CIO Perspective: AI, the Fed and Market Opportunities

Moderating inflation, a more flexible Federal Reserve and expanding AI-related financing argue for selective equity exposure and diversified fixed-income income rather than broad market beta.

• The Fed left rates unchanged despite three dissenting votes for a hike, while core CPI stood at 2.6%, down 70 basis points since June 2024, and market-implied inflation expectations were near 2%.
• The labor market is weakening beneath resilient aggregate growth: average payroll growth over the past 12 months was 26,000, employment outside healthcare fell by 45,000 in the latest month, and credit-card and auto-loan delinquencies reached 13.1% and 5.6% respectively.
• AI-related companies remain financially strong, with net debt at 0.36 times EBITDA versus nearly 2 times for the S&P 500 excluding financials, but more than 40% of year-to-date long investment-grade issuance was AI-related and equity financing exceeded $500 billion.
• Equity leadership is narrowing and changing: the largest seven technology companies have seen earnings growth normalize while semiconductor profits accelerate, and ecosystem valuations fell by roughly 5 to 20 turns in six weeks despite rising forward earnings expectations.
• In fixed income, 30-year Treasury real yields are near post-global-financial-crisis highs, while securitized and bespoke assets such as data-center ABS, aircraft and fiber collateral can provide additional yield and structural protection beyond benchmark credit.

Takeaway: Keep duration moderate and add gradually on weakness, diversify income across securitized and originated assets, favor equities with visible cash flows and high returns on invested capital, and retain liquidity to exploit volatility and market dispersion.