Top of the Morning: CEO Macro Briefing Book Q4 update

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Higher short and long yields have compressed S&P 500 valuations, tightening conditions for many businesses.

Hawkish rate expectations priced in over the summer, alongside fiscal concerns, pushed both the short and long ends of the yield curve higher. That led to valuation compression in the S&P 500. For many businesses this has tightened financial conditions by roughly the equivalent of one rate hike.

“we had both the short end and long end going higher. That has led to valuation compression in the S and P 500.”at 4:01

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Split government may curb US spending, so longer-term yields could rally.

With an institutional check on the White House, markets may conclude the US will be less profligate on spending. That could lead longer-term rates to rally. The team presents this as a possible market reaction rather than a firm forecast.

“The markets might think that The US will be less profligate when it comes to spending and the longer term rates might start to rally as a result.”at 11:13

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

US economy not late-cycle; moderate Q4 slowdown without recession, supported by strong nominal growth.

Late-cycle indicators (high rates, elevated inflation, narrow stock leadership) do not mean the economy is necessarily late-cycle. Cycles have lengthened: the 2010-2019 expansion lasted almost a decade and was ended by a pandemic rather than policy rates, so cycles 'can't die of old age'. The Fed believes current rates are high enough to slow growth by removing accommodation without causing a recession. Nominal growth is around 5-6%, up about 56% since 2020 versus 2019 (roughly two UKs of added economy). This is a supply-driven cycle, which makes the economy less interest-rate sensitive. The team expects a moderate economic decline into Q4 without a recession, which is generally good for the earnings backdrop.

“And that's generally our point of view. The economy, we think, will moderately decline going to q four, but not necessarily slow down where it will cause a recession.”at 2:36

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Fed likely pauses October, makes a dovish December hike, then pauses into 2027 versus market's two hikes.

Recent weaker jobs numbers give the Fed room to pause in October. The team is more dovish than the market and expects the Fed to take a dovish hike in December, then hold rates going into 2027. The market is pricing two more hikes. The team argues that rates have already tightened since summer, but policy does not look overly restrictive from a business perspective.

“we think that the Fed at that point in December will take an opportunity to have a dovish hike, so make rates pause going into 2027 rather than signal two more hikes, which is what I think the market is expecting.”at 4:31

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Business AI adoption is rising, near a quarter now and possibly around 30% by Q1.

Census Bureau survey data shows about a quarter of businesses have adopted AI, which could reach around 30% by Q1 if current trends hold. Private indices that measure business spending on AI models suggest adoption is much higher, around 70%. The team thinks the truth is somewhere in between. The bottom line is that more businesses are adopting AI in their practices, which is fueling demand and justifying hyperscaler capex plans.

“about a quarter of businesses have adopted AI, and that could go to around 30% by Q1 if current trends hold.”at 5:09

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Hyperscaler AI capex is accelerating on stronger demand, ramping toward $1 trillion a year by 2028.

Hyperscaler capex plans started 2026 around $500 billion. After Q2 earnings they rose further, as hyperscalers said demand for AI services and compute was far stronger than anticipated, justifying faster spending in 2026. The team expects capex to ramp to about $1 trillion a year by 2028. The team argues these large numbers are justified by stronger-than-expected demand.

“That number has gone even higher after the Q2 earnings ... and we think we'll ramp up to about $1,000,000,000,000 a year by 2028.”at 6:00

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

AI productivity gains are not yet visible, but small-business AI use points to future US productivity gains.

AI's productivity effect is not yet showing up in the productivity numbers that economists are watching. Business applications have surged since ChatGPT's 2022 launch to an all-time high, with more businesses created than at any point in history. Entrepreneurs say they use AI to replace outsourced marketing and legal advice, which helps small businesses grow. The team expects this to eventually lead to US productivity gains.

“we're not really seeing these yet in the productivity numbers, which I think most economists are watching out for. ... And I think eventually that will lead to productivity gains in The US economy.”at 6:36

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

AI IPOs are waiting for calmer rates; IPO and M&A activity already accelerating despite high rates.

Higher rates compressed valuations, so a gap has opened between the prices bigger IPOs expected and what the market is pricing. Several recent high-profile IPOs have had mixed performance. AI companies are taking a wait-and-see approach until rates calm, and conditions may improve with a more dovish Fed into Q4. Even so, 2026 has been a very strong IPO year despite high rates. Because the market is supply-driven and less rate-sensitive, IPO activity is accelerating from last year and M&A activity is also rising.

“they're really taking a wait and see mode. I think they might wait until the situation with rates have calmed down a bit.”at 8:16

Paul Hsiao · UBS Chief Investment Office, Global Wealth Management

Split government makes new AI regulation unlikely; it won't stop the AI trade.

The base case is a Democratic House and Republican Senate with a Republican White House. That split falls short of the two-thirds majority needed to override a veto, so Democratic-led AI regulation looks quite slim. A Democratic House would act as a legislative check through the power of the purse, and a Democratic Senate would be a personnel check on AI czars and cabinet confirmations. Overall, the team does not expect more AI regulation, and it will not stop the AI trade.

“So we don't think that we'll necessarily see more out of AI regulation, [it] will not stop the AI trade, and actually might be beneficial for rates”at 11:05