“So I think there's so many things about this narrative that the earnings are only a temporary relief, and then we get back to what's this really gonna look like.”at 7:02

Nate Thooft · Manulife Investment Management

AI winners and losers are diverging; markets reward spenders that show return on capital without burning free cash flow.

Manulife sees the AI ecosystem as much broader than tech, with winners and losers becoming more pronounced daily. The next stage is which companies can keep spending on AI without eating away at free cash flow and show a realized return on capital from productivity gains or better AI use. Markets are starting to sniff out those winners and losers.

“the discernment of that in the market is going to be between who can actually continue to spend these dollars, but do so in a way that they don't continue to eat away at their free cash flow and actually show some realization of return on capital.”at 13:03

Peter Tchir · Academy Securities

Expects more US attacks on Iran after the election, with no quick path to victory or an end to the conflict.

Tchir's firm expects more attacks after the election. The US is likely to target shoreline positions to degrade Iran's ability to attack shipping in the Strait of Hormuz and to make one more run at nuclear facilities. He sees no clear path to quick victory; more damage will only push Iran toward the table and will not end the conflict.

“No one really sees that there's a real clear path, though, to quick victory. We can do more damage to them, but it's only gonna help drive them to the negotiating table. It's not gonna end this.”at 11:11

Heidi Crebo-Rediker · Council on Foreign Relations

Expects a strong administration attack on Iran after the midterms; no end in sight to the Hormuz standoff.

There is a decent expectation the administration will strongly attack Iran after the midterm elections. Iran has no reason to give up its chokehold in the Strait of Hormuz, and there is no upside without counteraction such as cyberattacks or kinetic attacks on Gulf infrastructure. Crebo-Rediker expects this to play out over a long period.

“you already have a decent expectation that the administration is going to really go in strongly and attack Iran after the midterm elections. ...I don't see any end in sight.”at 21:42

Nate Thooft · Manulife Investment Management

Higher bond yields now look competitive and are a negative for equities; earnings cannot keep growing 30%+ a quarter.

Manulife had long been underweight duration, but it is now hard to dismiss yields and fixed income as competitive. Strong earnings have so far hidden the valuation resets in equities, but earnings cannot grow 30%+ per quarter forever. Long-term fixed income return potential now looks much more attractive than five years ago, though Thooft still believes equities have better long-term return potential.

“it's now really hard to dismiss the idea that yields and fixed income are actually competitive and they're getting more interesting, right? Which is a negative for equity markets.”at 15:20

Ella Gude · BNY Advisors

Equities are neutral to slightly defensive after a strong run and excessive valuations with concerning signs.

BNY is neutral to slightly defensive on equities because of the strong rally. US equities have returned more than the typical 8-10% for three-plus years, with double digits for several years. Productivity gains could play out, so BNY does not want to be very bearish, but valuations are excessive and markets show concerning signs, so rates look better than equities at the margin.

“In terms of equities, we're a little bit more neutral here, slightly more defensive in the allocation spectrum. Predominantly because we've obviously had a pretty good run.”at 30:55

Nate Thooft · Manulife Investment Management

The broader commodity cycle is in its early innings, with multiple years of potential upside.

Geopolitical concerns and fragmentation are higher than ever and are not unique to Iran. Even if energy pricing is lofty because of Iran, Manulife believes energy and the wider commodity cycle have multiple years of potential, both from potentially higher commodity prices and from long-term gains for the companies in that area.

“So our general view is we are in the early innings of a broader commodity cycle. And so I think even though there's gonna be maybe some loftiness pricing right now because of the specifics of Iran, we think that energy and the commodity cycle have multiple years of potential positivity.”at 17:00

Ella Gude · BNY Advisors

Real assets and natural resources are attractive as a hedge against sticky inflation.

Real assets have been very attractive over the last couple of years as a component of an allocation. Inflation has been higher and stickier, particularly over the last five years, which keeps real assets an important part of the portfolio. Natural resources have been an area BNY likes to own.

“clearly the real assets have been very attractive over the last couple of years to have as a component of your investment allocation. Also because we've been seeing higher and stickier inflation overall, particularly over the last five years.”at 29:59

Peter Tchir · Academy Securities

Cheap Chinese compute is among the biggest threats; Chinese chipmakers are catching up, eroding US first-mover advantage.

Academy Securities has been discussing the likelihood of cheap Chinese compute reaching the market. Chinese chip companies are improving their compute and catching up. China also has an energy advantage because it has spent more on its electricity grid going forward, so Tchir is worried that US first-mover advantages in AI will not hold.

“I think we've been talking a lot at Academy Securities about the potential for cheap Chinese compute to come on the market, and we feel that's one of the biggest threats that you're seeing the Chinese chip companies get better, you're seeing their compute get better, you're seeing them catch up a little bit.”at 2:04

Peter Tchir · Academy Securities

AI compute spending is a big GDP driver; if it slows, credit widening could spread and equities can't handle it.

AI compute spend has been a huge part of US GDP growth. If it slows, the economy slows. Tchir fears that fixed income and credit have so far been isolated to the compute story, but a broader economic slowdown could bring more widespread credit widening, and he does not think equities can handle that.

“Compute spend has been such a huge part of our GDP growth. If that slows, what happens to our economy? So my fear is right now, if I look at fixed income and credit markets, it's been very isolated to the compute story.”at 3:59

Peter Tchir · Academy Securities

Production for security and onshoring is going global; every country will become more vertically integrated.

Tchir has been talking about onshoring and production for security, a concept he finds exciting because it is spreading globally. He cites Australia announcing refineries and the need to build refineries more broadly, and argues every country will look more like a vertically integrated nation.

“I think every single country across the world is gonna look a little bit more like a vertically integrated nation.”at 5:19

Nate Thooft · Manulife Investment Management

Healthcare is underappreciated, with AI set to deliver diagnostic and personalized drug gains; Manulife is leaning in.

The market has hated healthcare, and the sector has been trading near all-time highs but recently shows signs of life. Thooft thinks investors are starting to realize there are large potential AI benefits within healthcare. Manulife favors companies that use AI to deliver more accurate, efficient diagnostics and to build more personalized drugs.

“I think healthcare is woefully underappreciated because one, the market has hated it.”at 13:35

Nate Thooft · Manulife Investment Management

Fed likely holds but must sound hawkish; underlying inflation is not yet coming under control.

A hold at Wednesday's meeting is consensus and the right decision before the election cycle. Last month's inflation print was weaker, but Thooft thinks the Fed needs to keep a fairly hawkish tone and prioritize getting inflation under control. He asks whether there are signs underlying inflation is easing and says he personally does not believe that is the case yet.

“Do we see signs of light that inflation under the hood is coming under control? And I personally don't believe that's the case yet.”at 18:21

Heidi Crebo-Rediker · Council on Foreign Relations

Iran war and tariffs are raising fuel, fertilizer and grocery costs, making foreign policy a midterm affordability issue.

Foreign policy is usually not top of mind for voters, but it is domestic politics now. The Iran war has raised gasoline, diesel and fertilizer prices, and tariffs have raised grocery bills. Crebo-Rediker expects these pocketbook effects to play out in the affordability debate in the midterms.

“foreign policy is domestic politics right now because the Iran war has raised gasoline prices, diesel prices, fertilizer prices. Tariffs have raised grocery bills.”at 19:45

Heidi Crebo-Rediker · Council on Foreign Relations

Trade war is drawing backlash from lost exports and angry farmers, and costing friendship with Canada.

Tariffs have raised grocery bills, and the trade war is getting significant backlash from lost exports. Farmers are unhappy, and in the case of Canada the US is losing friends over trade. Crebo-Rediker sees this as a major political problem alongside the Iran war.

“Tariffs have raised grocery bills. And trade war... The trade war is basically, you know, getting a lot of backlash from lost exports. Farmers are unhappy.”at 20:01

Heidi Crebo-Rediker · Council on Foreign Relations

Next two years will bring an expansionist US foreign policy, with broad presidential latitude regardless of election outcome.

The president holds broad executive authority in foreign policy. Whatever the election outcome, Crebo-Rediker expects an expansionist foreign policy over the next two years covering Iran, Ukraine, Russia, Venezuela and beyond. She expects Trump to have substantial latitude to act, which will double down on policies that hurt affordability through 2028.

“always a president has the executive authority in foreign policy. So I think we need to buckle up and whatever the election outcome is next two years are gonna be about an expansionist foreign policy.”at 20:41

Heidi Crebo-Rediker · Council on Foreign Relations

Replenishing US munitions and the defense industrial base will be a huge fiscal burden going forward.

The Iran conflict is increasing the fiscal burden because the US is running through munitions and weapons that must be rebuilt substantially. Replenishing the domestic defense industrial base will be a huge fiscal burden moving forward.

“That also increases the fiscal burden of having to actually replenish our domestic defense industrial base because we're running through our, you know, our munitions, our weapons, and we have to... We need to rebuild those pretty substantially. That's gonna be a huge fiscal burden moving forward.”at 22:27

Heidi Crebo-Rediker · Council on Foreign Relations

US is pulling back support for Ukraine and overtly backing Putin; Europe must step up.

Americans overwhelmingly support Ukraine and are negative toward Russia and Putin, but the Trump family and associates are giving Putin the benefit of the doubt, doing business deals with him, and the US has turned off Starlink. Crebo-Rediker sees the US pulling back support and offering overt backing to Putin, and does not expect that to change. Europe needs to step up, but fiscal challenges constrain it.

“We're really seeing the US pull back any and all support and actually counter with some pretty overt support for Vladimir Putin, and I don't see that necessarily changing.”at 24:17

Ella Gude · BNY Advisors

Investment grade credit is attractive after repricing, offering about 6% yield with useful duration.

Investment grade and high yield have repriced over the last couple of months. Investment grade has a higher duration component, which helps balance portfolios given the interest rate sensitivity. In many places it yields something like 6%, which is slightly above BNY's long-term market assumptions, so it is a good place to put money. High yield may need a bit more repricing but remains attractive.

“investment grade credit has a higher duration component... then actually investment grade credit makes a sense. And in lots of places you're getting something like 6% yield, which is not insignificant.”at 32:18

Ella Gude · BNY Advisors

Foreign markets look attractive; diversifying away from US AI concentration and dollar concerns favors international stocks.

When BNY does its annual market expectations exercise, many foreign markets look interesting, including the UK, where stocks are attractively priced and provide attractive income. Concern about AI concentration in US markets argues for diversifying into international markets with more attractive valuations. International investors also have concerns about the dollar, which makes international stocks more interesting to own.

“But broadly speaking, international is interesting here because if you're concerned about the level of, let's say, concentration of the AI theme... perhaps you want to take some capital and put it in international markets where valuations are a lot more attractive.”at 33:35

Ella Gude · BNY Advisors

Gold's correction removed speculative positioning, making it attractive as an ultimate hedge.

Gold and precious metals repriced heavily, with gold falling from around 4,000. The correction took out much speculative positioning, making it more attractive. Gold has hurt in risk-off periods and from the repricing of real rates because it pays no dividend or coupon. Data could get weaker and central banks are tightening, and investor nervousness about AI adds to the case for owning it as a hedge.

“the correction and sort of taking out a lot of that speculative positioning should make it more attractive here because we're at a juncture where potentially we believe data could get a little bit weaker going forward.”at 35:56