Goldman's Wilson-Elizondo: Two More Fed Cuts 'at Best'

Bloomberg

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00:00I do want to start with the AI trade. I mean, that has been the real fuel for this rally that

00:04we've seen over the last two or three years or so. And I don't think anyone's saying that trade

00:08is over. But you see a lot more scrutiny right now of the AI spend and what that return is.

00:13Are you doing that same type of scrutiny? Yeah. Anytime you add leverage to a theme,

00:16it gets more complicated. And I think what your prior guest was alluding to

00:20is that, you know, right now some people are outspending what they can afford.

00:25And the market's pretty discerning about that. Ultimately, though, what we're focused on is,

00:30you know, what is the use case for AI? And if it's we're going to completely replace something like

00:36yourself and myself, we're in the very beginning innings, or are we just going to be leveraging it

00:41for productivity? And I think that that question remains. It's why so many people are bringing up

00:45the topic of bubbles. It's just there's risks in the system and we need to be thoughtful around it.

00:51But how we're positioning in our portfolios is, you know, there's a lot of exuberance.

00:56We're participating in it, but in a very rational way. We're focused on quality. Companies that have

01:02ROE, low leverage, you know, the management teams, you know that they can operate throughout cycles.

01:08And honestly, that trade's been really cheap relative to what the broader market has done.

01:14What types of companies are these? Are these companies selling AI related services? Are they

01:19companies using AI internally to boost their own productivity and increase their own value?

01:24What types of companies? Well, more holistically, quality is actually across the sectors. So it's

01:29very much so focused on high ROE, low leverage names. Some of them are participants in the AI theme.

01:36Two of them are very large, you know, tech issuers. But it's more holistically focused on,

01:42hey, a lot of things are really expensive right now versus history, if you will. And we see that

01:47this space is a lot of value. And it's not just domestic, it's also international. So the quality

01:52basket is, you know, trading 17% cheaper than the broader index internationally. And you're getting

01:58exposure to places like India and Hong Kong and, you know, more diversification for the portfolio.

02:04Has that been a tough sell, though, for particularly like when you're talking to clients and other

02:08investors and even your peers? Because so much when we hear about the AI trade, it still seems narrow,

02:14or at least the discussion publicly seems narrow, both in terms of the industries, but also

02:19geographically, too. A lot of focus here on the U.S. Yeah, that's true and fair. Although you look

02:24at Europe and Europe in dollar terms is completely outperformed and has very narrow exposure to AI.

02:30So I think thematically people question it. But when you talk about risks that you're exposing

02:35yourself to, what happens when you have a concentrated index, how the beta of your portfolio can go up?

02:40You know, I think that it really resonates with our clients. We talk about being invested,

02:46being overweight equities, but being really rational in how we're exposing ourselves and that there is

02:51really great diversification opportunities across the globe. I mean, I spoke a little bit about how

02:56we're getting exposure to quality in India, but more holistically, we're very focused on EM.

03:01You have lower inflation, a Q3 GDP print of 8 percent, and a market that actually didn't get

03:09a lot of attention this year in terms of buying. Well, it's interesting you brought that up,

03:13because I did sort of give it some attention last week for like the first time all year,

03:17and I was surprised at how much it had outperformed a lot of the benchmarks here in the U.S.

03:21so far. Is that something that's sustainable, though? Because I feel like we've gone through

03:25these periods where we'll see at least on an aggregate basis, and I'm just kind of taking

03:28like the MSCI index, and I know it's very broad, but we've seen that outperformance before,

03:33and then that sort of falls off pretty quickly when people, you know, find some other shiny object.

03:38Yeah, I mean, specifically when you talk about EM, you can't divorce that from China because it's a

03:43very large exposure in the index. You know, we're on our third five-year plan from China. It was

03:48very pragmatic policy that we saw, export-driven growth targets that they have. It's easy to see

03:56because it's very under-owned, and it's trading, you know, one to two standard deviations cheap,

04:01even for relative cheapness on history. So we can see more room for that to outperform,

04:06but obviously there's a lot of trade tension involved in the space. So you have to be thoughtful

04:10in how you size in your portfolios. So I was looking at some of the things that you've wrote,

04:14and it was this idea that one of your contrarian bets for next year is actually to be short

04:19investment-grade corporate debt. Yeah. Why? Well, if you think of one of the spaces that's

04:26going to experience the most issuance as a result of the AI trade, it's going to be IG credit.

04:32And we've actually seen a couple of very large drive-bys turn to the market recently.

04:36Spreads are tight. If you think about one of the largest tailwinds to the index,

04:40which has returned something like 7.5% this year, it was duration. And our top-line view on where the

04:46macro is going next year is that we're going, you know, to have above-trend growth, around 2.4%.

04:51That growth is going to come with higher rates. So we just don't think a lot of the tailwinds are

04:56there. Spreads are tight. And then you're going to be the recipient of a lot of issuance as it relates

05:01to AI CapEx. And so we're a little bit more discerning there. We'd rather use the capital in equities.

05:06In equities, really? Yes. Okay. Well, what about you? I mean,

05:10we had one of your colleagues on earlier, or maybe it was last week, with regards to the

05:14launch of Innovator ETFs here. I mean, how are you structuring products right now for this outlook

05:21that you have for 2026? Yeah. So, well, first off, we're really excited to welcome them to the

05:26Goldman Sachs family. And in particular, within my business, I manage the model portfolios,

05:32which give advisors access to our holistic investment content and thinking. And one of the

05:38important tools to the toolkit is outcome-oriented solutions. And so you can use things like the

05:45Innovator ETFs in our model portfolio business, you know, to protect on the downside, to have more

05:50income in the portfolio. And so it just, from our perspective, it's, you know, a tremendous thing

05:55to be able to offer to our clients. Yeah. And I should point out, we had your colleague on Monday.

05:58Right. These days sort of get so jumbled. I knew it was recently. It's okay. Don't worry. I'll tell

06:02Brian. Thank you. I love him. Anyway, and just before I let you go, I'd be remiss in not asking

06:07you about what's going on with the Fed and rates. I know next week, pretty much a lock,

06:11at least the market thinks it's a lock. We're going to get 25 basis point cut. But what's the

06:15trajectory beyond that? Are you in this camp that we are in a prolonged rate cutting cycle?

06:20No. In fact, we only see maybe two at best, and in fact, might be dispersed throughout the year

06:25or next year, depending on what the information looks like. We're in a higher inflation regime.

06:30You know, we expect the terminal rate to be around three, three and a half. That doesn't give you a

06:34lot of room. And if you're operating from the Fed's perspective, they have a lot more tools in their

06:40toolkit to address slower growth, less so to address sticky inflation. And so they're, you know,

06:47they obviously have been, in terms of communication, a bit more discerning in terms of

06:51how much more dovish they're going to be from here.

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