US Markets: A Bullish Perspective

0:01Patrick Coffey:Hello, and welcome to the first episode of the Barclays Brief podcast. I'm Patrick Coffey, Global Head of the Product Management Group at Barclays Research. And I'm Ronnie Wexler, Global Head of Equities Distribution in our Markets Division. It's October 6th. We're in our New York headquarters, and we're excited to launch this podcast. But we should probably explain what it's all about. Yes, so it's called the Barclays Brief because each bite-sized episode will be just 10 minutes. And in that time, we're going to cover a lot of ground. We'll dig into the structural trends transforming sectors, from technology and healthcare to energy, industrials and beyond.

0:33Patrick Coffey:But we're going to keep it very focused and explore one key market theme each week. That could be across macro, equities, credit, or anything else that's impacting the market. And the aim is simple. We want to uncover the forces shaping tomorrow to help you make smarter decisions today. Absolutely. We'll spotlight the ideas driving client conversations, highlight what's catching our team's attention and share the kind of context you won't find in headlines. Our goal is to help you, our listeners, navigate complexity and anticipate what's next, whether you're managing a portfolio or leading a business.

1:04Patrick Coffey:So in a world of constant change, this podcast is your weekly source for differentiated perspectives that cut through the noise. So in terms of format, each week, one of us will interview an expert from our research or markets teams. And our job is to really challenge their views, try and explore alternative scenarios and get to the heart of what matters to you. Be sure to click the subscribe button wherever you're listening right now so you get notified when each new episode is released. OK, let's get started. Ronnie, I'm really happy to be here and having this conversation with you. It's my one chance to have you in the hot seat.

1:38Patrick Coffey:So we've known each other for a while now, and I know you have a front row seat to some of the sharpest minds in investing. Given everything you're hearing and seeing across the market, what market dynamics do you think our listeners should be paying attention to the most right now? Thanks, Patrick. It's fun to do this with you. So the dynamic that I think frames the debate most accurately right now is the skepticism from institutional investors on the power of the AI phase shift and the sustainability of the bull market. If you take a step back, we're seeing big tech bet massively that this is the next industrial revolution.

2:08These are some of the brightest minds and best capital allocators in the business world. They were early to invest in AI. They're ramping that investment further and the markets are rewarding it. Yet many institutional investors are dragging their feet and sowing doubt. In my view, Team AI has been winning this argument to this point, and I expect that to continue. All while investor skepticism has driven underweight positioning and a lot of hedging activity.

2:29Patrick Coffey:It's fascinating, isn't it? Especially given all the skepticism you mentioned. And I guess the fact that you're on Team AI's side. But when you layer in trade wars, geopolitical tensions, and even the current US government shutdown, surely it's still surprising to see markets at all-time highs. So against that backdrop, Ronnie, what's driving your constructive view? Sure. Look, all of those issues, while real, are what have driven a lot of the market-wide de-risking. And that's left investors far away from fully risk on. So that flips positioning to a tailwind for markets, while you have two clear market narratives that are supportive of further upside.

3:01AI and the Fed cutting cycle.

3:03Patrick Coffey:I definitely want to come back to AI in a moment, but can we just start with the macro? What's the foundation then of your bullish thesis? Sure. For me on the macro side, it begins with nominal GDP. It's quite high right now, and that compounds with each passing day. Our research team expects US nominal GDP to be around 5 % this year and forecast it to remain in that zone through next year. Euro area nominal GDP is a little bit lower, but still healthy. We expect close to 4 % this year and project above 3 % in 2026. So at these growth rates, the GDP of these economies continue to get larger with each passing year.

3:35And as that plays out, it supports the growth of corporate earnings and that helps sustain valuation even at historically high levels.

3:41Patrick Coffey:It's definitely a strong setup. And that's without even mentioning policy so far. So what policy changes are adding fuel to the rally from here? Look, it feels to me like the Trump prosperity agenda is in full swing. We have a lot of pro-growth focus, an administration that's embracing business leaders, furthering a deregulation agenda, and providing tax incentives that are all market-friendly. Then on the monetary side, the Fed cutting cycle has likely begun. And this is not to be underestimated historically as a markets practitioner. You're taught not to fight the Fed when you start in these jobs for a reason.

4:11And we expect two more 25 basis point rate cuts this year, two more next year, and another in 2027. That should be stimulative to the economy and the markets. Can we just quickly pause on that?

4:21Patrick Coffey:You mentioned don't fight the Fed. Can you expand on that for me? Sure. So a little more context on don't fight the Fed. In historical instances where we avoid recession during a rate cut cycle, equity markets tend to outperform bond markets and reach clear new highs by the six month point on that journey. But beyond that, I think we're in a rare and powerful moment where we have both fiscal measures and monetary policy acting as further stimulus to a market with a strong and sustainable investment narrative. In 24 years in this industry, I haven't seen much of this and it should be risk asset positive.

4:50Patrick Coffey:A rare and powerful moment. Let's zoom in your comments on policy, especially tax incentives and deregulation. What's catching your eye there, Ronnie? There are two key things that matter most to me in that mix. The first is the new bonus depreciation rules for capital equipment. And the second is bank deregulation. These new depreciation rules are an immediate tax savings for the hyperscalers and other corporates that are investing. And it's been a welcome change for them. In terms of deregulation, it paves the way for better potential capital treatment as well as further consolidation of the banking sector.

5:19I spent a lot of time with Jason Goldberg, our U.S. banks analyst, and he is constantly reminding me that the number of banks in the U.S. has halved over the past 20 years and could have again in even less time going forward. That's a lot of potential scale benefits and cost synergies that should filter into lending activity and the real economy.

5:35Patrick Coffey:Jason's reminded me of that a few times, too. Let's take a closer look then at positioning and sentiment. As I said, from your seat, you're in a great position to talk about this. Give us a sense of where investors are standing right now. Sure. So look, I spend a lot of time personally talking markets with our clients and hearing it directly from them. And we're also constantly polling our client base to better understand their sentiment. Alex Altman, our head of equities tactical strategies, surveyed our client base about two weeks ago to see where they fell on the bullish bearer spectrum. The results were interesting.

6:03Only 38 % of investors polled were in the bullish camp. That's quite low to me for a market at all time highs. So the wall of worry is still tall.

6:10Patrick Coffey:Okay, so policies are tailwind, deregulations pro-growth, but there's still quite a bit of skepticism out there. Earlier, you mentioned AI, and clearly that's everywhere right now. On the flight over here, I was listening to our sister podcast, The Flipside, and it unpacks that AI story brilliantly. But from your seat, is AI truly moving the real economy yet, or are we still in this hype phase? Let me tell you how I think about it. The power of AI is very real to me. I'm a true believer. It's helped me become so much more productive personally and professionally. Think about it. ChatGPT was the fastest growing technology app of all time when it launched, reaching 100 million monthly active users in only two months.

6:47Today, it has over 800 million weekly active users. That's a huge number. That says a lot about the power and allure of AI. At an industry level, the real world examples continue to emerge for companies in areas like logistics, healthcare, and financial services. Our recent global outlook flagged that AI discussions are appearing in nearly half of all company reporting. And most importantly, these companies have already started deploying AI in their businesses, driving productivity gains, margin expansion, and new revenue streams. And that is driving market-wide valuations higher. It won't be a straight line, but I am betting on the brightest minds in tech to be right here.

7:21Patrick Coffey:Okay, so I feel like we've funneled in on why you're positive, but now let's zoom out again. Tell me about the broader economy, Ronnie. Is the strength of the stock market now feeding through to real economic activity? It's interesting. The rallying stock market appears to be helping the broader economy as the economy has become more financialized. Equities in real estate as a percentage of household net worth are at the highest level they've ever been. And those mark to markets and realized gains are fueling strong economic activity, particularly for the higher end consumer. So this feedback loop has been powerful and is worth paying close attention to in both directions.

7:53Another thing to note, U.S. money market balances are at all time highs and that should help defend the market on weakness. Okay, Ronnie, I'm listening to you.

8:00Patrick Coffey:And if I put it all together, it almost sounds too perfect. So what could make the music stop here? What could derail your bullish thesis? Look, we live in a world where things can and often do change fast. There are plenty of risks associated with the market at all time highs and above trend valuations. That's part of the reason we wanted to launch this podcast so that we could keep our listeners up to date on our thoughts in real time. For me, beyond closely monitoring the developments in AI, I'm also focused on the health of the global consumer. You really don't want to see sustained and widespread weakness there.

8:28You also mentioned geopolitics earlier. There has been a lot to be concerned about in that realm. So we have to stay focused on the risk factors as well.

8:35Patrick Coffey:Okay, but we've got to stay focused on keeping the conversation brief. Ronnie, it's been great to chat. I feel like we've covered a lot. And based on what I've just heard, here's what I'm walking away with. Firstly, nominal GDP is quietly driving market momentum. That's compounding growth in a powerful way. Secondly, policy is working in sync. Fiscal incentives and Fed cuts are both supportive. and finally we talked about it quite a lot here AI and deregulation are no longer just headlines they're showing up in earnings they're showing up in productivity and having a real world impact thanks everyone for listening to this first episode do subscribe to the podcast and of course if you're a Barclays client you can explore more differentiated views data and analysis on Barclays Live