Equities, Bonds, and AI — Bloomberg Surveillance

PodcastBloomberg SurveillanceAlicia LevineOct 7

The discussion links market resilience to stronger-than-expected growth and earnings, while noting signs of pressure in cyclical sectors, distressed loans, and consumer credit. Speakers also address industrial activity and supply-driven inflation, uneven household exposure to price increases, and the possibility of a 5.5% 10-year Treasury yield. On AI, the focus is on profit growth and the potential for agents to take on business processes and reshape digital commerce.

Equities Corporate Earnings Economic Growth Inflation Interest Rates Artificial Intelligence

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Key Takeaways

Alicia Levine sees profitability as central to the AI investment story: substantial gross profit and rising margins matter, while businesses using AI to improve margins could gain operating leverage. Separately, Fatima Boolani expects AI agents could become teammates within three to five years and says agentic commerce may create opportunities for Cloudflare and Datadog as companies prepare their websites for agents.

Alicia Levine attributes upward pressure on the 10-year yield to industrial-economy strength reflected in wages and manufacturing, and says the yield could reach 5.5%—a level she considers consistent with nominal growth of 6.2%–6.3%.

The Wellington portfolio manager says inflation has been more burdensome for lower-income households, estimating cumulative post-pandemic inflation at upwards of 30% and real wage growth at about 1% for the top 60% of earners versus negative or near-negative growth for lower-income cohorts extending into the bottom 40%. She also reports rising delinquencies and roll rates as credit stress reaches prime borrowers, saying pressure could remain contained while the labor market holds up but warning that a deterioration in jobs would change the outlook.

Chuck Clough argues that markets generally respond more to monetary than fiscal policy and can overemphasize political concerns; he expects an election to produce gridlock, which he says markets favor. He also points to strong stocks despite a hawkish Fed, narrow quality spreads, and a resilient dollar as signs of market resilience.

GEO-POLITICS

Political Gridlock — Chuck Clough argues that markets generally respond more to monetary than fiscal policy, and that political concerns can be overemphasized. He says markets favor gridlock and expects the election to produce it.

“Most of the time it is. And in fact, very, if you look at fiscal policy, markets don't usually respond to fiscal policy…”—

TECHNOLOGY

AI Profitability — Alicia Levine says gross profit is central to the AI investment story, pointing to substantial profit generation and rising margins. She argues that businesses using AI tools to expand and improve margins could gain operating leverage.

“Look. This is like nineteenth century. Look at gross profit here. That's the heart of the AI matter. Correct…”—

ECONOMY

Industrial Growth — Alicia Levine attributes upward pressure on the 10-year yield to a boom in the industrial economy, reflected in wages and manufacturing.

“Nominal growth at 6.2, 6.3%. There's kind of a boom out there in the industrial economy. You see it in wages. You see it just on the manufacturing…”—

Operating Leverage — Alicia Levine says rapid revenue growth can eventually reach a company's bottom line and improve efficiency. With fixed costs, faster growth can produce an outsized increase in bottom-line results.

“Right?…”—

Supply-Shock Inflation — Chuck Clough characterizes inflation as driven by shortages and supply shocks rather than as permanent, arguing that investment capital and economic adaptation can help address them. He cites airlines keeping older aircraft longer amid a shortage of narrow-bodied planes.

“We all know there's a shortage of narrow bodied aircraft, but airlines are already beginning to extend the time that they hold older aircraft…”—

MARKETS

Growth-Led Rally — Alicia Levine says the S&P 500 has held up through policy discussions and rate uncertainty because growth and earnings have exceeded expectations, even as a handful of stocks carry the index. Growth is winning in a higher-for-longer rate environment, with the Magnificent Seven, semiconductors, and software rallying, though semiconductors and software have recently seesawed.

“Look, the market today is echoing the market from 2023 and some of '24, which was the top line index is being carried by a handful of names and everybody's…”—

Distressed Loans — The host says U.S. loans trading below 60 cents on the dollar are at their highest level since the pandemic, including loans held by software companies. Levine says weaker borrowers are showing stress after a 145-basis-point move in the 10-year yield and a Fed that appears more hawkish than markets had priced in six months earlier.

“I'm gonna go down the road less traveled and talk about deeply distressed US loans…”—

Productivity And Profits — Chuck Clough argues that productivity growth translates into higher profits, supporting a positive outlook for financial markets and equity shares.

“Well, productivity equals profits was probably the simplest answer of all. I think there are reasons to be positive about the financial markets…”—

FORECASTS

10-Year Yield — Alicia Levine says the 10-year Treasury yield could easily reach 5.5%, a level she considers consistent with nominal growth of 6.2%–6.3%.

“But we think we think the ten year can easily get to five and a half that works with Right. Nominal growth at 6.2, 6.3%…”—

Growth-Led Market Resilience

Levine attributes market strength to growth and earnings exceeding expectations, while warning that gains remain concentrated in a small group of stocks and higher rates could persist.

Distressed Loans And AI

Levine sees stress among weaker, highly leveraged borrowers as a normal part of the cycle, while expecting AI-driven productivity and operating leverage to benefit stronger companies.

Productivity And Profit Growth

Chuck Clough argues that productivity gains translate into profits and that private borrowing has declined, helping explain market resilience despite inflation and tighter rates.

US Markets And Disinflation

Clough favors US assets over Europe and China, views current inflation as supply-driven rather than permanent, and sees demographics and shrinking private credit as disinflationary forces.

Zscaler And AI Agents

Fatima Boolani highlights Zscaler’s growth outlook and plans for governing autonomous agents, which could reshape business processes and create new cybersecurity investment opportunities.

Inflation And Household Credit

The Wellington manager says headline inflation masks unequal household exposure: lower-income consumers face greater pressure, while credit stress is rising but remains contained if employment holds.