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We begin this hour stocks just edging lower, with marky Btel of All Springs Global Investments, writing, we do not expect the stock market to broaden out materially in twenty twenty six. We think the strong sectors will continue to have high growth. Margi joins us now and MARKI thank
you so much for being with us. You really are answering the question that Matt was just asking, which is how much do you see this outperformance of the rest of the world, of the rest of the four hundred and ninety three really taking hold next year.
Well, I think for the rest of the world, it's really sort of a catch up after a long period of underperformance. And I think that the US still has some of the best fundamentals of any country in the world, and we have good momentum really this year. We saw it in the third quarter that should continue in the force and well into next year with the tax treatment lower was holding higher refunds and the very favorable capital
expense treatment in the new tax bill. So we think that the US is going to be one of the better performing sectors next year in the world, really.
And it does Hinge.
In your view on AI remaining the dominant trade, how much is this on a currency adjusted basis versus overall in absolute terms?
Well, I think the artificial intelligence trade is going to continue. But really, over the last few months, we've already seen some erosion in the price earnings ratios of some of the leading companies in AI. So the market is already making an adjustment if we're looking at some moderation from the extremely hot growth, which is probably likely, but still that says to me, that's going to be one of the sectors that have well above average growth when you look at the whole economy.
So we still think that's a great sector.
Well, what kind of broadening out do we get in earnings, Margie, because we have seen the mag seven earnings though still you know, massive double digit.
Gains slow down and the rest of the.
S and P at least says the S and P four ninety three starting to catch up to some extent, but it hasn't really been substantial.
Does that change in twenty twenty six.
Ye, I don't think so.
I think the same sectors that have been strong for this year and a couple of years before are going to continue to be strong. The other sectors that I think, particularly for consumers, may be rather disappointing. So we still think it'll be technology industrials relating to the electrical grid and those will be the sectors, and aerospace defense will continue to be the strong sectors, and really I'll perform those other sectors.
We've seen, you know, a year to date, all of the GIS sectors on the S and P five hundred are up, but real estate has barely budged. I wonder if that changes with interest rates coming down. Consumer staples is the second worst performer, and energy, oddly enough is the third worst performer.
I guess because of oil.
Right, but we're going to need so much energy to power these colossus data centers.
Why doesn't it pay off? Well?
I think really when you look at the data centers and the growth and power that we need in this country and other countries really is going to come from the gas side.
So we think that gas will continue to be.
In strong demand and really detached from the price of oil. And when you actually look at oil, though there seems to be a gluck today, if you look down the road a year or two, it may look like that the country's producing oil have really been under investing, so we may have not today, not tomorrow, year from now, have a big surprise to say, oh, we really need
to invest more in oil. But we think the case for gas, especially in the US, the shale producers feeding into the electrical grid and the need for more power, it's really the only realistic source is going to make that sector very strong and really detached from what happens to the price of oil.
How much market is really lean into the whole real world economy, the old world economy, or being dominant. We've seen that to some degree with the metal space so far this year. Do you expect that to continue next year?
Yes?
I think so, and I think the US is going to continue to be one of the strongest economies, particularly because the fundamentals are really on our side. When you look at the emerging markets, a lot of them have had a big comeback, but fundamentally their economies don't have what we need to really see the sort of sustainable
growth in the US. It looks like we're on track to say two or maybe three percent next year, which would really put us near the high end of the range of sustainable growth around the world.
I know that.
Back in the day, Markie, you and I used to talk all the time about highle bonds and investment grade bonds and how fixed income fit into a portfolio. Increasingly you've talked about how equities have been a better proposition for a risk on move and frankly for returns than bonds. Do you think that that's going to shift come twenty twenty six.
No.
I think the bond market is a place of very small risk and very moderate returns. So you'll get, particularly in high yield, a little bit extra yield, maybe two percentage points maybe three percentage point more than the treasury yield, so say five and a half to six and three quarter or something like that. But you really can't look for much beyond that. If you look at the high old market, a lot of the poor quality issues have
been siphoned off, gone into the loan market. So the US public high yield market has a default rate only about two percent, so it's actually quite safe on a relative basis, and the defaults have been more on the private credit side, which are more than twice that amount.
And we think that'll continue.
And as I said, no room for capital appreciation because most bonds in the high old university training above their face value, so we can have the old fashioned capital appreciation that we would talk about in years past.
Just the math just isn't there, Margie.
I'm just an equity simpleton, so this is a little bit too much for me to understand. Why do we have credit metrics getting better and better Torus and Slock put out a note about it today and defaults falling at the same time as bankruptcy is hit the highest level since just after the Great Financial Crisis?
How does that work out well?
Because the public high yield market, Number one, they have not gotten the poor quality issues and may have in other years because those have been siphoned off into the private credit market. So you just don't have those very
vulnerable names. And secondly, during that period of zero interest rates, many high old companies took advantage of that to restructure their balance sheet, to pay off their bank lines, to issue new debt at very very low coupon rates of pre refund issues that might be callable or coming doing a couple of years. So actually the high old bond market as a whole has never had such a strong
balance sheet overall. And secondly, the supply is really pretty modest compared to the insatiable demand for higher yielding securities. So we think the high old market is a little i would say, an island of turnquility.
But it really looks pretty good.
The only criticism is you aren't going to get those types of equity like returns that we see in other markets, especially if the FED is very much.
On even keel relative stability.
It'd be different case if the FED were going to slam on the brake's check up interest rates. But that doesn't look like that's on the horizon at all. So we think the high old market for what it is is a modest yield, modest risk, and some investors like that, and that's so for that it's a good sector.
What does this mean for private credit? Margie?
As we go into twenty twenty six, and I see all of these non bank lenders in Blue Owl, Apollo, KKR, Blackstone underwater for twenty twenty five, they haven't performed for equity investors well.
And that reflects the fact that many many of transactions that were done were in the poor quality companies that really don't have the ability to improve their balance sheet to raise their growth and it was really just sort of play on spreads of the cost of money versus what they get. We think that'll continue, and actually that's a market that is now larger than the US high yield market. It's more than doubled in the last five years.
So it's really a case of that's where all the marginal dollars have flowed to, and so that will be where the marginal risk will be. And I think that as we've seen when there are bankruptcies or blow ups in that market, it really hasn't washed over into the bank sector, hasn't washed over into the high yeld market
with squads widening out, because the market has distinguished. Those companies that are under pressure got way too much money from the high old market, where it's more of a because of the better balance sheets and the credit outlook and moderate use of funds. When you look at high yield bonds, the purpose of why they're borrowing money more than more than half, maybe even close to three quarters in the last few years, have been to refinance other debts.
So they aren't going crazy with paying themselves big dividends or to make acquisitions. It will turn out to be too risky, so that's really, it's a very attractive actor looking at the fundamentals.
Really.
MARKI Patel of all Spring Global Investments, wonderful to see. Thank you so much for being with us.