Data Centers, AI Spending and Higher Rates 10/7/26

Dana Telsey · Telsey Advisory GroupBullish

Levi's quarter beat on EPS and gross margin; growth levers can drive accelerated growth and leverage.

Telsey says EPS beat expectations and guidance, driven by a gross margin beat, though revenue did not beat guidance and the US underperformed. The direct-to-consumer shortfall is unexplained for now, but management says that business has improved. Guidance was raised slightly, and she sees continued demand for denim and newness. Her swing factors are sales growth in women's, tops, international and stores, which would allow accelerated growth and then margin leverage. She notes the company has a track record of beating and raising, though there is still work to do on fourth-quarter guidance.

“So, overall, the EPS came in better than expected, better than the guidance. The revenues didn't make the cut in terms of beating the guidance.”at 39:02

Dana Telsey · Telsey Advisory GroupUncertain

Lululemon's management overhaul is not enough yet; the product newness has not delivered and top line must improve.

Telsey notes many executives left around the time the new CEO joined, leaving a lot of holes to fill. She sees stability in keeping the interim co-CEO as CFO, but argues the company must show top-line improvement. She says the newness in product has not delivered what management expected, so there is work to be done. She contrasts Lululemon with peers such as Free People and Athleta, and says the new CEO will not be heard from until December.

“But you need to see top line. We know that the newness in product hasn't delivered what they expected. There's work to be done.”at 41:08

Dana Telsey · Telsey Advisory GroupBullish

Urban Outfitters is executing well, with Newly and Free People as growth drivers beside the core Free People brand.

Telsey points to Free People Movement, part of Urban Outfitters' portfolio, which has seen double-digit performance increases in feminine and fashion lines. She says Urban Outfitters is doing a very good job with Newly and Free People Movement as growth vehicles, alongside Urban Anthro and the core Free People brand as base drivers.

“Urban Outfitters doing a very good job with Newly and Free People movement as the growth vehicles, urban anthro, and free people, the core free people as the base drivers.”at 42:54

Kate Moore · Citi Wealth

Winner-loser dispersion signals a healthy market; the recent tech pullback is healthy consolidation, not a thesis break.

Moore says a lack of dispersion would make her more anxious. A separation between near-term winners and losers is healthy because it means investors are not buying everything regardless of fundamentals. She expects some digestion in core themes (semiconductors, cybersecurity and security software), which she calls strong, durable themes. For a long-term investor, a backup in those names is a consolidation period rather than a reason to abandon them.

“When there isn't dispersion in the equity market, that actually makes me more anxious. The fact that there is, a separation between near term winners and losers, I think that's a sign of a healthy market.”at 5:05

Kate Moore · Citi Wealth

Small-cap rally was driven by rate-cut hopes, not fundamentals; the current backup is appropriate.

Moore says small caps surged early this year without super strong fundamentals; the surge rested on the expectation that rates would not be adjusted. The current backup in small caps, especially relative to large caps, is appropriate for where the growth cycle and policy expectations are. She stresses this does not mean selling all risk, but that the rate-sensitive adjustment is deserved for the macro backdrop.

“Small caps surged so strong for so long in the beginning part of this year, but it wasn't based on super strong fundamentals. It was around this expectation that there was not going to be a rate adjustment.”at 7:37

Kate Moore · Citi Wealth

Yields may have peaked near term and should floor rather than back up into year-end, against street consensus.

Moore disagrees with the street consensus that yields will back up into year-end. She thinks yields may have hit a near-term technical top. Competition for capital, a strong growth environment and fiscal deficits should put a floor under yields, so they come lower rather than higher. She says there is no magic yield level at which to buy duration, because what matters is why yields are moving. That is why she has stayed short duration and sees no value on the curve.

“Consensus on the street expecting bond yields to back up into year end. That's not necessarily our view. We may have hit a near term top kind of technically”at 7:07

Henry McVey · KKR

Investors should judge higher rates against nominal GDP; productivity and strong profits keep the cycle from stagflation.

McVey cautions that everyone is worried about higher rates, but investors should look at rates relative to nominal GDP. He points to booming corporate profits, a very low pre-announcement season and productivity flowing through the system, which keep the cycle from being stagflation. He says investors should favor companies that can deliver nominal GDP-level revenue and pass costs along to customers. Without productivity and with rising cost of living, that would be a tough spot.

“One thing I would caution investors, everybody is running around worried about higher rates right now. Let's make sure we're looking at higher rates relative to nominal GDP.”at 35:07

Willy Walker · Walker & Dunlop

The multifamily refinancing wall is manageable with agency and private lenders, but equity capital is the 2027 risk.

Walker cites $1.5T of multifamily debt that must be refinanced in the next four years. Fannie and Freddie do $150-160B a year and will be in the market in good times and bad. Private debt funds, captive insurers, life insurers and well-capitalized banks provide plenty of debt capital. The bigger concern is that many loans were written when rates were far lower. Property values are down about 20% while financing costs are up 30-40%, so borrowers are shifting to the short end of the curve, which pushes the maturity wall further out. The real question is who brings equity capital to reacquire these projects, and that is a big open question for 2027.

“In multifamily alone, Mike, in the next four years, there's 1,500,000,000,000 of debt that has to get refinanced in four years.”at 22:03

Willy Walker · Walker & Dunlop

Office and multifamily are undersupplied, so constrained new supply should push rents higher.

Walker says the time to start building is now, but equity capital is not flowing into new projects. Office supply in 2026 is about 9% of normal annual new supply, and multifamily is falling from record supply toward record lows. Projects started now would deliver in the next two or three years into a supply-constrained market, and that would push rents up because real estate is all about supply and demand.

“Now is the perfect time to be putting a shovel in the ground except no one's going do it. ... Office in 2026 is supplying 9% of its normal annual supply of new office. The office market is completely undersupplied”at 25:46

Henry McVey · KKR

Money is returning to Asia on intra-Asia trade, supply-chain buildout, and corporate reform spreading across the region.

After meeting KKR teams and CEOs across Asia, McVey sees a similar investment boom to Europe's, but driven by intra-Asia trade and a large build-out of the supply chain for redundancy, with AI as the exclamation point. Asia has been underfunded, and most US investors have been stuck overweight the US, which was the right call but is now flowing back to Asia. Corporate reform from Japan is spreading to Korea and Singapore. He sees green lights in consumption upgrades in Southeast Asia and India, and strong infrastructure and private equity opportunities.

“...what we pick up is you really have a similar boom, but it's intra Asia trade. There's a huge build out of the whole supply chain when redundancy,”at 32:35

Henry McVey · KKR

Asian markets, especially Japan and Korea, look cheap with corporate reform tailwinds; investors should take another look.

McVey cites Japan, where about 40% of the stock market trades below book value and about 17% of assets sit in cash, with activists now pushing companies to improve. In Korea about 70% of the market trades below book value, and ex-semiconductor players trade near 10x earnings while growing about 20%. He adds that Singapore is pursuing reforms to attract foreign capital. He concludes the Asia story is not over and investors should look again there.

“40% of the stock market still trades below book value. 17% of the assets are sitting in cash, and they're now activists coming in and saying, hey. You need to make this better.”at 36:40

Henry McVey · KKR

The aggregate US consumer is doing well, with stress confined to pockets hit by oil and healthcare costs.

McVey says that in aggregate the consumer is doing well. He concedes there are pockets of weakness, particularly among those hurt by higher oil prices and higher healthcare costs. He contrasts the current cycle with past ones, saying this one is quite different.

“Mean, aggregate, the consumer is doing well. It doesn't mean there aren't pockets, particularly those being afflicted by the higher oil prices and the higher health care costs”at 36:07

Dana Telsey · Telsey Advisory Group

Companies are managing the consumer well; spending has not faded despite a topsy-turvy backdrop.

Telsey expects retailers at her conference to be cautious, but says the consumer has not faded yet. She expects companies to talk about marketing, newness, events and using tariff refund money. She says that so far in the holiday run-up, including during Amazon Prime Day, companies have been managing well, even though the consumer backdrop feels like it should be more volatile.

“I think so far, companies have been managing well, and I think that's what they are showing, even with a consumer that feels like it should be topsy-turvy”at 42:27

Kate Moore · Citi Wealth

Companies embracing technology, including AI, are the winners in every sector, so the market isn't narrowly tech-driven.

Moore argues that the companies putting up better revenue growth and prospects in every sector are the ones embracing technology, so there is no separate theme outside the technology revolution even in non-tech sectors. This is her answer to concerns that money crowding into tech leaves no diversity. Winners in each industry have plans for driving future revenue, productivity and efficiency through technology.

“in every sector, in every industry, the winners, the companies that are putting up better revenue growth, who have better prospects, are the ones who are embracing technology right now.”at 5:50

Kate Moore · Citi Wealth

Gold has worked well as a substitute for duration in her portfolio.

Moore added gold last year as a substitute for duration, given she has stayed short duration and sees no value on the curve. She says it has performed very well in that part of the portfolio. She also notes her firm has had a strong commodity and industrial metals theme for most of the year, and that she keeps looking for uncorrelated instruments.

“Last year, I added gold as a substitute for duration. So that's performed very well...”at 8:54

Kate Moore · Citi Wealth

Q2 corporate margins were phenomenal despite broad inflation; don't bet against corporate resilience near term.

Moore was surprised by how strong margins were in second-quarter earnings, despite seeing broad-based inflation and knowing more energy cost pass-through is still coming in the next couple of quarters. Her takeaway is that companies can toggle their businesses up and down to protect the bottom line, so investors should not bet against corporate resilience. She expects that to hold for the next couple of quarters, while acknowledging doubts about sustaining double-digit earnings growth forever.

“And yet still, margins were phenomenal. This is just kind of a reminder for me once again and for the rest of investors on the street, do not bet against corporate resilience and the ability of companies to toggle up and toggle down their businesses in order to achieve the bottom line.”at 10:13

Willy Walker · Walker & Dunlop

Data center buildout keeps accelerating; a few project delays won't dent the capital flowing into it.

Walker says US data centers rose from 571 at the end of Q1 to 1,400 at the end of Q3, with about 2,000 in planning. Pushing a couple of projects to the sidelines won't change the amount of capital going in, and hyperscalers are expected to invest around $800B in data center buildout in 2026. Political pushback is a real question: governors in Pennsylvania and Texas have pulled back, and it is unclear whether the political will holds through election day. Still, financing is finding new routes, such as a large Michigan data center funded through a 144A bond deal rather than bank syndication.

“if the stat that you just put out there, a couple have been pushed off to the sidelines, it's not going to necessarily change this amount of capital that's going there. The hyperscalers are gonna supposedly invest $800,000,000,000 in data center build out in 2026.”at 20:43

Henry McVey · KKR

Europe is shifting toward business investment over consumption, with intra-European trade rising toward 70-75% of GDP.

On a London and Europe trip, McVey saw UK business fixed investment rising even as consumption trends down, and German exports rising within Europe and away from China. He says Europe's intraregional trade is about 65% of GDP, and that figure is probably heading to 70-75% as countries pull back from China and Eastern Europe grows. He calls this a new data point, driven by the fixed investment side, which he sees as a capex-over-consumption shift.

“fixed investment in The UK is going up even though consumption is trending down. Go to Germany. Germany is actually trading a lot more with Eastern Europe.”at 32:17

Henry McVey · KKR

Credit is migrating from banks toward liquid and private capital markets, a durable structural shift.

McVey says infrastructure is booming and will keep booming, and that more credit is moving away from the banking system toward both liquid capital markets and private capital markets. Tied to his Asia observations, KKR is doing infrastructure transactions with large conglomerates in Korea, which he sees as a signal that more is to come. The evidence he gives is qualitative, so this is a directional view rather than a number-backed forecast.

“And then I think there's more credit moving away from the banking system towards...”at 33:34

Henry McVey · KKR

Stress sits in government bond markets (France, US, UK), not in corporate credit, which he sees as sound.

McVey describes a second divergence in the cycle: the market concerns being reported are in government bonds, with France, the US and the UK as the hot spots. He says the corporate bond market is not the Achilles heel of the cycle, in contrast to the sovereign debt pressure. This is one of the two big divergences KKR wrote about in its mid-year outlook.

“all the things that you guys are reporting about is in the government bond market. Not talking as much about the corporate bond market. You can talk about France, you can talk about The United States, you can talk about The UK. Those are the hot spots.”at 35:43