Is client spend on AI starting to disappoint?

AI spending is shifting from indiscriminate expansion to tighter cost control, which should moderate U.S. growth and support core rates even as inflation remains a risk.

• Tech stocks retreated as signs of flattening AI spending emerged, while the recent stumble at OpenAI suggested that earnings-growth momentum may be losing some strength.
• A private portfolio company reported that underlying firms were flattening AI spending after exponential growth earlier in the year, with many managers beginning to ration token consumption.
• U.S. CPI remains in the mid-3% range, far below its 2022 peak above 8%, but the author expects inflation to peak at 4% early in the new year before base effects drive it lower.
• Meetings with U.S. policymakers support the view that the next Federal Reserve hike will not come before December; the author expects hikes in Q4 and Q1 2027, followed by a hold.
• Energy is the main upside inflation risk because regional escalation in the Middle East could push prices much higher, while a sustainable de-escalation deal is considered unlikely.

Takeaway: Investors should favour the front end and core rates, while remaining cautious on longer-dated bonds because rising U.S. and global government and corporate debt could increase term premia and steepen yield curves.