This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron's.
Folding SOX
Market Perspectives Generali Asset Management Oct. 30: AI investment, the backbone of this year's resilience, is under intense scrutiny. Hyperscalers and semiconductor providers experienced severe pressure in October: The SOX (semiconductor index) suffered its longest losing streak since 2008, and unsecured debt of neocloud provider CoreWeave fell into distressed territory. Unlike earlier this year, tech equity weakness has spilled into credit spreads. Core government bonds have gained from the risk aversion, recovering somewhat from their summer selloff.
AI frontier models may see more margin pressure from open-weight competition and clients' cost awareness. Yet despite recurrent setbacks amid lofty expectations, we wouldn't write off the prospects of a strong AI buildout prematurely. As AI unfolds as a powerful general purpose technology globally, demand for AI applications and computing power should keep growing fast, supporting the resilience of global economic growth and earnings amid geopolitical and energy headwinds.
Thomas Hempell
Good News From Anthropic
Quick Takes Yardeni Research Oct. 29: Anthropic's S-1 filing offered five encouraging signals about the sustainability of compute demand. First, H1 revenues surged from $1.2 billion to $16.3 billion year over year. Second, operating losses narrowed from $2.1 billion to $693 million, with Q2 marking its first quarterly operating profit. Third, 11,900 customers now spend at least $100,000 annually, up from roughly 950 a year earlier. Fourth, revenue per dollar of compute expense increased more than fivefold to $2.08. Fifth, Anthropic held $131.7 billion in cash and short-term investments to finance expansion.
Ed Yardeni
Why Bond Yields Rose
Special Fed Update Heritage Capital Oct. 28: People continue to ask why the long-terms [yields on long-term government bonds] have spiked. And my answer hasn't changed. It isn't because of 3.5% inflation. That's just silly, when it was 9% a few year ago. And it isn't because the economy is overheating. Q1 and Q2 GDP growth were sub-3% with Q3 expected around 4%. [Gross domestic product grew at an estimated annualized rate of 3.4% in the third quarter.] That's also silly. It is because the global bond markets are finally worried about return of principal, not just return on principal. In other words, the market is worried about the ability of sovereign nations to fund their deficits and roll over old debt with unfathomable supply coming to market. In short, the market is now concerned about sovereign default, and buyers want more yield to compensate for the risk.
Paul Schatz
More War, Less Oil?
UBS House View - Daily US UBS Oct. 28: Israeli Prime Minister Benjamin Netanyahu, who remains caretaker prime minister for now, said in a postelection speech that Israel and the U.S. would "remove this threat" of Iran. Separately, The Wall Street Journal reported that the U.S. has told several Gulf countries to be prepared for a short, intense military campaign after the U.S. midterm elections. Brent crude oil was up 1.2% at $115.3 a barrel at the time of writing.
Our view: Geopolitical developments in the Middle East and their impact on oil prices remain a key risk for markets. We expect oil prices to stay elevated over the coming months as energy flows from the Middle East have yet to normalize, while maritime security has deteriorated sharply in recent weeks. Additionally, global visible oil inventories remain on the decline, and high shipping costs are also supportive of oil prices.
But our medium-term oil outlook assumes that the global energy system will continue adapting to the supply disruption, and the impact of higher oil prices on global GDP growth should be limited. Even in a risk scenario in which U.S. gasoline and diesel prices rise sharply, we would not expect a recession.
The outlook remains uncertain, but we don't think geopolitical developments alone justify a more defensive investment stance. Broad commodity exposure can improve portfolio diversification and provide protection against a prolonged supply disruption.
Ulrike Hoffmann-Burchardi and team
Diversifying Away From AI
Thematic Reports BCA Research Oct. 23: BCA Research recently hired Matthew Dyson as chief strategist, technology and innovation. In his inaugural report, he answered a long list of questions about AI from the firm's clients and colleagues. Here is one such exchange.
Q: Brian Payne, Head of Portfolio Construction | Portfolio & Private Markets: What asset/asset classes are most diversifying to AI? I've received this question from many clients, particularly asset allocators. Aside from hedge funds (which isn't an asset class), our answer is real estate. What do others believe?
A: Matt Dyson: Urban real estate might be vulnerable. AI-driven workforce changes will take a few years, but falling demand for entry- and midlevel white-collar work would reduce demand for office space and housing in areas preferred by new graduates. Early evidence includes rising unemployment and underemployment among U.S. graduates and slightly declining one-bedroom rents.
Our view is that the best diversifiers are essential physical goods. During both the dot-com and current AI booms, oil, commodities, government bonds, and real estate all showed low correlation with U.S. software and telecommunications stocks, but only consumer staples were meaningfully less correlated. Corporate bonds have lost their diversification edge because hyperscalers, neoclouds, and semiconductor companies are borrowing extensively to fund capex.
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