Markets Ahead of the Midterms

Anthropic

Across the shows: 82 speakers in other episodes, 99 bullish and 65 bearish calls, past 30 days

• Paisley Nardini · Tema ETFsBullish

  Anthropic's S-1 shows a strong cash position, low burn to profitability, and a diversified customer base.

  In the S-1, Anthropic shows about $130 billion in cash and only about $9 billion in net cash burn to reach its profitability level, which is impressive, particularly as hyperscalers are penalized for spending cash. A year ago the top two customers were 20 to 25% of revenue, and now the top five are about 20%, so roughly 80% of revenue comes from outside the top five. Business breadth is encouraging, and the filing's healthcare and pharmaceutical information points to diversification. Tema is constructive on the filing.

  “a stronger balance sheet from a cash perspective... the fact that Anthropic is still showing about a 130,000,000,000 in cash and only about a $9,000,000,000 net cash burn to get to this profitability level is impressive.”at 22:26

US stock market outlook

• Jordan Jackson · J.P. Morgan Asset Management

  Health care is a defensive diversifier to the AI trade despite its expensive valuation.

  Health care has played defense against the tech trade and has proven to be the zig to AI's zag. The sector is expensive, which they acknowledge. Earnings are also strong in materials, industrials, and financials excluding Berkshire, which supports the more cyclical parts of the economy.

  “health care has been able to play a lot of defense relative to the [tech] trade... it does... Has proven to be that zig on the AI zag.”at 7:19

• Paisley Nardini · Tema ETFs

  Stocks typically rise after midterms, averaging about 14% over the six to twelve months after.

  Post-midterm the stock market has typically moved higher. Looking back to around mid-century, the average return was up about 14% in the six to twelve months after a midterm. That historical pattern is a tailwind for markets now.

  “post midterms, we typically tend to see the stock market move higher... the average return of the stock market was up around 14% in the six to twelve months after a midterm.”at 25:06

• Paisley Nardini · Tema ETFs

  Earnings broadening from megacaps to the other 493 stocks is bullish heading into 2027.

  FactSet data shows Magnificent Seven earnings growth decelerating in expectations for the fourth quarter, with the baton passing to the other 493 companies. The broadening trade could be supported by fundamentals rather than just technicals. Breadth was a concern in August and September, and now defensive health care is playing against tech and discretionary, which is bullish for markets heading into 2027 if fundamentally supported companies outside tech lead.

  “the MAG seven earnings growth is starting to decelerate expectations for fourth quarter of this year, and the baton is being handed over to the other 493 companies.”at 26:20

• Amy Wu Silverman · RBC Capital Markets

  Earnings are the key near-term market driver; the market has digested geopolitical shocks well.

  Silverman argues that earnings are still the main thing the market has to get through this quarter. Midterms or Iran could be a challenge, but she points to the market's track record of absorbing geopolitical news, with stocks powering through the Ukraine war and Iran tensions. She treats the political and geopolitical risks as secondary to what companies report.

  “I think it's still just earnings. What we still have to get through it. ... the market's been pretty good at digesting anything geopolitically.”at 35:43

Market sentiment, positioning & volatility

• Amy Wu Silverman · RBC Capital Markets

  Hyperscalers are now different beasts, with free cash flow inflection and bond issuance, so they need distinct volatility profiles.

  Earnings moves for Amazon, Microsoft and Google were among the largest realized moves on record, which shifts forward expected moves. Investors now see the hyperscalers as no longer the same companies they married. They have a free cash flow inflection but are hitting the bond market hard to fund spending, so they should be reflected in different volatility profiles.

  “They've got free cash flow inflection. They're going to the bond market. They're hitting it up pretty hard. And so at the top of the house, you know, these are just really different beasts, and they should be reflected in different volatility profiles.”at 30:30

• Amy Wu Silverman · RBC Capital Markets

  VIX is complacent while rates and other volatility are elevated; volatility will not stay contained.

  A month ago the VIX was very sanguine while rates volatility and the ratio of MOVE to VIX signaled nervousness elsewhere. History shows volatility in one asset class does not stay contained, and it spread to equities last week. That shakeout was healthy, but more ride is expected in the months ahead as investors ask more questions and do not just buy carte blanche.

  “VIX was very sanguine, but everyone else was nervous... volatility in different asset classes does not stay contained... there's definitely more of the ride, I'd say, in the months ahead.”at 31:06

• Amy Wu Silverman · RBC Capital Markets

  Investors should use options to hedge AI concentration, since factor-based hedges don't isolate AI.

  Hedging AI concentration is hard because AI is in everything and cannot be isolated as a factor like momentum, value or quality, and the circularity is there. The market's approach has been to violently rotate into healthcare or small caps. She thinks the better answer is optionality, since rates volatility eventually bleeds into index volatility, as seen last week.

  “should you use optionality? I think the answer is yes. Because as we have seen, if you had taken that initial signal of, hey, rates volatility is telling me something, is that gonna bleed into index volatility? It does eventually happen.”at 33:13

• Amy Wu Silverman · RBC Capital Markets

  Retail call buying has backstopped past drawdowns, but it isn't visible yet in this selloff.

  Retail investors have hedged or bought dips through options. Silverman says this has stepped in after every substantial drawdown since Liberation Day and COVID, and retail has been the market's backstop, buying the dip on the belief that it has learned from the past 20 years. She stresses that call buying has not yet appeared in this selloff, and that her desk is watching for it closely. If retail hedging proves insufficient and clients instead de-risk more broadly, she expects correlations to rise and index volatility to reflate.

  “you have had this backstop of retail saying, hey, I think I've learned my lesson of the last twenty years, which is typically you step it in by the dip. Now to be clear, we're not actually seeing that price yet in call options, ... but we're watching that very carefully”at 36:33

AI infrastructure & data centers

• Jordan Jackson · J.P. Morgan Asset Management

  Circular financing between AI suppliers and their buyers is a concern, but the demand story is much broader.

  Concern is warranted when the company selling the shovels also finances the buyers of the shovels, so the circularity is somewhat a worry. But the big AI players are finding other demand from neoclouds and new entrants, so AI demand is not just a circular story. He thinks the circularity concern is much broader than that and somewhat overblown.

  “you do get a little bit concerned when the company that's selling the shovels is financing the buyers of the shovels. ... it's much broader than that, and some of that's a little bit overblown.”at 4:50

• Steve Englander · Standard Chartered

  Midterm data center restrictions passed en masse could slow AI buildout and hurt equities and the dollar.

  A Democratic win matters for 2028 more than 2026. If the roughly 40 data center measures on midterm ballots pass en masse, they would raise questions about how fast the buildout proceeds and how fast the technology can be exploited. That could lower bond yields through slower growth and investment, damage equities given what is priced in, and hurt the dollar, which has been a source of its strength.

  “if those proposals... get passed en masse, I think it does begin to raise issues about the speed of the build out and how fast we'll be able to exploit this technology.”at 14:16

• Paisley Nardini · Tema ETFs

  Fund flows are rotating from hyperscalers into AI bottleneck plays such as photonics and optical.

  A lot of thematic ETF flows are leaving the hyperscalers and mega caps for bottleneck plays. Photonics and optical are examples. Data centers are needed to support the AI build-out, so the infrastructure itself has been top of mind, and the flows accompany these high-level themes.

  “a lot of the flows are leaving some of the hyperscalers, some of the mega cap companies into more of those bottlenecks. Some specific examples of that would be in photonics optical.”at 21:26

US elections & politics

• Steve Englander · Standard Chartered

  Markets prefer gridlock to any partisan outcome; a narrow split is the best result.

  The president has said he will veto Democratic bills he doesn't like, and markets prefer gridlock to any partisan alternative. Republicans have pushed two reconciliation bills, and everyone is dissatisfied with the deficit and debt. A big Democratic wave is risky because the progressive wing could mean less AI development and slower growth, and a progressive wave would signal a leftward shift in 2028. A Republican upset (about 5% in betting markets) would be negative. The best outcome is a narrow Republican Senate and narrow Democratic House, which creates gridlock and may push better 2028 candidates.

  “I think the markets actually prefer gridlock to any of the partisan alternatives.”at 13:04

• Paisley Nardini · Tema ETFs

  Market expects gridlock, which is bullish: no major regulation or policy shifts for two years.

  Markets are anticipating gridlock. That is bullish because it means no massive regulation or policy shifts in the next two years, so markets can focus on current information. The uncertainty before the midterms is what the market dislikes, and the market wants certainty whether the news is good or bad.

  “What the market is anticipating currently is, of course, gridlock... it essentially just means that we're probably not gonna have any massive regulation or policy shifts in the next two years.”at 24:54

• Amy Wu Silverman · RBC Capital Markets

  Derivatives pre-traded the election; a contested result could still create interim volatility.

  Derivatives have been pre-traded, so a clearing event is expected once the election is over. That assumes the election is actually over. As in past elections, such as the contested Alaska Senate race, a contested result or other issue can create interim volatility.

  “it's been pre traded a little... we're just gonna get a clearing event because it's finally over... assumes that it is over... That certainly can create kinda interim volatility.”at 34:58

AI bubble & tech valuations

• Jordan Jackson · J.P. Morgan Asset Management

  AI stock selloff is overblown: demand is intact, only free cash flow is punished, so it's a buying opportunity.

  Valuations have fallen about 25% from the start of the year, so much of the risk is priced in, visible in corporate credit spreads and CDS. The market is punishing free cash flow, not demand. Customer orders and backlogs show demand visibility out to 2028, and cloud revenues are up over 50% across the hyperscalers. The fundamentals look robust and the selloff looks like a crisis of confidence and a fading euphoria around a trade that did well for 3.5 to 4 years. He sees the consolidation as healthy and a better entry point.

  “The markets are pricing in some of this weakness, but they're punishing free cash flow, not demand. When we look at customer orders, when we look at backlogs, we've got this demand visibility, I would say, out to 2028.”at 2:48

• Paisley Nardini · Tema ETFs

  Still bullish long term on AI; recent selloff and valuations make it a buying opportunity.

  AI thematic ETFs have seen historic inflows this year, driven by the AI trade and its bottlenecks. Even though AI has been beaten up in recent weeks, Tema's clients are stepping back, and the firm sees the sell-off as a potential buying opportunity given attractive valuations. They remain bullish on the sector over the long term.

  “even though AI broadly has gotten beaten up in the last couple weeks, we're still bullish on the sector long term. We actually see this as a potential buying opportunity just given some of the attractive valuation.”at 20:45

Credit markets

• Jordan Jackson · J.P. Morgan Asset Management

  AI company IPO with a junk rating would face 300-400bp higher borrowing costs, adding financing stress.

  If a new AI player comes to market with a junk rating rather than investment grade, it would have to borrow at roughly 300 to 400 basis points more. He says that will certainly put some stress on the financing of the buildout. The financing side is becoming more interesting than the demand debate, and he will watch October annualized revenue to see how fast monetization is happening.

  “if we see this IPO come to market... and they've got a junk rating, now they've gotta borrow at three to 400 basis points more than what they would have if they would have come to market as an investment grade company. And that's certainly gonna put some stress.”at 5:39

US rates & the Fed

• Jordan Jackson · J.P. Morgan Asset Management

  Expects the Fed to deliver one or two more rate hikes, depending on inflation.

  Yields have come off a bit and markets are doing some of the Fed's work, but not enough to justify another one or two hikes on their own. He agrees broadly with markets pricing a more than 50% chance of a hike in March. The oil spike in April and May will create base effects that help the Fed's year-over-year inflation run rate from the second quarter. The open question is how patient the Fed will be.

  “I think we're probably looking at one or two more rate hikes coming from the Fed. It'll ultimately depend on what happens with inflation.”at 6:39

US growth & recession risk

• Jordan Jackson · J.P. Morgan Asset Management

  No recession expected next year; strong cyclical earnings backdrop supports markets.

  Nobody at JPMorgan AM is calling for a recession next year. Earnings in materials, industrials and financials ex-Berkshire are coming in very strong, which supports the more cyclical parts of the economy. That backdrop provides a good setup for the market and corporate earnings.

  “Nobody, including ourselves, are calling for a recession next year. And so, you know, that provides a good backdrop for a good backdrop for the market and corporate earnings.”at 7:55

US consumer

• Jordan Jackson · J.P. Morgan Asset Management

  Lower-income consumers are squeezed by negative real wages; upper-income households drive spending.

  Wage growth has been below inflation for seven consecutive months, so real wages are negative and weigh on consumers. Consumption growth has been driven by upper-income households, not everyday consumers. Strong market returns for four consecutive years sustain the wealth effect, and retirees with bonds are getting income, so the upper-income consumer stays in the driver's seat. He is wary of staples and lower-income discretionary names.

  “wage growth is below that of inflation... real wage growth has been negative... it has not been the everyday consumer that is driving consumption growth. It has been the upper income consumer.”at 8:44

US dollar

• Steve Englander · Standard Chartered

  Stays dollar positive because the AI and tech theme draws direct and portfolio investment into the US.

  Standard Chartered has run the AI and broader technology theme for a year. It is dollar positive because it induces direct investment in the US and portfolio investment, and those flows ultimately determine where the dollar goes. The view is less isolated now that much of the market has adopted it, and there is more risk given the political issues. They remain dollar positive but acknowledge that politics could put headwinds in the dollar's way.

  “that's dollar positive. That it induces direct investment in The US and induces portfolio investment, and, ultimately, that's what matters for where the dollar goes.”at 15:06

European politics

• Steve Englander · Standard Chartered

  Euro is only partly priced for European unrest, which is Europe-wide and not fading.

  Unrest is Europe-wide, with French presidential elections in April and May, Italian elections later in the year, and UK and German elections ahead. The euro at $1.12 rather than $1.14 or $1.15 reflects this, so it is partially priced in. He doesn't think it is fully priced in. Governments lack the money to spend their way out, and markets will punish them if they try, so they can't simply grow out of it.

  “The reason the euro's $1.12 rather than, say, $1.14 or $1.15 is because of this. So it's partially priced in. But we also know... I don't think it's fully priced in, and I don't think the unrest is going away.”at 18:16

Earnings & corporate profits

• Paisley Nardini · Tema ETFs

  Markets penalize even beats; investors now want proof of return on hyperscaler AI spending.

  Meeting or beating expectations no longer lifts stocks because the market looks under the hood. This is a shift from the last three years, when a rising tide lifted all boats. For hyperscalers, the market wants to see that AI spending will earn a return on investment. Alphabet was penalized as search ad revenue declined, so the market is becoming more discerning.

  “stocks are still getting penalized because the market actually cares about what's going on under the hood... making sure that spend is actually gonna have a return on investment.”at 25:56