Max Kettner on Market Weakness, AI Spending, and Economic Expectations

Economic Expectations and Market Weakness

• 📉 GDP growth expectations are subdued, with Q4 at 1% and Q1 at 1.3% from consensus.
• 📊 Earnings growth expectations for Q4 are flat quarter-over-quarter, and eight of the eleven S&P sectors are expected to see sequential negative earnings growth, excluding tech.
• ⚠️ The current market weakness is largely attributed to top-down and bottom-up expectations being subdued, which has so far defied reporting season.

Shifting Investor Sentiment

• 💡 Investor sentiment has shifted noticeably in the last 3-4 weeks, moving from being slightly underinvested to expressing worries.
• 😟 Key concerns now include the labor market, a potential AI bubble, and risks in private credit and BDCs.
• 🚀 This shift in sentiment has resulted in a notable increase in perceived downside risks.

AI Spending and Future Growth

• 🧠 AI spending is expected to continue into next year, with potential for even more capex from traditional cyclical sectors.
• ⚠️ A potential cliff event in AI capex is anticipated between 2026 and 2027, as growth may have been pulled forward from 2027 into 2026.
• 📈 This borrowing of growth means there might not be much left for 2027, but this is still several quarters away.

Investment Grade Issuance and AI

• 🚫 Concerns about investment-grade issuance from tech companies are downplayed, with names like Microsoft and Oracle mentioned.
• 💰 Many of these well-rated tech companies were recently running net cash positions, not net debt, making a bearish narrative difficult to construct.
• 💡 The focus remains on the sustainability of AI spending and its impact on future economic growth.