Previewing the Fed Meeting and AI IPOs

Broadcom

Across the shows: 6 speakers in other episodes, 4 bullish and 3 bearish calls, past 30 days

• Gary Gensler · MIT Sloan School of ManagementBearish

  Broadcom's $63 billion off-balance-sheet guarantee package raises worries of a 2008-style financing craze.

  Gensler notes Broadcom announced a $63 billion package of complex, off-balance-sheet guarantees that is not even in its S-1, so the filing must be amended. He says it makes him worry, and asks whether this resembles the off-balance-sheet craze before 2008.

  “when you see the debt issuance, which is very significant. Saw Broadcom announced late yesterday, a $63,000,000,000 package that's not even in that S1, they have to amend the S1 and put that in.”at 24:24

Meta Platforms

Across the shows: 49 speakers in other episodes, 45 bullish and 23 bearish calls, past 30 days

• Gary Gensler · MIT Sloan School of ManagementBearish

  Meta's $90 billion equity raise is a sign of AI exuberance that is cause for worry.

  Gensler sees Meta's roughly $90 billion raise, along with significant debt issuance, as evidence that capital markets are overfunding AI exuberance. He says that when you see this, you start to worry about the cycle.

  “when you see the metas raising $90,000,000,000 when you see the debt issuance, which is very significant.”at 24:24

US Treasuries & yields

• Robert Kaplan · Goldman Sachs

  Treasuries no longer act as a cyclical diversifier; rising debt makes investors reluctant to own them, a warning sign.

  Treasuries have not rallied when the economy slows, as they did for two years before. Kaplan attributes this to debt-to-GDP rising across Europe, Japan and the US, which makes investors reluctant to own government bonds. He also says heavy AI infrastructure financing demand is pushing rates up, and that the long end keeps backing up. He calls this a red warning light.

  “I think the treasury curve is not acting right now like a cyclical diversifier. ... But for the last two years, the theory is when the economy slows, markets go down, treasuries rally. We're not seeing that.”at 14:40

• Colin Graham · Robeco

  The 10-year Treasury is not yet at fair value; US growth differentials leave room for higher yields.

  Graham argues that the bond market, measured on the 10-year yield, is not yet at fair value. He says there is room for yields to rise, and that US growth differentials support higher rates.

  “the bond market, if you look at that, then, again, we're not even at fair value on a long [-term]... Ten year. So, is there room to raise? Yes. There is room... There is growth differentials in The US, which supports higher rates.”at 48:32

• Colin Graham · Robeco

  Treasuries offer no upside: about 5% yield versus equity returns of about 20% from earnings.

  Graham says there is no upside in bonds: they return about 5%, while equities return about 20% from earnings. He concedes the stock multiple is high, but argues that the past three or four years show valuations have been a poor indicator of forward stock returns.

  “there's no upside to bonds. You're gonna get 5% return, but you can invest in the equities and you get 20% in from earnings.”at 49:55

US stock market outlook

• Mike Wilson · Morgan Stanley

  Under-the-surface correction is 80-90% done; the bull market can resume into 2027 after clearing events.

  Wilson says the year began with a broadening, earnings-driven rally that paused in June as a mid-cycle transition, and then became very narrow. There has been an incredible correction under the surface since June, which he thinks is 80-90% complete. He says the market is in the ninth inning, and clearing events such as the midterms should bring a final end to this chapter, allowing the bull market to move forward into 2027.

  “there's been an incredible correction under the surface that started in June for the right reasons. And I think we're probably 80, 90% down there.”at 36:07

• Mike Wilson · Morgan Stanley

  Stay with quality leaders; quality factor has been the call since June, though corrections often end with quality getting hit.

  Wilson recommends staying with the leaders for now, which means quality, not just the Magnificent Seven. Quality as a factor has been Morgan Stanley's call since June. He notes that corrections tend to end when the S&P 500 catches down to breadth, and that the quality index often gets hit last, so the quality trade could later be challenged.

  “Well, I think you stay on board with the leaders for now, which is quality. And it's not just the mag seven, it's quality as a factor.”at 36:19

• Mike Wilson · Morgan Stanley

  S&P 500 multiple is now cheap enough to discount risks; monopoly-type megacaps should sustain earnings growth.

  The S&P 500 multiple has fallen almost 20% from a year ago, from about 23 times earnings to roughly 18-19 times on equal- or market-cap weighting. Wilson argues this is cheap enough that investors feel comfortable the market has discounted many of the risks. He notes that monopoly-type businesses drive the bulk of the index, so it is hard to argue the trend of earnings growth does not sustain. He expects the market to be discounting slower growth as the 2026 capex boom decelerates, and says the multiple may go to about 16 times, though he hedges that it may not need to fall much further.

  “Yeah, I think the multiple now is cheap enough to basically feel comfortable that it's discounted a lot of these risks. And when you have these monopoly type businesses really driving the bulk of that, it's hard to argue that this trend of earnings growth doesn't sustain.”at 40:12

US growth & recession risk

• Robert Kaplan · Goldman Sachs

  Growth is strong only in AI and defense; housing, autos and low-income consumers are sluggish, so growth is narrow.

  Kaplan describes a two-speed economy. AI- and defense-related activity is super strong, while housing, autos and lower-to-moderate income consumers are sluggish. He notes that the AI push is narrow, focused on data centers, power and chips, unlike the consumer-led economy of past decades. Growth therefore depends on productivity and balanced regulation.

  “If it's anything AI related or defense spending related, super strong. If it's related to housing, autos, serving low moderate income consumers, sluggish.”at 4:28

• Colin Graham · Robeco

  Slowing nominal GDP is a risk, since smaller fiscal stimulus next year will deflate nominal growth.

  Graham argues high US nominal GDP growth has let other sectors generate good earnings, so a decline in GDP growth is an issue. He expects the fiscal stimulus next year to be smaller, which he says will probably deflate nominal GDP. He answered yes when asked if a decline in nominal GDP over two years is a legitimate risk.

  “GDP coming down is an issue. So if we go through next year, what do we think the fiscal stimulus is gonna be? It's probably gonna be less. So that's going to probably deflate normal GDP”at 50:51

US inflation

• Robert Kaplan · Goldman Sachs

  Much of current US inflation is structural rather than cyclical; the economy is not overheating.

  Kaplan says the bulk of inflation may be structural, not cyclical, and he does not believe the economy is overheating. He also says the Fed should debate how much inflation comes from supply and how much from demand, and that the data will not settle it as well as talking to companies.

  “some of this inflation and maybe the bulk of it is structural, not necessarily cyclical. I don't know that there's an overheating of this economy.”at 4:58

• Mike Wilson · Morgan Stanley

  Inflation, in a nominal world, is the main reason stocks have risen so much since COVID.

  Wilson links rising headline numbers, such as big offering sizes and expensive stadiums, to inflation rather than real wealth creation. He argues that stock market gains since COVID mainly reflect nominal inflation. He says the firm has written about this extensively, and that investors should ask whether they are really getting ahead or just keeping up in a nominal world.

  “[The] reason why the stock market has done so well since COVID is inflation. And we've written about this extensively, as you know. So we live in a nominal world.”at 42:49

US rates & the Fed

• Robert Kaplan · Goldman Sachs

  Fed should move deliberately; raising rates too far, too fast would hurt sluggish sectors without curbing inflation.

  Kaplan argues that if diesel-driven inflation does not come down, rapid hikes would slow already sluggish parts of the economy and would not make a dent in inflation. He says the Fed should act deliberately, and only move faster if this were a cyclical overheating.

  “I could raise the Fed funds rate. If diesel does not come down, the impact of raising too far too fast may be to slow already sluggish parts of the economy, and it may not make a dent in inflation.”at 6:24

• Gary Gensler · MIT Sloan School of Management

  Expects a Fed rate increase in December, with a possible pause afterward.

  Gensler says the Fed should ask what a slowdown from the AI capex boom means for inflation and growth in 2027 and 2028. He thinks the Fed will raise rates in December and may pause after that, since a deceleration would change the calculus.

  “And if I were at the Federal Reserve this week, I'd be saying, look, if we have a deceleration, what does that mean for inflation... I think they're going to have a rate increase come December.”at 25:57

AI & jobs

• Robert Kaplan · Goldman Sachs

  AI adoption will shrink programming roles while client-facing, relationship-building jobs grow; narrowly defined jobs will suffer.

  Kaplan says the AI adoption phase will change the mix of businesses and employment. Microsoft has many programmers, and there will be fewer of them, but more people covering clients and building external relationships. He says workers who define their jobs narrowly will struggle and need to be more flexible.

  “The issue at Microsoft, they have lots of programmers. There are gonna be fewer programmers, but I think you're gonna have more and more people covering clients, building relationships, externally focused.”at 9:03

• Gary Gensler · MIT Sloan School of Management

  More optimistic on AI productivity gains over five to ten years, though data centers may be overbuilt.

  Gensler acknowledges some expect only modest productivity gains and significant labor disruption, but he is more optimistic about productivity gains over the next five to ten years. He qualifies this by saying the data center build-out could still have overbuilt capacity.

  “I'm more optimistic about the productivity gains over the next five to ten years. But that still could be that we've overbuilt some of these data centers.”at 34:34

US elections & politics

• Robert Kaplan · Goldman Sachs

  Midterm outcome is priced in; the open question is whether Congress changes regulatory policy.

  Kaplan says business people and markets have already priced in the midterm outcome. The unknown is whether a Congress change would alter regulation. He does not expect tariffs or immigration policy to change, and hopes for a couple more years of balanced regulation to support growth and productivity.

  “So like a lot of things, most business people and certainly the markets have already priced in the outcome.”at 10:03

• Mike Wilson · Morgan Stanley

  Midterms will not change markets much; the pre-election uncertainty and anxiety has largely been priced.

  Wilson says the market impact of the midterms is not about who wins or the size of the win, but the uncertainty and tension in the lead-up, which has weighed on markets for the last month. Most of this has been priced, and legislation is unlikely to change dramatically in a midterm. Elections are clearing events because nothing really changes once they pass.

  “Not much. ... the markets tend to pre trade this just like any event ... So part of the reason why the markets have been unstable or weaker the last month or so is there is a lot of nervousness around this election.”at 37:11

US deficit & government debt

• Robert Kaplan · Goldman Sachs

  Governments' high leverage is the biggest tail risk; the US and others must show how they will bend deficits.

  Kaplan says governments are historically highly leveraged and COVID added more leverage, with no workforce growth to offset it. Since the economy is relying on productivity growth, he worries that debt-to-GDP levels are a risk. He says the US, like others, needs a fiscal plan showing how deficits will be bent as a share of GDP.

  “the biggest tail risk I see still starts with governments around the world and witness what's going on in France. Government's historically highly leveraged.”at 11:59

• Gary Gensler · MIT Sloan School of Management

  US has limited fiscal room to respond to a downturn, though its economy is larger than France's.

  Gensler says France has higher debt relative to its economy and lacks fiscal room to step in. The US has limited fiscal room too, but as a bigger and more significant economy it is in a somewhat better position. He sees the long-term structural debt load as a concern.

  “But see what's happening in France, who has even a higher debt to economy. They don't have what's called fiscal room to step in. We have limited fiscal room as well.”at 27:53

AI infrastructure & data centers

• Gary Gensler · MIT Sloan School of Management

  AI infrastructure debt is near $600 billion this year, much of it off balance sheet, a systemic risk.

  Gensler cites over $500 billion of new AI-related debt issued this year, and adds Broadcom's $63 billion package, pushing the total near $600 billion. He worries about who holds it and about guarantees from Broadcom, Nvidia and AMD written into data centers, which are off balance sheet with special purpose vehicles.

  “I do concern myself that the risk in the system in artificial intelligence, we've raised over $500,000,000,000 of new debt this year. And then you add this Broadcom 63,000,000,000. So we're pushing 600,000,000,000.”at 30:54

• Mike Wilson · Morgan Stanley

  AI spending is circular across the chain but mostly funded by equity and cash flow, not debt.

  Wilson describes one group of companies feeding the hyperscalers, which in turn feed the other companies, so the spending is circular. He argues it is still mostly funded by equity and cash flow. He concedes the hyperscalers have been borrowing more recently, but says markets have already adjusted for that, so the financing risk is priced in.

  “So it's kind of a circular thing, but it's all being funded [mostly] by equity and cash flow. I mean, for the most part, yeah, they've been borrowing more money lately, but the markets have adjusted for that.”at 39:44

Oil & fuels

• Robert Kaplan · Goldman Sachs

  Elevated diesel prices are feeding broad inflation, since diesel is embedded in many other goods and services.

  Kaplan argues diesel is embedded in roughly 50 other items, so a broadening of inflation is unsurprising while diesel is this elevated. He ties diesel's persistence to the Fed's dilemma: raising rates would not bring diesel-driven inflation down.

  “When diesel goes up, turns out it's embedded in 50 other items. And so a broadening of inflation is not a surprise when diesel is this elevated.”at 6:12

Enterprise AI adoption & AI software

• Robert Kaplan · Goldman Sachs

  Enterprise AI adoption is early; Kaplan is optimistic many use cases will work, learned over the next year.

  Kaplan distinguishes the current AI push, which is narrow and about building data centers, power and chips, from the coming adoption wave. He says the adoption wave is early, and he is very optimistic about how many adoption use cases will work, though the economy will learn a lot over the next year.

  “And then you've got the adoption wave, but we're early in the adoption wave. I'm very optimistic about how many of these adoption use cases are gonna work, but we're gonna learn a lot over the next year.”at 7:33

US housing

• Robert Kaplan · Goldman Sachs

  Long-end Treasury yields keep rising, squeezing housing and the broader economy.

  Kaplan worries about the long end of the curve, which keeps backing up. He says this is squeezing housing, and in another part of the conversation he notes that housing is among the sluggish parts of the economy, along with autos and lower-income consumers.

  “Because I worry about the long end of the curve. That it keeps backing up, and that's squeezing housing.”at 12:34

US immigration

• Robert Kaplan · Goldman Sachs

  US needs one to two million immigrants a year to fill open jobs and restore growth.

  Kaplan says a lot of open jobs are not being filled and that this is slowing growth. He argues immigration policy should be relooked at, to bring in roughly one to two million people a year, as part of a set of steps to grow faster.

  “We need [one to two] million a year in immigration. There are a lot of open jobs that are not getting filled, and we're... It's slowing growth.”at 13:12

US entitlements

• Robert Kaplan · Goldman Sachs

  Entitlement overruns and rising interest costs drove the 2026 deficit miss; entitlement reform is needed.

  Kaplan cites the big 2026 budget deficit miss: about $250 billion from an entitlement surprise, and roughly another $100 billion from higher interest expense. He argues entitlement reform must be on the menu because entitlements are such a large part of the budget.

  “you notice the big miss on the budget deficit in 2026, I think 250,000,000,000 of it was entitlement surprise heading north another 100,000,000,000, I believe, was interest expense. So we're gonna have to look at entitlement reform.”at 13:48

AI bubble & tech valuations

• Gary Gensler · MIT Sloan School of Management

  AI boom will decelerate and reverse within 18 to 30 months; timing and depth depend on debt.

  Gensler argues capital markets tend to overfund exuberance, citing railroads, canals and the internet, and that everyone wants in. He expects deceleration, then a reversal in 18 to 30 months. The key questions are when and how deep, which depend on how much debt is in the system, where it sits and who holds it.

  “I think that we will have a deceleration of this AI boom, and then some form of a reversal in the next eighteen to thirty months.”at 22:33

Private credit

• Gary Gensler · MIT Sloan School of Management

  Insurers have built large holdings of AI-linked debt through private credit, a worrying concentration.

  Gensler says the insurance sector appears to hold much of the AI-related debt, either directly or through private credit. He is worried about that concentration, given the guarantees and off-balance-sheet structures tied to data center financing.

  “And who holds it? I think it's insurance sector, I worry about that's picked up a lot of holding of debt through private credit or just directly.”at 31:20

AI chips & semiconductors

• Gary Gensler · MIT Sloan School of Management

  AI chips funded today have 4 to 7 year lives and will be worth far less by 2032.

  Gensler says much of the AI funding goes to chips, including memory chips, which might have four to seven year useful lives. Given rapid scaling and technological advances, he argues the chips of 2026 will not be that valuable in 2032, so he is unsure about depreciation and obsolescence.

  “I do not have a clear picture. So a lot of the funding is funding the chips, the memory chips, and those chips might have four to seven year useful lives. ... the chips of 2026 won't be that valuable in 2032.”at 32:06

US–China AI & chip race

• Gary Gensler · MIT Sloan School of Management

  White House is racing to outpace China in AI, and China will not slow down, making choices hard.

  Gensler says the White House has its foot on the accelerator, wanting to go as fast as possible in competition with China. He notes China is not going to slow down, which together with the worry about overall financial stability during a capex slowdown, makes the choices hard.

  “And then you've got a White House that just got their foot on the accelerator pedal and wants to go as fast as possible in competition with China. And China is not gonna slow down.”at 33:31

Market sentiment, positioning & volatility

• Colin Graham · Robeco

  Currencies, oil and credit are raising the volatility floor as the gap between earnings and capital costs widens.

  Graham argues earnings have raised the ceiling for equity investors, but currency, oil and credit-market moves are lifting the floor on volatility. He says the gap between earnings growth and the cost of capital and competition for capital is therefore rising, and that is what his team is focused on.

  “while we've got earnings, then the ceiling is right being raised for equity investors. However, the currency, the oil, the credit markets, that's really putting a floor on the volatility, and that's actually rising that floor.”at 47:31

US dollar

• Colin Graham · Robeco

  A stronger dollar keeps growth concentrated in the US; a weaker dollar would spread growth abroad.

  Graham says a stronger dollar is good for the US and keeps growth there. He contrasts this with a weaker dollar, where growth spreads across the world, which helps emerging markets, but concentrates less of the growth in the US. He treats currency as a contributor to the overall financial conditions squeezing equity valuations.

  “So the currencies are another contributor to that, stronger dollar, good for The US, but it means it keeps the growth in The US.”at 47:51

International equities

• Colin Graham · Robeco

  Investors should not ignore non-US markets; they outperform at points in the cycle as capital rotates out of the US.

  Graham says the US is expensive but must still be held because of its growth. He argues investors should still pick and choose outside the US, since other regions significantly outperform at points in the cycle. He treats the US as a source of capital: when a theme draws money out of the US, those markets pop, as seen in Korea and gold.

  “So if there's a theme somewhere else and a little bit of capital moves out of The US into those markets, they pop. You've seen it in Korea, you saw it in gold.”at 49:25

Europe's economy

• Colin Graham · Robeco

  Raising rates into an energy shock is a poor recipe for Europe's growth, given its energy import reliance.

  Graham points to France, where GDP is about 2%, and says tight monetary conditions there are what markets worry about. He argues that rate hikes into an energy shock are more acute in Europe than in the US, because Europe imports much more of its energy. Europe also lacks the nominal GDP growth buffer that the US has, so he sees a poor backdrop for growth and for investors there.

  “into energy shock, and it is more acute in the Europe than it is in The US because they import much more of their energy. It doesn't seem like a good recipe for continued economic growth and for investors necessarily there.”at 51:45