The Cycle Raises the Bar

The US mid-cycle expansion remains intact, but higher real rates are raising the hurdle for equities and require more selective, less cyclical positioning.

• Third-quarter US growth is tracking near 2.75%, earnings growth has broadened, and AI investment remains the largest single source of real growth, while inflation has stalled above target and the labor market is softening without breaking.
• The Federal Reserve raised rates by 25 basis points in September to 3.75%-4.00%, its first increase since 2023, and Calamos expects one or two further hikes as the neutral rate rises with strong growth, fiscal deficits, and AI-related capital demand.
• The 10-year Treasury yield has risen by more than one percentage point since February to its highest level since 2002, mostly through real yields rather than inflation expectations; Calamos therefore sees limited immediate recession risk but a higher discount rate for long-duration equities.
• AI demand remains resilient because hyperscalers are increasing capital-spending guidance and usage-based pricing is indicating customer value, but consensus expects 2027 earnings growth to become concentrated again in technology and health care.
• The fund returned 0.46% in the third quarter versus 2.30% for the S&P 500 and negative 3.51% for the Bloomberg US Aggregate Bond Index; exposure to the AI capital-spending supply chain detracted, while AI platforms, software, and refiners contributed.
• Calamos reduced industrials and AI supply-chain exposure, added health care—where consensus expects approximately 22% earnings growth in 2027—short-term Treasuries, lower-beta income, and index puts, while retaining an equity overweight.

Takeaway: The base case is continued above-trend expansion moderating toward low-2% growth in 2027, with core inflation near 3% and returns driven by earnings rather than multiple expansion; Calamos would de-risk further if yields rose on risk premia, AI financing weakened, hyperscaler spending guidance fell, or labor data broke decisively.