Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. The Fed is on Hold

The Fed met last week and held interest rates steady. Beyond that headline, we got some insight into how the Fed is thinking about the current environment.

The core insight is that the Fed still views inflation as too high, and Warsh was emphatic that the Fed’s inflation target is 2%.

“If you think that we’re tolerating some inflation target somewhere in the 2’s, let us disabuse you of it.” - Federal Reserve Chair Kevin Warsh

Warsh acknowledged that financial conditions have tightened since the last meeting but doesn’t seem to view conditions as restrictive.

“While overall financial conditions are tighter, I’m unwilling and unable to call them tight.” - Federal Reserve Chair Kevin Warsh

Importantly, he doesn’t seem disturbed by any recent fluctuations in capital markets, which implies that volatility could persist without much action from the Fed.

“We observed—but were not surprised—that financial markets showed bouts of volatility and shifting correlations.” - Federal Reserve Chair Kevin Warsh

Read more

Summary: The Fed met last week and held interest rates steady. Big tech companies reported earnings, with strong revenue growth but negative free cash flow. Anthropic filed its S-1. There’s a lot going on in the world.

Editor’s Note: We have made this week’s newsletter available to all subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

Warsh is looking out the window
“At each policy meeting, my colleagues and I assess the economy by looking out the window—it’s what we call “interrogating reality”—to gauge what’s really going on. It is not a task that has grown easier.” - Federal Reserve Chair Kevin Warsh

The economy is strong, inflation still high
“What exactly do we observe? Economic growth has strengthened...And yet Americans, of course, are still dealing with inflation that has been running above the Committee’s objective for close to 6 years. It’s our responsibility to get inflation down. That’s the reason the FOMC’s discussion over the last couple of days focused mainly on the price stability side of our remit.” - Federal Reserve Chair Kevin Warsh

“...we continue to see strength. The underlying business is very strong. Consumers and businesses are spending. The overall environment remains very supportive.” - Mastercard () CFO Ling Hai

“Fourth quarter U.S. credit grew 11% year-over-year, and debit grew 9%...We did not see signs of the lower-spend consumer weakening in our volumes.” - Visa () CFO Chris Suh

“I want to touch on inflation. It has proven stubborn, and elevated energy prices continue to push input costs higher.” - IDEX () CEO Eric Ashleman

Warsh’s Fed will not tolerate inflation above 2%
“...there’s no lack of clarity in our purpose at the Fed...We’ve made clear our readiness to act as circumstances require, and we have shown our willingness to act...we doubled down on the 2 percent inflation target...if you think that we’re tolerating some inflation target somewhere in the 2’s, let us disabuse you of it.” - Federal Reserve Chair Kevin Warsh

Market conditions have gotten tighter but not tight
“Since our policy action in September, we have started to see some changes in financial and credit conditions. They have tightened for some businesses and households, much as we would expect. Market participants are becoming somewhat more discerning in their capital allocations. And while overall financial conditions are tighter, I’m unwilling and unable to call them tight.” - Federal Reserve Chair Kevin Warsh

The Fed is not surprised by volatility
“We observed—but were not surprised—that financial markets showed bouts of volatility and shifting correlations.” - Federal Reserve Chair Kevin Warsh

Interest rates matter to tech
“Since early September, what we’ve seen inside of the technology complex, outside of the technology complex...Interest rates have had an effect. You’ve seen market participants that are discriminating between the kinds of investments they want to make. You’ve seen credit spreads for certain assets widen out, gap out. For others you’ve seen some tightening in financial conditions, but not significantly. So on the thrust of your question of -- with respect to the new technology and this investment surge, do interest rates matter? I believe they do. And I don’t believe that they’re somehow divorced from the rest of the economy” - Federal Reserve Chair Kevin Warsh

Markets are pricing in rate hikes
“In September, the Fed raised rates for the first time since 2023. The ECB and the Bank of Japan raised rates the same month, taking Japan’s policy rate to its highest level since 1995. Inflation re-accelerated to 3.7% in September, and markets are now pricing more hikes, not cuts.” - Welltower () CIO Nikhil Chaudhri

A lot is happening in the world
“The period right in front of us is information rich. There is a lot that’s happening in the world.” - Federal Reserve Chair Kevin Warsh

Anthropic is preparing to IPO
“Today, Anthropic, PBC filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission relating to its proposed initial public offering of its Class A common stock. Anthropic intends to list its Class A common stock on the Nasdaq Global Select Market under the symbol “ANT.” - Anthropic

International

Middle East conflict poses less risk to markets than it did earlier this year
“The way we look at the world, we had more risk a year ago than we do today. It does not mean we will not have continued hostilities, but we’ve now seen the region adapt. We’ve seen what is possible. We’ve seen how this region will behave under a variety of circumstances. My own view, we have less risk today.” - Apollo Group () CEO Marc Rowan

European consumers remain resilient
“I would say if I take a look at the macro environment right now, the European consumers are very resilient. That’s probably the best description.” - Mastercard () CFO Ling Hai

Warsh is watching the Korean economy
“I would say I pay probably more attention to the Korean economy than you might think, because when I’m looking at the feedstocks effectively for this new surge in technology, a lot of it’s coming from Japan and Korea, some from Singapore. So I’m particularly interested in what’s happening in the Korean economy, usually because it’s telling me what’s on planes and ships coming this way” - Federal Reserve Chair Kevin Warsh

Chinese policy is weighing on new real estate construction
“...it did not get improved in the third quarter. It was still down 10% the market. The reason for that is something called the 828 Rulebook. It happened on August 28 when the central government basically -- and I believe for all the right reasons - came out with guidance for high-quality development. It’s going to be very good structurally for China over the medium and long term. But what it did to developers was said that they should favor selling and finish completing units right now versus presales. And for any presales they do, for the first time in 2 decades, those down payments have to go to escrow, so they can’t be used to finance the next project, which, as you know, had been done for many years.” - Otis Worldwide () CEO Judy Marks

Financials

The Fed is reducing the number of rate-setting meetings on its calendar
“...we have decided on a change in our FOMC schedule starting next fall. We believe 8 meetings per year is the right number for the FOMC. But in 2027, one meeting will focus exclusively on broad monetary policy strategy, with neither a vote on the federal funds rate nor a policy statement anticipated. The rest will be regular FOMC policy-setting meetings. I expect that in 2028, we will have 2 meetings dedicated to discussions of strategy and 6 for setting policy.” - Federal Reserve Chair Kevin Warsh

Warsh still believes in forward guidance in a crisis
“I don’t believe in forward guidance, absent exigent circumstances, absent a crisis. I have to give that caveat because, in the darkest days of the 2008 financial crisis...that kind of forward guidance is actually quite helpful. But in normal, ordinary times, especially times where the underlying real economy is this strong, I don’t believe in it. I don’t favor it.” - Federal Reserve Chair Kevin Warsh

The Fed is not just Warsh
“I’ve got 18 quite independent colleagues. If you were inside that room the last couple of days, you would come to believe that to be true.” - Federal Reserve Chair Kevin Warsh

AI companies are raising significant amounts of capital
“These Offerings are part of a financing plan that consists of approximately $35 billion of underwritten public offerings...and...approximately $60 billion at-the-market (”ATM”)....The Company intends to fund these investments through a balanced mix of operating cash flow, investment-grade debt, strategic partnerships, and equity capital...Meta’s planned investments will support its continued momentum across its core business and emerging AI opportunities” - Meta ()

AI financing is reaching into non-investment grade markets
“I think what we have been experiencing is that as the CapEx numbers have continued to scale, they went from largely equity-funded to then high-grade funded and now you’re starting to see some of that funding demand flow through into the leveraged finance and private credit market. So there’s an evolution here. But even as spreads are widening in certain parts of the market, it’s still accretive relative to the cost of equity capital. And so I don’t think that the weight of this demand is necessarily going to stop because of rate sensitivity.” - Ares Management () CEO Michael Arougheti

Conditions are tightening for the smaller players
“If a customer comes in and they’re unwilling to provide a corporate guarantee for an SPV, we’re just -- we’re kind of at a point where, like, appreciate your interest in the product, but if we can’t get comfortable with who the parent company is and we can’t get some level of guarantee around that for purposes of us underwriting the credit for a project, and we’re not going to do it.” - Generac () CEO Aaron Jagdfeld

Capex expectations aren’t being impacted by capital availability
“To the contrary, we’re seeing very strong demand from our customers. As I said, if I look at our largest customers, they’re basically all investment-grade companies, right, generating very strong cash. We’re not seeing any impacts from any credit issues whatsoever if they are out in the market. Demand from our customers is, if anything, strengthening versus what it was a quarter ago.” - Sandisk () CFO Luis Visoso

Consumer

Consumers continue to spend
“And most importantly, I think, is that the consumer is resilient. It’s really interesting to look at what’s happening with the consumer spend. It’s a bit of a K curve for sure. If you have assets, you’re spending. If you don’t, you’re stretched. But as long as the employment rate stays fairly stable and it appears to be fairly stable in our country, consumers are going to spend because they have assets” - United Parcel Service () CEO Carol Tomé

Labor markets are low hire, low fire
“I think it still is a relatively low hire, low fire environment. As I mentioned in my prepared remarks, our clients are continuing to hire at a steady pace. ...So I don’t really think a lot has changed.” - Automatic Data Processing () CFO Peter Hadley

Starbucks has returned to annual comp growth
“Global comps grew 7.2%, our fifth consecutive positive quarter... U.S. comps grew 7.7%, with a healthy balance of transactions up 2.4% and ticket up 5.2%.” - Starbucks () CFO Cathy Smith

Cruise demand remains strong
“Demand for our leading vacation experiences remains strong, and while it is still early, 2027 bookings are pacing ahead of historical levels at higher rates.” - Royal Caribbean Group () CEO Jason Liberty

The global lifestyle footwear market is difficult
“And then, yes, the white elephant in the room, the lifestyle footwear market is currently difficult. And yes, you see a lot of discounts.” - adidas AG (ADDYY) CEO Bjørn Gulden

It’s still early days for agentic commerce
“...the quarter was a bit of a tipping point...where you can actually have an agent who can go out on your behalf and execute not just shopping but real transactions and do it either with or without a human in the loop...it’s still very early in terms of the number of consumers that are doing this.” - Visa () CEO Ryan McInerney

“It is still early days, and the numbers are not yet significant in the grand scheme. But as the AI agentic assistants have emerged, agentic transactions are ramping up at impressive weekly growth rates. We’re now seeing the early stages of consumer adoption.” - Mastercard () CEO Michael Miebach

Few consumers are actually using agents for purchasing for now
“A natural question is whether agentic shopping from external horizontal agents is meaningfully impacting Amazon Ads. The answer is no. Few customers are doing much shopping this way yet, as the experience is still not great nor more convenient than coming to a retailer directly to research or one-click order there.” - Amazon () CEO Andy Jassy

Technology

Big tech delivered strong revenue growth
“Our results exceeded expectations across revenue, operating income and earnings per share, driven by strong demand across the Microsoft Cloud. This quarter, revenue was $92.3 billion, up 19%.” - Microsoft () CFO Amy Hood

“We are reporting $201.9 billion in revenue, up 12% year-over-year. Operating income was $28.1 billion, up 61% year-over-year. Q3 was another strong quarter for Amazon.” - Amazon () CEO Andy Jassy

“We had a strong third quarter delivering our 13th consecutive quarter of double-digit revenue growth. Consolidated revenues were $127.6 billion, up 25% in both reported and constant currency.” - Alphabet () CFO Anat Ashkenazi

Their cloud business is surging
“Google Cloud revenues grew 103%. Our AI infrastructure and solutions are the major drivers for Cloud growth, and our customers see us as the leading provider here, so there’s huge demand.” - Alphabet () CEO Sundar Pichai

“AWS grew 39.3% year-over-year, accelerating for the sixth straight quarter, our fastest growth in nearly five years. Backlog is $578 billion, growing triple digits year-over-year and well-diversified...We believe that AWS can grow north of 40% in each of 2027 and 2028 and be a trillion-dollar revenue business in the next 5-10 years.” - Amazon () CEO Andy Jassy

“Azure revenue was ahead of expectations and increased 48%...Foundry revenue more than tripled year-over-year with upside driven by efficiency gains across our GPU fleet...as well as higher revenue per token” - Microsoft () CFO Amy Hood

But free cash flow has turned negative
“We had negative free cash flow of $9.1 billion in the third quarter, driven by our investments in CapEx.” - Alphabet () CFO Anat Ashkenazi

“I think next year is an investment year for us as we look at the year. Probably not a dynamic where we’re going to have positive free cash flow next year.” - Intel () CFO Dave Zinsner

Capex is huge and expected to grow in 2027
“Our full year 2026 CapEx guidance range of $195 billion to $205 billion remains unchanged. We continue to expect our CapEx to increase significantly in 2027, and we’ll provide further details on our Q4 call.” - Alphabet () CFO Anat Ashkenazi

“We still expect 2026 cash CapEx of approximately $220 billion, the majority for AWS, and expect to spend meaningfully more in 2027 with a clear line of sight to attractive financial returns, as I laid out on our last call.” - Amazon () CEO Andy Jassy

“In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion...In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs and GPUs as well as the 3P capacity deliveries that shifted to H2.” - Microsoft () CFO Amy Hood

Demand justifies the spend
“...this is a once-in-a-lifetime opportunity. I think what we are seeing with AI, it is the biggest transformation in our lifetime...Would it be more convenient if this type of acceleration and opportunity happened over 25 years, and you could spread the CapEx over 25 years? Yeah, it might be more convenient, but that is not the world that we live in, and that is not the opportunity. We can fund this plan, and I think it will forever change the size of Amazon. It will forever change our revenue, it will forever change our free cash flow, and we are going to invest and we are going to pursue it to continue to be the significant leader like we are today.” - Amazon () CEO Andy Jassy

Hyperscalers have $3 Trillion in RPOs
“RPOs, or remaining performance obligations, remain quite high. The latest Visible Alpha sell-side estimates there for those hyperscalers is just under $3 trillion for 2027.” - S&P Global () CEO Martina Cheung

“Commercial remaining performance obligation grew 73% to $677 billion...Our RPO has a weighted average duration of 2.3 years and roughly 30% will be recognized in revenue in the next 12 months, up 29% year-over-year.” - Microsoft () CFO Amy Hood

“At the end of the third quarter, we had future purchase commitments of $924 billion and pre-commencement leases and other obligations of $152 billion. These dollar amounts reflect the maximum contractual obligations. However, a number of these agreements have variable pricing and volume flexibility, which could result in lower spend.” - Alphabet () CFO Anat Ashkenazi

Labs are growing revenue much faster than cost
“Revenue per dollar of compute has expanded meaningfully, even as we have accelerated research and product velocity and expanded our internal Claude usage. For example, our revenue grew 1,368% year over year for the three months ended June 30, 2026, compared to our compute and infrastructure expenses that grew 300% during the same period.” - Anthropic

The trend for compute demand is only going one way
“There are going to be moments of irrational exuberance. There are going to be moments of bust. There are going to be moments of constraint, and glut, and up, and down. But I think the trend is toward... We always just want more compute. The demand for sufficiently capable models at a sufficiently low price, I think that trend only goes one way.” - OpenAI CEO Sam Altman

Inference costs will keep falling
“I think if we all want enterprises to be able to use inference the way we all believe they will, we have to keep working on taking the cost of inference down.” - Amazon () CEO Andy Jassy

Token production will keep rising
“On our AI models, customers are using our models more than ever. Our first-party model APIs are now processing nearly 32 billion tokens per minute, 40% more than last quarter and more than 4x what we processed a year ago.” - Alphabet () CEO Sundar Pichai

The internet as we knew it is dying
“...we’re witnessing something that is no less than an earthquake on the Internet or the web as we know it. And I’ve been talking about this for over a year. And I think that we’re starting to see this. The Internet, as we’ve known it for the past 20-plus years, is going away. And it’s going to completely change. It’s dying” - Fiverr International () CEO Micha Kaufman

Search traffic is going away
“Our search referral traffic was down meaningfully in Q3, with the decline accelerating later in the quarter...The biggest one is the AI Overviews or AI Mode. Both have evolved a lot. And particularly recently, they appear to be expanding them quite aggressively both in the U.S. and outside. So what started as a feature is now the full search experience. And at the minimum, it pushes everyone down the search page. And then on top of that, the experiences themselves are not traffic drivers” - Reddit () CEO Steve Huffman

Google is starting to scale ads within AI mode
“...it’s worth noting that the strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode. To be clear, we feel very good about our trajectory here. Our ad experiments have shown promising results, and we’re now scaling ads within both AI Overviews and AI Mode to more users and more queries” - Alphabet () Chief Business Officer Philipp Schindler

High memory prices are hurting PC and smartphone sales
“In recent weeks, our customers began signaling a PC slowdown based on the memory prices and availability...The pace of this PC correction has accelerated over the last 2 months, as our OEM partners are aggressively managing inventory to match the softer sell-through. We expect the current environment to persist until memory availability and prices begin to normalize...we see TAM declining in ‘26 by about 12% on a unit basis.” - Intel () CEO Lip-Bu Tan

“In Q3, continued memory price increases led to a quarter-on-quarter decline in smartphone market volume, mainly in the mid-to-entry segments, while market revenue grew driven by higher ASP and a greater mix of premium products.” - Samsung Electronics (SSNLF) VP of MX Division Daniel Araujo

Memory shortages will likely persist through 2028
“...tight supply conditions are expected to continue in 2028… Thanks to strong performance in the industry in 2026, CapEx is expected to see a significant increase in 2027 across the broad market. However, due to various factors, it will likely be difficult for this higher CapEx to drive a bit of production growth.” - Samsung Electronics (SSNLF) EVP of Memory Business Jaejune Kim

Memory makers have been burned in the past
“For a very long time, if you were a producer of DRAM, you would invest $20 billion of CapEx to make $19 billion. And you would go through these booms and busts. Maybe some years you would make $21 billion, some years you would make $18 billion. But until right now, I don’t think making memory has ever been a great business over a long period of time. And then, all of a sudden, these guys are each going to make like $100 billion of free cash flow in a year. Unbelievable. But I think they all remember their history. How many times they almost went bankrupt by making too many fabs and being promised this time it was different.” - OpenAI CEO Sam Altman

Eventually, the robots will build their own capacity
“We made a chip that is an incredible performance at units of intelligence, performance of units of intelligence per watt. We are learning how to build our own data centers. We have a robotics program that we’re going to point at making lots of data centers.” - OpenAI CEO Sam Altman

Health

Eli Lilly’s GLP-1 medicines reach just 1 in 10 eligible U.S. patients and 2 in 100 internationally
“You look at the U.S., and we’re talking about 1 out of 10 patients that we are reaching nowadays. And even OUS, we are talking about 2 patients out of 100 patients. So it’s actually a really low base. So the number seems really big, $16 billion this quarter of incretin business.” - Eli Lilly () CFO Lucas Montarce

Obesity medicine demand is spreading to middle-income consumers internationally
“And the other was the depth of the consumer purchasing internationally and whether we were really just skimming very high net worth individuals in these out-of-pocket markets or if more middle-income households would be interested in improving their health and losing weight at scale.” - Eli Lilly () CEO Dave Ricks

AI models need more data to scale in biology
“AI models need a large amount of data to learn from. And in biology, those models only work if the data is accurate, standardized, and reproducible. But these data sets don’t exist at scale. There is no Internet of biology.” - Illumina () CEO Jacob Thaysen

Industrials and Transport

European industrial barometers are improving
“Then you look at PMI, when you look at, let’s say, industry barometers, especially here in Europe, you see some positive trends. So leading indicators look rather more positive than what we have seen 3 months ago. I would expect a certain positive momentum now for the rest of the year, especially in industrial sectors, but of course, coming from a low base.” - BASF SE (BASFY) CEO Markus Kamieth

The industrial economy is in expansion
“And obviously, we’ve continued to see the industrial economy with positive ISM through the year. It’s been in, kind of, the low to mid-50s, but it’s been in expansion territory. So that’s been good.” - Old Dominion Freight Line () CFO Adam Satterfield

Freight demand is improving
“We feel like we’re seeing some good market share opportunities as we go through bids and seeing customers asking about multiyear contracts, things that when you read the tea leaves are more indicative of an improving demand environment.” - Old Dominion Freight Line () CFO Adam Satterfield

Caterpillar is seeing strong order rates
“...backlog continues to grow due to strong order rates, and we’re now taking some large reciprocating orders as far out as 2029 and turbine orders into 2030...as we’re extended pretty far out, I mean this is going to be -- this is unusual for us. Typically, we’ve only had 12 months or less line of sight to our backlog. And now in particularly this situation, customers are placing orders pretty far out there. We have a lot of quoting activity in ‘29, ‘30.” - Caterpillar () CEO Joe Creed

Verizon estimates SpaceX would need $300B–$500B and 4–6 years to build a competitive terrestrial network
“There is no magic wand. There’s no secret sauce. There’s no shortcut. There’s no radically lower structural cost advantage. If they build one, they’re going to look at 65,000 to 80,000 macro sites. They’re going to need backhaul, some combination of fiber and maybe some satellite. They’re going to need RAN. They’re going to need a tremendous amount of spectrum. And assuming that’s the case and assuming they try to go do that, it’s going to take a minimum of 4 to 6 years to fully build that out. It’s going to cost hundreds and hundreds of billions of dollars, I assume somewhere between $300 billion and $0.5 trillion over the next like 7 or 8 years. And then they need to build retail, customer service, back-office systems, et cetera. And all of that gets them basically the same network and same capabilities and same cost structure as what we have today. And then sometime over the next 4, 6 years, they have the possibility of becoming the sixth, not the fourth, the sixth competitor in the market. And frankly, at that point, I welcome the opportunity to compete against them. It’s very hard to throw a punch against something that doesn’t exist, but once they come into the market, we will be ferociously competitive.” - Verizon () CEO Dan Schulman

Materials & Energy

U.S. data center expansion could require ~100 GW of additional capacity
“In the U.S. alone, approximately 100 gigawatts of incremental data center capacity is expected by 2035, requiring roughly 18 Bcf per day of incremental gas supply to meet the associated electricity demand.” - Baker Hughes () CEO Lorenzo Simonelli

Gas turbine prices have risen approximately 50% in one year
“...our orders in ‘26 relative to ‘25, pricing is up directionally 50%. So that kind of -- with any 1 quarter, mix can move those numbers, but I think that year-over-year marker is important.” - GE Vernova () CEO Scott Strazik

Energy security and reserve depletion are reigniting global oil and gas exploration
“Ongoing disruptions continue to reinforce the importance of energy security and the need for reliable geographically diverse sources of supply. At the same time, the industry continues to face the structural challenge of offsetting natural decline and replacing reserves following several years of limited exploration.” - SLB N.V. () CEO Olivier Le Peuch

U.S. drilling contracts are lengthening as energy producers prepare for a tighter rig market
“The first part of this year, I think we were in a 0 -- call it, spot to 6-month type market with the occasional 1-year contract. And then throughout the middle of this year, it’s kind of gone into a 6-month to 1-year contract. And now we’re having more conversations in the 1- to 2-year range. And it’s certainly not where the broad market is. I think the broad market is really kind of in a 6-month to 1-year type range, but we are having more conversations in that 18-month to 2-year range with customers.” - Precision Drilling (PD:CA) CEO Carey Ford

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. Even the Hyperscalers’ Minds Are Blown by Their Own Capex Numbers

At this point, all of us are well aware that hyperscalers are spending an unprecedented amount of money on datacenter capex. The business community seems to have run out of superlatives to describe the level of spend. It was interesting, though, to see that even Andy Jassy, CEO of Amazon, finds the amount of money that his company is spending to be “mind-blowing”:

“We’ve said this year, in 2026, we expect to spend about $220 billion of CapEx. By the way, I’ll just tell you that I remember being at a leadership team breakfast 15 years ago when we couldn’t believe the telco company spent $50 billion in CapEx. We’re like, ‘We’re not really spending that much on CapEx.’ So these numbers are kind of mind-blowing numbers.” - Amazon (AMZN -0.22%↓) CEO Andy Jassy

Jassy went on to say that the spend is justified by the demand and that even with the current spend they won’t be able to satisfy current demand:

“And even spending $220 billion in CapEx this year, we’re leaving a meaningful amount of demand on the table. We just... The thing that helps us here is that we have really good visibility into customer demand.” - Amazon (AMZN -0.22%↓) CEO Andy Jassy

This felt like a fairly earnest assessment of the situation for the AI industry at the moment. Everyone can see that the numbers are difficult to comprehend, but at least one person who has very good visibility into the demand side of the equation is convinced that it’s easy to justify.

We saw several comments this week that were similar to Jassy’s that justify the capex for the datacenter developers. Elon Musk, for instance, noted that the payback period on new deployments is less than one year.

“What we’re seeing in the market is extraordinary. At current pricing, new compute deployments are generating a payback of less than a year. Pricing is currently tracking slightly above the high end of the $30 to $50 per watt range we were discussing just last quarter, which further supports the attractiveness of these terrestrial SI compute investments.” - SpaceX (SPCX 1.02%↑) CEO Elon Musk

2. Are the AI Service Providers Making Money, Though?

Meta’s earnings call highlighted that some companies are feeling more financial pain from AI spend than others. Free cash flow last quarter was -$2B, and its net cash position is now negative:

“Capital expenditures, including principal payments on finance leases, were $34.9 billion, driven by investments in servers, data centers and network infrastructure. Free cash flow was negative $2.1 billion. We ended the quarter with $82.4 billion in cash and marketable securities and $83.7 billion in debt.” - Meta (META -1.36%↓) CFO Susan Li

Importantly, even though Muse has been a modest success, Meta is clearly trying to figure out how to monetize it sooner than it usually would because the cost of delivering the service is otherwise prohibitively expensive.

“My guess, I think that we are going to work on monetization somewhat sooner on this than our normal playbook for a couple of reasons. One is just the size of the numbers that we’re talking about in terms of both the costs and the opportunity, I think make it kind of important to make progress on that in order to be able to scale it” - Meta (META -1.36%↓) CEO Mark Zuckerberg

Meta is also clearly reaching the limits of what capital markets can support. Its own special committee explicitly said so in an SEC filing:

“The Special Committee also considered whether debt financing could be an alternative for the financing needs of the Company but recognized that debt financing alternatives of the magnitude that Company management was considering could have an adverse effect on the Company’s credit ratings and would be a less attractive alternative for the Company.” - Meta (META -1.36%↓) Special Committee

Is this a sign that capital markets are becoming tighter for all AI companies or just some?

3. China’s Consumer Environment Isn’t Strong

China’s tech economy makes headlines in the US for how rapidly it is moving to compete with the US at the frontier. But it’s worth noting that not everything is rosy for China’s economy.

In recent weeks, we’ve seen several companies talk about a weak consumer environment in China, including comments this week from luxury companies Hermes and Kering:

“It’s worth reminding you that the macroeconomic context is not favorable because real estate is down. Consumer trust in China is still quite low with a very high savings rate and consumption, which is -- which remains unchanged. Now what made it a bit tougher is that financial markets dropped slightly over the last few months” - Hermès (HERM:CA) CFO Eric du Halgouët

“Mainland China is our major headwind as consumer confidence stays subdued and customers are increasingly selective” - Kering (PPRUY) CFO Armelle Poulou

This data matters, especially if consumer discontent in China puts pressure on political leadership to adjust priorities.

However, today the battleground for global economic dominance is in tech. For the moment, consumption is a bit of an afterthought in both China and the US.

Summary: AI capex is the key catalyst for the US economy, and there isn’t any sign that hyperscalers are slowing down. There are signs, however, that capital markets may be reaching the limits of what they are able to bear.

Editor’s Note: We have reserved the sections after Macro for our premium subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

The U.S. economy remains resilient
“The U.S. economy continues to demonstrate resilience while managing through inflation and elevated interest rates and is supported by strong corporate earnings, healthy consumer spending, and continued investment in AI and digital infrastructure.” - Nasdaq () CEO Adena Friedman

AI is the key catalyst
“Stepping back, the economy is strong today. The key catalyst, as I mentioned, is the historic level of investment taking place to facilitate the development of AI, including data centers, chips, equipment, power generation, construction and engineering services, and many other related areas. This engine is supporting exceptional corporate earnings momentum, as well as momentum in our own portfolio.” - Blackstone () CEO Steve Schwarzman

The consumer is also doing well
“So I think the consumer has held up remarkably well.” - General Motors () CFO Paul Jacobson

“In this U.S. consumer segment, we’re reporting this quarter, 9.4% spend growth. It is the third highest we’ve seen over the last 3 years...and very strong growth in discretionary categories such as T&E and airline. So a lot of momentum and strength in our billings.” - American Express () CFO Christophe Le Caillec

“In aggregate, the consumer is resilient. We see 2% to 3%, 2.5% to 3% value growth across all categories globally. And that is unchanged, maybe a little bit better than what we saw and reported last quarter.” - The Procter & Gamble () CFO Andre Schulten

Consumer strength has been surprising
“The consumer continues to show signs of strength. I think it has been a little bit surprising, not only to us, but to the industry more broadly.” - Synchrony Financial () CEO Brian Doubles

“The US economy has been supported by strong consumer spending despite inflationary pressures.” - JSW Steel (500228) CEO Jayant Acharya

Spending is strong even though confidence is weak
“If you’re looking at consumer confidence, you don’t feel great. But when you look at what the consumer’s actually doing, you feel a lot better.” - Synchrony Financial () CEO Brian Doubles

“...when you look at a lot of the consumer sentiment surveys, they really have become disaggregated from consumer behavior on the ground, and that’s evident in our average transaction price. It’s evident in our trim mix.” - General Motors () CFO Paul Jacobson

“It’s like the consumers don’t read the headlines. And so there’s kind of a wall of worry. And yet the consumer keeps on being resilient through this process. And so that’s kind of what we’re seeing” - Ally Financial () CEO Michael Rhodes

The AI players are price insensitive
“This whole AI ecosystem build-out is kind of full on...And even with higher rates, the kind of desire to get the compute power in place, the players aren’t really batting an eyelash, up 25 or the back end of the curve is moving up a bit. So I think that’s relatively inelastic to pricing.” - Citizens Financial Group () CEO Bruce Van Saun

Inflation is expected to continue in 2027
“So as we look forward to 2027, it is an inflationary environment. It’s likely we’ll see more pricing. And while there may be a short-term consumer reaction...we’re confident that over the medium term that we can sustain both RIG and price.” - Nestlé S.A. (NSRGY) CFO Anna Manz

Capital markets are tightening
“Recent significant capital raises at other notable companies...have resulted in an increasingly challenging environment for raising capital. The Special Committee considered that, while the Company presently has sufficient capital resources for its current needs, in order to finance its funding needs going forward it would be prudent for the Company to do so before even more companies have absorbed available capital in the market.” - Meta () Special Committee

“As of the past few weeks, debt markets have almost entirely shut off access to money for any company that doesn’t have substantial revenue independent of AI data centers. SpaceX closed $40B of debt for GPUs, but we’re investment grade and have Starlink & launch revenue. That means the 200+ neoclouds are going to see guppy-level death and consolidation. Some will make it through, but not many.“ - Tesla () CEO Elon Musk

Hyperscalers are stretching the limits of what they can finance
“The Special Committee also considered whether debt financing could be an alternative for the financing needs of the Company but recognized that debt financing alternatives of the magnitude that Company management was considering could have an adverse effect on the Company’s credit ratings and would be a less attractive alternative for the Company.” - Meta () Special Committee

International

Read more

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. A Shortage of Capital?

This week we saw several quotes from CEOs hypothesizing that the reason interest rates are rising is that there is so much demand for capital that capital itself is becoming scarce. This is a dynamic that has not really occurred in the modern economy. Larry Fink captured this in his remarks:

“For the first time in my career, and that’s 50 years of a career, I’m seeing genuine shortages of capital. Governments are running historically large deficits, while at the same time, demand for private capital is rising across the economy. Governments need financing for infrastructure. Companies need to fund a generational AI build-out.” - BlackRock () CEO Larry Fink

One reason that there hasn’t been a genuine shortage of capital in Fink’s career is that the modern monetary system makes capital shortages almost impossible. Fink’s 50-year career goes back to the mid-1970s, a window entirely after Nixon’s abandonment of the gold standard.

Nixon’s “Shokku” effectively made the potential supply of capital infinite, with only inflation as a penalty. Subsequent policy made the Federal Reserve the ultimate authority in modulating the supply of money, and the Fed has consistently increased monetary supply through an explicit 2% inflation target. The Fed has broad power to ensure that the money supply never becomes scarce, and it retains that power today.

2. Kevin Warsh is Facing His First Real Test

So, to the extent that money is becoming scarce and that is driving up interest rates and stock market volatility, Kevin Warsh may be looking at his first test as Fed Chair. Will he give markets confidence that he will expand the money supply or will he dig in to defend his credibility as an inflation fighter?

As we’ve been chronicling since Warsh took over at the Fed, he’s articulated a fairly dogmatic philosophy that is a break from recent Fed chairs. He wants the Fed to say less and let the markets say more so that he can hear the signal that they are sending him. Because of that, his reaction curve is more opaque than usual.

For now, markets are conditioned to expect that he will eventually provide the Fed put, but it’s unclear how much pressure is required to get his Fed to act. Is a 10% drawdown enough? It was for the Powell Fed. Warsh seems less reactive.

One comment that he made this week suggests that he’s not impervious to pressure, though. He, like most others in his generation of policymakers, is still scarred from 2008, which means the Fed put is almost certainly in play, but just at an uncertain level.

“I will say I have still a little bit of scar tissue from the deepest, darkest days of the global financial crisis. I might be over-scarred from that period, but better over-scarred than under-scarred, I presume.” - Federal Reserve Chair Kevin Warsh

Read more

Summary: Global capital markets are becoming a tug of war between AI spending and higher interest rates. Equity markets suggested that they're feeling a bit spooked last week by the implications of higher rates. How will the Fed react?

Editor’s Note: We have made this week’s newsletter available to all subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

AI CapEx is powering the global economy
“...the quantums are so big, and the growth of the U.S. economy is at some level and even the global economy being powered by this AI CapEx cycle. I don’t know that it necessarily accelerates from the $1 trillion that we’re at. It could be $1 trillion, it could be $1.2 trillion, but we are at a level where it is meaningful, 50, 70 basis points of real GDP in the U.S. That is no small matter.” - Morgan Stanley () CEO Ted Pick

“...it is obviously hitting the demand side of the economy before it is going to hit the supply side of the economy. If you are a central banker and you are in the business of trying to ensure stable prices and full employment, you have got to recognize this as a shock, but it is a positive supply shock in the medium term. I do fundamentally believe that. On the path to that positive supply shock, we are seeing increases in aggregate demand.” - Federal Reserve Chair Kevin Warsh

A lot of capital is required
“We’ve got a good U.S. economy supported by the consumer and by the AI CapEx. And there’s underneath that, a lot of capital requirement from these AI companies and the whole environment that surrounds them.” - Bank of America () CFO Alastair Borthwick

AI capital demand is competing with government demand, pressuring rates
“I think one of the things that’s going on is there’s a lot of demand for capital for this AI cycle, and that’s also competing with the fact that governments have borrowed very aggressively, and there’s a lot of demand for capital for government. So there is, there is some pressure around that that affects rates, but I’m not, I’m not scared you know, about all this.” - Goldman Sachs () CEO David Solomon

There’s a genuine shortage of capital
“For the first time in my career, and that’s 50 years of a career, I’m seeing genuine shortages of capital. Governments are running historically large deficits, while at the same time, demand for private capital is rising across the economy. Governments need financing for infrastructure. Companies need to fund a generational AI build-out. Individuals need better ways to invest and retire.” - BlackRock () CEO Larry Fink

The rest of the economy is very, very strong
“We have a very, very strong underlying economy. The economy continues to be very, very resilient despite some of the headwinds.” - Goldman Sachs () CEO David Solomon

Consumers are spending
“...we’re not seeing anything on the consumer side. Spend levels are high. Employment is strong.” - U.S. Bancorp () CFO John Stern

“...our data shows that our consumer and business customers are doing well. Consumers are spending more, loan delinquencies are low, and deposit and investment balances have grown.” - Wells Fargo () CEO Charles Scharf

“Consumers continue to spend, with year-to-date money movement up 5% from 2025” - Bank of America () CEO Brian Moynihan

Inflation is sticky
“However, large fiscal deficits, sticky inflation, elevated asset prices, rising interest rates, and geopolitical conditions continue to shift under the surface. These forces may be manageable, but we remain prepared for a wide range of outcomes” - JPMorgan Chase () CEO Jamie Dimon

Markets want to know how the Fed will react
“I think that what markets are looking for is they’re looking for any guidance as to where the Fed is going to go...I think they respond more based on what they think the Fed will do rather than what they think we should do. And so I think that it’s important to take signal back from the markets about how the economy is progressing, but I take more signal about how the economy is progressing from the data, from the stories I hear in the district.” - Cleveland Fed President Beth Hammack

Warsh is looking out the window
“What I have tried to do, which might be a little bit of a change for policymakers, is what I try to do is look outside the window...we can focus on the past, on the history...but it is really lagged data...We can also focus a lot of our time and attention on the future...but none of us are perfect forecasters...I try to look out that window as clearly as I can.” - Federal Reserve Chair Kevin Warsh

He still carries scars from 2008
“I will say I have still a little bit of scar tissue from the deepest, darkest days of the global financial crisis. I might be over-scarred from that period, but better over-scarred than under-scarred, I presume.” - Federal Reserve Chair Kevin Warsh

International

LVMH saw a rapid decline in Chinese consumer demand
“...the macro news flow that led to a rapid shift in the Chinese backdrop translated in Chinese demand down mid-teens. American clientele, by contrast, held up well, up mid-single digits. Europeans were up modestly. Japanese and Middle Eastern were down mid-single digits” - LVMH (LV:CA) CFO Cécile Cabanis

Financials

Is this the peak for capital markets?
“I know everybody wants to call the peak. It’s hard to call the peak, but let’s just step back. And I want to go back to something I said just a little bit earlier, I still think for capital markets activity, it’s a top quartile environment. For strategic M&A, there’s an enormous amount of dialogue that continues. Our backlog is incredibly robust.” - Goldman Sachs () CEO David Solomon

Higher rates tend to slow activity
“Does a move in interest rates of the magnitude that we saw impact transactional activity from our clients? Yes, that does happen...when rates go up 85 basis points in a quarter, that tends not to be good for those businesses. Clients tend to slow their activity. It’s not good for asset prices.” - Bank of America () CFO Alastair Borthwick

5% 10-year Treasury yields are normal
“I mean, I’ve been around for 64 years. The anomaly is zero interest rates, not 5% 10-year Treasury. And so, obviously, significant moves when they happen quickly upset markets and can have an impact. But you’re seeing the world’s absorbed, you know, this move in the 10-year Treasury reasonably well.” - Goldman Sachs () CEO David Solomon

Volatility is the issue
“What creates headwind for markets is when you have very, very abrupt moves. Yes, we had a meaningful move in the quarter. There were probably some days when it was abrupt, but you’ve got a lot of other things going on that are very, very important” - Goldman Sachs () CEO David Solomon

But pipelines are solid
“Intuitively, higher rates, as this goes forward, is going to crimp CapEx and otherwise slow borrowing, but we’re not seeing any instance of that yet, and our pipelines remain strong.” - PNC Financial Services Group () CEO William Demchak

“I think you should feel pretty good about the pipeline. It’s a solid pipeline to say the least...The IPO market continues to be a bit more selective. So certainly an option for issuers of durable earnings.” - Citigroup () CEO Jane Fraser

“I actually look out. I see some very big equity deals coming. I see some potentially very big IPOs coming. I look at our M&A backlog. We said on the call yesterday, our backlog is still at very, very robust levels, and so I feel very good about revenue accruals we have coming in M&A, and I also see the strategic activity and dialogues that are going on, and I feel pretty good about it.” - Goldman Sachs () CEO David Solomon

“The DCM pipeline is strong, but it’s supported by clients acting before rates move higher and stay there for longer.” - Citigroup () CEO Jane Fraser

Corporate balance sheets remain strong
“Businesses continue to have strong balance sheets and losses remain low” - Wells Fargo () CEO Charles Scharf

Credit quality is stable
“...the stats are very strong...So in terms of seeing any stress on the consumer, absolutely not in terms of credit quality.” - Bank of America () CEO Brian Moynihan

“Net charge-offs and the nonperforming asset ratios also remained stable, supporting our view that the broader portfolio credit trends remain sound.” - FB Financial () CFO Michael Mettee

Loan demand is robust
“C&I loan demand is quite robust and broad-based.” - U.S. Bancorp () CEO Gunjan Kedia

“Given the robust pace of lending this year, loan growth has outpaced deposit growth, which has resulted in greater utilization of our diversified funding sources.” - The Charles Schwab () CFO Mike Verdeschi

“We grew loans at an annualized rate of 9.7%, which is at the very high end of our forecasted range of mid- to high-single digits.” - FB Financial () CEO Chris Holmes

There’s plenty of capital in the world
“But, you know, is there a crowding out effect that at the margin affects the cost to capital a little bit? Absolutely. But that doesn’t mean the capital’s not available and for good projects and good returns and good opportunity, there’s plenty of capital in the world.” - Goldman Sachs () CEO David Solomon

Higher rates are pressuring housing markets
“Like others across the industry, we expect higher rates to weigh on near-term origination volumes and profitability.” - FB Financial () CFO Michael Mettee

Private Equity is also struggling to adapt
“My less positive, less salutary response would be it is a little frustrating. There are some sponsors in the universe that are stuck on marks and MOICs that are just not going to come to pass, given the market is very sharp to what is in folks’ portfolio and very sharp to the reality of what the new weighted average cost of capital regime is around the world and what incremental country risk or supply risk or AI risk means for that asset.” - Morgan Stanley () CEO Ted Pick

We’re going to learn a lot from Anthropic and OAI IPOs
“I guess we’re gonna learn a bunch over some period of time in the future. Assuming that Anthropic and OpenAI go public, we’ll learn a bunch about exactly how public market investors will look at that and value that.” - Goldman Sachs () CEO David Solomon

Consumer

Consumers are under pressure
“...we are seeing the customer remain under pressure, particularly our lower-income customers, they’re still trading down, looking for value, buying more private label, and we expect to see that to continue for the short term.” - Albertsons Companies () CEO Susan Morris

But bank account balances are growing
“...if you go to the balance in our accounts, they’re growing. And when you look at the paychecks, the direct deposits coming from employers to our consumers, we see those growing across the 3 segments of income we have low, medium and high, and we see the low having picked up. So that all bodes well.” - Bank of America () CEO Brian Moynihan

Consumers are accepting price increases
“...customers are acknowledging the reality of inflation. I mean everyone is feeling it. And when you look at our spring ‘26 pricing action, we’re seeing good realization.” - Lamb Weston () CEO Mike Smith

“...the fact that our product continues to be seen in a consumer basket as reasonably affordable even at a 20% price increase, which largely we have taken this year. I think that’s a very good sign for the future.” - Delta Air Lines () CEO Ed Bastian

Travel demand remains strong
“Our demand in premium products continues to be high teens, and that’s leading us also to our corporate -- pulling our corporate travelers. We see no cracks in that demand for the fourth quarter. And the economy is really strong. So we’re set up for a really strong fourth quarter.” - Delta Air Lines () CCO Joe Esposito

Restaurant traffic is soft
“U.S. restaurant traffic was essentially flat, while QSR traffic declined by 1%..Internationally, QSR traffic declined 1% in the U.K., France, Italy and Germany, while Spain was essentially flat.” - Lamb Weston () CFO Jim Gray

AI consumer agents are a growing topic of conversation
“In the long arc, you’d clearly expect that demand will shift from current avenues more and more towards agentic demand. There always will be demand that lives elsewhere, just in the same way that there’s still brick-and-mortar demand in commerce and there’s a lot of e-commerce demand. In the same way, I think agentic commerce demand will grow as a portion of the pie.” - Meta ) Chief AI Officer

“...when you think about the world of AI, about the Agentic economy where to me, at some level, it sounds like the OTA is returning to the scene here, trying to commoditize your product and your premiums. I think it’s even more important that we hold tight and continue to ensure that we’re focused on premium, we’re focused on service and not getting distracted by trying to cash out along the journey.” - Delta Air Lines () CEO Ed Bastian

Technology

Belief in ASI is reaching a religious fervor among some believers
“I think there’s a profound truth to that Pascal saying that every human has a God-shaped hole in their heart. And it’s important to understand that many of these folks in Silicon Valley who are building this technology have filled that hole with the machine god of AGI. And I mean, there’s so many interesting stories around this. Like, for example, so many AI researchers have started smoking as a way of signaling to other researchers how much they believe in AI. I believe so much... That makes no sense. What do you think? I believe so much in AI that it’s going to cure cancer, so I will... I’m showing you my chips are all in. So there is kind of this mass psychosis, social delusion around it. And I think it’s getting in the way of actually what is happening with AI. Where is it meeting the American worker in industry? What are the results of doing that?” - Palantir () CTO Shyam Sankar

We need 1 billion x more compute
“It’s very fairly logical why the amount of compute that we’re going to need is a billion times more than where we were just recently, so call it last year. And the reason for that is because thinking and problem-solving takes a lot more inferences than repeating something, regurgitating something that you memorized, right?” - Nvidia () CEO Jensen Huang

Agents are driving even more demand
“Agentic AI consumes about 2x to 4x more wafers than a generative AI pod.” - Applied Materials () CEO Gary Dickerson

More compute is going to get built
“But one thing’s for clear, there’s a lot of demand for compute at the moment. The supply has not come into balance. More is going to get built. More financing is going to be necessary” - Goldman Sachs () CEO David Solomon

The numbers sound crazy, but they keep growing
“Last year at our custom AI event, I showed that analysts were forecasting about $1 trillion in total data center CapEx by calendar 2028...I remember when we put the $1 trillion up there, it kind of stuck in my mouth a little bit, $1 trillion, like that’s a lot of money. Is this a little bit crazy? And then you fast-forward 1.5 years, and it wasn’t crazy at all, actually. We ended 2025 over $700 billion. And now we’re hitting over $1 trillion this year already. Clearly, this is a fast-moving market and one that’s hard to forecast, and it’s growing faster than anybody expected.” - Marvell () President Chris Koopmans

Capex is expected to reach $3 trillion by 2030
“By 2030, we expect total data center CapEx to reach roughly $3 trillion, growing at about a 35% compound annual rate starting from calendar ‘25 to calendar ‘30. And importantly, that assumes that the current rate of CapEx growth moderates over that period, moving closer to historical levels in the outer years.” - Marvell () CEO Matt Murphy

Maybe spend could get as high as $10 trillion
“...we’re still relatively early in the CapEx cycle. Whether it ends up being $10 trillion or more or less, we will see as it plays out. But the hyperscaler CapEx is running as we speak at around $1 trillion a year.” - Morgan Stanley () CEO Ted Pick

70% of the spend is coming from 10 companies, 50% from 4
“So if you look inside that data center CapEx, the top 10 or so hyperscale customers are actually driving over 60% of that last year. And as large as they are, they’re actually expected to grow their spend even faster than the overall TAM, reaching more than 70% out in calendar ‘30. That’s astounding. If you do the math, that means that these top 10 companies are $200-plus billion TAMs each. And if you look within that, the top 4 U.S. hyperscalers alone were more than half of total data center CapEx last year.” - Marvell () President Chris Koopmans

Demand is outstripping supply
“If we take a step back to look at the market environment, we see that the pace of the AI build-out continues to be very robust. Supply shortages across advanced Logic and Memory nodes continue to increase in size and in time horizon.” - ASML Holding () CEO Christophe Fouquet

“The gap between demand and supply are still quite big, and that is why we put all our strengths to increase the capacity, as I just mentioned. Whether it is bigger or if the gap become bigger or the gap become narrow, we are working very hard. I cannot answer this question right now because my customer continue to increase their demand.” - TSMC () CEO C.C. Wei

Suppliers are trying to increase capacity
“...we have very strong conviction in the AI megatrend. Therefore, our CapEx from 2026 to 2028 is expected to be significantly higher than the past three years. And this is a step up of our investment to support the customers’ growth. We have no intention to leave any food on the table for others.” - TSMC () CEO C.C. Wei

Semiconductor suppliers are experiencing shortages of their own
“I think the primary constraint, Mark, that we called out is clean room...I think that’s the major -- we talked about how that will meter the growth rate. That is the primary variable that we see.” - Applied Materials () CFO Brice Hill

But capacity is growing slower than demand
“...we shared our intent last quarter to increase our capacity in 2027 by 30% for both Low NA EUV and deep UV immersion systems as well as to investigate adding a further 30% in 2028. However, given the dynamics of this quarter, we now anticipate that our current planned levels of output in ‘27 and ‘28 will not fully meet the demand of our customers.” - ASML Holding () CFO Roger Dassen

The entire industry is facing inflation
“The tool price inflation is real. The tool price, material, labor cost, et cetera.” - TSMC () CFO Wendell Huang

Hyperscalers are willing to pay any price
“We’re in an environment where demand is much bigger than supply. The chips have never been more valuable.” - Applied Materials () CEO Gary Dickerson

Will capital markets continue to finance it?
“...we are extremely conscious of the fact that the expectations for the quantum of financing that’s necessary to build out the data center infrastructure in the United States, based on what people are predicting, is quite significant. And over time, there is risk. There is risk to pressure on crowding out the size of scale. Not every project’s going to be received as well.” - Goldman Sachs () CEO David Solomon

Enterprises are spending tokens like kids in an arcade
“When you are a kid you go to a video arcade, you play. Your parents give you $10 of tokens, you finish it in 10 minutes, and you haven’t learned anything,” he said. “That’s what's happening in enterprises today.” - Broadcom () CEO Hock Tan

They are trying to rein in costs
“Just before this meeting, I met with 4 different customers, and what they’re frankly worried about is the token cost tied to those agents who tells me they want to use the agents, and we have to get smart in how we work with them to make sure that the costs don’t run away from them.” - Workday () CEO Aneel Bhusri

Most enterprises are seeing clear benefits
“AI is accelerating our product development life cycle. So we are launching new products at lower cost and at faster speed...We’ve reduced our tech vendor spend by 30% year-over-year as a consequence, and that’s still got a long way to run.” - Citigroup () CEO Jane Fraser

The cost of intelligence will fall quickly

“My expectation is that the cost of intelligence would fall fairly quickly... obviously we’re bringing more compute online. These models are getting smarter. When you’re smarter, you could be more efficient.” - Nvidia () CEO Jensen Huang

Are we at the threshold of where further deployment is no longer safe?
“We have frontier models now that have not been released because people have realized maybe we’re not ready to release them. That would have been an unimaginable thought a year ago.” - Palantir ( ) CTO Shyam Sankar

Meta doesn’t seem to be slowing down
“Quite famously, we were not happy with the trajectory that we were on with Llama 4. We kind of rebuilt the whole team. I mean, that’s been this kinda crazy thing over the last year and a half that we should probably spend a bunch of time on. Because we’ve had some war stories. But the team basically had to go build up different tiers of models to kinda get to this one. And now that we are kind of at the frontier, everything that we do going forward will just kind of be pushing the frontier, as opposed to there’s a lot of background work that we needed to do before that.” - Meta () CEO Mark Zuckerberg

So far the doomsayers have been wrong
“The doomsdayers have basically been wrong. Everything they predicted. They told us that ChatGPT-2 was too dangerous to release. They told us at this point in the timeline we’d already have mass unemployment and job displacement, and the economists see that actually we’re having job growth in areas that we wouldn’t have predicted doing exactly that. So the technology industry has two burdens. One is to show very clearly to the American people that AI is going to result in economic prosperity and security for the nation. And two, to actually do and absorb the burden of engineering. You cannot abdicate this idea that designing safe products is your job. You can’t handwave around it.” - Palantir () CTO Shyam Sankar

Healthcare

Healthcare costs are rising along with everything else
“Costs remain stubbornly high across the entire healthcare landscape and particularly in areas such as specialty pharmacy and acute healthcare service intensity...Care intensity remains elevated relative to historical norms, even as we continue to see signs that trends are bending in a more stable direction than what we have recently experienced.” - UnitedHealth Group () CEO Tim Noel

Industrials and Transport

Industrial activity improved further in Q3
“Industrial conditions improved further in the third quarter. U.S. manufacturing PMI averaged nearly 55, and industrial production for our key end markets remained positive. This is consistent with the gradual improvement we’ve seen since late last year. Although momentum remains stronger in select industrial markets than in the traditional manufacturing and automotive area.” - Fastenal () CFO Max Tunnicliff

Global aluminum inventories are historically low
“Aluminum prices moderated from recent highs but remains supported by constructive market fundamentals. On the supply side, production is gradually recovering as Middle East smelters restart and Indonesian capacity ramps up. The timing of a full recovery to pre-conflict production levels in the Middle East remains uncertain. Global aluminum inventories remain historically low at approximately 42 days of consumption, leaving the market with limited capacity to absorb further supply disruptions or stronger-than-expected demand.” - Alcoa () CEO William Oplinger

The Strait of Hormuz has had a major impact on aluminum supply
“I think the world has changed when it comes to aluminum within the Strait of Hormuz. And I think it’s going to be a while before that completely gets normalized of flows in and out. And so I think it is a big impact. You see it in pricing today, even though prices are off from where they were, we’re still sitting at close to $3,000 a ton. And so it has had a big impact, and I think it will still have a big impact going forward.” - Alcoa () CEO William Oplinger

China has plenty of aluminum supply
“China remains well supplied from within the region as new refinery capacity has increased production and inventories. This continues to create a clear divergence between softer market conditions in China and tightening fundamentals outside China.” - Alcoa () CEO William Oplinger

The new Tesla roadster isn’t necessarily safe or legal, but it is fun
“So the car has attitude control thrusters and main thrusters in the rear, so it can basically fly like a rocket. It could do rolls, crazy gymnastics, whatever you want, really. Now, I should say that this is not necessarily a safety-optimized car, but it takes the fun meter to 11 out of 10....This will be an actual car that’s on the roads. I’m not sure it’s necessarily legal in all jurisdictions, but there will be such a car that someone can own. So it’s going to be pretty wild that you can have a rocket car....It’s using an advanced, ultra-high-pressure air tank. So the car can recharge its air tank. It’s not like you need special propellant or anything like that. It literally is just going to puff itself up and be able to do these maneuvers.” - Tesla () CEO Elon Musk

Materials & Energy

Energy remains a primary bottleneck for AI
“We’re not seeing a slowdown in investment in the broader AI ecosystem behavior there. There’s simply not enough compute. Energy remains a bottleneck, requiring more investment. That’s globally, not just in the U.S.” - Citigroup () CEO Jane Fraser

Meta is planning for 5GW datacenters
“We built this Prometheus cluster in Ohio that’s scaling to larger than a gigawatt, and now we’re building this Hyperion cluster in Louisiana that’s gonna scale to five gigawatts. Those actually pre-date MSL, because building a whole data-center site from scratch takes years.” - Meta () CEO Mark Zuckerberg

TSMC is wondering whether customers have the power to receive the chips that are being produced
“Definitely, the power supply situation is one of the consideration factors that we are looking into. That is why we also do one more step to double-check whether the power supply situation in the US, and we have done all the study, and so far so good, let me say that.” - TSMC () CEO C.C. Wei

Nuggets of Wisdom

Act decisively
“I think one thing that is quite special about Mark is the degree to which, once he concludes that something is the right thing or something makes sense, he just fully shifts everything to be consistent with that belief set...He’s very willing to pivot entire things to be consistent with it.” - Meta () Chief AI Officer Meta Chief AI Officer

Think big
“As an investor, well, I say, forget about short-term, small money. Think big. The result is proportionate to your dream. If your dream is so small, if your wish is so small, you still get 70% achievement. If the wish is so big, the dream is so big, you still get 70% achievement. So, no matter how big your wish or dream is, you’re not gonna get 100% that easily. On average, you’ll get 70%. So why not think big?” - SoftBank (SFTBY) CEO Masayoshi Son

A good captain is willing to go down with the ship
“I took half of my money, half of it, that day when I was made the CEO, and put it in that stock. And not because I thought the stock was a bargain, but because I wanted everyone to know that’s what I’m going to do. I’m going to go down with the freaking ship, and anyone who joins knows that I’m going to do the best I can, as hard as I can, for as long as I can, to make it the best possible bank I can.” - JPMorgan Chase () CEO Jamie Dimon

The 3rd quarter of 2026 is over. Here’s a recap of some of the themes that we’ve seen and are watching going forward at The Transcript.

We have made this edition available to all subscribers. If you’re not a premium subscriber already, we hope that you will read this and subscribe.

Share The Transcript

Macro

The US economy remains strong. Consumer spending and employment are steady. Business confidence is high.

AI has come to dominate more than just the tech industry. It has increasingly become an economic force unto itself. AI capex spending now rivals the size of the US defense budget. Such significant spending is driving inflation in adjacent industries. Critically, it also appears to be a factor contributing to higher long-term interest rates, which are, of course, foundational to global capital markets.

“And in terms of economic impact, the economic impact is significant, especially for the U.S. economy....AI contributes around 1.5% to 2% of the U.S. gross domestic product, as well as 50% of the growth in net imports, right?” - Expeditors International of Washington (), Onyx Sr. Geopolitical Analyst Suryo Nugroho [8th September – AI Bottlenecks]

In addition to these fundamental drivers, a shift in philosophy at the Fed has been an important change in the last quarter contributing to higher rates. Kevin Warsh took over as chair of the Fed, and markets have been acclimating to his leadership style and approach. Warsh has been clear that 1) he wants the Fed to say less, 2) he wants the markets to “play the ball, not the umpire,” and 3) his Fed will not tolerate above-trend inflation. As part of this approach, he seems content to let longer-term interest rates move independently of Fed policy targets. He appears to want the signal from yield curve shifts to inform Fed policy rather than the other way around.

“Markets over time will come to understand how this Fed makes its decisions, what’s relevant and not, and I wouldn’t want to editorialize that for them beyond it.” - Federal Reserve Chairman Kevin Warsh [21st September – Keep Moving Fast]

This hands-off approach to interest rate markets is potentially a tectonic shift in the architecture of markets. We’ll only really know Warsh’s resolve with respect to his philosophy when markets test it. In recent weeks, markets certainly have been pushing to find the boundary of what the new Fed is willing to accept without intervention. In this way, capital markets have become somewhat of a tug of war between AI and interest rates. It remains to be seen which force will be the bigger driver of equity values.

International

Chinese industry represents a wild card within the global AI race. While US tech companies currently dominate the field, Chinese tech companies are also investing heavily in frontier models, infrastructure, and components.

“Given that Chinese AI companies are doing as well as they are with a relatively small amount of compute, it seems that if they had a lot of compute, there’s a good chance they would be the leaders. At some point, they probably will have a lot of compute, so there’s a good chance they will become the leaders” - SpaceX () CEO Elon Musk [27th July – Freely Flowing Cash]

The Chinese government seems to be particularly focused on developing a domestic semiconductor industry, which would enable independence from global semiconductor suppliers. China has a current disadvantage in this space.

China has other advantages, though. In particular, it leads the world in electricity production, which is a core bottleneck for the industry. Additionally, its strategy focused on lower-cost open-source models has led to share gains among enterprise users for basic tasks. The balance of the rest of the global economy is stable if not spectacular.

“China has far more electricity than the United States. In fact, China has more electricity than the United States, Europe, and India combined already, um, and is heading to... And my guess is China gets to four times the electricity production of the US, which is roughly proportionate to the population.” - SpaceX () CEO Elon Musk [27th July – Freely Flowing Cash]

Financials

The capital markets deal boom that was expected earlier this year has not fully materialized. But confidence is still high within the financial industry. Anthropic is expected to IPO this year and OpenAI potentially sometime in 2027. Broad stock market indexes are up significantly in 2026 with relatively limited volatility.

“I actually think that, given everything happening with safety, right now would be an ill-advised moment to go public, and we don’t feel pressure on that,...I would say not 2026” - OpenAI CEO Sam Altman [14th September – Slow Down]

Within commercial banks, credit quality is high, and loan demand has rebounded. There are some questions about whether hyperscaler capex is stretching the limits of what even the deepest capital markets can support.

“... our answer is very boring. There’s just nothing that’s really an area of issue right now. As I mentioned, credit metrics are likely going to be stable in the quarter.” - U.S. Bancorp () CFO John Stern [28th September – Powering Forward]

Consumer

Amazingly, the US consumer has gotten somewhat lost in the shuffle of the AI action.

Consumer spending is still strong, and unemployment is low, but the consumer isn’t the marginal driver of capital markets and economic activity today.

“... based on what we see across our businesses every day, the economy and the customers remain in very solid shape” - Urban Outfitters () CEO Dick Hayne [31st August – Hall of Mirrors]

“Our consumer continues to be resilient…” - Levi Strauss () CFO Harmit Singh [13th July – Stealing Alpha]

“Consumers and small businesses continue to show resilience despite elevated gas prices and inflation... - JPMorgan Chase () CFO Jeremy Barnum [20th July – As Good As It Gets]

The consumer economy continues to exhibit signs of a K-shape. Affluent consumers are doing very well while lower-income consumers are increasingly under pressure from broad inflation. However, even the lower-income consumer is driving stable spending growth.

“What we’ve seen so far is what we’ve seen all year long, and that is we’re operating in what we would describe as a K-shaped economy…” - Lowe’s Companies () CEO Marvin Ellison [19th August – Memory Wars]

“...that bifurcating consumer is real” - La-Z-Boy () CEO Melinda Whittington [24th August – Treasury Buybacks]

Travel and entertainment spending remains particularly strong. Meanwhile, the housing market has been in a multi-year malaise, which perhaps speaks to the underlying health of the “old” economy more than any other indicator. High interest rates weigh on this sector, but this too goes largely unnoticed by financial headlines.

Technology

The AI boom is cementing its place within the great economic booms of history. While there are many questions about whether the boom will eventually turn to bust, it’s clear that AI tools are having a profound impact on the way that people interact with the world. The tools continue to develop at unprecedented speed. While coding agents were the focus of capital markets just two quarters ago, attention has shifted to a broader adoption of agents encapsulated in part by the launch of Meta’s Muse.

“This one just really clicked right out of the gate. So it’s been very exciting to see, and the fact that we’re like two weeks in and there’s millions of people using it is, I don’t know, this is pretty rare. Every few years we get something like this, but this is definitely the fun part of building a company.” - Meta () CEO Mark Zuckerberg [28th September – Powering Forward]

Frontier models also continue to evolve. It’s not always perceptible how much they have progressed from week to week, but high-profile breakthroughs like solving century-old math proofs lend credibility to the idea that machine intelligence may soon exceed the capabilities of human intelligence. All of this supports the idea that there is insatiable demand for tokens and that the trillions of dollars in capital spending are just the beginning of the boom.

“In just one year, monthly AI token processing jumped from about 0.7 quadrillion to 1.7 quadrillion. But that was before agents. Once AI starts working continuously, the curve changes dramatically. By 2030, estimates reach 120 quadrillion AI tokens processed every single month.” - AMD () SVP & GM Jack Huynh [8th September – AI Bottlenecks]

Still, there are deep questions about whether the benefit of AI fully balances the economic equation. Businesses are now closely auditing token spend and moving workloads to cheaper open-source models. Still, OpenAI has disclosed that it is generating $50B in run rate revenue, a staggering sum for such a young company.

“The other thing that you’ll notice is that this thing, once the subsidies stop for everybody... there’s marginal cost to tokens. And so one of the core business model realizations is that... this all has to be about the return that the user gets whether it’s in the consumer space or in the enterprise space..It is going to consume tokens and so there needs to be ultimately a business model” - Microsoft () CEO Satya Nadella [28th September – Powering Forward]

“On the token-maxing, I think the -- we’ve gone up so like just in terms of costs, we’ve gone up maybe 3x or so since January, it’s certainly going to continue to go up by the end of the year.” - Roper Technologies () CFO Jason Conley [19th August – Memory Wars]

The most bearish data point for the AI industry is one that we highlighted recently after Micron earnings. Despite multi-x increases in capital spending by hyperscalers, industry capacity is increasing at a far slower pace than the spending would suggest. Suppliers like Micron are seeing explosive growth in revenue, but datacenter capacity is only growing in the high teens to 20% range. Building a data center is just much more expensive than it used to be. Price inflation is driving most of the financial returns, and pricing power is likely slowing.

“....with robust demand trends including new upside requests from customers, we do not have line of sight to when supply and demand will return to balance...it just takes a long time for these new clean rooms that the whole industry is working on to be able to build and then qualify and then equip” - Micron () COO Manish Bhatia [5th October – High Rates?]

“Demand is still faster than supply, though, for traditional server and AI server. So those two buckets continue to have demand that was really robust. As we look into next year, we see the supply differential only getting worse, not getting better” - Dell Technologies () CFO David Kennedy [14th September – Slow Down]

Importantly, the capacity bottleneck may increasingly be piling up at the energy infrastructure layer, where new capacity is the slowest to develop. There’s a bear argument that in the coming years there will be GW of “stranded” chips. Datacenters without power to operate. While this would certainly work itself out over time, the balance of financial commitments may be more precarious, especially for neo-clouds.

Healthcare

Capital markets seem to be more open within the biotech space recently. It’s not clear that this is directly tied to the AI boom, but it’s likely that biotech is peripherally benefiting as investors look for additional frontiers and diversification. There are also some signs that the big AI labs may be turning their focus to biology. What would happen if the labs do to the field of biology what they are doing to the field of mathematics?

“As AI improves the ROI, customers will fuel their pipeline to capitalize on that. And you will see more indications going in parallel on clinical research...you’re seeing demand pick up in some of the early research spend because there’s new activity happening, which would not have happened in the past…” - Thermo Fisher Scientific () CEO Marc Casper [28th September – Powering Forward]

Industrials

The industrial economy appears healthy. Freight markets have emerged from their long doldrums. PMI surveys have been consistently in expansion territory.

“We had a freight recession for 3 or 4 years. It’s been positive in the first half of this year. And so we hope that continues. It’s more of a supply-driven rally” Roper Technologies () CEO Neil Hunn [14th September – Slow Down]

“...the industry is coming off of a cyclical low. The fundamentals are improving; I would describe it as cautious optimism.” - Cummins () CEO Jennifer Rumsey [10th August – Steady as She Goes]

Aerospace and defense spending has been strong. The auto industry has been stable, and EV spending has been rebounding.

“I think we would both argue that from an electric vehicle adoption perspective, we’re now at the point where we’re back to a more stabilized area, and we’re going to see growth from there. I think part of it is -- and look, I own all electric vehicles.” - Rivian Automotive () VP of IR Chip Newcom [5th October – High Rates?]

The industrial economy is also being touched by inflation, though. The prices paid component of recent ISM surveys has been above 60 for 8 months, highlighting a persistent inflationary psychology.

Energy

While conflict with Iran is still ongoing, the situation in the Strait of Hormuz has faded from headlines. Oil prices are elevated, but production appears to be finding ways around and through the Strait. Markets seem to be comfortable with the status quo.

“The other thing we’d tell you is the market fundamentals for the most part are working. And when you see a supply shock like we’ve seen in the oil markets, one of the things you’re going to witness is a rush to try to increase supply. And we’ve seen unprecedented levels of release of inventory, both strategic commercial reserves but also strategic petroleum reserves” - ExxonMobil () CFO Neil Hansen [21st September – Keep Moving Fast]

With oil markets more stable, the focus of the energy industry returns to electrical capacity to support data center growth.

“Demand far exceeds supply. The grid cannot keep up with the demand from hyperscalers and others, and we see that persisting for years.” - Chevron () President of Chevron New Energies Jeff Gustavson [3rd August – Reaction Functions]

Elon Musk argues that space-based data centers are the best way around capacity constraints. He’s planning for an astronomical 200GW of new capacity per year from this source.

“SpaceX is aiming together with Tesla to do 200 gigawatts of solar production per year” - Tesla () and SpaceX () CEO Elon Musk [5th October – High Rates?]

“And it’s pretty magical that orbital compute is clearly the solution here on the power and cooling and permitting side. But we wouldn’t give that range for next year unless we had line of sight to power specifically, but power and facilities and permitting needed.” - SpaceX () CFO Bret Johnsen [14th September – Slow Down]

Closing Thoughts

As written earlier, the story of capital markets is setting up to be a tug of war between rising interest rates and AI spending. Interest rates have historically been the dominant force over capital markets. When rates rise, economic activity tends to constrict, and economic booms turn into down cycles.

But on the other hand, AI may just have enough wind at its back that it can overwhelm the rates side of the equation. Still, as AI spending reaches the limits of what capital markets can bear, growth rates will likely slow in 2027. Equity markets typically don’t love slowing growth rates.

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. Memory Pricing Is Moderating

Micron reported last week that its revenue grew an astounding 3.5x in FY 2026. It’s well known at this point that memory is in extreme short supply. Micron said that it has no line of sight as to when that will change.

“With robust demand trends including new upside requests from customers, we do not have line of sight to when supply and demand will return to balance...it just takes a long time for these new clean rooms that the whole industry is working on to be able to build and then qualify and then equip” - Micron (MU -0.96%↓) COO Manish Bhatia

Pricing has been the key driver of Micron’s results, so it’s worth noting that the company is expecting some moderation in price increases:

“We had indicated for the balance of the year that we would see margin expansion relative to Q1 a function of continued price increases, albeit at a more moderate pace. And we’ve said that for some time that eventually price increases would moderate.” - Micron (MU -0.96%↓) CFO Mark Murphy

Server unit volumes are only up in the high-teen percentages, and customers are trying to reduce the amount of memory they’re using amid supply and pricing constraints.

“We expect server unit growth in the high-teens percentage range in both calendar 2026 and 2027. This strong server unit growth is supported by a modestly lower rate of content growth than prior expectations, amid tight memory supply.” - Micron (MU -0.96%↓) CEO Sanjay Mehrotra

This is all extremely important because it implies that perhaps AI spending may be reaching its financial limits. Even though there is going to be a supply constraint, as far as Micron can see, there is only so much that hyperscalers are able to pay for access.

2. The Sources of Capital, Even for Hyperscalers, Are Eventually Finite

Comments from Digital Realty Trust also corroborate that capital availability may be reaching its limits. DRT mentioned that capital markets are becoming more discerning in financing data centers, especially for neo-clouds:

“Access to capital is still abundant and available, but I would say it’s becoming more discerning. And maybe even more so with where interest rates are going, but particularly from, I think, an underlying customer set, right?…it feels like there’s almost becoming like 3 tiers now. There’s the high-investment-grade customers, AA or single-A and above, you can get deals done as long as your contracts are structured appropriately. You then have kind of like lower-investment or BBB level. Some of those are getting harder, more discerning, in order to get capital against them. And then you have, call it, more neo-cloud, no ratings. I think that’s becoming much harder across -- at least from what we see across the -- from a broader landscape perspective across the globe.” - Digital Realty Trust (DLR 1.10%↑) CFO Matt

None of this means that AI spending is coming to a halt, but it does all imply that the comparative growth could be slower in 2027 than 2026. This would also coincide with a potential slowdown in frontier model development due to safety concerns.

For capital markets, slower growth is usually not well received.

3. The Political Blame Game for Higher Rates

As interest rates continue to rise, it’s noteworthy that the Trump administration appears to be directing its political fire at the FOMC in general rather than Kevin Warsh specifically. After the Fed raised rates in September, Trump himself implied that Warsh couldn’t fight a politically motivated board, and last week Kevin Hassett made a similar comment:

“The other thing about the Fed, and you know how long I’ve been close friends with Kevin Warsh…, he’s managing an unusually partisan Fed...If you go back to 1913, when chairmen, when their term is up, they leave. The same has been true for vice chairs… So why are they sticking around if not to worry about what the future Fed is going to do?” - U.S. National Economic Council Director Kevin Hassett

We have chronicled for the past few months how Warsh’s policy doctrines are encouraging the yield curve to shift. If he stays out of the immediate line of fire, it gives him more cover to continue to implement policy in the spirit of his philosophy. This means that it’s likely Fed policy will stay on its current course, and interest rates with it.

Summary: Interest rates are rising. Consumer spending is strong. Memory and energy are bottlenecks to AI.

Editor’s Note: We have reserved the sections after Macro for our premium subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

FOMC members see broadening inflation
“Currently, I anticipate that productivity gains will provide modest disinflation within the next few years. However, I do not expect those effects to arrive in time to offset the broadening inflationary pressure later this year.” - Federal Reserve Governor Lisa Cook

The Trump administration argues that inflation is low
“When I’m thinking about what future inflation is, then I look at the last three months of core.... When you annualize it, you know what the number is? 2%.... Right now I think that markets believe in future Fed credibility, but I think the argument that I would make if I were a governor is that if core is 2%, then why are we hiking?” - U.S. National Economic Council Director Kevin Hassett

Political pressure is being directed at the board, not Warsh
“The other thing about the Fed, and you know how long I’ve been close friends with Kevin Warsh…, he’s managing an unusually partisan Fed...If you go back to 1913, when chairmen, when their term is up, they leave. The same has been true for vice chairs… So why are they sticking around if not to worry about what the future Fed is going to do?” - U.S. National Economic Council Director Kevin Hassett

Rates really aren’t that high yet
“And by the way -- and everybody says, what do you think about these high rates? What do you think about these high rates? What do you think about higher for longer? And the first thing I always say is these are not high rates. They’re high relative to the rates that have prevailed since ‘09 when the Fed decided to cut the Fed funds rate to 0 to save the world financial system, but these are not high rates. These are quite low rates relative to the long sweep of history.” - Oaktree Capital Management Co-Chairman Howard Marks

International

Read more

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. Meta Scores A Point With Muse

Meta launched Muse last week to great fanfare. It’s tough to differentiate between the capabilities of the top AI apps at this point, but Muse is tilted in a more agentic and mass consumer direction. Its simplicity on that front may allow it to gain some market share and, more importantly to capital markets, justify Meta’s AI spending. Zuckerberg seemed pleasantly surprised by the uptake:

“You never really know when you ship something how people are going to respond. Every once in a while it’s a home run and people love it out of the gate, but most of the time you get some feedback that’s positive and you have to iterate on a few things before they really click. This one just really clicked right out of the gate. So it’s been very exciting to see, and the fact that we’re like two weeks in and there’s millions of people using it is, I don’t know, this is pretty rare. Every few years we get something like this, but this is definitely the fun part of building a company.” - Meta (META -3.62%↓) CEO Mark Zuckerberg

Aside from the implications for Meta, Muse seems to be a psychological win for AI agents generally. The AI industry has been pushing the idea of agents for most of this year. We’ve seen their mass adoption in coding. Muse may be a bridge that allows for mass adoption by a broader population.

Of course, more agents mean more demand for compute, especially CPUs.

Read more

Summary: The US economy is powering forward thanks to the consumer and AI buildout. Meta launched Muse last week to great fanfare. Inflation is persistent, as are rising rates.

Editor’s Note: We have made this week’s newsletter available to all subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

The economy is powering forward
“As long as the U.S. consumer keeps spending and the AI build-out keeps happening, things continue to motor along. And while the tail risks keep growing- geopolitical instability, domestic political questions, the trade war, inflation, energy prices- the market doesn’t seem to care as long as those 2 things of consumer spending and AI build-out continue forward, the underlying economy and, therefore, the markets keep powering forward.” - Apollo Global Management () Co-President Scott Kleinman

“Economy is strong. Not more to say. I mean I can’t explain why the economy is so strong, but it is very strong on all fronts.” - M&T Bank () CEO René Jones

“...we’re not seeing any deterioration. It’s continued strength. It may not be at the highest level that it’s been over the last 12 months, but we do see continued strength.” - Bank of America () Co-President Jim DeMare

The consumer is surprising everyone
“And the consumer. The consumer is surprising us. She’s resisting gas prices. She’s resisting worries about tariffs, and she’s spending.” - The PNC Financial Services Group () President Mark Wiedman

The consumer remains resilient
“Our members continue to show resilience in their spending, and they show a willingness to spend in discretionary areas where they’re seeing exciting new items at great value.” - Costco Wholesale () CFO Gary Millerchip

“I think e-commerce continues to do quite well, right? So that continues to be fairly resilient. I think the consumer continues to be fairly resilient, right? When you -- even in light of where fuel prices are.” - GXO Logistics () CFO Mark Suchinski

“So I would simply say the consumer remains resilient. I never thought I would use that word as often as I’ve used that word. They’re definitely choiceful.” - Macy’s () CEO Tony Spring

CEOs are confident
“...you have got confidence at the boardroom, and you have got private equity with a monetization backlog that is big and a dry powder that is big...credit is in really good shape. Spreads are tight. Equities are close to highs.” - Morgan Stanley () Co-President Dan Simkowitz

Earnings are up
“The companies have been shockingly resilient. Earnings are up. And generally, credit performs well if the economy is good, absent specific risks or stupidity.” - Apollo Global Management () CEO Marc Rowan

Labor markets are strong
“The last thing I’ll mention is, and I’m sure you’ve asked this question, is the consumer is very resilient though, still through all this. And the biggest reason why, and it’s no surprise, is she is gainfully employed still.” - Dollar General () CEO Todd Vasos

“What I tend to hear from our clients right now is they are having trouble finding people. There is a lot of capital investment going on. There is a need for a lot of electricians and a lot of construction work going on in some of this AI boom...So we have not seen anything in the macro environment, still not seeing any signs of a recession.” - Paychex () CEO John Gibson

Inflation remains persistently high
“Inflation remains persistently high, driven in part by fuel prices, which prompted the Federal Reserve to raise interest rates last week.” - KB Home () Executive Chairman Jeff Mezger

“Immigration enforcement and enthusiastic data center construction continue to create tightness in certain geographies. While we’ve been able to offset labor cost increases with efficiencies from scale, the pressure on cost is certainly building.” - Lennar () CEO Stuart Miller

More rate increases may be on the way
“In my view, given changes to the economy, we were out of position, and we made an adjustment in the right direction. In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion.” - Federal Reserve Governor Michael Barr

Rates could stay higher for longer
“So I think the idea that we would be continuing on the easing cycle has really pivoted to more of a higher-for-longer outlook, not just -- and not just on the short end. I mean, I think the -- we had the 10-year...it looks like that’s over 5% today. So very different backdrop when it comes to the equity markets and rates.” - State Street () CFO John Woods

Higher rates mean slower economy
“....this increase in rates thing is really interesting. If we’re going to -- if the Fed is going to increase interest rates, it’s because they want to slow inflation, which means they want to slow the economy.” - M&T Bank () CEO René Jones

Fed rate changes affect the economy with a lag
“...the thing that’s long proven, long studied is it takes 12 to 15 months for an interest rate impact by the rates or movement by the Fed to make its way into the economy....you might get an initial reaction by the stock market, but you won’t see it in the companies for 12 months” - M&T Bank () CEO René Jones

International

Chinese AI is leading in performance per compute
“Chinese AI models are generally outstanding, actually. I mean, you can see on the intelligence rankings, especially given the limited amount of compute that the Chinese AI companies have, the performance is excellent. Probably China is doing by far the best in terms of performance per unit of compute. And as I’ve said publicly, I think China’s going to address the compute limitation faster than most people expect. My rough guess would be that China addresses the compute constraints with lithography and chipmaking in about two or three years.” - Tesla () CEO Elon Musk

Alibaba plans 20GW of compute capacity by 2032
“Our target is that by 2032, the global data center capacity operated by Alibaba Cloud will surpass 20GW, fueling the industry’s exponentially rising demand for AI.” - Alibaba Group () CEO Eddie Wu

China has a huge edge in electricity production
“It was just a statement of fact that China, I think, earlier this year passed the electricity output of the United States, Europe and India combined, and is continuing to increase significantly. So if China reaches the same GDP-to-electricity output as the US, which I think is likely, then China would go from where it is now, roughly three times the US electricity production, to probably four times, which would be proportionate to the population difference.” - Tesla () CEO Elon Musk

The Chinese car market is 67% electric
“China is 34 million cars. The size of the Chinese car market is as big as the European and American car market together. And if I include cars with plug-in hybrids, cars with a cord, the total share of cars with a cord in China is above 67%. China is going electric as a speed that we did not see happening. And it happens even at an amplified speed in the last 6 months.” - Volvo Car AB (VLVCY) Chief Commercial Officer Erik Severinson

50% of new cars sold in Germany are electric
“in the last weeks, we’re seeing almost 50% of all new cars sold in Germany are fully electric. So Germany is going electric...when Germany turns, a lot of the other markets will follow as well. Nordics, already there. France, highly electrified. Belgium is electrifying, slightly slower pace in Spain and Italy. But as a whole, Europe is clearly going electric.” - Volvo Car AB VLVCY Chief Commercial Officer Erik Severinson

Financials

Capital markets are open
“But I feel there’s a lot of pent-up demand around the capital markets. They’re open. Spreads remain relatively tight. And so -- we’ve got huge pipelines. And companies generally, our corporate customers are all having good years...They are investing. They’re out borrowing money.” - Citizens Financial Group () CEO Bruce Van Saun

Pipelines are robust
“We are still of the view that we are relatively early in the M&A capital markets cycle...You have a lot of pent-up demand....When we look out around the pipeline...over the next 18 to 24 months, those opportunities aggregate to be multiples of a SpaceX.” - Morgan Stanley () Co-President Dan Simkowitz

“We look at our pipelines and the kind of deals that we’re working on, and it’s very exciting. I do think in that business, our ship is coming in and still has a lot of room to run as we look out into ‘27.” - Citizens Financial Group () CEO Bruce Van Saun

There’s a good breadth of companies ready to IPO
“So we’re seeing a pipeline, of course, in the whole AI infrastructure, whether you’re talking about semi or data centers or AI models themselves. And then you’ve got defense, which remains here. We’ve got a little bit in insurance and real estate. And even biotech, which had been a little bit too calm for a while, is starting to come back. So we are quite excited to see the breadth of what we are seeing in the IPO market.” - Nasdaq () CFO Sarah Youngwood

Credit quality remains resilient
“So it’s still a pretty good environment. I’d say the biggest negative in the environment right now is we wish deal flow was a little bit more robust. But away from that, underlying credit quality is good, not seeing an increase in the number of defaults, names on the watch list. And as I said earlier, I feel pretty good over the next 12 to 18 months; those trends will continue.” - Blue Owl Capital () Co-CEO Doug Ostrover

“Well, I mean, our answer is very boring. There’s just nothing that is -- that we see that’s really an area of issue right now. As I mentioned, credit metrics are likely going to be stable in quarter.” - U.S. Bancorp () CFO John Stern

Commercial real estate is showing early stabilization
“There have been some green shoots within the commercial real estate space, which are probably helpful. It’s early days on that, but we do see good momentum there, and we’ve released some very cool insights and products that are getting traction within real estate.” - MSCI () CFO Andy Wiechmann

Consumer

Consumer sentiment is down, but consumers are spending
“I’ll say externally, you can see consumer sentiment being down, but consumers are still spending. They’re still resilient. They’re spending in Casual Dining.” - Darden Restaurants ( CEO Rick Cardenas

Higher-income consumers are doing extremely well
“And then I think on the Consumer side, clearly, high-end folks are doing extremely well. And they’re just getting the benefit of a really high value stock market and home values holding in really nicely.” - Citizens Financial Group () CEO Bruce Van Saun

Lower-income consumers are doing ok
“But even as you go down into the lower spectrum, folks are managing okay. I think they’ve become adaptable and resilient and kind of make trade-offs in how they’re spending their money. But we don’t see a lot of stress. We don’t see delinquency roll rates ticking up or anything like that.” - Citizens Financial Group () CEO Bruce Van Saun

Lower-income wages are growing faster than higher-income cohorts
“What do I mean by that? Take a look at the wage growth numbers that we show. If you look at wage growth on a 3-month rolling average, that lowest tercile is now at a rate that’s above -- in terms of growth above the higher 2 sections.” - Bank of America () Co-President Jim DeMare

Inflation is putting pressure on the consumer
“And what we’ve seen in this economy, and again, not a surprise probably to anybody in this room, is we’ve seen a customer across all cohorts of income levels being somewhat distressed, especially in sustained inflation outside of gas prices for a minute, just basics.” - Dollar General () CEO Todd Vasos

$100k in income doesn’t really feel high income anymore
“...high income for us is that $100,000-plus crowd. And I would tell you, we’re hearing more and more from them is I don’t feel like I’m higher income at $100,000 any longer, right, because of all of the headwinds that I just mentioned.” - Dollar General () CEO Todd Vasos

Costco Q4 sales grew double digits
“Net sales for the fourth quarter were $93.87 billion, an increase of 11.2% from $84.43 billion in Q4 2025. Comparable sales were up 9.4% and 6.7% adjusted for gas price inflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were also up 6.7%.” - Costco Wholesale () CFO Gary Millerchip

Travel demand has been incredibly resilient
“...as we look into the fourth quarter, bookings are tremendously strong...the consumer has disposable income and wants to spend on experiences. And so the industry, to maintain profitability, has had to push through some price to offset rising fuel prices. And I wouldn’t say, to our surprise, it was our expectation, but it’s proven out that demand is incredibly resilient.” - United Airlines () CFO Mike Leskinen

“Elevated fuel prices and airfares increased the cost of travel and weighed more heavily on longer haul demand. Despite these pressures, travelers’ appetite for exploration remained resilient, with demand shifting towards shorter-haul destination.” - Trip.com Group () Executive Chairman James Liang

McDonald’s sales are down
“August was also slightly negative. We expect September will be positive. But I think because of that slower start to the beginning of the quarter, I think we expect the U.S. business will be slightly negative for Q3” - McDonald’s () CEO Chris Kempczinski

GLP-1s are starting to have a noticeable impact
“In the U.S., approximately 10% of adults use GLP-1s. And of those households with GLP-1 users, guess how many visit McDonald’s? 84%. Let me say that again. 84% of households with GLP-1 users visit McDonald’s. This is an opportunity.” - McDonald’s () President Skye Anderson

“Now you throw on top of that the beginning early impact of GLP-1s. And don’t ask me the specifics because I can’t tell you. All I can see is that the plus-size business is very soft and that most other areas of apparel are healthy. And I think you’re seeing people as they go through a period of time on GLP-1s, losing enough weight, what happens? People want to get a new wardrobe. And you don’t get a new wardrobe just for the summer. Then you need a new wardrobe for the fall, then you need a new wardrobe for the winter, then you need a new coat, then you need a new swimsuit. So we see this as a -- we’re on the early cycle of GLP-1s” - Macy’s () CEO Tony Spring

Housing markets remain challenged
“The housing market remains challenging, with conditions having weakened since our last earnings call in June. Affordability is under further pressure due to rising mortgage rates.” - KB Home () Executive Chairman Jeff Mezger

“Existing home sales have been near historic lows for much of the past three years, which suggests that the market is more likely to recover than to deteriorate further, and existing home sales are actually up slightly year-to-date through August.” - Sherwin-Williams () SVP Investor Relations Jim Jaye

Consumer electronics remains weak as higher memory prices weigh on demand
“One is consumer electronics; we knew it was going to be weak. It has been weak. You see memory prices come up, devices are slow, PCs, notebooks, tablets, phones, we know that was going to be down in the back end of the year. We actually outgrew the market in the second quarter” - 3M () CEO Bill Brown

There’s been very limited new supply of retail real estate
“Elsewhere, if you were at 95%, 96% occupancy, you’re going to see a ton of shovels in the ground in other sectors. Retail is just not the case for all the reasons that we’ve talked about land is expensive...So we really don’t see on the horizon any meaningful amount of new construction or development within retail anytime soon.” - Kimco Realty () President Ross Cooper

Technology

Meta scored a hit with Muse
“But you never really know when you ship something how people are going to respond. Every once in a while it’s a home run and people love it out of the gate, but most of the time you get some feedback that’s positive and you have to iterate on a few things before they really click. This one just really clicked right out of the gate. So it’s been very exciting to see, and the fact that we’re like two weeks in and there’s millions of people using it is, I don’t know, this is pretty rare. Every few years we get something like this, but this is definitely the fun part of building a company.” - Meta () CEO Mark Zuckerberg

Personal super intelligence is within reach
“What a wild time to be building. Delivering personal super intelligence is now within reach. Soon, everyone is going to have an extremely capable personal agent that understands your goals and can work 24/7 on your behalf to help you achieve them. Whether that is helping you improve your relationships, helping you be more present with your friends and family, saving you time, saving you money, helping you create things, helping advance your career. The technology now exists to make this all possible.” - Meta () CEO Mark Zuckerberg

Demand for compute keeps exceeding expectations
“...every quarter our customers are coming back to us and telling us they need a lot more than they thought they did. We had a customer, one of these AI clouds, one of the smaller ones, come to us a quarter ago, and we told them we need to plan ahead for the next 3 years because there’s supply chain implications and you need to be aware of this. And they said we’re probably going to need about 500 petabytes over the next 3 years. And last week they came back to us and said we’re going to need an extra two exabytes on top of that 500 petabytes. And my expectation is that, from what I’m seeing in other parts of the landscape, that they’ll come back again in a quarter or two and say we need a double-digit number of exabytes. We undershot.” - VAST Data CEO Renen Hallak

Demand greatly exceeds supply
“If you look at our pipeline today, for every GPU, we have a customer ready to sign. We have four customers ready to sign for every GPU...And there’s a sort of growing level of fear that if you don’t actually secure your future, you’re not gonna have the compute that you need in order to be able to succeed.” - Nebius Group () CRO Marc Boroditsky

More frontier models are on their way
“Our intention is to, like — as soon as possible — to release an early post-training output because we see the results and we are excited” - Alphabet () Google DeepMind Chief Koray Kavukcuoglu

“Pretty soon we’re dropping the most capable model we’ve ever trained. It’s going to help our entire model family get smarter and more useful for everyone, including the models that power Muse. You’ll hear more on that soon.” - Meta () Chief AI Officer Alexandr Wang

Is robotics next?
“I think with GPT-6, we’ve seen that the models are now just crushing a bunch of benchmarks in the robotics space, and I think that’s only the beginning...I would really suspect there to be a huge boom in physical AGI, and we’ll probably have a shortage of robot parts, the same thing that happened with the whole supply chain with graphics cards, I would expect to happen with robotics.” - OpenAI Head of Applied Research Boris Power

The AI industry won’t be supply constrained forever
“At some point, demand and supply will be inverted again, and that’s just the nature of markets. It’s not going to happen next year. It’s not going to happen in the next two or three years — I just don’t believe that. But at some point, we will likely have more supply than demand. I just don’t know when that is. And so there’s not much to learn from the past.” - Nvidia () CEO Jensen Huang

Maybe AI capex spend isn’t so large after all
“Despite the scale of the AI build-out, these investments so far remain less than 1% of GDP. That’s well below prior investment cycles, starting with railroads all the way through the dot-com era, which I think we’re more like in the 2% to 5% of GDP range.” - Blackstone () CFO Michael Chae

Doomers are really killing the AI industry’s vibe
“There’s a lot of rhetoric that is filled with doom. I’m quite optimistic about the fact that this is going to be a very positive future for everyone.” - Meta () CEO Mark Zuckerberg

“And then, of course, all of our narratives about the end of the world are not helping. What reasonable person says: Come and build this data center in my town, and by the way, whatever you produce is going to end humanity as we know it. And so I think all of this negative, doomer narrative is not helping our country, and we started off on our back foot.” - Nvidia () CEO Jensen Huang

Zuckerberg says that coordination isn’t required
“I don’t think that we need some kind of industrywide coordination. I think that each lab needs to take the time, and when it sees that there are issues, you just take the time that you need internally to basically make sure that you’re proceeding safely.” - Meta () CEO Mark Zuckerberg

Huang says that if AI labs can’t contain their models, they should be shut down
“...if they say the alternative, which is: There is no way to contain our experiments, there’s just no way; when we test our A.I. models, it will get out, and it will damage the world — then I think the answer is that we have to shut the labs down. Because the cost to humanity, the damage is too great. The shareholder, the liabilities — it could be civil liabilities, it could be criminal liabilities. I mean, the liability’s incredible.” - Nvidia () CEO Jensen Huang

Bessent says the labs are responsible for their actions
“The Hugging Face incident is the responsibility of OpenAI’s management, not a bunch of agents. What the president was saying is that we cannot say, ‘We absolve you of responsibility, and the government is going to take responsibility.’ These labs need to take responsibility for themselves. They can slow down any time they want to.” - Treasury Secretary Scott Bessent

Can agents be trusted?
“I think that trust is going to be the maximum biggest issue for us... can I really trust it with all of my credentials when it does autonomous activity? How do I make sure that this is something that I can feel that I’m in control, I can audit? And in the enterprise, this is everything.” - Microsoft () CEO Satya Nadella

AI services aren’t free
“The other thing that you’ll notice is that this thing, once the subsidies stop for everybody... there’s marginal cost to tokens. And so one of the core business model realizations is that... this all has to be about the return that the user gets whether it’s in the consumer space or in the enterprise space.”..It is going to consume tokens and so there needs to be ultimately a business model. And the business models, as far as I can tell, will always be the same, which is somebody pays subscriptions, somebody pays pay as you go, or somebody pays through some sort of two-sided thing like an ad... or transactions... software for the first time has marginal cost.” - Microsoft () CEO Satya Nadella

Healthcare

Preclinical biotech spend is starting to turn back on
“I think over the past couple of years, you’ve seen a real pinch down on the budgets from a preclinical perspective. That narrative has definitely changed over the past couple of quarters. You’re starting to see the opening of the faucet in terms of preclinical funds, which we knew they could not keep compressed for a long period of time. They need to keep feeding that innovation engine. And then even on top of that sort of, I would say, normal return to preclinical spending, we’re starting to see some incremental tailwinds from some of the AI momentum.” - Revvity () CFO Max Krakowiak

AI is inducing new drug development spending
“As AI improves the ROI, customers will fuel their pipeline to capitalize on that. And you will see more indications going in parallel on clinical research...you’re seeing demand pick up in some of the early research spend because there’s new activity happening, which would not have happened in the past, which is you’re seeing large-scale lab experimentation being done just to populate biological models, right, which is just to create that foundational biological model.” - Thermo Fisher Scientific () CEO Marc Casper

Industrials and Transport

The freight cycle is turning up
“We saw the first double-digit volume quarter in Intermodal in over a decade...And so here we sit today, and I would tell you all the plays that we would normally call at this part of the cycle, which is we need to dramatically ramp up our driver hiring department. We need to institute driver sign-on bonuses, we need to raise driver pay, we need to prepare for peak season. We’re sort of facing all that right now.” - J.B. Hunt Transport Services () CFO Brad Delco

Higher fuel prices are boosting rail demand
“Fundamentally, at a higher fuel price, not as hot -- is never good for the economy in the long run...It helps us bring more business, and we sure don’t want to damage the -- and have the economy damaged by having high fuel prices and slowing some things down. But so far, we haven’t seen that.” - Union Pacific () CEO Jim Vena

Construction demand is really strong
“...the demand environment feels great. It’s really been strong. We had pretty solid expectations when we came out with guidance in January, and the year has just progressed better than we had thought. The construct of demand has been pretty similar to what our expectations were, where large projects were going to drive most of the growth.” - United Rentals () CEO Matt Flannery

Consumers are buying cars
“...you see consumer sentiment down, but behavior hasn’t really changed. And that’s been true across the board. We’ve still seen a lot of success in our full-size trucks and SUVs . And no sign of that abating.” - General Motors () CFO Paul Jacobson

737 production is supply constrained
“The supply chain is in really good shape, including CFM on the engines, for our rate ramps on 737. The area we’re constrained right now is in our wings production. We actually produce all the wings in Renton for the MAX line. And we just have not seen the flow improvements that we expected in the time frame.” - The Boeing () CEO Kelly Ortberg

Copper supply is structurally constrained
“...you start with one of the issues for copper supply is that discoveries, major new discoveries of new resources is extremely rare. And so you don’t see constant replenishing of projects because there aren’t significant new discoveries. When you do have a discovery, it can take 2 decades or so to be able to develop it. So there’s a real challenge now with the lack of greenfield opportunities. There are a number of projects that the industry is pursuing and you’ve seen a lot in Argentina in different places. But we don’t have the pipeline of projects that we once had in the industry. So copper prices could go. You’ve seen copper prices go from $4 through $5 through $6. And to your point, not a near-term supply response.” - Freeport-McMoRan () CEO Kathleen Quirk

Higher fertiliser costs will drive more soybeans and less grains
“Without getting too specific, what I would tell you is fertilizer costs, given where we are in the planting cycle, more likely to be a headwind and affect crop planting decisions as you go into late spring next year, next calendar year. So that would be the place where, as farmers are making trade-off decisions about their input costs, they might switch to lower fertilizer-reliant crops such as soybeans and swap out of grains, which obviously affects the supply of some of the grain complex, which are more fertilizer reliant.” - General Mills () CFO Kofi Bruce

Materials & Energy

The US has not planned for enough energy production
“One, they just have a lot more energy than we do, and they plan to build a lot more than we did. I think we just have to acknowledge that we got ourselves really gummed up in climate change and sustainable energy, and as a result, we just didn’t plan enough energy production.” - Nvidia () CEO Jensen Huang

Data-center diesel standby demand remains extremely strong
“So I think fundamentally, to be as direct as we can, demand remains extremely strong. We announced in Q2 earnings, we just re-signed one of the large hyperscalers to a multiyear agreement and demand fundamentally remains extremely strong.” - Cummins () Executive Director of IR and Business Analysis and Planning Nick Arens

Nuggets of Wisdom

Underpromise and overdeliver
“What we have learned the last couple of years is overpromising and underdelivering loses trust very quickly.” - Novo Nordisk () CEO Maziar Mike Doustdar

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. Supply and Demand for Capital Will Set Interest Rates

The Fed raised short-term interest rates last week, and Warsh implied that he sees policy as relatively accommodative at the moment. But under the Warsh Fed, short-term rates may be less relevant than they have been in the recent past.

Warsh appears happy to let market forces move long-term rates rather than control the yield curve via the rate-setting mechanism. In this way, it appears that Warsh may be taking a laissez-faire approach to rate markets. At his press conference, he said this:

“What bond market prices do prospectively, I want to let them do their – I want to let them tell me any story they wish to. I want to try to interrogate that.” - Federal Reserve Chairman Kevin Warsh

As we’ve written in past issues, this is a significant departure from the way that the Fed has operated for several decades. Rates may, for the first time in a very, very long time, be more subject to the classical forces of supply and demand for capital than to central bank policy.

Warsh articulated exactly this view when he gave his thoughts on why longer-term interest rates are rising. He sees demand for capital pushing the cost of capital higher:

“I think part of the reason why we’ve seen over the course of 2026 long-term yields go up is the economy has strengthened. Second reason, competition for capital....the so-called hyperscalers are out in the market raising funding....The third is geopolitics. The situation in hot spots around the world are driving long-term yields.” - Federal Reserve Chairman Kevin Warsh

By encouraging longer term rates to move based on the forces of supply and demand, Warsh is forcing capital markets to abide by his single clearest policy directive: play the ball and not the ref.

If Warsh holds this ground, it could become the largest reform to the structure of capital markets since the Fed/Treasury accord of 1951. This is not something that equity markets are currently discounting.

2. The Demand for Capital From the AI Industry is Reaching Systemic Proportions

At this point, it’s not surprising to anyone that the AI industry is spending massive amounts of capital building data centers, but the scale of the capital is still large enough to be staggering. David Solomon of Goldman Sachs noted that the number is expected to be $8 trillion over the next five years:

“...with respect to AI financing, if everyone is right and the build-out of the compute capability in the next 5 years is going to take $8 trillion, there’s going to be a lot of financing to do that.” - The Goldman Sachs Group (GS 0.32%↑) CEO David Solomon

To put this into perspective, the US Treasury market is $30 trillion, the entire US corporate bond market is $12 trillion, and total consumer credit outstanding is $5.1 trillion.

3. Nothing is Flashing Red?

The macro section of this week’s The Transcript was positive, as it has been consistently for most of this year. In fact, the economy is so strong that Wells Fargo’s CFO said that resilient isn’t really the right way to describe it anymore:

“I think -- when you look at the consumer side, I stopped using this word resilient because it’s just strong.” - Wells Fargo (WFC -0.56%↓) CFO Michael Santomassimo

The CEO of JP Morgan’s Commercial and Investment Bank was similarly bullish. He said that he doesn’t see any flashing red signals at this time:

“I think the U.S. is a bright spot, one of the more relatively stable and strong parts of the global economy right now. But I don’t -- we don’t really see anything flashing red and very little flashing yellow. Anything that’s flashing yellow would sort of fall in the category of companies that are in the center of the bull’s eye for disruption for AI or anything exposed to the low end of the U.S. consumer demographic.” - JPMorgan Chase (JPM -0.30%↓) CEO of Commercial & Investment Bank Doug Petno

While these comments may accurately reflect the moment, we can’t help but wonder whether markets are already priced for perfection.

Summary: The Fed raised rates last week. Warsh implied that he sees policy as relatively accommodative. In AI, safety has taken center stage. Safety programs will require even more compute.

Editor’s Note: We have reserved the sections after Macro for our premium subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

The Fed raised rates
“Job gains have kept pace with the workforce and the unemployment rate has changed little. But inflation remains elevated. Today’s policy action will support a timelier return to the committee’s 2 percent goal. This committee will deliver price stability.” - Federal Reserve Chairman Kevin Warsh

Warsh wants markets to know that he’s serious about inflation
“Today’s action starts to show we’re serious about this, and we will deliver on the price stability objective, and as the statement said, we’ll do it on a timelier basis.” - Federal Reserve Chairman Kevin Warsh

He views rates as accommodative
“I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the committee. So we removed a dose of accommodation.” - Federal Reserve Chairman Kevin Warsh

He thinks three factors are driving up longer-term yields
“I think part of the reason why we’ve seen over the course of 2026 long-term yields go up is the economy has strengthened. Second reason, competition for capital....the so-called hyperscalers are out in the market raising funding....The third is geopolitics. The situation in hot spots around the world are driving long-term yields.” - Federal Reserve Chairman Kevin Warsh

Higher rates aren’t expected to knock the economy off balance
“So we feel very good about the underlying U.S. economy. And our team, like your team has mid-2s growth for the year and Fed will raise rates, but it won’t knock the economy off its movement.” - Bank of America () CEO Brian Moynihan

The economy remains resilient
“...client activity generally remains constructive. The economy appears resilient...feel like when we talk to our clients, they’re telling us, regardless of that source of uncertainty, they’re getting comfortable sort of navigating this area.” - KeyCorp () CFO Clark Khayat

“...you’ve got a really strong sort of employment picture with unemployment still quite low...it’s hard to see sort of what’s going to be the catalyst for that to change at this point.” - Wells Fargo () CFO Michael Santomassimo

Consumers are doing well
“Consumers continue to spend, consumers continue to pay their bills on time. That’s the simplest version. So if I talk about spend for a second, we are seeing around 6% year-on-year spend momentum.” - Citigroup () CFO Gonzalo Luchetti

“I’m sure a lot of analysts in this room were always surprised and heartened by the strength of the consumer” - Yum! Brands () CFO Ranjith Roy

“...despite the inflation and tariffs and wars that are going on, the consumer seems to be in a pretty good place.” - Capital One Financial () CEO Richard Fairbank

“...the reality is that there was more spending on cruise bookings, more spending on restaurants...consumer spending on a broad-based out-of-home entertainment has been big. The movies have come back because they’ve had some good movies. So the consumer is spending money” - Bank of America () CEO Brian Moynihan

Consumer spending isn’t just resilient, it’s strong
“I think -- when you look at the consumer side, I stopped using this word resilient because it’s just strong.” - Wells Fargo () CFO Michael Santomassimo

“Unemployment is low. The new job creation just rebounded very recently. Consumer spending is pretty strong. Bank balances, when we look at bank balances, they are up a little bit over last year on average per person.” - Capital One Financial () CEO Richard Fairbank

CEO confidence is high
“I told you at the beginning of the year, we’re going to have [higher inflation and interest rates]. You wouldn’t have said, “Well, that we’d expect higher CEO confidence.” But what I think is underpinning that, look at earnings growth...CEOs feel like they can really drive earnings at the moment.” - The Goldman Sachs Group () CEO David Solomon

“You would honestly not know that we’re at war, oil is above 100 for 10 years higher than it’s been since 2007. We have a hawkish Fed, hawkish central banks in Europe. Our clients are seeing through the market volatility and the fog of uncertainty, and they’ve been incredibly resilient.” - JPMorgan Chase () CEO of Commercial & Investment Bank Doug Petno

“...whether it’s executive search, Professional Search, RPO, or Interim. We are starting to see a lot more confidence in hiring decisions being made.” - Korn Ferry () CFO Robert Rozek

Hyperscalers are spending $8 trillion over the next 5 years
“...with respect to AI financing, if everyone is right and the build-out of the compute capability in the next 5 years is going to take $8 trillion, there’s going to be a lot of financing to do that. Now I’m not sure it’s going to be a straight line. I’m not sure everybody is estimating at the end of the day, the right capital needs that they’ve got the right pricing models. But I do think there’s going to be a lot of demand, and there’s going to be a lot of needs.” - The Goldman Sachs Group () CEO David Solomon

Nothing is flashing red
“I think the U.S. is a bright spot, one of the more relatively stable and strong parts of the global economy right now. But I don’t -- we don’t really see anything flashing red and very little flashing yellow. Anything that’s flashing yellow would sort of fall in the category of companies that are in the center of the bull’s eye for disruption for AI or anything exposed to the low end of the U.S. consumer demographic.” - JPMorgan Chase () CEO of Commercial & Investment Bank Doug Petno

International

Read more

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. Inflation Expectations are Broadening

Earlier this year, rising oil prices were viewed as a relatively transient driver of inflation. However, the longer the conflict with Iran has dragged on, the more that higher oil prices are coming to be viewed as a new normal. This, along with AI spending, appears to be starting to rebase inflation expectations. We’ve noted sentiment along these lines in past issues of Catalyst Watch. This week, a comment from Restoration Hardware stood out:

“We are going to be in a higher-cost world for probably at least the next six to 12 months. Even if tomorrow they end the war, there is too much inflation in the pipeline. All the raw materials are going up everywhere, on everything. Everything is impacted by oil. That is why you are seeing crazy things. We are trying to manipulate currencies, buying back things. It is a crazy time.” - RH (RH 2.01%↑) CEO Gary Friedman

The Fed is likely still more concerned about medium- and longer-term inflation expectations than 6-12 month expectations, but we’re now going on 6 years of inflation running above the Fed’s 2% target. Can medium- and longer-term inflation expectations remain anchored without Fed action?

Read more

Summary: Not much changed in the economic story last week. The economy remains strong. The AI supply chain is bottlenecked and could remain so through 2030.

Editor’s Note: We have made this week’s newsletter available to all subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

Consumer spending remains strong
“The overall macro environment remains very supportive of both consumer spend and business spend. I continue to be impressed by how resilient consumers are. I mean, in the U.S., that resilience like continues to shine through. People are spending their money on travel. Americans are going to box office movies like Spider-Man and Odyssey. They’re spending money on experiences such as dining.” - Mastercard () CFO Ling Hai

“...if you actually look at our business and how they’re spending, it’s strong and stable. In the U.S. for the last 6, 8, 10, 12, 18 quarters, months, I should say, the last 1.5 years, let’s call it, our business in the U.S. has been growing about 6% to 8% roughly....In the last quarter, our U.S. business grew 10%. If you look at quarter-to-date through the end of August, it’s been growing about 9%.” - Visa () CEO Ryan McInerney

“But from a macro perspective, right, employment remains strong, wages are going up. Yes, there’s inflationary pressures. They’ve been there for some time now. What we see is an incredibly resilient and very healthy consumer. We’re seeing no price resistance.” - Urban Outfitters () COO Francis Conforti

It’s honestly a little bit boring
“It’s -- honestly, it’s a little bit boring, which is more of the same for us...Growth for lower-income consumer cohorts is just as strong as growth for us in higher-consumer income cohorts. And mobility business in the U.S. has accelerated since late last year. So at this point, the consumer for us remains robust, and we don’t see any signal of that changing.” - Uber Technologies () CEO Dara Khosrowshahi

There is pressure on the consumer, though
“Customers remained under pressure, and that has affected the industry broadly. Unit growth has slowed since the start of the year. Reductions in SNAP benefits, higher fuel prices, and softer consumer confidence are all putting pressure on household budgets. Customers are buying more on need.” - The Kroger () CEO Greg Foran

Labor markets are stable but slow
“Everything was going fantastically well until the last 3.5 years, when a macro downturn hit the United States economy, hiring effectively went backwards every month for 3.5 years. That’s bad if you’re a recruiting business. Fortunately, hiring has stabilized in 2026, albeit at levels we haven’t seen for over a decade.” - ZipRecruiter () CEO Ian Siegel

“...we’re starting to see a lot more confidence in hiring decisions being made. Each business is a little bit different, executive search.” - Korn Ferry () CFO Robert Rozek

Inflation is extending beyond oil
“We are going to be in a higher-cost world for probably at least the next six to 12 months. Even if tomorrow they end the war, there is too much inflation in the pipeline. All the raw materials are going up everywhere, on everything. Everything is impacted by oil. That is why you are seeing crazy things. We are trying to manipulate currencies, buying back things. It is a crazy time.” - RH () CEO Gary Friedman

“I think the pressure on pricing will increase with some of the cost pressures sustaining. And again, the longer oil stays at above $100, the harder it will get, I think, for everyone to manage, and I think the higher the combined pressure on pricing will be.” - The Procter & Gamble () CFO Andre Schulten

International

Travel patterns have shifted in 2026
“And the other thing that I’m seeing in travel is people continuing to travel, but they’re just shifting their traveling -- travel routes a little bit. So for example, your northern neighbor here, the Canadians, are not coming to the U.S. as much now, but they’re going to Europe, right? During UEFA, the Europeans are coming to the U.S. But then, off-season, the Europeans are traveling to Asia. So they’re avoiding the Middle East, but they’re coming to Asia. So even though you see some puts and takes, but overall, I think it’s more of a shift in terms of cross-border travel.” - Mastercard () CFO Ling Hai

European macro conditions appear softer than the U.S
“Just speaking to the Urban Outfitters brand in Europe, we continue to honestly exceed our expectations...I don’t think the macro there is necessarily as strong as what we’re seeing here in the U.S.” - Urban Outfitters () COO Francis Conforti

Financials

OpenAI rules out a 2026 IPO
“I actually think that, given everything happening with safety, right now would be an ill-advised moment to go public, and we don’t feel pressure on that,...I would say not 2026. Yeah, we got a lot of stuff to do, like meeting this moment of what is going to be required for safety and alignment, and how the industry and governments can work together.” - OpenAI CEO Sam Altman

Prediction markets are growing fast on Coinbase
“I want to start off with prediction markets. Prediction markets crossed the $100 million annualized level just with a couple of months of launch and then grew another 106% quarter-over-quarter in Q2. That’s an extraordinary curve.” - Coinbase Global () Director of Digital Assets and Fintech Services Equity Research at Citi Research Peter Christiansen

Small businesses are stable
“The SMB macro, SMB, means -- yes. The macro remains quite stable. The 2 metrics that are my favorite to look at are the cash reserve that these customers have and the hours worked. Both the cash reserves and the hours worked are up for the small businesses and even more so for the mid-market businesses. So they continue to be stable.” - Intuit () CFO Sandeep Aujla

Consumer

Travel demand remains strong
“Despite oil prices, despite the fact that air ticket prices are up, people are still prioritizing travel. And it’s probably one of the few good things that has stuck around after our experience in COVID, which was sort of this human need to want to travel. Certainly, we’re seeing more strength at the high end than on the low end. There was more strength in domestic travel. Still, U.S. outbound is strong, but my interpretation is that with gas prices up, maybe people are choosing to stay a bit more local.” - Expedia Group () CEO Ariane Gorin

“So what we saw was, of course, at the onset of the conflict in the Middle East, March, April, May, consumers, travelers were very careful to get their bookings in. But then actually from June onwards, we saw that travelers were saying, I’m not going to give up on my summer holiday. I still want to make that trip. And we saw actually the demand picking up in a very strong way.” - Booking Holdings () CFO Ewout Steenbergen

Live sports is on fire
“On the other hand, live sports is just on fire. People just can’t get enough of it, and our advertisers can’t get enough of it. Overall, the ad environment is healthy for us. It’s just that different channels are reacting differently at this point.” - Disney () CFO Hugh Johnston

Housing is in an unprecedented 5-year downturn
“I keep thinking, gosh, it is like my entire career, and I have been doing this a long time, I never saw a housing market that was down longer than 18 months. It looks like we are going to go into year five.” - RH () CEO Gary Friedman

“...we’re talking about 4 million home sales. So we are nowhere close to normal. And that 4 million home sales has been pretty consistent over the last 4 years at this point. I think 2023, ‘24, ‘25 and ‘26 will all be about 4 million home sales. So we’re in a particularly depressed time in a cyclical market.” - Zillow Group () CFO Jeremy Hofmann

Consumer PC demand will be down 18-20% this year
“...the PC market, particularly in consumer, was going to get squeezed a little bit. It’s projected to be minus 18% to minus 20% on units.” - Dell Technologies () CFO David Kennedy

LLMs are changing the way e-commerce companies acquire traffic
“...the single fastest-growing and new source of traffic for ZipRecruiter for job seekers is LLMs. So whether it’s Claude or whether it’s ChatGPT, we see an influx of job seeker traffic from these two sources. And not only do we see that influx, and not only is it growing rapidly, but these are the most engaged job seekers we’ve ever received,” - ZipRecruiter () CEO Ian Siegel

LLM-driven commerce traffic is higher intent
“But when you start with an LLM, and you do your searching there, you’re 2.5x more likely to end up right on the product page rather than starting somewhere in a general spot on the merchant’s website, you’re going straight to the product you want. And then that leads to an uplift in conversion. We’ve seen roughly an 80% uplift in conversion.” - Shopify () CFO Jeff Hoffmeister

Two-thirds of Booking.com traffic now comes direct
“We are now having 2/3 of the traffic coming directly to our marketplace. Yes, we are still paying for 1/3 of the traffic. We like that because it’s, of course, bringing new customers to us, but 2/3 is coming direct. We are facilitating the payments at a low 70% of all those transactions.” - Booking Holdings () CFO Ewout Steenbergen

AI marketing slop doesn’t convert customers
“Look, what is happening is that if you use an LLM to generate a generic e-mail and send it to the set of contacts you have, the click rates and the open rates are just going down. There is no room for just AI that is generating e-mail that is not personalized.” - HubSpot () CEO Yamini Rangan

“Employers are beleaguered with resumes that look perfect because AI is very good at helping people write resumes that look perfect.” - ZipRecruiter () CEO Ian Siegel

Aging demographics could be a bigger labor market shock than AI
“...for the next 5 years...the impact of aging workforce is much bigger than AI impact. We are losing experienced, skilled baby boomers every day....So we’re going to lose 6 million workers in the next 5 years, 6 million workers. That’s almost 4% of the U.S. labor force...AI replacement is too slow to catch up this -- the aging workforce change. Aging workforce is for sure happening. That’s why employers are struggling to fill positions.” - Recruit (RCRUY) CEO Hisayuki Deko

Apple launched a foldable phone
“So that is iPhone Duo, the most transformational iPhone experience since the original. It features the largest display ever on iPhone, along with a beautiful outer display and a reimagined iOS experience that makes the familiar feel entirely new. With pro performance, unique camera experiences, amazing durability, and unparalleled versatility, it is an iPhone like no other iPhone. iPhone Duo starts at $1,999, with storage capacities ranging from 256GB to 2TB” - Apple () Engineering Director Josh Shaffer

Technology

There’s not enough compute
“We still feel really short...if we had more compute, there are more things we could do.” - OpenAI CFO Sarah Friar

“And so I think given the need for everyone’s short compute and the need for more compute and the supply being deployed to meet the demand that’s out there” - KLA () CFO Bren Higgins

“...the hardest thing to find right now is compute. Even if you get yourself an open-source model, you want to run it for $1 billion a year, you have to go buy $1 billion of compute. So it still costs you.” - Palo Alto Networks () CEO Nikesh Arora

The demand has only gone up
“One invariant that has been true so far is that the demand for server-side computing in data centers has only gone up. And it turns out so far that everything we see about the AI use case is the same way, but only more so, right? The fact that when we go out, and we have capacity up for renewal, that we actually can achieve higher prices to the order of 20%, all of those are very positive signs for the -- both the continued demand, the growth, and then the profitability of this business.... GPU utilization remains extremely high at 97.9% in Q1. GPU longevity and value continue to impress” - Oracle () Clay Magouyrk

Supply chains are stretched
“Upstream, the supply chain is very challenging. And the reason for that is because, obviously, we’re growing super fast. So packaging is a challenge. DRAM is a challenge. LPDDR, DRAM is a challenge. Connectors are challenging. Everything is challenging, okay? Voltage regulators are challenging. Everything is challenging. Wafers are obviously challenging. All kinds of different challenges upstream.” - NVIDIA () CEO Jensen Huang

“...when you look at the macro supply environment today, whether it’s for PCBs or components, you’re often in environments where larger players are sucking up big chunks of capacity from the supply chain.” - Keysight Technologies () CEO Satish Dhanasekaran

“Demand is extremely strong. It’s grown quite quickly. And honestly, customers want things sooner than we can get it for them. Things are relatively tight.” - Lam Research () CFO Douglas Bettinger

“Obviously, dominated DRAM and NAND is by far the big brother in that equation. Given the growth in CPUs, obviously, that now comes into the equation also. But look, ultimately, any part associated within an AI box is short to some degree. So optical, transceivers, T-glass, any component that’s in there is constrained to some degree.” - Dell Technologies () CFO David Kennedy

“...demand is above supply in every segment today. So we give priority to our big customers, I would say, and the data center because it’s 80% of our business.” - Seagate Technology () CFO Gianluca Romano

Memory is the biggest bottleneck
“...when I talk to our customers, they told me that none of the memory supplier can even give them a commitment about allocation for November, right? They don’t even know how many memory or what’s the price they’re going to get in November, how can they commit to us. So that’s the biggest variable in my opinion, the biggest uncertainty that I think everybody is dealing with and not just us.” - Ambarella () CEO Fermi Wang

The semiconductor equipment industry is effectively sold out
“Maybe let me describe a little bit of how things are working with customers and then how that shows up relative to how we’re managing the company. I think that will provide color for everybody that hopefully will be illustrative. Listen, things are sold out, right? The industry just fundamentally sold out. The industry is constrained right now by clean room availability.” - Lam Research () CFO Douglas Bettinger

Electricians and construction workers are making $200k
“...what’s happening is, for example, like electricians, you can find electrician jobs, which are paying more than $200,000. It’s so important for everybody who builds a data center to hire electricians. And that’s why also like the construction workers, if you want to hire skilled workers, it’s very -- I think it’s happening even today.” - Recruit (RCRUY) CEO Hisayuki Deko

The supply shortage is getting worse, not better
“Demand is still faster than supply, though, for traditional server and AI server. So those two buckets continue to have demand that was really robust. As we look into next year, we see the supply differential only getting worse, not getting better. We see -- yes, there is a small bit of supply growth, but it’s pretty minimal on the basis of the demand signals that we’re seeing. So it’s actually tighter next year than it is this year in relation to that as we look out. And then we’ll see as we go beyond from that perspective.” - Dell Technologies () CFO David Kennedy

Demand is expected to persist into the 2030s
“And we even have discussions with customers all the way through 2030. My view is AI compute demand is going to remain very strong for many years going forward into the future.” - Applied Materials () CEO Gary Dickerson

Hyperscalers are more focused on speed than efficiency in spend
“...you are looking at your demand signal, and it is pretty healthy. So, you can probably get more out of every dollar you spend...Right now, I would say the focus is far more on how quickly we can get supply revenue-ready than it is trying to figure out if I have USD 1 billion of CapEx here or there to move. It is much more how quickly can we get it into the system.” - Alphabet () CFO Amy Hood

They are generating strong ROI
“...our payback period on AI servers in aggregate is less than 2 years and on our own silicon is half that. So we have a strong payback period. And the majority of our infrastructure contracts, the total contract value of the infrastructure, is long-term committed 5-year contracts.” - Alphabet () CFO Amy Hood

Pricing of older GPUs is going up, not down
“Pricing has increased. But just like the older generations of either H100, H200 pricing is going up, not down. So we’re very optimistic about our ability to continually drive that yield higher.” - DigitalOcean () CFO Matt Steinfort

“Of all the GPUs that came up for renewal in Q1, that capacity was renewed or resold at a 20% premium to prior contracts. The majority of those GPUs are 4 years or older. We see a long useful life with increasing value for the AI capacity we’re deploying.” - Oracle () CEO Clay Magouyrk

Semiconductor companies are generating huge profits
“I will comment at our level, and certainly, our customers and our customers’ customers is there is -- their profitability levels are unprecedented. There’s a ton of profitability in the system. It contributes to the outlook I just talked about...At least as it relates to our outlook and the profitability to fund that outlook, never seen anything like it, and I think we’re pretty compelled about our ability to deliver to it.” - KLA () CFO Bren Higgins

Companies are spending more on tokens than they expected
“...we’re seeing, like others, we’re spending more on tokens than we thought we would spend. And so that’s a factor in the business, but we’re starting to see some efficiency in there” - KLA () CFO Bren Higgins

Users are getting more focused on spending efficiency
“I think that conversation’s already happening more and more with customers as they’re focused on the outcome. If the outcome can be and have a positive ROI to them, then it’s worth continuing to do that work. If it doesn’t, then it’s probably not.” - Microsoft () CFO Amy Hood

“Not every small business has an endless token budget, if you will. And so really making sure that the economics work to drive the productivity and the performance of this offering is probably that second community of customers that now needs a little bit more knowledge and know-how to make it work and make it work right.” - Salesforce () CCO Bill Patterson

Lower cost models could take share
“The ability to be able to use frontier models for frontier problems, but really also to be able to use a mix of models to deliver the best value has been really where we’ve focused. I think actually that’s not going to be unusual. I think many people and enterprises, at least that I talk to, are focused on how to make sure they’re getting a high ROI, a high return on the outcome that they’re looking to achieve. I think that sophistication continues to grow.” - Microsoft () CFO Amy Hood

Frontier models are advancing faster and faster
“My first concern is that, since roughly this summer, AI has been advancing drastically faster, driven primarily by AI’s growing ability to build the next generation of AI. This dynamic is called recursive self-improvement, and it is starting to happen across the industry, including at Anthropic, as we and others have described. Left unchecked, it could outrun our ability to understand and control these systems, and so must be pursued very carefully, if at all.” - Anthropic CEO Dario Amodei

AI leaders are calling for slowing frontier progress
“I believe that if slowing down bought us even an extra year or two before models reach critical levels of capability, and we used that time to advance alignment, we could greatly reduce the risk that something goes seriously wrong. A coordinated pacing strategy would give frontier AI developers the time to do this vital work without sacrificing commercial advantage or the United States’ lead in AI. More generally, society must have a say in how this technology is used, and more time for the necessary public deliberations — which pacing the frontier would bring us — is surely a good thing.” - Anthropic CEO Dario Amodei

“I agree with Dario that we need to pace the frontier. This has been a primary topic of discussions we’ve had at OpenAI in recent weeks. Committing to having independent evaluators with employee-like access is a great idea, and we will do the same. We’ll have more to share soon.” - OpenAI CEO Sam Altman

Cybersecurity is becoming a CEO and board-level concern
“We’re getting calls from folks that you all would know in this room, CEOs of very prominent companies that are calling us directly and saying, “What do we need to be worried about? And how can you help protect us?” This is not the CIO” - CrowdStrike () CFO Burt Podbere

“I think you were alluding to the Mythos moment, and how is that impacting our pipeline and our deal cycles and conversion rates? So we see a really strong demand environment, and that is very, very clear in our pipeline.” - SentinelOne () CFO Sonalee Parekh

Security will probably be a major business for the big labs
“And so it’s not a complicated concept. And -- but the fact of the matter is cybersecurity will likely be the next major use case of AI, and it’s going to run continuously. And so -- it will be a great new business opportunity for the labs.” - NVIDIA () CEO Jensen Huang

Frontier models won’t be able to police traffic at the endpoint cost-effectively
“If you put a frontier LLM to inspect 160 megabytes a day at the edge of your laptop, I suspect it’s going to cost you more than $40 a year. Now if the customer wants to pay $4,000 a year to predict an endpoint, hallelujah, go for it, I’d like to be in that business too. But if it’s $40, you want a cheap alternative. So you have to build a replacement product that only -- not only is better than the product that is currently in the market, but has to be cheaper than $40.” - Palo Alto Networks () CEO Nikesh Arora

Apple enters the foldable phone market
“So that is iPhone Duo, the most transformational iPhone experience since the original. It features the largest display ever on iPhone, along with a beautiful outer display and a reimagined iOS experience that makes the familiar feel entirely new. With pro performance, unique camera experiences, amazing durability, and unparalleled versatility, it is an iPhone like no other iPhone. iPhone Duo starts at $1,999, with storage capacities ranging from 256GB to 2TB” - Apple () Engineering Director Josh Shaffer

Industrials and Transport

Industrial demand is recovering, led by North America and China
“So I think with some of the just kind of inherent macro recovery you’re seeing, you’re seeing, obviously, not surprisingly, North America and Asia, particularly China, starting to see better traction. And that’s exactly like we said we saw in Q2 with the short- to medium-cycle being up mid-single digits with -- but North America being the leader of the pack there at up high single digit on the orders front.” - Ingersoll Rand () CFO Vikram Kini

Freight trends have improved modestly
“DAT, I think we’ve mentioned that we’ve seen a freight recession. We had a freight recession for 3 or 4 years. It’s been positive in the first half of this year. And so we hope that continues. It’s more of a supply-driven rally. And so we’re a little cautious, right? We’re not seeing constructive demand, but it is certainly -- we like the trends in that business.” - Roper Technologies () CEO Neil Hunn

Copper demand remains structurally tight
“I’m just saying that today, on a relative basis, when you look at the value of the business, we’re driving a lot of value in our U.S. business, particularly with where prices are and where they could be going as we look forward as the world needs more copper and you’ve got this demand driving ahead of where supply can respond to.” - Freeport-McMoRan () CEO Kathleen Quirk

China is largely self-sufficient in aluminum, leaving ex-China markets structurally undersupplied
“We do see in aluminum a divergence in the market, because China is largely self-sufficient. They have been exporting a small amount yet, but that’s not material to the global market. So ex-China, the markets are again, overall, in deficit, with North America and Europe at the greatest levels of deficit.” - Alcoa () CFO Molly Beerman

Materials & Energy

Power generation demand remains strong
“Yesterday, I stopped to visit them. We’re not seeing customers slow down right now in their need for power generation. I think -- we’ll see how this all shakes out over time, but there’s a lot more of bring your own power, which I think favors us actually in the industry from equipment supply at large. So from a demand standpoint, we’re not really seeing customers change their behaviors right now.” - Caterpillar () CEO Joseph Creed

SpaceX sees orbital compute as the obvious solution to power bottlenecks
“I think everybody is seeing it, right? And you’re seeing it across the industry now. And it’s pretty magical that orbital compute is clearly the solution here on the power and cooling and permitting side. But we wouldn’t give that range for next year unless we had line of sight to power specifically, but power and facilities and permitting needed.” - SpaceX () CFO Bret Johnsen

Nuggets of Wisdom

Thought leadership compounds when leaders publish consistently
“I went to do this podcast, and I told this guy, he’s building his own brand on the back of interviewing all of us and getting us to speak for an hour, and he does 20 a month or whatever he does, and he’s becoming more popular. I’m like, “Dude, this isn’t fair.” He’s like, “Well, you’re stupid, I’m not.” And I say, “Why am I stupid?” He says, “Well, you could build your own brand by tweeting once a day.” And then, of course, I started tweeting once a day, and then Allie, our Head of Comms, said, “That’s too much. Don’t do so much. You put your foot in your mouth.” I said, that is -- it doesn’t matter. I can do that once a week, and I can still put my foot in my mouth. So I’m trying to balance putting my foot in the mouth once or twice a week.” - Palo Alto Networks () CEO Nikesh Arora

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. AI is Moving The Needle On Macroeconomic Indicators

AI has dominated the capital markets narrative for several years already. In recent months, the spending has been impacting the real economy more and more. This week, several quotes stood out in this respect. Expeditors International’s management team highlighted a few numbers that captured the scale of the mobilization:

“And in terms of economic impact, the economic impact is significant, especially for the U.S. economy....AI contributes around 1.5% to 2% of the U.S. gross domestic product as well as 50% of the growth in net imports, right?… I think it was 7% or 8% of global air cargo is related to AI, and that’s on a volume basis. On a value basis, it’s something like 40%, 50%, some crazy big number.” - Expeditors International of Washington (EXPD -0.86%↓), Onyx Sr. Geopolitical Analyst Suryo Nugroho

Arguably, the most significant impact of AI spending is on bond yields, which are of course fundamental to economic activity:

“I think what’s driving it in large part is higher yields is really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general. So I see this as more of a reflection of the strength of the economy. We’re not seeing it in terms of inflation compensation. We’re seeing it mostly in real rates.” - Federal Reserve Bank of New York President John Williams

The more AI spend impacts the broader economy, though, the more political actors take notice. What risks do politics pose to the industry?

“I think part of the backlash is just from fear. There’s just a fear that many jobs are going to go away. The AI boom, for good or for bad, has benefited a lot of people, and there’s a lot of people who have no benefit from it, right? And there’s a lot of America, just again on the American political scene, who it’s tough to make the mortgage, you know, their paychecks haven’t gone up, and now they’ve got this AI thing that just looks going to even harder. So I think the data centers become a bullseye unfortunately for all the things that could be bad about AI.” - ARM (ARM 0.18%↑) CEO Rene Haas

2. Will Open Source Models Supplant Frontier Models?

This question has been a growing debate within capital markets recently. Palo Alto Networks’ management team captured some of the dynamics:

“For the past 90 days, the market has moved beyond a handful of frontier models towards a diversified ecosystem of open-weight and open-source architectures. Enterprises are increasingly prioritizing sovereign control over their AI, leading to the deployment of specialized models deeply integrated with proprietary data. We expect a major acceleration as organizations utilize internal telemetry to fine-tune models for bespoke enterprise use cases.” - Palo Alto Networks (PANW 3.02%↑) CEO Nikesh Arora

Perhaps the most interesting part of the quote above is that 90 days feels like an eternity within the AI industry. Things move incredibly quickly. So while today it may seem like open source is taking share from frontier models, that could change by tomorrow.

OpenAI launched GPT-6 last week. The release feels like it’s the first time that OpenAI has recaptured buzz in a while.

“We’re introducing GPT‑6 Astra, the world’s most intelligent and aligned model…Astra saturates FrontierMath Tier 4 with a 98% score, having already helped solve long-standing open problems⁠ in mathematics. Astra also saturates ARC-AGI-3 with a 99.9% score and ExploitBench with a 100% score. It also sets a new frontier on computer and browser use, handling the most demanding professional work with unmatched speed, accuracy, and judgment.” - OpenAI

The pendulum between low-cost and frontier models may persist for some time, but in the long run it seems likely that market share and distribution advantages will accrue to companies that are perceived to have the best models.

3. What Will Frontier Labs’ Compute Strategy Be In The Long Run?

This question is not front of mind for capital markets today, but the result will have a profound impact on some of equity markets’ biggest bets. Avago’s management team laid out what it sees as the path forward. It’s worth considering how this impacts current hyperscalers and dominant GPU producers:

“Now these guys are going to be hyperscalers in their own right. So what they do is they want first-party compute capacity just as they create their own -- they want to create silicon that is very cost-performance optimized, and they want to run their own data centers, eventually first path, not even eventually, they want to run it as fast as they can. Short term, you’re right. They are using cloud services, third-party services, to deploy their models. Long term, we see these guys to be no different from a hyperscaler and will run their own data centers and be first party to offer AI, generative AI, APIs, SaaS models to the world. So we see that happening. It’s not speculation. It’s actually happening, and we are in the midst of enabling them.” - Broadcom (AVGO 1.45%↑) CEO Hock Tan

Summary: The US economy is very strong. Consumers are resilient, and AI spending is having a measurable impact on GDP.

Editor’s Note: We have reserved the sections after Macro for our premium subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

Some consumers are strained, but the economy is very strong
“So, you can see there’s still, still strong demand, but I think you do feel the customer, there’s a consumer that is still clearly feeling the pain and struggling and having to stretch a lot further to, with that, with that dollar. And I think that does exist. There’s no question when we look at the underlying results. But at the same time, the fundamentals around the economy, at least from what we’re seeing through the second quarter, remain very, very strong.” - Berkshire Hathaway (BRK) CEO Greg Abel

“So we see the U.S. consumer being very resilient and holding up. And we see the consumer in the U.S. responding really well to where we lean into these key categories and key franchises.” - PVH () CEO Stefan Larson

AI spending is moving the needle on GDP
“And in terms of economic impact, the economic impact is significant, especially for the U.S. economy....AI contributes around 1.5% to 2% of the U.S. gross domestic product, as well as 50% of the growth in net imports, right?” - Expeditors International of Washington (), Onyx Sr. Geopolitical Analyst Suryo Nugroho

AI spending is also moving the needle on bond yields
“I think what’s driving it in large part is higher yields is really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general. So I see this as more of a reflection of the strength of the economy. We’re not seeing it in terms of inflation compensation. We’re seeing it mostly in real rates.” - Federal Reserve Bank of New York President John Williams

AI is also impacting political narratives
“I think part of the backlash is just from fear. There’s just a fear that my jobs are going to go away. The AI boom, for good or for bad, has benefited a lot of people, and there’s a lot of people who have no benefit from it, right? And there’s a lot of America, just again on the American political scene, who it’s tough to make the mortgage, you know, their paychecks haven’t gone up, and now they’ve got this AI thing that just looks going to be even harder. So I think the data centers become a bullseye, unfortunately, for all the things that could be bad about AI.” - ARM () CEO Rene Haas

Bessent is trying to slow things down
“Well, I didn’t say I was trying to change the direction that the I don’t believe that I can change the equilibrium price, but nothing is ever in equilibrium. You’re either moving from equilibrium or away from equilibrium. And financial journalists maybe not you, job and hedge fund managers’ job is to speed things up. Mine is to speed things down and make sure that everything is fact-based to let market participants know that things maybe aren’t a one-way trip.” - U.S. Treasury Secretary Scott Bessent

International

Read more

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. Jackson Hole

Kevin Warsh spoke at Jackson Hole last week. His speech focused primarily on his philosophy around monetary policy. He does not want markets to be focused on the Fed’s next move:

“The Fed should be humble and never naïve. The Fed plays an essential role in the economy and the markets. And our tools are powerful. We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.” - Federal Reserve Chair Kevin Warsh

He explained why he feels this is important. He called it a “hall of mirrors problem”:

“The economic literature has long described the distorting effects: a hall-of-mirrors problem. If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments . . . more likely to be caught unprepared for a turn of events . . . and more likely to commit errors in policymaking.” - Federal Reserve Chair Kevin Warsh

Warsh’s approach is now well known because he has articulated this philosophy through congressional testimony, the FOMC press conference, and here at Jackson Hole. Still, we’ll have to wait for data on how his philosophy actually gets implemented in a dynamic capital markets environment.

One particularly interesting emerging tension is the extent to which Warsh’s philosophy conflicts with the philosophy of Scott Bessent and the Trump administration, which is actively engaged in trying to influence prices in both foreign exchange and Treasury markets. How will the Fed react, if at all?

Stanley Druckenmiller, who has ties to both Bessent and Warsh, gave his assessment in a WSJ OpEd. The man who made his name in breaking the Bank of England had strong words for the US government:

“Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn’t put itself on the wrong side of that trade, not with the most important price in the world, and not when that price is trying to say the one thing Washington most needs to hear: Let the bond market speak.” - Duquesne Capital Founder Stanley Druckenmiller

Read more

Summary: The economy is strong. Consumers continue to spend, and the AI industry is becoming a macroeconomic variable. Kevin Warsh delivered a speech at Jackson Hole. Inflation pressures persist.

Editor’s Note: We have made this week’s newsletter available to all subscribers. If you’re not already a premium subscriber, please consider subscribing.

Share The Transcript

Macro

The economy is resilient
“For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened. One indicator of strength is how well an economy holds up to shocks. On that score, both Main Street and Wall Street have been remarkably resilient.” - Federal Reserve Chair Kevin Warsh

Consumers are in solid shape
“Much has been written in the media questioning the health and resilience of the consumer. However, based on what we see across our businesses every day, the economy and the customers remain in very solid shape. Job stability is real, take-home incomes are rising, and our customers continue to spend on fashion.” - Urban Outfitters () CEO Dick Hayne

“...overall, again, consumers are resilient, granted discerning. But when you get the right product at the right price, they show up, and it converts.” - The Gap () CEO Richard Dickson

“Our consumer is doing fine. You can see that in the numbers.” - Affirm Holdings () CEO Max Levchin

Persistent inflation is weighing on sentiment
“So I would describe the consumer environment right now really is not improving. The headline for me is that consumers are still feeling quite strained with low sentiment. And that strain, a lot of it comes from those cumulative effects of inflation, which we’ve talked about before. I would add that high fuel prices have contributed further to that strain as this year has unfolded. So I think that’s a bit of the backdrop.” - Hormel Foods () CEO Elect John Ghingo

“Over the last few years, many households, especially moderate to lower-income families, have struggled with the higher cost of living, higher prices on essentials like groceries, rent, gas prices, et cetera...our stores that are in lower-income trade areas continue to outperform the rest of the chain.” - Burlington Stores () CEO Michael O’Sullivan

“...the inflationary backdrop continues to pressure all household budgets, particularly for lower-income consumers.” - Dollar Tree () CEO Mike Creedon

“Our core customers continue to be financially constrained with a variety of factors impacting their budget. Most notably, higher and more volatile fuel prices have forced customers to further prioritize purchases with a focus on value and affordability.” - Dollar General () CEO Todd Vasos

Memory prices are pushing consumer electronics prices up
“We continue to see memory pricing go up and flow into our assortment in the Q2 time frame. It is very much what we expected. So you’re looking at ASP increases in the quarter on mid-teens and then you’re seeing unit declines in the high single digits.” - Best Buy Co. () Chief Customer, Product, and Fulfillment Officer Jason Bonfig

Fuel price increases have not been temporary
“...there was a big spike in gas prices back in March because of the situation in the Middle East. But first, I think many observers thought that would be temporary, but it hasn’t turned out to be temporary. And I think that sort of adds to the general concern that consumers, especially moderate- to low-income households, are feeling stretched right now.” - Burlington Stores () CEO Michael O’Sullivan

“We did see a temporary reduction in fuel prices, but they later returned to the higher levels. And even as of right now, they’re at the highest level since the conflict started....So freight, logistics and fuel costs continue to present those year-over-year headwinds, and those trends are reflected in the outlook.” - Hormel Foods () Interim CFO Paul Kuehneman

Medium-term inflation expectations remain stable
“The good news is that measures of inflation expectations in the medium term, by and large, look stable. And inflation compensation measures from the swaps market send a strong and similar message. Especially in light of recent developments, it is a credit to the Fed as an institution—and consistent with the best of the Fed’s traditions—that market prices show confidence that we will deliver price stability. And I can assure you . . . they’re right.” - Federal Reserve Chair Kevin Warsh

But inflation expectations can change quickly
“The thing about market measures of inflation expectations in economic history is that they tend to look strong and durable until they don’t. Those expectations are not pushed around easily, and right now they are well anchored. But they must be closely minded. It’s the Fed’s job to make sure that inflation expectations do not get unanchored.” - Federal Reserve Chair Kevin Warsh

AI is a macroeconomic variable
“The Fed watches all of this attentively. We recognize that AI is a new variable—potentially a new factor of production—that will have consequences for both the economy and the conduct of monetary policy.” - Federal Reserve Chair Kevin Warsh

International

China’s GDP growth was just 4.3% in Q1
“Macro in China remains in a gradual recovery model. China’s real GDP growth slowed down from 5% in the first quarter to 4.3% in the second quarter on the back of subdued household consumer confidence.” - FinVolution Group () CFO Alexis Xu

Chinese steel demand remains soft
“Chinese steel demand remains subdued and benchmark price has eased towards the low 90s per ton, and yet the freight read is positive.” - C3is () CEO Diamantis Andriotis

Financials

Warsh doesn’t want markets to be fixated on the Fed
“The Fed should be humble and never naïve. The Fed plays an essential role in the economy and the markets. And our tools are powerful. We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.” - Federal Reserve Chair Kevin Warsh

Forward guidance leads to slower response times
“Providing forecasts to illustrate the Fed’s reaction function works better in theory than in practice, better in the lab than in the field. I’m not alone in noticing that forward guidance in 2021, to cite one example, might well have slowed the policy response to high inflation.” - Federal Reserve Chair Kevin Warsh

If markets rely on the Fed, it creates a “hall of mirrors”
“The economic literature has long described the distorting effects: a hall-of-mirrors problem. If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments . . . more likely to be caught unprepared for a turn of events . . . and more likely to commit errors in policymaking.” - Federal Reserve Chair Kevin Warsh

The Fed needs clear market signals
“The Fed needs clear market signals, as unfiltered as possible . . . from market internals . . . the level and change in asset prices across sectors . . . the prices and trading volumes of Treasury securities. . . the foreign exchange value of the dollar . . . the cost and availability of credit . . . and the price of a broad set of commodities. These and other indicators should inform the Fed’s near-term outlook on economic activity and inflation throughout the business cycle.” - Federal Reserve Chair Kevin Warsh

Bessent seems to have an opposite philosophy to Warsh on market intervention
“Judge an intervention by what it responds to. This one responded to a price, not to plumbing, which is exactly how the market read it, and why the effect evaporated within a day. You can’t buy your way out of a solvency conversation with liquidity tools. You can only postpone the conversation and raise the eventual price.” - Duquesne Capital Founder Stanley Druckenmiller

Druckenmiller warned that Bessent needs to let the bond market speak
“Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn’t put itself on the wrong side of that trade, not with the most important price in the world, and not when that price is trying to say the one thing Washington most needs to hear: Let the bond market speak.” - Duquesne Capital Founder Stanley Druckenmiller

Consumer

Retailers reported earnings
“Total sales grew 11% on top of 10% growth last year. New stores are a major driver of this growth. In Q2, we opened 51 gross new stores. After store relocations and closures, this represents a net increase of 45 new stores.” - Burlington Stores () CEO Michael O’Sullivan

“Today, we are very pleased to report better-than-expected Q2 results. Our comparable sales grew 4.1% versus last year with positive comps across almost all our major product categories.” - Best Buy Co. () CEO Corie Barry

“The Dollar Tree team delivered robust top- and bottom-line results. Net sales growth increased 7% to $4.9 billion. Comp store sales growth increased 3.7%, exceeding our expectations.” - Dollar Tree () CEO Mike Creedon

“Same-store sales increased 3.5% during the quarter, driven by customer traffic growth at 2% and average basket growth of 1.5%.” - Dollar General () CEO Todd Vasos

Dollar Tree saw sales growth across income cohorts
“Our data shows we grew sales across all income cohorts. Households we serve were up nicely year-over-year with gains skewing to the middle and higher-income households. Comp strength was broad-based across the assortment, with personal care and toys notable outperformers.” - Dollar Tree () CEO Mike Creedon

High-income consumers are still buying boats
“...we have not seen a correlation between rising fuel prices and our retail boat sales at the upper end of the market, and usage has stayed strong. Our MBI customers are still on the water, still buying parts, still spending time at the dock, and that tells us the experience of boating with family remains the priority for our core buyer, even at a higher cost per gallon.” - Malibu Boats () CEO Steven Menneto

Even high-income consumers are value-focused, though
“...that middle and upper middle income consumer is under, and that is usually that $100,000-plus crowd, if you will, that has been trading in the better part of a year now and has continued to trade in through Q2 and now into Q3, I would tell you, is looking for more and more value as time goes on.” - Dollar General () CEO Todd Vasos

“Our Q2 results did not materially change our existing commentary on the customer. Consistent with the past several quarters, we see a customer who is still spending, but is value-focused and attracted to sales moments.” - Best Buy Co. () CEO Corie Barry

Retailers are turning to promotions
“As the quarter progressed, conditions across portions of the athletic footwear and apparel marketplace became increasingly promotional, and we took action to remain competitively priced to protect and grow our leadership position.” - DICK’S Sporting Goods () CEO Lauren Hobart

Technology

AI demand continues to accelerate
“...demand is super strong and, incredibly, it’s accelerating. You know, obviously we’re already a very large company, but to be able to grow continuously and now to accelerate our growth is pretty extraordinary.” - NVIDIA () CEO Jensen Huang

NVIDIA’s revenue doubled y/y and expects another double next year
“Total revenue of $96 billion more than doubled year-over-year as growth accelerated for the fourth consecutive quarter... Incredibly, we are seeing demand acceleration even at our scale. Customers’ forecasts point to our growth doubling next year.” - NVIDIA () CFO Colette Kress

Agents require ~15–100x more compute than a single prompt
“...the large language models are larger than ever because they are smarter than ever. These agents go through reasoning and planning multiple terms of tool use. The amount of compute necessary for an agent versus a human using it is probably 15 to 100 times, depending on the type of problem you are trying to solve. The amount of compute necessary is just extraordinary. That is a factor that almost everybody sees.” - NVIDIA ()CEO Jensen Huang

The frontier labs are growing faster than their balance sheets can support
“The Frontier AI labs have extraordinary demand for training and inference compute, but they are growing faster than what their balance sheets and credit profiles can support. They have rapidly growing customer demand, yet still lack the decades-long infrastructure contracts and investment-grade financing capacity needed to secure the AI factory infrastructure independently.” - NVIDIA () CFO Colette Kress

20 AI services companies now have revenue >$1B
“Nearly 20 companies, including Cursor, owned by SpaceX, Figma, and Together AI, now exceed $1 billion in annualized run rate revenue, up from 13 companies in Q4 of last year, with vertical enterprise software logging the fastest growth” - NVIDIA () CFO Colette Kress

But there’s really two AI companies that matter
“Now, having said that, taking a step backwards, investing in these two companies, or there are several AI labs that we have invested in. Investing in these companies are once-in-a-generation opportunity. I think the only regret that I have is that I did not invest more and sooner. Two of the companies will likely go public soon and others will follow. These will be some of the most consequential technology companies in history. I am delighted to be their friend. I am delighted to partner with them.” - NVIDIA () CEO Jensen Huang

The industry is compute constrained
“...their growth isn’t limited by their technology or customer demand. It’s limited by compute. For these companies, more compute means more intelligence, more users, and more revenue.” - NVIDIA () CFO Colette Kress

The entire supply chain is challenged
“I think the answer is, our entire supply chain is challenged. Everybody is really running flat out. More capacity is coming online all the time, which is one of the advantages what is going to happen this year. It is not going to come online in an instance in time, but it is going to come online every day.” - NVIDIA () CEO Jensen Huang

Supply constraints are expected to persist through 2028
“Although we will work to close the supply-demand gap, we expect supply to remain a bottleneck at least through the end of fiscal year 2028.” - NVIDIA () CFO Colette Kress

“Looking ahead to fiscal 2028, aggregate demand continues to accelerate, and our operations team is doing an outstanding job securing additional supply despite pervasive industry-wide constraints.” - Marvell Technology () CEO Matthew Murphy

Hyperscaler capex is expected to reach $1.3T next year
“With cloud industry backlog now greater than $2 trillion, CapEx by the top five hyperscalers is expected to reach nearly $800 billion in 2026 and $1.3 trillion in 2027.” - NVIDIA () CFO Colette Kress

Memory tightness could persist into 2030
“There are no clear signs of a downturn, so this situation will continue through the end of 2030...Even if a downturn comes, it will be closer to a gradual decline or flat trend rather than a steep drop,. After 2030, I believe supply and demand will find balance and the entire AI industry can grow together.” - SK Hynix () CEO Kwak Noh-Jung

Rising memory prices are even hitting NVIDIA’s margins
“Many of you have expressed concerns regarding our gross margins as component costs have risen significantly. As you are already aware, we are experiencing extreme pricing conditions in memory. The magnitude of the price increase has exceeded our prior expectations and are headed even higher into next year. As a result, we are resetting expectations today. For Q3, we expect GAAP and non-GAAP gross margins to be 74%, ±50 basis points. We expect margins to bottom in Q4 in the 71% to 72 range before settling at 72% to 73 in fiscal year 2028, as executed price increases take effect in Q1.” - NVIDIA () CFO Colette Kress

OpenAI is building its own custom chips
“The results show a significant performance advance: Jalapeño can serve more AI work per unit of power while also returning responses more quickly. Jalapeño delivers both higher throughput and lower latency with one architecture, where existing hardware systems often have to make a tradeoff between the two. For customers, that can mean faster responses, more responsive agents, and more reliable access as demand grows...By producing more useful work from the same power and hardware, Jalapeño can help us serve more demand and lower the cost of delivering a successful result.” - OpenAI

NVIDIA is confident that it will still remain dominant
“Whereas many of these XPUs are inference-specific chips for one cloud or one service, NVIDIA is a platform, an entire AI factory platform that spans the entire AI life cycle that you can use in any cloud. It’s in every cloud. You can run anywhere. We’ll help you set it up anywhere. We built something very different. All of the AI services, at some point, are going to want to go around the world, and those data centers won’t necessarily be just built by them. I think they’re going to run on NVIDIA all around the world.” - NVIDIA () CEO Jensen Huang

Enterprises are trying to manage token spending
“Listen, I think the headlines are accurate. I talk to CFOs, my peers, every single day, and all of them are talking about how do they manage their token budgets going forward. So it’s real. People are spending. Listen, Anthropic and OpenAI have huge revenue numbers. So we know that folks are spending. The question I get often is, “Is it taking away from your budget?” And I would -- and our customers spending less elsewhere as a result? And I’d say there’s probably some customers that are spending less in other areas because of their token spend.” - ServiceNow () CFO Gina Mastantuono

“When we think about IT infrastructure, and we think about the CIO, having the ability to help them manage cost is a big part of our selling point as well. So you get the guardrails that you’re looking for, you get the protection you need, and also you have visibility into where your AI agents are and what people are actually spending on these results. And it’s incredible. I mean, we’ve heard EAs spending $10,000 just on tokens because of the way they were using the models. And dramatically, once you understand and have visibility around that, you can dramatically cut those costs down. So it’s really a one-two punch of protection and cost management.” - CrowdStrike () CEO George Kurtz

AI is changing headcount
“We’re keeping our headcount flat this year, and this is after absorbing M&A. How are we able to do that? Because we’re seeing $500 million worth this year alone of AI efficiencies, which allows us to not increase our headcount, right? But still growing at 23%.” - ServiceNow () CFO Gina Mastantuono

“And so through the use of AI, we’ve been able to go faster. And I think you’ve actually seen that when you’ve looked at WEX, right? Like headcount is down in 2026 from where it was in 2023. But yet we are innovating at an accelerated pace. We’ve announced more products in the market. So you can actually see the impact of that coming through, which we’re excited about.” - WEX () CFO Jagtar Narula

AI cyber-security risk concerns are rising
“I think, with our posted commentary today, recent surveys we run across our customers, 81% of the CISOs that we talk to are aware right now that they are exposed with agents deployed in their enterprises where they do not yet have an adequate security platform in place.” - Okta () COO Eric Kelleher

“We’re seeing agents go rogue, swarming to attack and moving beyond their guardrails to autonomously harm. Agents are proving capable of data theft, permission alteration and full-on command and control at scale, leading to organizational compromise. The agent of today is both a friend and foe...I think we’re only going to see more stories around agents gone wild, and we’re going to be there to protect our customers” - CrowdStrike () CEO George Kurtz

Agents can move faster than organizations can respond
“The problem is you’ve hit the sound barrier of actually rolling out a patch. And what that means is that companies are looking for their ability to prioritize where these exposures are because they’re not going to be able to fix everything all at once within the window of what autonomous agents can actually exploit.” - CrowdStrike () CEO George Kurtz

“Offensive AI capabilities are compressing the time between vulnerability discovery and weaponization. What was theoretical quarters ago is now an operational reality. Frontier models are advancing from basic vulnerability discovery to reasoning through multi-stage attack paths and executing autonomous cyberattacks.” - SentinelOne () CEO Tomer Weingarten

We have a narrow window to build defense
“We have a limited window to strengthen cyber defenses. In the coming months, AI-enabled cyber attacks will become far more widespread and sophisticated as models around the world become increasingly capable. The companies and public services our communities depend on—from hospitals to water treatment plants to the infrastructure that powers the internet—are at risk. Today’s AI advances are already giving defenders new ways to fix weaknesses that have accumulated for years. If we act decisively, we can use the defenders’ window to make our digital world much more secure.” - OpenAI

The number of transistors-per-chip continues to grow
“And one unique aspect for our business is our workload is not static, okay? It is growing exponentially. If you think about the complexity of the chip design, the most complex chip these days is, call it, Blackwell or what it is, like [ 10 billion ] transistors. But it’s -- we fully expect that to grow. It’s going to grow to like 1 trillion in a matter of 5 to 6 years, okay? If you weave into complexity, it’s about 30, 40x kind of workload increase in the foreseeable future. So that will be the ultimate driver for our business.” - Cadence Design Systems () VP of IR Richard Gu

“...from an execution perspective, particularly on a process and also in terms of the advanced packaging, it’s going extremely well. 18A yields are progressing, beating the milestones that we’ve internally set. 14A, when you look at the defect density, is tracking better than the target curve we had for 14A, and it’s also doing better than any of the previous nodes in terms of how quickly we’re bringing down the defects.” - Intel () CFO David Zinsner

Healthcare

Life-sciences funding has improved
“The funding environment is relatively good. There’s a lot of changes with AI and science is moving ahead. So there’s a lot of priorities for the customers. And so when that happens, they can’t do all things at once, and they generally try to pick some things that they can do and that are high priority..And I think what happened is the life sciences industry has gotten used to, hey, the world is going to have a lot of moving parts. And they’re just moving forward. So I think it’s -- you’re good to point this out.” - Veeva Systems () CEO Peter Gassner

Industrials and Transport

Fuel prices are driving freight costs higher for retailers
“What is different is really this fuel -- the fuel surcharge that’s coming through is very, very meaningful. And that’s going to continue as long as the fuel prices are elevated. There is an impact from drivers. It’s not nearly as much as fuel.” - Dollar Tree () CEO Mike Creedon

Lower tariffs are helping to absorb fuel inflation
“...we’re seeing some pressure in supply chain, of course, because of fuel. So rather than passing those costs on to the customer, we’ve taken advantage of the fact that we’re getting that lower tariff rate in and that tariff rate is absorbing inflation and helping us to maintain value across key categories. We think that’s helping our traffic.” - Dollar Tree () CFO Stewart Glendinning

Automotive semiconductor demand has stabilized but has not yet entered a replenishment cycle
“Automotive, we talked about the stability. We have not seen a replenishment cycle nor have we seen kind of demand uptick. If you look at the SAAR overall, SAAR is kind of actually slightly down to a first order. But we expect automotive to grow about 6 or so percent year-on-year, which -- if you think about our target and the content growth that we talk about in automotive, we’ve always talked about high single digits above SAAR. So we’re already delivering on that in a stable demand environment...In automotive, as said, I think we’re shipping back to natural demand. So we’ve gotten through the inventory digestion. In some cases, automotive is still dangerously low.” - ON Semiconductor () CEO Hassane El-Khoury

Materials & Energy

~15GW of 2027 AI compute could remain stranded by infrastructure constraints
“Consensus estimate is that ~15GW of AI compute produced in 2027 cannot be turned on in 2027. This is harder than just finding power, as you also need to build out all the transformers, wiring, liquid-cooling, (massive) chillers & complex networking.” - SpaceX () O Elon Musk

Welcome to Catalyst Watch at The Transcript, a report for paid subscribers that highlights investment themes from this week’s newsletter.

Share The Transcript

1. Bessent’s Buybacks

A few weeks ago, we wrote about how Kevin Warsh’s philosophy of Federal Reserve management could reshape the yield curve. This week, the potential second-order effects of that philosophy appeared to catch the Treasury Department’s attention.

Scott Bessent seems less comfortable than Warsh with leaving long-term interest rates entirely to the market. In response to rising yields, Treasury increased its bond buybacks—an effort that appeared intended to put a ceiling on rates. Bessent explained:

“We’re trying to signal that we think that this is a thinly traded area of the market, that we’re in August, and there’s been a lot of corporate issuance that’s influenced the market. And we believe that there are many underlying factors in turn that the market is not looking at, and we are going to make a market in these. We routinely do buybacks, and we’re going to increase the size of the buyback. And, you know, Sara, I would note that it could be more than the $4 billion per issue.” - U.S. Treasury Secretary Scott Bessent

The move was likely intended to influence market psychology, but Treasury does not have the Fed’s firepower over the yield curve. Because the federal government already runs a substantial deficit, Treasury cannot buy back long-term bonds indefinitely without issuing more debt elsewhere. In practice, the transaction amounts to replacing longer-term debt with shorter-term debt—an approach that carries risks of its own.

Yields initially fell sharply but ended the week close to where they began. Bessent may be inadvertently setting up a game of chicken with the bond market: the more Treasury signals discomfort with higher long-term rates, the more investors may test the limits of its willingness and ability to intervene. If that increases interest-rate volatility, the turbulence could spread across capital markets.

2. Is AI Pushing Interest Rates Higher Too?

Bessent argued that one reason for rising rates is the enormous amount of capital hyperscalers need to finance their AI buildouts. Because these companies have an insatiable appetite for capital to fund AI investment, he suggested, they are relatively insensitive to the cost of borrowing:

“We are also seeing big corporate issuance. And a lot of that corporate issuance, I would say, is almost yield-agnostic, because the build-out for A.I., the returns on that, the companies believe they’re going to be so high. They don’t really care what they’re paying.” - U.S. Treasury Secretary Scott Bessent

That interpretation is consistent with the price behavior in other markets affected by AI spending, including memory and energy. Hyperscalers are competing for scarce resources and appear willing to pay whatever is necessary to secure them.

If AI investment is now affecting the bond market, it is another sign that the buildout’s economic consequences extend far beyond the technology sector. The cost of capital influences nearly every form of economic activity. As AI’s external effects grow, so does the risk of political intervention—as Bessent’s response may already demonstrate.

3. Housing Has Been Frozen for Years

As the economy’s focus has shifted toward AI, traditionally important sectors such as housing have quietly languished. Home Depot reminded investors just how unusual the current freeze has become:

“Every time we’ve seen it hit the sort of 3% of the housing stock changing hands over history, it’s always bounced up relatively quickly. We’ve seen housing turnover at these low levels for 4 years now. So I don’t think that we’ve seen much volatility from the recent increase in rates. We do know that when we see step downs, we begin to see a little bit of life come into housing, but there’s just no sign of an inflection point at this moment.” - The Home Depot (HD 0.50%↑) CFO Richard McPhail

Housing turnover is depressed for several reasons: persistently elevated mortgage rates, the lingering effects of the pandemic-era housing boom, and the pressures created by a K-shaped economy. Each of these themes appeared in The Transcript this week.

Housing is a cyclical industry and will eventually rebound. But if the dynamics outlined in the first two sections persist, there is still no obvious catalyst for a recovery.