Top of the Morning: CIO Strategy Snapshot - An assessment of recent market pricing

Amazon.com

Across the shows: 17 speakers in other episodes, 13 bullish and 3 bearish calls, past 30 days

• Jason Draho · UBS Global Wealth ManagementBullish

  Amazon's AI capex plans unlikely to change despite higher borrowing costs, given its balance sheet.

  Amazon is one of four hyperscalers that together account directly or indirectly for about 75% of expected AI-related capex this year and next. These firms have, on average, AA credit ratings, market caps above $3 trillion, diversified businesses, long profitability track records and balance sheets that can take on much more debt. Their returns on capital are above 25%. A rise of one or two percentage points in borrowing costs would raise the price of funding but is unlikely to materially change how much they spend.

  “These are companies that have, on average, AA credit ratings, market caps over $3,000,000,000,000 diversified businesses, long track records of profitability, and really balance sheets that can take on a lot more debt at this point in time.”at 7:26

Microsoft

Across the shows: 11 speakers in other episodes, 10 bullish and 0 bearish calls, past 30 days

• Jason Draho · UBS Global Wealth ManagementBullish

  Microsoft's AI capex plans unlikely to change despite higher borrowing costs, given its balance sheet.

  Microsoft is one of four hyperscalers that together account directly or indirectly for about 75% of expected AI-related capex this year and next. These firms have, on average, AA credit ratings, market caps above $3 trillion, diversified businesses, long profitability track records and balance sheets that can take on much more debt. Their returns on capital are above 25%. A rise of one or two percentage points in borrowing costs would raise the price of funding but is unlikely to materially change how much they spend.

  “These are companies that have, on average, AA credit ratings, market caps over $3,000,000,000,000 diversified businesses, long track records of profitability, and really balance sheets that can take on a lot more debt at this point in time.”at 7:26

Meta Platforms

Across the shows: 42 speakers in other episodes, 41 bullish and 19 bearish calls, past 30 days

• Jason Draho · UBS Global Wealth ManagementBullish

  Meta's AI capex plans unlikely to change despite higher borrowing costs, given its balance sheet.

  Meta is one of four hyperscalers that together account directly or indirectly for about 75% of expected AI-related capex this year and next. These firms have, on average, AA credit ratings, market caps above $3 trillion, diversified businesses, long profitability track records and balance sheets that can take on much more debt. Their returns on capital are above 25%. A rise of one or two percentage points in borrowing costs would raise the price of funding but is unlikely to materially change how much they spend.

  “These are companies that have, on average, AA credit ratings, market caps over $3,000,000,000,000 diversified businesses, long track records of profitability, and really balance sheets that can take on a lot more debt at this point in time.”at 7:26

Alphabet

Across the shows: 12 speakers in other episodes, 10 bullish and 1 bearish calls, past 30 days

• Jason Draho · UBS Global Wealth ManagementBullish

  Alphabet's AI capex plans unlikely to change despite higher borrowing costs, given its balance sheet.

  Alphabet is one of four hyperscalers that together account directly or indirectly for about 75% of expected AI-related capex this year and next. These firms have, on average, AA credit ratings, market caps above $3 trillion, diversified businesses, long profitability track records and balance sheets that can take on much more debt. Their returns on capital are above 25%. A rise of one or two percentage points in borrowing costs would raise the price of funding but is unlikely to materially change how much they spend.

  “These are companies that have, on average, AA credit ratings, market caps over $3,000,000,000,000 diversified businesses, long track records of profitability, and really balance sheets that can take on a lot more debt at this point in time.”at 7:26

Market sentiment, positioning & volatility

• Jason Draho · UBS Global Wealth Management

  Recent equity rotation is positional, not de-risking; investors remain long equity exposure this time.

  Last week the S&P 500 fell 0.5% and the Nasdaq fell 0.8% while the Russell 2000 rose 2%. Defensive stocks have outperformed cyclicals by about 20 percentage points over recent months, and AI beneficiaries were hit hardest, with some of their early-year outperformance fully retraced to roughly flat for the year. The surface looks calm but churn underneath is large. Jason reads this as positional rotation rather than net de-risking. In the summer selloff investors were relatively long equity exposure and derisked, whereas now that has not happened to the same degree.

  “But really what it looks like is more of a positional rotation rather than net [risk], sort of derisking in equities. Unlike in the summer when there was that sort of derisking going on, investors were kind of relatively long exposure to equity markets.”at 3:11

Credit markets

• Jason Draho · UBS Global Wealth Management

  Markets are separating AI-linked borrowers by quality; lower-tier unsecured issuers face widening spreads.

  Markets are focused on rising spreads and default risk, especially for some neoclouds and other lower-rated AI infrastructure participants that lack the credit quality, capital structure, scale and profitability of hyperscalers. Investors are discriminating between quality tiers. Lower-quality issuers using unsecured debt not backed by data centers or chips have seen the biggest price declines. Loans secured by chips and lease payments from higher-quality hyperscalers have been far less affected.

  “What we've seen in the past couple weeks is the markets are really focused on these rising spreads and default risk of some of these, especially some of the neo clouds”at 8:29

AI infrastructure & data centers

• Jason Draho · UBS Global Wealth Management

  Higher borrowing costs will change how AI buildout is financed, not materially cut its volume.

  Higher borrowing costs are likely to derail the AI build-out over time for weaker players, but the main effect will be on how it is financed, requiring more secured financing and backstops or contractual support from higher-quality issuers to the wider ecosystem. The build-out already intended should not be significantly constrained. AI investment will continue and earnings flowing through the ecosystem should continue. Concerns about financing costs should abate, as concerns about AI monetisation did after DeepSeek's release, when markets became comfortable it would not disrupt the AI trade.

  “So it's more of how the money is raised and who is providing the capital as opposed to significant contraction of available capital that actually outright constrains the build out that's already intended.”at 9:29

US growth & recession risk

• Jason Draho · UBS Global Wealth Management

  US Q3 GDP likely 3–3.5%, strong momentum; moderation to 2.5% would still be solid.

  Q3 US GDP is likely to land between 3% and 3.5%, very strong growth that gives good momentum into Q4. Jason expects some moderation, but he sees roughly 2% as the trend level, so even a slowdown to 2.5% would be a solid number. This resilient growth is a key pillar of his macro view that fundamentals remain solid.

  “It's likely to be somewhere between 3%, 3.5, so very strong kind of growth numbers, good momentum going into Q4.”at 14:37

US inflation

• Jason Draho · UBS Global Wealth Management

  Underlying US inflation still disinflating gradually; core PCE is the outlier and should clarify soon.

  Most underlying inflation trends still point to disinflation, though at a gradual pace. Core PCE is the one component that matters most for the Fed and is the outlier, running higher. Many other inflation components look much lower and more contained. Jason expects this divergence to become clear in the coming months, which he thinks will allow the Fed to hike in December and March and then pause.

  “Underlying inflation trends still point to disinflation, maybe at a gradual pace.”at 14:54

US rates & the Fed

• Jason Draho · UBS Global Wealth Management

  Fed holds this week but hikes in December and March, then pauses; markets price out cuts.

  Market pricing shows less than a 10% chance of a hike this week, but about a 90% chance of one full hike by December and roughly 1.85 hikes by March. Jason expects no move this week. Hikes in September were justified by inflation falling too slowly, and the September inflation print came in higher than expected. That makes a pause a mixed message, so the December meeting is very much live. Jason expects hikes in December and March, then a pause, and markets pricing out cuts beyond that horizon. He flags that Chair Warsh's press conference could be challenging, since emphasising the trend over a single data point could be read as either reassurance or a sign that more work remains.

  “And that will allow the Fed to hike in December and March but kind of pause thereafter.”at 15:16

Earnings & corporate profits

• Jason Draho · UBS Global Wealth Management

  Q3 earnings growth tracking near 27%, with a slight beat likely; nearly 80% of companies beating.

  So far in Q3 nearly 80% of companies have beaten earnings expectations, which Jason calls very strong results. Most of the reporting is concentrated in the coming week. UBS's expectation of 27% Q3 earnings growth is very much on track, and he expects a slight additional beat when reporting is complete. He ties this to resilient growth and solid corporate earnings, which underpin his constructive equity view.

  “And our expectation of earnings growth of 27% in Q3 is very much on track. There'll probably be even a slight beat to that when it's all said and done.”at 15:37

US stock market outlook

• Jason Draho · UBS Global Wealth Management

  Equities remain attractive on solid growth, earnings and continued AI investment over six to twelve months.

  UBS's house view on a six-to-twelve-month horizon did not change much despite higher investor concern about AI capex spending. The macro fundamentals behind the market outlook remain solid: Q3 US GDP is strong, underlying inflation is disinflating gradually, nearly 80% of companies are beating earnings expectations, and Q3 earnings growth is tracking about 27%. AI investment will continue. Together these make the backdrop favorable for equities, which UBS continues to find attractive.

  “So that is kind of favorable for equities while we continue to find them attractive.”at 15:57

AI chips & semiconductors

• Jason Draho · UBS Global Wealth Management

  Favors higher-quality semiconductor and hardware companies that benefit directly from AI infrastructure spending.

  UBS's equity team takes a barbell approach to technology. One side favors higher-quality semiconductor and hardware companies that can benefit directly from AI infrastructure spending. This sits alongside a defensive side of mega-cap platforms and defensive tech. Semis sold off sharply in the summer deleveraging, but the core view is that direct beneficiaries of the AI build-out remain the preferred exposure while capex continues.

  “On the one hand favoring higher quality semis and hardware companies that can stand to benefit directly from AI infrastructure spending.”at 16:13

Big Tech platforms & digital ads

• Jason Draho · UBS Global Wealth Management

  Mega-cap tech platforms and defensive tech should be resilient through volatile periods as AI capex plays out.

  Within UBS's barbell approach to tech, the other side is mega-cap tech platforms and more defensive tech companies. Jason expects these to be resilient during volatile periods as the AI capex boom plays out. This complements the preference for direct AI infrastructure beneficiaries, giving a mix of exposures that can hold up if AI-related sentiment remains choppy.

  “But then on the other side is the mega cap tech platforms and the more defensive tech companies that could be resilient during these volatile periods as the AI CapEx boom plays out.”at 16:21

US Treasuries & yields

• Jason Draho · UBS Global Wealth Management

  10-year Treasury yield seen at 4.9% by year-end, with a possible rise to 5–5.3%; keep duration short.

  Last week's yield decline reflected growth concerns about AI capex, not better inflation, so the Fed may not need to hike as much. A systematic, rules-based short squeeze exacerbated the drop. Jason thinks that positioning adjustment is largely done unless fundamentals drive another big move lower. His 4.9% year-end forecast for the 10-year sits at the lower end of the range, and yields could easily climb back to 5% to 5.3% in coming weeks depending on macro data. He stays cautious on extending duration and prefers the intermediate part of the curve, while noting bonds still diversify equities.

  “So what that means is when we think about the ten year, our forecast for year end is 4.9%.”at 17:13