Negative headlines, resilient markets

0:00Ajay Rajadhyaksha:Hey, everybody. Welcome back to the Barclays Brief. It's Ronnie. It's Monday, September 28th, and I'm so excited to have Ajay back on the pod. Just to remind everybody, Ajay is our global chairman of research, and he drives our macro research and strategy effort. And Ajay, I think the last time we did this together, in fact, I know it was right after the Iran conflict picked off. In hindsight, we did a pretty good job of seeing signal through noise in that moment. we find ourselves in another moment in time, in my view, that requires just that. The current macro backdrop leaves us with a lot of risk factors to grapple with.

0:35Ajay Rajadhyaksha:Bond yields are higher. Central banks are tightening again. Oil prices remain elevated. And yet the global economy keeps surprising to the upside. And as I walked up to the studio from my desk, I saw the NASDAQ up about 15 % on the year so far. So welcome back. A lot to unpack for our listeners. 2026 has been quite an environment, quite a market cycle. We've had a lot to grapple with. You just recently published your latest quarterly global outlook. I love the title, Reluctantly Optimistic. Can you walk us through your intent with that title and the views that drove it, please?

1:11Ronnie Wexler:Sure. And it's always good to be back here, Ronnie. This is one of my favorite podcasts and not just because you guys have me on.

1:18Ajay Rajadhyaksha:That's part of it, though.

1:21Ronnie Wexler:That plays a role.

1:22Ajay Rajadhyaksha:Yeah, but your calls have been spot on. So we'll keep having you on.

1:26Ronnie Wexler:Better lucky than smart. So the point of the title is that the headlines have, like you said, turned relentlessly negative. The bond yield move is the move that is most visible. But you're right. Central banks have pivoted from holding to tightening. We thought Iran, U.S. at some point would start to deflate. It shows no signs of doing that. Oil is back by$100. dollars. But underneath that surface, the three things that have driven the global economy, the U.S. economy, three months ago, six months ago, nine months ago, are the same things that are driving it now with remarkable consistency. And yes, they're all U.S.

2:01Ronnie Wexler:centric, but they are all pertinent. One is the strength and intensity of the AI CapEx cycle. The second is the strength of U.S. corporate earnings, which are absolutely spectacular. And the third is the resilience of the U.S. consumer. I don't especially want to be optimistic. It would be easier to go doom and gloom,

2:20Ajay Rajadhyaksha:but I look at the newspaper. Exactly. You think that everything should go down every day.

2:24Ronnie Wexler:I look at the numbers and I can't help but be. That's where the title came from.

2:28Ajay Rajadhyaksha:Right. Well, I love the title. Let's dig into a little more of these deteriorations in the macro backdrop. Why? And more importantly, like why they haven't translated into much weaker growth. You've done a lot of work on this. Why don't you tell our listeners about why they haven't translated?

2:42Ronnie Wexler:Right. So this is actually a great question. Usually, Ronnie, there is a self-correcting mechanism built in between interest rates and the U.S. economy in particular. Interest rates go up beyond the point. The cyclical rate sensitive parts of the U.S. economy, most importantly, housing, start to react. As a result, there is weakness in the economy that propagates outside of housing to other sectors. The interest rate market takes a look at that and starts to slow down on any sell-off. You know, that's the self-correcting mechanism. Now look at what has happened this cycle. Housing has been in the dumps for the last five years.

3:18Ronnie Wexler:So its ability to cause more damage to the U.S. economy because, you know, everyone goes up and jumps up and down about mortgage rates being where they are. They were at 6.5 % in the first half of 2022. We went from 3 % to 6.5 % and then basically a bounce between 6.5 % to 7.5 % for the last five years. So housing's ability to do more damage is limited. And it has been replaced, Ronnie, by what seems like a very rate insensitive AI investment cycle. A Google, a Meta, yes, they are doing debt financing. They are spending an enormous amount of money, but they are not going to pull back on that financing because they say, look, the 10-year went from 4 % to 5 % when they did not blink, when high bandwidth memory prices tripled in the last 18 months.

4:03Ronnie Wexler:They're not pulling back. And if they're not pulling back, the U.S. economy is responding less to the rate sell-off, less to central bank tightening than before.

4:11Ajay Rajadhyaksha:It's amazing how focused we've been on 25 basis points, 50 basis points, and then they come in to do these massive financings.

4:18Ronnie Wexler:And they're much less price insensitive than anyone's been in the financing markets and the bond markets in recent memory.

4:24Ajay Rajadhyaksha:It's just a reminder. They obviously feel like we've spoken about this AI impulse. they're sitting on something huge and they just want to get it built out and they're not overly sensitive to 50 or 100 basis points in the current financing rate.

4:36Ronnie Wexler:And you know, if I may jump in, Ronnie, there's a nuance here. We saw a sign of it in the last earnings numbers. So Google's earnings call, for example, they went out of their way to say that the third quarter's margins would compress because they would have to rent third-party compute because they did not have enough to meet existing client demand. Forget the individual company. You know, take a step back. I can't think of something more macro for those who, you know, more bullish on the macro side, for those who are worried that, look, demand for computers is going to at some point start to fall behind supply.

5:09Ronnie Wexler:It's not happening.

5:09Ajay Rajadhyaksha:Right. And I think the point you're making, and this is something that we're imploring our teams to really see through, is that a lot of the historically held adages around markets just don't seem to apply to this current market environment for some reason. And so we just need to be very open-minded around how much the world has changed. But let's take this into AI and the tangible breakthroughs that we're seeing at this point in the cycle. Metamuse, huge deal. I mean, at least in the sense of consumer adoption. Do you think we just had our next major AI breakthrough moment?

5:42Ronnie Wexler:I think we've had a number of these. So like you said, the big tech breakthroughs, whether it be ad matching by Meta or Google, you know, where they are very quietly talking about how their ad matching numbers, their ad efficiencies are going up sharply because of AI or something more public like Metamuse is the catalyst. But even in industries that people don't pay enough attention to, life sciences, for example, you're starting to see AI make remarkable progress. You see it in the earnings numbers, Ronnie. This quarter, earnings are up 30 % annualized. And the revenue numbers are up 13%. That is operational leverage kicking in on a very strong scale.

6:20Ronnie Wexler:And that has to be at some level AI driven.

6:23Ajay Rajadhyaksha:So look, I want to get your opinion on this and I'm still sort of working through it. But it's pretty amazing to me that this many people are willing, with all the sandbox issues and agent swarm issues and things that you read about in the press, the fact that anecdotally this many people on the consumer side are willing to give meta or instinct access to their entire life. all their websites, all their passwords, all their bank accounts, all their credit cards. I think that says something. And again, like I'm still working through it, but a lot of the concerns around the risks on AI, when you look at the behavior, people are voting with their decisions in a way that makes you feel like they view the risks as being minimal versus the rewards for them in engaging with this technology.

7:06Ajay Rajadhyaksha:And anyway, I don't know if you have a view on that, but it's just something that really struck me over the weekend.

7:10Ronnie Wexler:No, I think you're absolutely correct. Now, maybe that's blind faith. But so far, I think part of it is that the trust comes from the relationship with the hyperscalers in particular. This is a relationship that has been in place for 20 years. You know, these are not new companies. These are not startup telcos. They are the biggest profit generation machines in the history of capitalism who are, you know, spending money hand over fist. And so I think you are right. I think that trust might shake if there is a real incident. But that is true of the banking sector also. So, you know, if there is a big cyber attack on a bank that succeeds, but until there isn't, we are a relatively high trust society.

7:46Ronnie Wexler:I don't think that goes away. It does raise questions, Zorani, about whether that translates to the U.S. being open to Chinese open source models, things of that nature. And there I think that trust is not going to last very much.

7:58Ajay Rajadhyaksha:So let's move to this profit cycle. You called it stellar. There's a lot of operating leverage out there. How important is this earning story to your broader investment view at this point? Extremely important.

8:09Ronnie Wexler:for a few reasons. One is because it shows that there is more AI diffusion than people realize that it's showing up in operating leverage across a host of industries. Number two, it emphasizes that the earnings picture is not limited to big tech. The rest of tech, for example, has done much better all of 2026 than big tech. Financials were the second best performing sector in the index in terms of, you know, being additive to earnings. Energy, yes, you can argue that it was a one-off because of the US around windfall. But eight out of 10 S &P sectors are up for the year. This is an earnings story that is not just holding in place.

8:47Ronnie Wexler:I would argue it is both accelerating and broadening. Over a three-year period, Ronnie, you're going to have the single best three-year performance on earnings that you have coming out of a non-recessionary year in many, many decades. It's very hard to see the U.S. economy slowing down when the profits are closed.

9:04Ajay Rajadhyaksha:You wouldn't know it if you read most of the headlines out there.

9:05Ronnie Wexler:That is exactly correct.

9:07Ajay Rajadhyaksha:Okay, so the three key pillars that you outlined, AI investment, U.S. corporate earnings, the U.S. consumer, we need these to continue doing what they're doing for the market to continue to act well. How do you feel about these persisting into 2027?

9:21Ronnie Wexler:Pretty good. I think, take the labor market for the consumer, for example. So the labor market is very slowly tightening at the margin. The underemployment rate has fallen a whole percentage point over the last year. If there was ever a period, look, we all have recently biased running, but remember last April, you and I were more scared last April than at any point in 2026. The equity markets pulled back 20%. If there was ever a point for the US consumer to throw up their hands and say, look, I'm going to start saving, you know, enough is enough. It was last summer and it didn't happen, then it's not going to happen, you know, now they're going to keep on spending.

9:56Ronnie Wexler:The August retail sales numbers, for example, were, you know, extremely strong. The AI cycle, look, enough said in this entire podcast, but it is still intensifying in intensity that there's just no sign in any. You look at all of the hyperscale earnings calls and the sentiment express is the same. They all say, guys, we know that you, our shareholders, are upset about how much we are spending, but believe you me, not a single dollar of this is speculative. We are simply trying to keep up with client demand, you know, over and over. They could all be collectively lying. I don't think so. And then finally, the profit cycle, it will slow down.

10:31Ronnie Wexler:You can't grow at 30%. There were a bunch of one-offs, but you're still going to have a very, very healthy profit cycle in 2027. I don't see any of these things long now.

10:40Ajay Rajadhyaksha:Okay, so let's end on the risks. Let's end on the reluctant side of your quarterly narrative. If we're sitting here in six months and markets are lower, not higher, and the continuation of these risks gets worse on the bond market and oil, where would we have gotten it wrong? Bonds, for sure.

10:58Ronnie Wexler:I'm far less worried about oil. I think the worst is past, even if there is no solution immediately. You know, the oil market took its shot at taking down the world economy, failed across 2026, second and third quarters. But the bond market worries me. Across Western economies, the US, the UK, France and Japan, lots and lots of outstanding debt in many countries, deficits rising at a faster pace than nominal GDP and zero political will anywhere across political systems to do anything about it. So the French second round elections next year, for example, I can imagine that being a possible catalyst if you have the far left versus the far right, both sides want to spend.

11:37Ronnie Wexler:But absent something really bad, like a bond crisis in Western economies, and I'll remind you, we haven't really seen a bond crisis except for LDI and there the system bent in the UK. Absent something like that, I still think you are supposed to own risk here. You know, famous last words, but that's what I would stand. Yeah.

11:57Ajay Rajadhyaksha:It's hard to disagree with you, especially when you frame it the way that you did. Great to have you here. We always love having you on the pod. Thank you for your great insights.

12:05Ronnie Wexler:Thanks, Ronnie. And look, I got to tell you, I'm really happy we are doing this Barclays Brief podcast right now. It is such a great way to get our views out to a broad audience of listeners. Very, very glad you had me on again.