Key Takeaways
Lower yields would offer the broadest benefit across assets if inflation and policy risks ease while growth holds up. A decline driven by weaker growth would carry a different message.
AI’s long-term opportunity can remain intact even as individual investments differ. Our equities team maintains a diversified mix of AI investments, assessing opportunities and risks company by company.
Lower U.S. Treasury yields or reduced bond issuance could support corporate bond prices, even without improving borrowers’ credit quality. Weaker growth could offset those benefits, making security selection important.
Our investment teams weigh what comes next for stocks, bonds, and AI to help you explain what may come next.
1. What would make the post-election backdrop more favorable for markets?
Our Multi-Asset Strategies & Solutions (MASS) team sees divided government as more likely to result in compromise rather than a complete policy reversal. Our positive outlook depends on meaningful relief from tariffs or global political tensions, alongside less stimulus from additional government spending or tax cuts. Lower tariffs could reduce company costs and support profit margins. But avoiding another tariff increase isn’t the same as cutting tariffs already in place.
De-escalation involving Iran could offer relief, but continued disruption or renewed escalation remains a meaningful risk. A durable agreement that improves energy flows could lower costs for consumers and energy-importing businesses while easing inflation pressure, though lower energy prices would weigh on energy producers’ earnings. If accompanied by a weaker U.S. dollar, those conditions could also support international and emerging-market assets. Continued disruption in the Strait of Hormuz or renewed escalation could instead keep oil prices elevated, sustaining inflation pressure and weighing on consumers and energy-sensitive businesses.
Our broader fixed income team does not expect the dollar’s initial decline to persist, while the investment grade credit team sees firm energy prices supporting bond issuers. These views reflect separate scenarios rather than a shared forecast for oil or the dollar.
2. Does the election change how we evaluate companies?
Our equities team sees greater scope for performance to vary within sectors, but its focus remains on underlying business strength: does a policy shift simply delay revenue or does it weaken a company’s long-term profit outlook?
AI infrastructure and power projects could face greater challenges with permits, costs, and schedules, making existing capacity and secured power supplies more valuable.
In defense, budget disputes could delay new programs and contracts without reducing long-term demand. Companies with signed contracts and orders waiting to be filled are better protected than those still waiting for funding.
In health care, executive orders and agency decisions matter more than major new laws. Drug-pricing changes could pressure biopharma, while changes to Medicaid, ACA coverage, and reimbursement could have different implications for providers and managed care. Life-science tools may be less directly exposed.
3. Would slower growth help bonds?
Our fixed income team broadly expects divided government to limit further efforts to boost the economy through debt-funded spending or tax cuts.
We expect nominal growth, to slow from about 7% this year but stay in the 5% range. We think yields may have passed their highs for a time, although stronger economic data make that judgment less clear.
The election removes one source of uncertainty; however, growth, inflation, global political risks, and Europe’s energy supply are still in play. Slower growth from a strong starting point isn’t the same as a shrinking economy.
A lower yield doesn’t tell the whole credit story
Our investment grade team sees potential tailwinds for spreads if a slowdown in AI construction reduces new borrowing and increases the value of existing computing capacity. Timing matters: spending plans may not shrink quickly, and the effects on the economy could take time to appear.
Our high yield view is neutral to mixed. Lower U.S. Treasury yields can raise fixed-rate bond prices. But slower growth could lead investors to demand more extra yield for the risk that borrowers may not repay. Funding, rules, and local project approvals can affect issuers differently.
What would change our outlook?We are watching whether relief from tariffs or global political tensions translates into lower costs, whether growth slows without weakening sharply, and whether project delays alter earnings, cash flows, or financing needs. Our equities team would reassess its views where policy significantly alters earnings prospects. In fixed income, we are assessing whether spreads provide enough compensation for the risks of individual borrowers and securities as yields and supply change. |
4. Do mortgage and other securitized markets tell the same story?
Not entirely. These markets have different borrowers, repayment patterns, and structures. Our teams assess how lower rates, smaller rate swings, regulatory changes, and shifts in property or borrower cash flows could affect each market.
- Agency residential mortgages: Smaller interest rate swings can help. So far, housing proposals do not point to an immediate change in how quickly borrowers repay their mortgages, though possible changes to refinancing rules remain a risk.
- Non-agency residential mortgages: Over the medium term, the team sees potential benefits for loans outside standard qualification rules from lower yields and housing measures that encourage transactions or improve the properties backing those loans. Whether and how those measures take effect remains uncertain. Closer oversight of loan servicing or consumer protections could also raise costs and alter the timing of cash flows.
- Commercial mortgages: The team believes it is too early to gauge the full impact on slower-moving property markets. Interest rate swings still matter, while limits on data centers could benefit existing properties. Local taxes and shifts in technology companies’ demand for office space call for a property-by-property assessment.
- Collateralized loan obligations (CLOs): Loan pools diversified across companies could limit the direct effects of slower AI construction. Slower AI adoption might also give vulnerable companies time to adapt, though economic risks remain. Lower-rated portions of CLOs are still more sensitive to shifts in investor confidence. The election did not change the team’s near-term outlook for new CLO issuance.
5. Does a slower AI buildout weaken the investment case?
Our equities team remains confident in a diversified mix of AI investments and does not expect the election to meaningfully alter the long-term course of AI infrastructure development. We believe large cloud operators can navigate local requirements or move development elsewhere, though the implications differ for companies with operating assets, those funding new projects, and businesses adopting AI.
Our MASS team does not see a federal pause on data-center development as the most likely outcome; state and local permits, utility prices, and incentives are more immediate concerns, in their view.
Our equities and MASS teams believe a more gradual buildout could reduce the risk of excess capacity without necessarily resolving computing shortages.
- Operating assets: Existing facilities and secured power supplies may gain value when restrictions limit competing supply. Large operators could benefit even as they face obstacles to their own expansion.
- Future development: For smaller specialist cloud providers and borrowers funding projects, delays, higher costs, and financing needs could undermine growth assumptions. Any increase in the value of existing capacity may not fully offset those risks.
- AI users: Businesses adopting AI face different costs and potential returns from those building the infrastructure. The cash returns on AI investments remain an important test of the opportunity.
As with defense and health care, our equity assessment centers on whether policy changes delay revenue or weaken long-term profits. For clients, confidence in a lasting trend isn’t the same as confidence in an individual investment.
How we are assessing AI investments
Within our AI holdings, we are reviewing companies’ ability to handle changing rules and plan to shift the portfolio toward those better equipped to adapt. Planned additions also include select investments where price declines appear to exceed what underlying business conditions justify. We favor companies with lasting competitive strengths and strong balance sheets, as well as businesses that enable or adopt AI.
These are planned actions, not completed trades. We continue to view prices as attractive relative to long-term growth prospects. Stronger cash returns and clearer policy would help test that assessment.
A note about risk
All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. All security transactions involve substantial risk of loss.
Artificial intelligence (AI) including natural language processing, machine learning, and other forms of AI may pose inherent risks, including but not limited to: issues with data privacy, intellectual property, consumer protection, and anti-discrimination laws; ethics and transparency concerns; information security issues; the potential for unfair bias and discrimination; quality and accuracy of inputs and outputs; technical failures and potential misuse. Reliance on information produced using AI-based technology and tools should factor in these risks.