We're Not Near an AI Bubble: BlackRock's Chaudhuri

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00:00and Gargi earning season. We've already started it. The banks are out of the way. I always feel

00:04like the banks don't really give us the best read because I mean, look, you know, we know they're

00:07doing OK. But there is a bigger question here about the overall health of the economy, at least

00:12through the lens of the publicly traded stocks. Are you hopeful or are you optimistic that we are

00:18going to see some of these companies succeed expectations? Sure. So first of all, good

00:22afternoon. Great to be here. And I'll pick up a thread that you mentioned around the banks not

00:26mattering. And I would argue that they actually are a really good signal in this market right now,

00:32which is surrounded by so much noise. And the one thing that we learned from the banks this week is

00:37that the consumer still remains really resilient, that there are no large broad based defaults that

00:45we should be worried about yet. And I think that's important for the health of the broader economy.

00:50So I do think there's some signals there which we should take into consideration as we're thinking

00:55about the health of the entire earnings season. To your point, obviously, next week and as Katie was just

01:01mentioning, we have some of the larger names in the large cap stocks that are reporting. And I think that the

01:07bar is quite low. Obviously, tech has a higher bar, 20 percent or so. But broadly, it's a low bar. And I do

01:16think once again, we've said this from sort of the middle of this year, we've continued to hold our belief that

01:21being active within large cap, specifically growth and AI, that is the engine of earnings growth. But not

01:28just that, that is also the engine of GDP growth. It certainly is. And we've already seen that show up

01:34in the data. Do you have any worries, though, about I don't want to call it a bubble, because I feel like

01:39that's going to an extreme, but just worries about that how much further this can go, because you look at the

01:45investment, you look at the money coming in. That's not going to be long term, right? I mean, at some point,

01:49we do have to sort of maybe slow down a bit or maybe not. So that's certainly been a question

01:55that we've been getting from a lot of clients this week around, you know, what should we make of all

01:59of the deal flow that has been taking place in the space. So two thoughts there. Look, there are going

02:04to be winners and losers in the space. No doubt about that. There are going to be companies that

02:10are going to be able to profit very well of all of the capex that they have been doing and are planning

02:16to do. And then there are going to be some companies on the other side of that. So recognizing

02:21and being able to pick the right companies, I think, is going to be important. But broadly,

02:26I think that this this fear of this all being a bubble, I think it's a little too far, because,

02:32frankly, if you look at where some of the capex that's planned out this year, 2026 to all the way

02:38to 2028, over 50 percent of that capex is coming from free cash flow. Right. And I think that is the

02:44sign. So are there going to be neoclouds of smaller companies that might not do as well? Maybe. But I

02:51think the large companies and this is where we focus on ETFB AI, that really does focus on that

02:57active AI opportunity. We think that's what makes a lot of sense. Well, you make an important point,

03:02and I'd love to unpack it a little bit more, that when you think about how it's being funded,

03:06this spend, it's coming out of the operating cash flow rather than these companies taking on debt. But

03:11we know that that started, especially in the case of Oracle. And if we see that trend build,

03:17where some of these big tech companies are more often tapping the debt market to fund these these

03:22ambitions, basically, I mean, how does that change the nature of investing in the tech sector?

03:28And this is where I go back to the point that there are going to be winners and losers. And to the

03:32extent that a company is using some debt, but is still very well capitalized and has a lot of free

03:38cash flow, but is choosing to sort of use their balance sheet. That's one thing. On the other hand,

03:44when you're looking at the much smaller companies that don't have that free cash flow and are really

03:49going entirely going down the debt spectrum to actually do some of this capex and then are not

03:56able to be profitable, are not showing that in the earnings growth. I think that's where the worries

04:01will eventually end up. I don't think we're anywhere near that yet. Right. So when we're talking about

04:07having a preference for large gap and having a preference for growth, it's very much around being

04:13active in that space and going for those names and those companies that do have that profitability

04:19and are showing the earnings growth. Yeah. And it was interesting a couple of weeks ago to this point,

04:24we reported that when you take a look at the high grade debt market,

04:27more of that $1.2 trillion is tied to AI than it is to financial. So certainly perhaps something

04:33changing under the hood here. But let's talk about the other thing that folks have gotten worried

04:37about in just the past week or so. And that is what's going on in the corporate credit market,

04:42specifically when you think about private credit, that these fears have been fanned by what we're

04:47seeing, of course, in Zion, what we're seeing in Western Alliance and what we just got over when it

04:52comes to First Brands and Tricolor. Do you think that there is something brewing there when you think

04:58about, you know, just what might be going on in terms of the quality of the lending?

05:03Sure. So hopefully we'll be able to get through this whole segment without using the word cockroach.

05:08I was careful there.

05:10I think that there is right now, it appears to me that some of this is more idiosyncratic in nature.

05:18And thankfully, we're also, as we were mentioning before, in the midst of earning season. And even

05:24today, we saw some of the regional banks reporting. And again, there isn't large scale credit write-offs

05:30that are taking place. And that does give the market and has given the market a fair amount of

05:34comfort. For us to get really concerned around this, we'd have to see something much more broad-based

05:41and systemic. We haven't seen that yet, right? So these are, so far, we believe, much more

05:47idiosyncratic around a few names that you mentioned. And if you look at the large cap earnings, if you

05:54look at the bank earnings, what we're actually finding out that the delinquencies are actually

05:59declining. Credit is fine. Default rates are low. And that gives us a fair amount of comfort around

06:05large cap banks.

06:06Just, I mean, not to belabor the point, I understand there are some very specific idiosyncratic

06:11issues, maybe even potentially pending investigations, bordering on fraud with some of those names.

06:16But when you start to talk about the interconnectivity, particularly in the private space, and even how

06:22it connects into the public markets, does it worry you at all that there could potentially

06:26be some systemic risk based on those relationships?

06:30I think that we, obviously, there has been a lot of money going into the private credit space. I think

06:36that there may be some deals somewhere that could have some troubles that could have, that could

06:44default. But broadly, have we seen signs of broad-based, you know, issues? We have not. So can there be

06:54certain, and even in the next few months, can we see some headlines around some deals that are coming

06:59through that perhaps, you know, did not go out, especially because we're in the midst of this

07:04K-shaped recovery? So just like we saw this one deal, which is around auto loans, could there be

07:09others that are that are related to certain parts of the economy that are not doing as well as other

07:14parts? Yes. But I think, is it systemic, is the question that we need to answer. And what is the

07:20transmission mechanism? Is it transmitting to the entirety of the U.S. economy? And there are no signs

07:27of that as of yet. All right. So you're still optimistic? Yes.

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