00:00I wonder how much of this investment still going full out on equities is just about that valuations
00:06still look attractive with us trading under a 24 times P.E. yet again versus perhaps even if we
00:12weren't there and we hadn't sold off over the past two weeks, you would still be this bullish on
00:16equities. Yeah, look, the thing I love about equities so far in 2026 is that it's been earnings,
00:22not price. That is really kind of driven things like, look, everyone was concerned at the beginning
00:28of this year around multiples and around valuation. And this has been a recurrent concern.
00:33We continue to wring our hands as multiples have ground higher over the course of a number of years.
00:39But this year, because it's earnings and not multiples that are driving markets higher,
00:43and because the fundamentals continue to come in very strong and we expect actually very solid
00:48reporting over the course of this week, that we feel more comfortable in continuing to add to
00:53positions, especially when there are bits of a pullback. I would note, though, of course,
00:58we've been in this trading range for the last couple of months, and it's going to take a broader
01:02array of investors to get comfortable with adding additional risk to really drive the markets up
01:08higher into year end. But we think that can happen as some of the worries that people have around
01:13geopolitics, inflation rates and AI sustainability fade. Kate, I wonder how you're thinking about
01:20hyperscaler spending, Nvidia spending, the circularity of it, and how this market is likely to continue to
01:26receive those numbers as we go through the rest of the earnings this week.
01:30Look, I mean, amongst all the worries that we've had, again, over the course of 26, and this was
01:35some echo of the second half of 2025 as well, is this worry around, you know, are companies spending
01:40too much? And if they're spending too much, how do we think about the return on investment? I mean,
01:45this is a consistent investor angst. What I will say, and we're going to get a lot of information
01:50about this over the course of the week, is we actually see no signs of any slowdown in overall
01:55CapEx. We got that from Alphabet last week, and a very clear message that the increase in spend
02:01is because of demand, that they're going to likely revise up their 2027 expectations for CapEx and
02:06spending. But something I just want to highlight here, we focus a lot on the CapEx in the AI and
02:11tech
02:11space. But actually, overall investment in the economy is exceptionally strong. In fact, we got data this
02:17morning suggesting that momentum is very, very strong. So when we think about the investment cycle, it's not
02:22just AI and tech, but also the broadening out of the spending that's happening, and how that's going to
02:26support both the macro and we think of a widening array of fundamentals across industries.
02:31So to what degree, though, is it outside of tech, Kate? Because the point has been made by Torsten Slock
02:36and
02:36others that it's an economy increasingly reliant on AI spend. Does the kind of figures you're seeing for this
02:41macro economy give you confidence that should we see a pullback on spending by some of these tech
02:46players that this is an economy that will do OK and not slip into a recession?
02:51Yeah, I'm not worried about the economy slipping into recession. But if we were to get either a
02:56pause, I don't think we're going to get a cut, but a pause in terms of overall CapEx spending,
03:00I do think that would be another shock to sentiment. You know, we monitor sentiment, you know, very
03:05closely, as well as positioning. That's a big part of our process. And, you know, our readings now
03:10suggest that actually sentiment has slipped further over the last two weeks. So we're in kind of the
03:15summer doldrums, again, cycling through these worries around AI CapEx, geopolitics, inflation,
03:22et cetera. And I think, you know, if we were to get any of these sort of shocks, whether it's
03:27around
03:27a broadening of the war or further challenges to energy supply or the AI tech and CapEx spending
03:35backing off, I think we'd see another hit to sentiment. But I don't think it derails the economy. I mean,
03:40that's the important thing. In fact, one of the things we were talking about earlier this morning
03:44is how strong economic surprises have been, not just in the back end of 2025, but throughout the
03:50course of 2026. You can say economists maybe have been conservative, but you could also say
03:55that the data has come in much stronger across almost every metric on consumer side, on business
04:01side. And that activity we expect to continue into the back half of this year. So a very strong
04:07macro backdrop, but sentiment could take a hit further if there was any sort of talk around
04:13pausing or stabilization in terms of the CapEx landscape for AI. Can we talk about that macro
04:18backdrop, Kate, especially as it relates to this week? This is a market that considers the meeting
04:23live from this new Fed chair, Kevin Warsh. What are your expectations? And could Fed hikes change some
04:30of your outlook? Yeah. So our expectation is not that we're going to get a hike this week. Of course,
04:35it's not a zero probability event. And we see that, of course, getting priced into markets.
04:39You know, a key message we've had over the course of this year has effectively been that inflation
04:43has been broad enough and persistent enough that even before the shocks from the Iran war,
04:48that the Fed was going to have to really consider more of a tightening bias rather than easing bias.
04:52And the market caught up and then sort of overshot on that front. And we think the most likely next
04:58move from the Fed is a hike. Although the timing of that, again, doesn't seem likely this week.
05:03I think the important point here is when you strip out the energy effects, there is sort of broad-based
05:09goods inflation. And, you know, we are now overshooting the Fed's target for over kind of
05:14five and a half years. And I think Chair Warsh made this very clear in the June commentary and during
05:20the presser that they were very focused on that 2% target. And so I think it's unlikely that we
05:26would
05:27get any type of easing. But the tightening starting as soon as this week is not a high probability
05:32event in my mind. Well, perhaps what Kevin Warsh needs to do is bring the long end down. He's
05:36concerned about the housing market and about financing. And this is a long end that has
05:40been drifting higher. Kate, for the 30-year yields, we are above 5.1%. Real yields are also incredibly
05:46high. Just for the price of a 30-year yield, it's been above 5% for the longest streak since
05:522008.
05:54Should that be impacting or has it even been impacting risk assets at this point?
05:59You know, we've seen the relationship between bonds and equities actually break down
06:03considerably. And it's one of the reasons why we've shifted a little bit of our portfolio
06:07construction to look for diversifiers. Because, you know, our expectation is that yields, particularly
06:13the long end, will stay elevated. I don't know that we get the 10-year creeping up to 5%. I
06:17think
06:18that's a psychologically important level. And people would likely be buyers at that point. But that the
06:23long end will remain elevated. And against that backdrop, we've also seen bonds not perform the
06:29way that we would historically want them to perform in periods of shock, right? We've had equities
06:35down and yields up in a couple of these shock moments, which also leads us to believe that we
06:40need to, you know, really rethink our portfolio construction. One thing I would also note is we've
06:45heard a lot of officials and pundits discuss, you know, the impact that these higher long end yields
06:50are having on government funding. We know that deficits are going up in the U.S. and around the
06:54rest of the world. And that's something that governments are really going to have to grapple
06:58with. To the extent that, you know, the Fed and political politicians discuss wanting to keep the
07:05long end anchored, you know, they can try and jawbone it. But if the market is concerned around overall
07:11spending and the persistence of inflation, I think it's going to be really hard for them to do. So
07:14we've remained very short duration in terms of our portfolio. And, you know, I see very little
07:20reason to add duration in the near term. Kate, the difference in correlation between fixed income
07:26government bonds and equities, can we extend this conversation to corporate bonds? Because later we're
07:32going to be talking to Carlisle Zakeel Bansal, who oversees asset-backed financing, and is basically
07:36making the pitch that traditional fixed income corporate bonds don't give you diversification anymore.
07:41A 60-40 portfolio doesn't work because of all the tech issuance and just how highly correlated
07:47equities are now to credit. Are you seeing the same concern? Have you rethought at all
07:52about the place for traditional fixed income, specifically corporate credit, in a portfolio now?
07:58Yeah, we prefer to take our risk in equities, like, over credit at this point. But of course,
08:02that doesn't mean we have got rid of all of our credit exposure. The one thing I would flag here,
08:06and this is an important one, is, you know, I was making this point around valuations compressing
08:10over the course of 2026 as earnings have outpriced the price movement. But that has not happened in
08:16the credit space. Spreads are still incredibly tight. They're trading close to their, you know,
08:2115-year tights. And, you know, there's been a little bit of a disconnect between the equity and
08:27corporate credit environment. So here's what I would say. Like, you have to be very thoughtful,
08:33too, about where you allocate in credit because spreads remain really tight and don't reflect,
08:38you know, the same types of, you know, concerns that equities have reflected. And that, you know,
08:44you're right. There is continuously, or there continues to be some more overlap in terms of
08:49the sector exposure and the thematic exposure that you may be getting in credit. We're not at a point
08:54right now where we would say this is concerning. In fact, we think some of the companies that are
08:59issuing corporate credit are actually very high quality. And it can be, you know, you know,
09:04an interesting part of your overall credit portfolio, but it's something that it bears
09:07watching. And as the tech and AI-related credit becomes a larger percentage of the overall market,
09:14we will have to ask ourselves, how much overlap are we comfortable having between
09:18our credit and our equity exposure, but still biased towards equities over credit at this point?
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