00:00Over the last year, they've cut 75 basis points and the U.S. tenure is only down like 10 basis points.
00:07How do you expect the tenure to be priced in 12 months time, Scott?
00:13Well, I think the way we're thinking about this, Matt, is that, you know, in our view, the Fed's path to policy neutral is the path that we're on right now.
00:22And getting to that point and lessening some of the restrictiveness is an important element of this.
00:28Do you think the Fed is restrictive right now, that this is a restrictive rate for the U.S. economy?
00:33They've been pretty clear on this.
00:35Now, the discussion on terms of where Fed neutral is, is open ended.
00:39But many will say it's in that three, three and a half percent range.
00:42So the starting point here is you need to get the Fed down to neutral.
00:45I think the consumption data, you know, would tell you that there's still a concern regarding the labor backdrop and aggregate spending that the, in our opinion, the Fed needs to respond to.
00:55So you've got the path lower for Fed funds rates.
01:00Now, the other side of this is inflation and the term premium you're going to place out to the 10-year.
01:07And there, we're of the view that inflation is in a fairly manageable position right now.
01:12So, you know, where the 10-year ends the year, obviously, is going to be probably around these current levels, 4-1 or so.
01:19But the path lower still is going to be tied to inflation and Fed funds.
01:23We think, generally speaking, you continue to see the rate complex move lower, which, again, speaks to and sets up for a cyclical rotation as we go into next year.
01:33Speaking of cyclical rotation, Scott, commodities have been doing so well.
01:36The Bloomberg Commodity Index trading around a 2023 high.
01:40You could say it's maybe the economy, expectations of an uptake.
01:44Maybe it's the new economy with demand for different infrastructure.
01:47How are you viewing that, and how does that translate into some of the stocks that you like heading into 2026?
01:54Yeah, so there's a big discussion out here in terms of what the drivers are of sort of the macro tailwinds that we're dealing with right now
02:02and how much of that is a pull from the AI infrastructure build-out.
02:06And I think that debate will be ongoing next year.
02:10But suffice it to say, we have had that as a tailwind.
02:14We think it, again, broadens down other paths as we go into next year, all of which sets up, we think, pretty constructively for this ongoing broadening thesis.
02:23So you step back and look at the way we've been positioning.
02:26Yeah, we've been overweight tech all year with a focus really on the semiconductor space and software as well.
02:34But within that, we've also been pushing out the cyclical path, whether it's financials.
02:38And so we're fairly keen on the banks here still, despite very strong performance this year.
02:44And then within the more traditional cyclicals, we've gotten more constructive on cap goods.
02:49And we've been using names like Rockwell and Quanta Services on our rec list for over a year now.
02:55And then even down the consumer path where, again, lower rates as a catalyst here and a still fairly healthy high-end consumer
03:05has kept us very constructive on some of the larger cap names such as Walmart, which you highlighted a few minutes ago.
03:12You mentioned Rockwell. I see in your note that you guys have spent time with the company management there.
03:17What did you take away from those meetings?
03:20You know, I mean, Rockwell conceptually is a pretty straightforward play here in terms of the automation backdrop.
03:26But, you know, what really investors are looking for is signs that the shorter-term order uptake is in pretty good shape.
03:32And that's what we're starting to pick up here.
03:34So you get a company that, you go back two or three years ago, was really struggling to keep up with the rest of the industrial sector.
03:44The short-term order pattern picks up, and boom, the stock has been much better so far this year.
03:48So, I mean, I think what investors are looking for in this industrial space is a tie to the AI infrastructure build-out,
03:56which has been a real point of differentiation within that component of industrials.
04:00But then also, are you beginning to see a more broadening in terms of the economic underpinnings that can further drive the fundamentals from here?
04:09It seems like it's falling in place.
04:10Well, Scott, that's like you mentioned Walmart, too.
04:12Another one of these companies that people are pointing to is saying they're making great strides in their technology offering and how they're using AI.
04:21Emblematic of that, Matt was showing them ringing the bell at the NASDAQ.
04:23They've relisted onto the NASDAQ to say, hey, we're a tech company now.
04:27Scott, especially for a company like Walmart and any other of these staples, discretionary, really consumer companies trying to brand themselves as tech companies,
04:36how do you distinguish what is AI theater and what's real and what's a buy case?
04:41You know, really good question.
04:42I'm not sure how much time we have to go into this, but this is an important thesis, right?
04:46So essentially, we think one of the storylines for next year is that we see a broadening away from the AI enablers and creators of this year and last year to AI users next year.
05:00So you begin to switch away from the discussion around the hyperscalers, as an example, towards the users of the technology that are improving their operations.
05:09And there's going to be a plethora of companies, every S&P company, you know, if it doesn't have an AI strategy by now, it will.
05:18And if you don't, you've got investors questioning what's going on.
05:21My point here, though, is that the opportunity structurally for U.S. equities is that you see more companies deploying AI in a way that lessens their historic earnings volatility.
05:35And as you do that, you can pay a higher current multiple for that and a higher terminal value.
05:42It's one of the reasons why I think Walmart trades more expensively than does NVIDIA, which is showing much stronger earnings growth right now.
05:48So this notion of deploying technology to better improve even a traditionally low margin business like Walmart's is really, really critical to the way the large cap U.S. equity landscape is unfolding.
06:01I think it's going to be an ongoing, important storyline for next year.
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