Bloomberg Surveillance TV: October 20th, 2026

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1:54Edward Mills: We begin this hour with tech stocks inching lower following Monday's bounce back. Angelo Koukoufas of Edward Jones writing, We continue to believe the AI investment cycle has further to run. Concentration may be a feature, not a bug of this cycle. Angelo joins us now for more. Angelo, good morning. Good morning. Let's start with the runway and welcome to the program. How long is that runway? And does a compromised capital market process, these IPOs, the pushback we've seen, shorten the runway?

2:19Angelo Kourkafas: There are no signs yet that demand is slowing. So the demand story is still solid and there. What has changed is financing costs are becoming higher and that is pushing some of the marginal players. I think there is some healthy skepticism and potentially some maturation in the theme from going up from everyone, everything. AI goes up, now moving up in quality to the players with the deepest pockets that now have to probably finance a lot of this to meet the demand that exists.

2:50Edward Mills: How does that influence your outlook?

2:52Angelo Kourkafas: I think now at this point in the cycle, investors will be prudent to manage some of the risks and concentrations. AI will remain a key theme, but sticking to quality and potentially betting on some of that broadening that may happen, because in our view, we'll still have the economic benefits of AI so up. Now, not all of that is going to accrue to the tech space or the space that leads this innovation. Historically, we've seen when the theme matures, the benefits spread out. And that may be the case as we think about 2027.

3:25Edward Mills: As financing costs get more expensive in the debt market, how much do you expect some of these AI players to increasingly turn to equity?

3:31Angelo Kourkafas: I think that's a likelihood we're going to hear more in the coming weeks. But I think as the cost of debt has moved higher, potentially more equity issuance is going to be in play.

3:42Edward Mills: If that's the case, why do you remain more bullish on equities than bonds, given that potentially there is a supply pressure? You're not able to finance yourself as cheaply in the debt market to finance the equity markets. And there's more skepticism around valuations.

3:58Angelo Kourkafas: The fact is that companies continue to generate very strong profits. And it's very hard to be overly negative when this is happening. Now, the question is, is this 30 % earnings growth rate for the S &P going to be sustained? Probably not. But the market doesn't have to have the same growth rate persist as long as economic conditions remain solid. We still have a broadening that we see on the earnings front as well. And at the same time, the labor market remains solid. So in this backdrop, I think managing exposures is more important than trying to time some of these pullbacks. We spend more than a year now without a 10 % correction.

4:36Angelo Kourkafas: So having realistic expectations for returns and volatility is going to be key for investors thinking about the next 12 months.

4:43Edward Mills: The equity channel is under pressure too. We start the program with that. And obviously, access to capital is becoming increasingly uneven. And we can see that in some of the more leveraged players. For the bigger players, what kind of signal would you take of an Anthropic, a large player like an Anthropic, the IPO for them was delayed and leaked into next year?

5:01Angelo Kourkafas: Yeah, I think this is a test now to the appetite that exists about AI. But at the same time, we are not in a risk-off environment. Yes, there is some pockets of pressure, but it remains a highly rotational market. Money is not moving out of equities, not abandoning equities, it's just rotating within it. And I think it can go a long way if we see bond yields stabilize. And partly that is tied to energy markets.

5:29Edward Mills: That might have been true up until the last week. What do you think the last week was? Did you start to see a rotation out of equities and into bonds? Are you seeing any of that?

5:36Angelo Kourkafas: I think there is a lot more value in fixed income. Investors recognizing that the alternative is getting more attractive. And that's no doubt an incremental headwind. But at the same time, again, going back to what has driven markets this year, it's been earnings, not valuations. Valuations have been reflecting this macro, for the most part, headwinds. And the tech sector, more specifically, has re-rated lower. So the sustainability of the earnings growth is not extrapolated from investors. And I think that's good news. The worst outcome is when investors pay peak multiples on peak earnings. But if you assume that the earnings have peak, you're not paying those peak multiples at the moment.

6:17Edward Mills: You talked about how oil prices seem to be driving benchmark yields in a significant way. It seems like that correlation has broken down a bit today. and you are seeing a bid into bonds, even with oil prices going higher. Do you see us on the cusp of a change in sentiment where suddenly higher oil prices suppress the idea of future growth in a more material way rather than just being an annoyance, an inflationary pressure?

6:41Angelo Kourkafas: I think that's exactly right. Bonds have been responding to inflationary shocks while the growth backdrop has been pretty solid. But I think one of the issues that markets are going to have to deal with and absorb in 2027 is that second derivative, that slowdown in growth. So I think bonds are going to be starting to reflect, and maybe that has already started, some of that deceleration. So it's not only about inflation anymore, it's about some of that second derivative, the slowdown in economic growth that likely is coming, which though shouldn't be much of a surprise to markets given everything that's going on.

7:21Edward Mills: Slowdown in growth after the Fed continues to hike interest rates?

7:24Angelo Kourkafas: Yeah, we think it's going to be more so a mid-cycle adjustment. Our base case calls for the Fed to basically hike two more times from here, removing the rate cuts that they delivered in 2025, but keep the 2024 cuts in place. If that's the case, we're not talking about a 2022 type of scenario where the Fed policy rate was way below the rate of inflation. This is not where we are today. So that can still be something that markets can absorb if growth slows but stays at solid levels.

8:01Edward Mills: That's your base case because that's what you think is needed for the economy and what the bond market is telling? Or because of what the Fed is saying? Because we have Fed officials who are saying it's one more hike and we're done.

8:11Angelo Kourkafas: Yeah, the Fed is still in uncertainty. We operate under a more foggy environment, if you will, than we did before in the new Fed. And that's been part of the bond story. I think there is a premium attached to that uncertainty of not having this solid guidance. But at the same time, we don't see the conditions, whether we look at the labor market, the housing market, that would trigger a major wave of inflation. I think a couple of adjustments, a couple of hikes can restore confidence that we are calibrating to the AI story that's supporting growth. It's not going to be indefinite, but at the same time, we don't see the end.

8:52Angelo Kourkafas: And that may be enough. Stay with us. More Bloomberg Surveillance coming up after this.

9:01Edward Mills: If you invest, lead a business or allocate capital, one-sided views aren't enough. Join me, Brad Rogoff, the Global Head of Research at Barclays, on the Flipside podcast. Each month, I go head-to-head with one of our expert analysts on my global team to debate the economic and market issues that matter most. From inflation and AI to equity and credit trends, each debate helps you see what headlines might miss. Find the Flipside wherever you get your podcasts. This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Masser. Millions of Americans are taking peptides, short strings of amino acids that can act as biological signals for cells.

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11:34Edward Mills: Let's talk about the situation in Washington. Ed Mills of Raymond James writing, Democrats are in a solid position to win a majority in the House of Representatives and are increasingly likely to win enough seats to capture a Senate majority. Ed joins us now for more. Ed, welcome. We expect the House to flip. Let's talk about the Senate. What's going to lead, what are the seats that you see flip in one way and not the other that lead to that majority?

11:56Dave McKay: Well, John, the big question for us is, can Democrats perform in deeply Republican areas? We look at the analysis, and Democrats likely need to flip two or three seats that Donald Trump won in 2024 by 10 percent or more. But when you go back and you look to say, all right, when was the last time a state was willing to go that far? It was 2018. And in our last five elections, we've only had three times that that has happened. were asking in one election for it to happen all one night. And so that is Texas. That is Alaska. That is Ohio. Other states obviously are in reach for Democrats, but they probably need to win those three seats to have this majority.

12:37Edward Mills: Ed, so you really think Texas can go blue?

12:41Dave McKay: The polling suggests that, yes, it could go blue. What we have seen in the past is that Democrats need a historically weak candidate to convert a state like Texas. You go back to 2018 when Democrats were able to win a seat in Alabama. It was a special election. It was against a deeply flawed candidate. I think if there was any other Republican candidate running in Texas, I don't think we were going to be having this conversation. But given the structure of that race, we have to look at that. And the other thing that we are telling investors at Raymond James is don't just pay attention to the Senate race there.

13:16Dave McKay: The gubernatorial race is going to have a huge impact on policy for AI in data centers. If Gina Hinojosa wins, you actually have a real moratorium that could be coming on data centers. That could be like a hurricane five category storm hitting the data center market that most investors are not paying attention to right now, Anne-Marie.

13:36Edward Mills: If it's an absolute Democratic blowout, how do you see leadership taking hold in the House and in the Senate?

13:42Dave McKay: Well, I think that the kind of success has a thousand fathers. Defeat is an orphan. Hakeem Jeffries becomes a speaker. The most likely scenario is that Sherrod Brown or I mean, Chuck Schumer is the majority leader in the Senate. He's gotten candidates recruited like a Sherrod Brown, like a Patola in Alaska. There is going to be questions about their leadership, but usually there's a rally around that. I don't think that there is going to be too much drama, especially if they have a decent majority. If it's a one or two seat majority, that's where the drama comes in, Anne-Marie.

14:16Edward Mills: I'm glad you brought up what's going on in Texas governor race in terms of AI, because it sounds like potentially where we're going to see a lot of the changes is more state, local level. What kind of changes would we see on a national level, given the fact that we're going to have a divided government?

14:31Dave McKay: Yeah, so what we're saying is that the higher risk is if there is a Democratic sweep. In politics, when you're explaining you're losing, if the takeaway from this election is that opposition to data centers, pro AI regulation is what wins you races, especially in areas where Democrats don't normally win. There's going to be a lot of members of Congress who are going to be very concerned about making sure they're not on the wrong side of this come the 28 election. So if Democrats have both the House and the Senate, is there a bill that goes onto the floor that Republicans politically feel the need that they have to vote in favor of?

15:07Dave McKay: And all of a sudden, is there a veto proof majority? Do Democrats use leverage and must pass bills to get those provisions into the base of the bills that are considered in the floor of the House and the Senate? And Donald Trump has to sign these into law. What happens with the next couple of months as we go into presidential election season? If the takeaway from this election is being against AI, being against data centers, get you votes, every person who's running on both the Democratic and Republican side are going to be adopting those issues. And we're going to have volatility in the market depending upon who's up, who's down.

15:42Edward Mills: Ed, what would be the timeline for those type of proposals? And what exactly do you expect them to restrict?

15:47Dave McKay: Yeah, so, Lisa, those, I think, are going to be something that Democrats prioritize very quickly. It's actually something that has moved to the top of the agenda. Is it something that they even look to get in the lame duck session? Or is it something that is right out of the bat in January after they take control? One thing I say is that elections have ways of establishing different narratives. Ninety four being against gun control was something that cost Democrats the majority for the first time in 45 years. We still haven't done gun control in this country since that election. In 2010, it was about Obamacare.

16:21Dave McKay: Think about all the conversations we've had over the last 16 years because of these election results. Democrats will try to maximize their political position here. And because President Trump is still so in favor of these issues, jamming him up would be something that Democrats want to do. Ultimately, what's done? Changes to environmental regulation. Changes to the way in which they get power. Changes to the way in which we regulate different models. I think we're in the very early innings. We're probably in the first inning of all of this AI regulation. And I think most investors I talk to at Raymond James thinks once we get to the midterm election, it's a completely different story.

16:58Dave McKay: It is a different story, but it gets worse, not better.

17:00Edward Mills: How much do you see also potential cuts to the defense complex if Democrats gain control? That's one area in the stock market that's been a little bit more wobbly on the heels of some of these poll results.

17:11Dave McKay: Yeah, Lisa, one thing that we wrote last night at Raymond James is that the worse Republicans do on November 3rd, the more likely Republicans try to use this lame duck session to do a reconciliation to increase defense funding. We do have a supplemental request that got the first hurdle cleared in the House of Representatives. But there is going to be a push to maybe make that from 70 ish billion up to 200, 300 billion to get closer to what President Trump spoke about and has proposed. One of the big issues is that the reconciliation bill that funded the defense budget over the last year are all the different special projects, not the regular things that the Defense Department does.

17:53Dave McKay: So if you really want to see that investment and you want to see the non-primes being able to compete, you have to do reconciliation 3.0 in the lame duck session. If Democrats have swept, Republicans have one last chance. It is not a guarantee by any matter. And all of the things that President Trump is doing kind of on a geopolitical basis makes this even harder. But that would be the chance that Republicans have to put away defense spending for the rest of President Trump's term.

18:22Edward Mills: Just quickly, I've got 30 left. Are there any holes in this polling that gives you pause?

18:28Dave McKay: Yeah, we have a real question on whether or not if Republican voters, especially in rural areas, are responding to these surveys. and there is anecdotal evidence that suggests they're not. But when we look at the generic ballot test, when we look at other kind of indicators, we look at it compared to other midterm elections, midterm elections have been much closer in polling data than in presidential elections. And so if the polls are right, Democrats will do well. Republicans are hoping for a polling error.

18:56Edward Mills: Stay with us. More Bloomberg surveillance coming up after this.

19:03Edward Mills: This is the Bloomberg Tech Minute brought to you by Chachi PT. I'm Carol Masser. Millions of Americans are taking peptides, short strings of amino acids that can act as biological signals for cells. Bloomberg's Anika Inampudi reports peptides may be exploring their next frontier, the brain. People are taking peptides for mental clarity and cognitive benefits and to gain a competitive edge or stave off the effects of aging, Both insolid and semaglutide are approved by the U.S. Food and Drug Administration. Because importing or selling unapproved peptides for human use is not legal in the U.S., many people turn to online forums for guidance and overseas vendors with questionable credentials to obtain them.

19:44Edward Mills: Unapproved peptides, which are marketed as research chemicals, have been circulating in what's become a billion-dollar gray market amid the rise of do-it-yourself medicine as people increasingly turn to social media or artificial intelligence for medical help. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com. For big business, AI opened up a world of promise, but that world of promise turned into a world of pain. Cost spiraling, data scattered across disconnected systems, security and governance increasingly complex, AI initiatives struggling to scale, and ROI that remains frustratingly out of reach.

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22:11Edward Mills: the Royal Bank of Canada progressing in their own initiatives aiming to reach up to one billion dollars in AI driven enterprise value by next year I'm pleased to say the in studio the CEO Dave McKay joins us now for more Dave good morning good morning good to see you how many people know that you're bigger than Citi and bigger than Wells Fargo I don't think that's that well known oh thanks for helping tell the story that's great I'm here to tell it what's led to that moment for you to get to that position?

22:34Dave McKay: I think it's our diversified business model across Canada, the United States, Europe, Asia. I think we've got two very large global businesses in wealth management and capital markets, along with the number one franchise in Canada across every dimension, retail, commercial, wealth management, asset management and capital markets. So we're a scaled bank, top 10 in the world and with great growth ambitions here in the United States. You're a North American bank based in Canada with big exposure to the U.S.

23:04Edward Mills: and you've been very transparent on what you think that relationship should be. How different is it to what it is right now and what it should be in your mind? Our opportunity specifically in the

23:14Dave McKay: United States.

23:14Edward Mills: The relationship between the U.S. and Canada.

23:16Dave McKay: I think we're going through an adjustment period and we're trying to find a trade deal that recognizes different objectives. Canada needs to diversify its economy. I think that's a good thing for Canada. We're looking at exporting our energy, exporting our raw materials, creating trade connections with Asia and Europe that we haven't developed sufficiently over the number of years. We've relied on 80 % of our trade that go to the United States. The linkages between the two countries are still foundational across manufacturing, across energy. We export 4 million barrels a day to the United States.

23:46Dave McKay: Do we export another 2 million barrels to the United States or another 2 million barrels to Asia? So diversifying our energy capabilities. We'll do both. We're going to build Prairie Link, which is the Keystone remodel. We're going to build Pacific Link resources, another million barrels to Asia. Our LNG exports will go to Asia and Europe where the demand is. And therefore, you're going to see an and. Growing with the United States, we'll find our way through this trade friction that's affecting steel, auto, and softwood lumber extensively. But we'll find our way through this. We'll find a place where we can continue to trade.

24:20Dave McKay: And Canada will grow its economy with other partners as well.

24:22Edward Mills: Has it affected you? Has it held the bank back?

24:25Dave McKay: It's certainly affected us in that Canadian consumers aren't buying homes. It's not a price issue anymore. It's really around a confidence issue. We're seeing investment slow down, and certainly foreign investors in the country, the manufacturing sector, and steel autos are saying, I need to know the rules of the game before I invest. So you've seen Canadian manufacturers, foreign manufacturers slow down. Net-net, the Canadian consumers picked up a lot of that slack. The service industry has been strong. we're still growing at roughly 1%. So the economy has been resilient, but those sectors and investment has definitely been impacted.

24:57Edward Mills: One of the underpinnings of the resilience has been this AI boom and this race to finance, the AI boom. And there's a real existential question in markets. We were just talking about it, about how much that's coming to a halt, how much this pipeline of IPOs and debt financings is being challenged by the broader backdrop. What are you seeing?

25:17Dave McKay: We're seeing strong demand. You're seeing a number of announcements in Canada. Some of that demand is shifting to Canada, where the rules of approval, the rules of how fast we can move around energy, using natural gas to power those generators for that electricity that comes on the grid. So that was a big theme in Mark Carney, Prime Minister Carney's investment summit. We saw significant interest out of the United States in building AI infrastructure in Canada, weather being blocked in the United States. But we're still seeing strong demand coming through, albeit uncertain demand in the future around where the offtake is going to be.

25:52Dave McKay: When we look at the demand within our own organization, we're running open-weight models. We're running rerouting towards lower models for this task versus higher-cost models. We've built our own tech stack and our own compute and storage capabilities. So we're running our own capabilities. We're not consuming a third-party anthropic token in most cases. So we found a way to optimize our demand. And therefore, the market, I think, is struggling to predict exactly what will demand be at the same time as we're creating all this capacity and demand capacity uncertainty. So I think you've got a lot of questions the market's asking is what is the true long-term offtake when you start thinking about optimization and the number of use cases you're adding?

26:33Dave McKay: And then the concern about will you get approval to build? So it's a supply-demand issue that's created a lot of confusion in the marketplace. We've lent into that and we've helped construct a number of data centers in the United States and in Canada. And we're actually taking some risk off the book ourselves. Like we're running, we're writing strategic risk transfer, our SRTs. And we're thinking about kind of repositioning our portfolio a little bit. And, you know, too much of a good thing is not a good thing in banking. And therefore, you have to manage your limits and you have to manage your exposures.

27:01Edward Mills: Right now, do you see more risk just generally in the AI complex, especially as some of the investors are pushing back against the debt financing in particular? I mean, do you see this as something that's a prolonged, kind of more risk-averse kind of market in the AI space?

27:16Dave McKay: Yes, exactly. So because of the insatiable demand and the size of that demand, it's just something we haven't seen before. And the amount of balance sheet that's been put out there by all banks to fund this, everyone's stepping back, including the market, and saying, how do we progress from here? You've tapped equity markets. You've tapped high-yield markets. You've tapped bank balance sheets at the end of the day. and people are saying, okay, there's a limit to how much capacity there is. You're squeezing out other investment-grade funding capabilities, yields are backing up a bit because of that.

27:47Dave McKay: And therefore, you're seeing all these factors at play are creating concern in the overall space.

27:53Edward Mills: Anthropic just a few days ago announced their first Canada data centre. You had Meta yesterday announced they're going to Alberta with their first data centre in Canada. Are you seeing pushback the same way we are in the United States when it comes to data centres?

28:07Dave McKay: No, because we have strong capability in producing electricity that goes behind it. We've got natural gas to power the generation into that. The federal government has created a very clear set of rules that they've syndicated with Canadians that say this is how we're going to build out the data centre capacity. We've got very strong telecommunications networks that we can move the bits and bytes across borders to the United States or to other countries. So I think we got ahead of some of the challenges the U.S. is facing around how do you approve these into how do you construct a fair deal with consumers so electricity prices don't go up at the residential and commercial level.

28:39Dave McKay: I think we watched what happened in the US and we got ahead of that curve. Therefore, businesses like Meta and others know the rules of the game, they know the cost structure they're going to play, and they're signing long-term deals in Canada because of the stability of the foundation to how you're going to do it. You mentioned Meta. Have you blocked Muse? It's something I'm thinking about, absolutely. At the end of the day, as we look at the safety and soundness, privacy, issues there we have to get our heads around how we protect our customers and we at the same time offering the services they want or do we create our own capability set around that as well so certainly something that is on our radar screen we haven't made a decision yet what's prompting

29:16Edward Mills: you to go one way or the other what kind of calculations you have to make we called up with brian moynahan the last week or so and he said you need a human in the mix because what happens if someone makes a transaction and says it wasn't me who's on the look at the hook what's the liability What are your attorneys telling you, your lawyers? What's the legal advice you're getting?

29:32Dave McKay: At the end of the day, protecting consumers and doing what's right for consumers is critical. And if you can't monitor the transaction safely and that data is being scraped or taken away without their consent or fraudulent consent, you have to protect that consumer. And then we're liable for that as an organization. So we have to make sure we protect the consumer and therefore protect the system in going through that. And we're working through those details now. And we're not going to make a rash decision. But we have to balance the needs of a consumer with the privacy and safety of the system.

30:02Dave McKay: We'll do that.

30:03Edward Mills: Do you feel better about everything that's happened with respect to some of the Anthropic products that had, like Fable, that had really scared you earlier this year?

30:12Dave McKay: We've done extensive work in running all of our, we call our software estate, all of our internet-facing and market-facing software, whether it's from commercial banking, capital markets, consumer banking. We've won it through the most sophisticated models the market has to offer and Anthropic has to offer. And we've been able to kind of reinforce that estate, and we feel it's super secure. It's cost us a fair bit of money to do it, and we'll continue to do it to protect the system and to protect our customers. And we feel confident that we're using the most advanced tools to do that. And we'll continue to do that.

30:46Dave McKay: It's an evolving, dynamic game. It's not a static game that we've done at once, and we'll continue to do that. And therefore, all organizations have to weigh the cost of playing offense, I say, and rebuilding their business and their tasks with AI, but at the same time have to play defense against cyber attacks, which are mounting the complexity of those cyber attacks and the complexity of those models. So in RBC playing defense, certainly the cost to our organization has gone up substantially in playing that defense and protecting our consumers.

31:14Edward Mills: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6 a.m. to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg Terminal and the Bloomberg Business App.

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