Thoughts on the Market

Investors are keeping a close eye on Jackson Hole for signals on the economic outlook and the path for rates. Our Chief U.S. economist Michael Gapen joins Global Head of Macro Strategy Matthew Hornbach to discuss whether markets get what they want—or what the Fed needs.
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Matt Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley.
Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.
Matt Hornbach: Today, we'll be discussing the Jackson Hole Economic Symposium and Chairman Warsh's opening remarks.
It's Thursday, August 27th at 10am in New York.
So, Mike, let's get right into it and talk about the upcoming opening remarks by Chairman Warsh at the Jackson Hole Economic Symposium that will be delivered to the public at 10 am tomorrow, Friday. How are you thinking about what to expect from those opening remarks?
Michael Gapen: Well, historically, and by historically, I mean in a post-2008-2009 world, Jackson Hole has been used, not every year, but frequently as a venue to communicate to markets. The longest gap on the Fed's meeting calendar is between the July and September meetings. So, Jackson Hole falls between that and provides a useful opportunity to communicate what might be coming.
That's what's normally been done. Warsh has repeatedly stated he wants the Fed to talk less and communicate less and say less. So, I don't think we will see or hear, in this case, a lot about his views about how the economy is operating today and how monetary policy may be conducted into year-end. So, I don't think we'll hear a lot about, say, the December; the outlook for the economy from September to December, and what it might imply for interest rate policy or balance sheet policy.
So, little in the way of near-term forward guidance.
I do think, however, he did say in the July press conference that the venue would be good to tackle some of these big questions that he has talked about, that he's created these task forces for. So, whether it is the balance sheet or the inflation framework, or communication or AI and productivity or data quality and so forth. This would provide, I think, a reasonable opportunity for him to start talking about that.
I don't think maybe we'll get a lot of conclusions. But I would look for commentary that's more in the question; or in the spirit of those big questions and less about the near-term conduct of policy.
So maybe not what markets want, but this is what markets will get.
Matt Hornbach: Just rewinding a bit, the conference itself is on a somewhat of a niche topic. What exactly is the conference about? And, in terms of the papers that get released at the conference, do you have any sense as to where they might be headed?
Michael Gapen: So, the topic of this conference, the economic symposium, as you noted, is Financial Innovation: [its] Implications for [the] Payments [system] and [monetary] Policy.
So, I would expect there to be a lot of sessions for things like central bank digital currencies or stable coins or Bitcoins. Near money type innovation that has happened in recent years, which leads to things like competition for deposits from the non-financial sector vis-a-vis the financial sector.
So, a competition of near moneyness to money, if you will. Its implications for the interaction between the non-financial system and the financial system, competition for deposits. Does it create risks around financial disintermediation? And therefore, how might the regulatory environment and monetary policy work in that world?
So little more, I'll call it, esoteric and maybe arm's length from the day-to-day conduct of policy. But I would look at the speeches probably in that vein. Deposit competition, financial market stability, and what kind of regulatory framework might you need to ensure we can still conduct policy effectively in that world.
Matt Hornbach: Sounds like an exciting set of papers…
Michael Gapen: Yes. Yes.
Matt Hornbach: … for professors to read through.
Michael Gapen: This is why they don't often leak the schedule too far in advance, right? We all might decide not to listen.
Matt Hornbach: Indeed. Well, it is the end of August, and people are probably still on holiday here and there…
Michael Gapen: I'm doing my best, but you called me in today.
Matt Hornbach: Yeah, the least I could do. So, you did mention that this might be an opportunity for Chairman Warsh to maybe spotlight a bit these task forces and the topics that they're tackling, one of which is the inflation framework.
And that word framework, I think, is important because the investors that we've been speaking with are frustrated that the Fed has not really laid out a framework – for monetary policymaking in this new era of Chairman Warsh, and his leadership at the Fed.
So, I'm curious, if we're not going to get forward guidance on monetary policy and what will happen at the next meeting. And we're also not going to get much forward guidance on the framework that the Fed is using to decide on what to do with short-term interest rates. What are we meant to think about the framework?
Michael Gapen: Yeah, I think ultimately, of course, we're going to need to know this, and this is what economists would refer to as the ‘difference between forward guidance and the "reaction function." So, the framework is really, you've got a set of tools, how do you intend to use them to achieve your objectives?
A conventional Fed would say, "Well, if interest rates are low and inflation's too high, then we should raise rates," right? So high inflation brings high interest rates, low inflation brings low interest rates. All else equal, there's still the employment side of the mandate, of course. And the market had that view, at least initially, right?
As we were in the June-July period and Warsh was talking hawkishly, the curve generally flattened. Expectations for front-end yields moved higher, and inflation-fighting credibility maybe kept the back end stable or brought the back end down. So, you could argue the markets looked at Warsh as maybe bringing a conventional reaction function and a conventional framework.
But in the June and July FOMC meeting and in conversations with the press during the press conferences, Warsh – I don't want to say backtracked. He just didn't validate that and did say that we will achieve price stability. Didn't quite say how he would use the tools to do that. And even suggested maybe interest rates weren't the primary mechanism with which to influence, create, deliver price stability.
So, the curve then steepened out. So, I think the market is wondering what Fed chair we have and what his reaction function is? And if inflation's running hot, is it an interest rate answer or is it a balance sheet answer?
I'd also just add one last thing, Matt, is it makes a difference what the rest of the 18 people on the FOMC think. [Be]cause I think you would agree, and I'll put forward right now, I think they have a largely conventional view. Half of the committee thought it was time to raise rates in June. So, we have a balance between not knowing the chair's framework and having to intuit it. Or hope that we hear more. But then also knowing the other 18 who could band together and have greater voting power act in a largely conventional framework.
I think that's the debate and the dilemma that we're all dealing with.
Matt Hornbach: Yeah, I think investors, have certainly expressed frustration about the lack of guidance in any form or fashion. Perhaps with the exception of the balance sheet; we have a general idea that the balance sheet will be smaller in the future.
And we have a sense from what Chairman Warsh has said in front of the House of Representatives during his semi-annual testimony that any changes would happen gradually over time. But, in terms of the pricing of the July meeting, and what happened at the July meeting, investors were very disappointed that the Fed did not go ahead and raise rates in July.
Now, the market was only assigning about a one in three odds of a rate hike in July. And so, the fact that the Fed did not go ahead and raise interest rates in July was not a surprise in the sense of market pricing. But I do sense that investors were frustrated; that because they didn't get much forward guidance going into the July meeting, that the market might not have priced more probability on a July rate hike because the Fed, in fact, did not signal that they were leaning in that direction.
But I see it as somewhat ironic because it seems to me, and I'd like to get your view on this. It seems to me that Chairman Warsh doesn't want to provide that type of specificity. He'd rather have the markets tell him what to do at an upcoming meeting, as opposed to him telling markets what to do at an upcoming meeting.
How do you think about that?
Michael Gapen: Oh, I think it's… [It] strains credibility to think that by saying nothing, you get the market's interpretation of the economy, data, and events – without the market thinking what the Fed thinks about it. I don't think that there's a world where you get the unvarnished market expectation independent of the Fed.
So, I don't personally agree in the analogy of the market should play the ball and not the referee. The Fed is not a referee in markets. The Fed is a player in markets. Monetary policy acts through financial markets to achieve a set of financial conditions to deliver price stability and maximum employment.
So, the Fed and markets are on the field at the same time. The Fed, in some ways, is the 800-pound gorilla on the field at the same time. So, everybody else on the field has to know what the gorilla is doing in order to do what they're supposed to do.
Yes, there's always some circularity between Fed communication and market reaction to that. But I think that's natural and normal and important in making monetary policy effective – meaning it has to transmit through financial markets.
And so, you could diminish the effectiveness of monetary policy if you don't tell the market what, at least what your framework is and what your reaction function is. And the tools that you intend to use and how you would intend to use them. Then the market could be an inefficient transmitter of monetary policy.
So, I disagree with the notion that by saying less, the Fed learns more. But that's my view. I'm one of many. That's my opinion. The chair obviously has a different view.
Matt Hornbach: Well, I can certainly understand not wanting to be the referee, especially after what we saw at the World Cup. There were a couple of games where the referee…
Michael Gapen: And nobody likes the referee. At least half the people are upset with the referee.
Matt Hornbach: Indeed. Okay. So, Mike, I think we're going to leave it there.
Michael Gapen: Thanks for having me on, Matt.
Matt Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our Global Head of Fixed Income Research Andrew Sheets discusses when and how higher yields and mounting U.S. debt could become more than abstract concerns.
Read more insights from Morgan Stanley.

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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, at what point do higher yields and higher debt actually matter?
It's Wednesday, August 26th at 2pm in London.
In its first 240 years, the United States of America accumulated roughly $20 trillion in federal debt. The country has borrowed another [$]20 trillion in just the last 10.
The question for investors is when this debt load will act as a brake on economic activity? Or, worse, create stress that disrupts today's relative calm?
So, let's start with the first question.
For economic activity, the bar seems pretty high. You see, even with all the activity around AI, U.S. corporate debt as a share of the overall economy is broadly unchanged in the last decade and actually lower than where it was before the pandemic.
The balance sheets of the household sector in the U.S. are even stronger. Household debt to GDP is lower than where it was prior to COVID and lower than where it was in the year 2000. And this may even understate the strength – because much of this debt is locked in at historically low mortgage rates; while household assets, the other side of the balance sheet, have soared to record levels.
That may help explain why both consumers and businesses have remained more resilient than expected this year despite the higher interest rates and energy prices.
This divergence of trend between public and private balance sheets is also global. Europe has also seen higher government debt offset by even more private sector de-leveraging, while Japan has seen rising public borrowing and pretty stable private sector leverage.
To some degree, this divergence between the public and private sides of the economy reflects a policy choice. Governments determine how to balance taxation and spending. And many countries, not just the U.S., have reduced taxes over the last decade while allowing public borrowing to increase.
A deterioration of public sector finances relative to private sector finances – it's not especially surprising given that choice.
If strong balance sheets are helping U.S. households and companies be less sensitive to higher rates, where should we look for stress?
Well, for all of this debt, the U.S. bond market is actually still pretty well-behaved. U.S. inflation expectations are roughly unchanged year to date. Expected bond market volatility is historically low.
Indeed, one reason that recent intervention by the U.S. Treasury into the bond market was such a surprise to investors was the lack of these usual stress markers. Instead, the point at which these higher yields might have a larger market impact may be up to another factor: asset allocation.
Today, 30-year Treasury bonds yield about 3 percent more than expected inflation over that period. Long-dated U.S. investment-grade corporate bonds once again yield more than 6 percent. And so, the question of when higher yields begin to matter may be less about when businesses stop borrowing or consumers stop spending. And be more about when investors decide that bonds offer better value than stocks.
So far, Morgan Stanley Research is not seeing clear evidence of that shift. Fund flow data and market correlations do not suggest a significant reallocation away from equities, and strong earnings growth is helping support the equity valuation case.
But these are metrics that we'll be watching. In the meantime, we think that rising U.S. debt and Treasury market intervention may weaken the U.S. dollar, especially against a high-yielding currency with much, much lower debt levels – the Australian dollar.
Thank you as always for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Paul Walsh, Michelle Weaver and Daniel Blake discuss how thematic mapping can help investors separate true beneficiaries from market hype and identify risks hiding beneath the surface.
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Paul Walsh: Welcome everyone to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's Head of Research in Europe.
Michelle Weaver: And I'm Michelle Weaver, U.S. Thematic and Equity Strategist.
Daniel Blake: And I'm Daniel Blake, Head of Asia Thematic Strategy.
Walsh: And today we're discussing why thematic investing may be entering a new phase – moving from simply identifying big ideas to systematically measuring them.
It's Tuesday, the 25th of August at 2pm in London.
Weaver: It's 9am in New York.
Blake: And it's 9pm in Singapore.
Walsh: Daniel, let's kick our discussion off today. Thematic investing has become one of the most important ways for investors to think about long-term opportunities. But your latest work suggests the framework itself is evolving. So, what's changing?
Blake: Well, if you look at where we've started. So thematic investing has been narrative-driven, focusing on identifying major structural trends for investors. So, at Morgan Stanley, we've identified core themes of artificial intelligence and tech diffusion, the future of energy, societal shifts, and the transition to a multipolar world.
So, what's changing is that investment approaches are becoming much, much faster. So, we're now seeing clients deploy agentic AI to drive trade recommendations. And sure, AI can read a new 100-page thematic report from Morgan Stanley faster than humans. But for the right conclusions, it's important to connect these models with high-quality data sets. And we think that's going to be helpful for human investors as well.
So, this is where the third phase of thematic investing comes in. The first phase was identifying secular trends that cut across markets and industries. The second phase was creating investable products around those themes. But this next phase is about measuring that exposure systematically in real time.
So, this allows investors and their AI agents to identify whether a theme's importance is broadening or fading and to track individual companies' exposure to that theme over time.
Walsh: So, the thematic investing is moving from narrative-driven to a higher velocity data-driven approach. And I guess that's where our thematic mapping exercise really comes in. So, Michelle, when investors hear the term thematic map, they may think it's just another screening tool. But it's much, much more than that, isn't it?
Weaver: Absolutely. The easiest way to think about it is it's a research framework that sits on top of traditional sector and regional analysis. Historically, investors organize portfolios by country, sector, or industry group, and those verticals are still very important.
But increasingly, the biggest investment forces cut horizontally across those boundaries. AI touches software companies, industrials names, healthcare, financials, and it's even had a huge impact on the utility sector.
Thematic mapping helps us identify where those exposures exist across thousands of stocks, and importantly, how significant those exposures are – all with the help of our analyst experts.
And the innovation isn't simply identifying if a company's exposed to AI, energy transition, or defense spending. It's determining whether that exposure is central to the investment thesis, just supportive or insignificant. And that's very different from traditional thematic baskets.
Walsh: So, we identify the exposure, but the idea of significance seems particularly important because investors constantly hear companies talking about themes on earnings calls for example and in their public communications.
But how do you separate genuine exposure from a more marketing-driven language around thematics, Daniel?
Blake: This we see as the most valuable and ultimately human-driven part of the framework. So, as an example, we know that many companies are outlining their AI initiatives, and not all of them will end up being AI beneficiaries. So, the key question is how a given theme will impact revenues, margins, competitive positioning, and valuations.
And this requires the deep knowledge of both the industry and the company, as well as where things are going. And so that's where our analysts come in. Across all countries, all sectors, mapping the materiality of their entire coverage, that's almost 4,000 companies, to every global theme in real time.
Sp. our job in the thematic strategy team is to coordinate the framework, help identify emerging themes, and draw out the insights and recommendations. But the core insights are really coming at the analyst level, company by company.
Walsh: And so, to your point, Daniel, it's about the analyst overlay in terms of significance that is really important. So, investors really shouldn't think of thematic exposure as a simple yes or no question…
Blake: Exactly. That's really the new innovation in this framework, and most companies will sit somewhere along that spectrum for a given theme. And there's value in tracking how that position is changing over time.
Walsh: Yeah, rate of change is clearly critical. And Michelle, one of the things I found particularly interesting is that the framework isn't just about identifying winners. It's also about identifying companies that may be challenged by structural change as well. Why don't you help our listeners understand why that's so important?
Weaver: Because every major theme, yes, creates a lot of opportunity, but it also creates disruption. And I think investors naturally focus on beneficiaries. Where are we looking on the long side? But in many cases, understanding who might be negatively exposed can be just as valuable.
If you think about AI, there are obvious beneficiaries, whether those are the big enablers or they're companies adopting the technology successfully. But there could also be companies facing pricing pressure, margin pressure, or broader disruption because of that same theme.
And that's equally true whether we're thinking about the future of energy, societal shifts and big demographic realignments, or the multipolar world. And a complete thematic framework should help investors understand both parts of that equation. And this is becoming increasingly important as markets move from broad thematic enthusiasm towards more selective stock picking.
Walsh: Absolutely. The ability of the thematic mapping to help us understand both sides the equation clearly incredibly important. Let’s bring it back to investors' portfolios. Daniel, how should investors think about thematic mapping as part of portfolio construction rather than simply stock selection?
Blake: If you're looking at that portfolio construction level, whether you're a retail investor or you're one of the largest asset owners of sovereign funds, one of the biggest benefits is for revealing and managing hidden exposures.
So, an investor might believe that their portfolio is diversified with positioning across many sectors and markets. But when you use the thematic map to underline, to explore the underlying thematic exposure, you might find that many of these holdings are tied to the same structural trend.
So, the thematic map allows investors to better diversify portfolios while retaining the best expressions of desired themes. And as you mentioned, it's not just a screening tool. But it's pretty useful as a screening tool as well if you want to take exposure to a given theme overlay with valuations and preferences. It’s very helpful for that reason as well.
Walsh: Yeah, understood Daniel. And Michelle, as we look stock markets right now, how are you seeing the opportunities via the thematic mapping work that we’ve done?
Weaver: Flagging potential rotations is another key part of what this analysis offers. And if we think about your question from a valuation perspective, AI adopters currently look relatively inexpensive, but they still offer strong expected earnings growth. And we're also seeing analyst sentiment beginning to improve.
You're seeing a growing number of companies having their earnings estimates revised higher. We're also seeing a similar opportunity across our societal shifts themes. Valuations here are well below their typical levels over the past decade. And at the same time, we're also seeing earnings expectations improve here.
Walsh: So, perhaps the biggest takeaways are that thematic investing is becoming more measurable, more transparent, and more integrated into portfolio management.
It's no longer just about spotting the next big idea. It's about understanding where that idea exists, how much it matters, and of course, how it's evolving.
Michelle, Daniel, thanks so much for taking the time to talk.
Weaver: Great speaking with you Paul.
Blake: Thanks for having us.
Walsh: Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Bonds may no longer provide the shelter investors have expected. Our CIO and Chief U.S. Equity Strategist Mike Wilson talks about the changing relationship between inflation, yields and risk.
Read more insights from Morgan Stanley.

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Bonds may no longer provide the shelter investors have ex
Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast I’ll be discussing the shifting landscape in macro markets.
It's Monday, August 24th at 11:30am in New York.
So, let’s get after it.
Over the past few weeks we’ve seen large moves in rates, oil, gold and crypto. What does it mean for equities?
First, investors are still treating these markets as separate stories, when they are all part of the same regime shift that began with COVID. More than six years ago, in the depths of that recession, I argued investors should prepare for the return of inflation. That was a very out of consensus view.
At that time, the world was obsessed with deflation, the 10-year Treasury yield was below 1 percent, stocks had been hit hard, and gold was sitting around $1,500 an ounce. But the policy response to COVID – what I called helicopter money – changed the game. It marked the end of the 40-year disinflationary regime and a very different investment environment for investors to navigate.
It is also the foundation of our run it hot thesis. In a world where inflation has returned, cycles are likely to be shorter, policy more reactive, and leadership changes more frequent. That is very different from the 1982-to-2020 period.
Then falling inflation and falling rates allowed economic cycles to stretch for eight or 10 years. We are now in a world that looks more like the post-World War II era: stronger nominal GDP growth, more persistent inflation, higher economic volatility, and a bond market that is no longer the tailwind it used to be for risk assets. In short, the great secular bull market in bonds ended with COVID. This has huge implications for investors of all stripes.
My near term view on rates is also different from the mainstream. A lot of investors are saying rates are rising because of debt and deficits. I am not dismissing those factors. But I think the bigger driver is strong nominal GDP growth, which really is the result of aggressive fiscal policy since the pandemic. We are in an era of fiscal dominance, and in that environment the Treasury and the Fed are forced to find ways to fund deficits without breaking markets.
That is how I interpret the Treasury’s recent buyback activity. I don’t think this is quantitative easing or yield-curve control. The scale of the program is not large enough. Instead, it’s just another tool to maintain market functioning and stable financial conditions. So when I look at the large move in precious metals and crypto last week, to me it suggests that markets believe this is just a first step toward larger intervention – if financial conditions tighten further.
For equities, this all reinforces the quality rotation we have been recommending. Since the peak rate of change in earnings revisions breadth in June, led by Semiconductors, the market has gone through a significant leadership change. Quality factors have started to outperform after a year of lagging, which is exactly what we would expect as a post-recession recovery matures.
High free cash flow, high gross margins, stable sales growth, and low capex-to-sales factors have all been working. Some investors are frustrated that the S&P 500 barely sold off during the historic momentum unwind. But if quality is coming back into favor, that makes perfect sense. The S&P 500 is one of the highest-quality benchmarks in the world. Leadership at the stock level may continue to morph, but index leadership for the S&P is unlikely to fade – and may even get stronger.
The near-term risk remains oil. Brent crude prices have moved higher over the past couple of weeks. And rising oil has historically been a much more reliable headwind for equities than falling oil has been a tailwind. Our still constructive equity view does not require crude to collapse. It simply requires crude to stop rising. If oil spikes again because the Strait of Hormuz remains closed, that could pressure input costs, push yields and bond volatility higher, and create another round of market instability.
Bottom line, the run it hot regime is alive and well. It supports equities. But it also shortens cycles, increases rotations, and forces investors to be more tactical at times. I currently like large-cap quality stocks, AI adopters, and the S&P 500 over international peers.
Hedge the oil risk with energy stocks and keep your head on a swivel as we navigate the next phase of this recovery and bull market.
Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

AI’s enormous capital requirements are reshaping the way companies tap credit markets. Our Chief Fixed Income Strategist Vishy Tirupattur takes stock of this summer’s key financing developments.
Read more insights from Morgan Stanley.

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Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist.
Today: Why the summer of 2026 is all about AI Financing and the evolution of credit markets.
It is Friday August 21st at 2pm in New York.
The summer of 2026 may ultimately be remembered not for a new model release or a breakthrough chip, but for developments in AI financing that highlighted how quickly capital markets are adapting to the demands of the AI buildout.
The starting point of our analysis remains unchanged: the demand for compute continues to outstrip supply of compute, resulting in upward revisions in AI infrastructure capex expectations as hyperscalers commit additional capital to secure future capacity.
Our equity research colleagues now estimate that the total capex for the four largest hyperscalers will rise 57 percent in 2027 versus 2026. These spending plans reflect growing conviction that such investments can generate 25 percent plus returns on invested capital.
At the same time, the lag between capex deployment and monetization continues to pressure near-term cash generation, with our analysts' 2027 free cash flow estimates for the four hyperscalers continuing to move lower.
To a credit analyst, what this means is that the result is a widening financing gap in 2027. That means AI-related credit issuance will remain substantial and may even need to increase further before cash flows from these investments begin to catch up.
Developments in credit spreads this summer have been equally telling. Credit spreads for hyperscalers have widened meaningfully. More notable even than the absolute level of widening is the divergence across financing channels.
For example, spread widening was most pronounced in unsecured bonds, where issuance volumes accelerated sharply and investors remained exposed to a broader range of risks tied to the AI investment cycle. By contrast, spread widening in data center ABS and CMBS was much more modest.
These structures are backed by operating assets that have already been constructed, powered, and leased, with contractual cash flows largely established. Combined with a more measured pace of issuance, these characteristics helped insulate securitized credit products from the volatility seen in unsecured credit markets.
The divergence across credit markets also reflects the differences in issuer incentives and sensitivity to funding costs, which will shape issuance volumes going forward. At the higher end of the quality spectrum, the major hyperscalers, with average ratings of roughly AA, combine substantial financing needs with significant ratings flexibility.
Given their ROIC expectations, these issuers are relatively insensitive to modest changes in borrowing costs. Higher funding costs alone are unlikely to materially slow capital raising by the highest-quality participants in the AI ecosystem.
The opposite is true further down the quality spectrum. Lower quality hyperscalers and data center developers, including former bitcoin miners and REITs, have less balance-sheet flexibility and lower tolerance for higher funding costs. For these borrowers, wider spreads represent a more meaningful constraint, making funding costs a natural stabilizer of future supply.
The next phase of AI financing is also likely to look quite a bit different as incremental capex shifts from data center shells toward compute equipment, particularly servers and chips, as well as energy assets. While some of these assets have already been financed through high-yield bonds and leveraged loans, compute infrastructure is particularly well-suited to asset-level financing, creating a larger role for private capital.
The emergence of large-scale component financing is likely to be enabled by the highest-quality issuers flexing their ratings as well as balance-sheet strength. We expect these issuers to increasingly provide backstops, credit support arrangements, and residual value guarantees, helping private capital underwrite ever-larger pools of AI infrastructure assets.
As AI scales from a technology cycle into a capital cycle, understanding the nuances of financing is becoming increasingly important. In the next phase of the AI buildout, understanding the flow of capital may prove nearly as important as understanding the flow of innovation itself. AI is no longer just a technology story. It is increasingly a capital markets story as well.
Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.