Global Perspectives: Navigating AI transformation and rate uncertainty

Lara Castleton: Hello, and thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications they have for investors. I’m your host for the day, Lara Castleton.

Markets have been anything but boring. AI optimism is fueling equity markets, while fixed income continues to offer some of the most attractive yields we’ve seen in years. But beneath the surface, Fed uncertainty and macro volatility are keeping investors on their toes, raising questions about their allocations, how to position duration, and where the next opportunities lie.

To talk through the implications markets are having for multi-asset portfolios, I’m excited to have back two co-portfolio managers on our Janus Henderson Balanced Strategy, Greg Wilensky and Jeremiah Buckley. Thank you both for being here.

Greg Wilensky: Thanks, Laura.

Castleton: So, Jeremiah, let me go to you first. As I mentioned, AI is driving a lot of the equity market. There is macro uncertainty still under the hood. But how are you as a large-cap U.S. investor seeing AI play out among your names?

Buckley: Yeah. So, a number of different factors. So obviously the Mag 7 and a lot of the AI infrastructure names have done, you know, really well so far this year, they’re seeing substantial earnings growth. I think what’s important to point out about them though is not only are they seeing it on the revenue acceleration side, there’s certainly demand for the products and services that they’re offering, but they’re also using AI internally on themselves. And so, what we’re seeing from those companies [is] that they’re showing better than expected operating margins, because they have been able to reduce costs faster and they’ve been able to invest in more initiatives by using the same amount of resources. So that’s example number one.

But it’s also broadening out. So, if we look at the rest of the U.S. large-cap companies, in the earnings season over the last couple of quarters, we’ve seen better than expected earnings. Not only because, you know, revenue growth has been strong, but the operating leverage has been much better than we would have expected given that revenue environment. And so, we’re seeing evidence that companies are using and leveraging AI, and they’re seeing the productivity gains, that it’s helping them boost earnings growth even faster.

And then the last piece that we’re seeing from AI is it’s also helping in the industrial economy. So, there are a lot of companies that provide, whether it’s commercial HVAC or electrical supplies or even backup power sources, that are needed in this construction of all these AI data centers. And so, there are multiple areas of the market. It’s not just the mega-cap names that are providing a lot of this infrastructure, but it’s also the companies that have been early in adopting and have the CapEx and R&D budgets to do that adoption and transformation. But also, a lot of the industrial infrastructure of the economy that’s helping build these physical assets.

Castleton: That makes sense. So as with every podcast we’ve done, basically we have addressed AI, and it sounds very important as an active investor to take that holistic approach for end clients. It’s not just for Mag 7, although we still find that traction within those companies, but just being able to spread out in those three areas. That was really great.

So, Greg, if I go to you then: Optimism around equities, how does that affect the multi-asset process that you both have? Especially, as I mentioned, fixed income is providing pretty compelling yields.

Wilensky: So while it certainly makes sense for a multi-asset investor to try to come up with, if you will, independent forecasts for both equities and fixed income, I think what we really need to recognize is that it makes sense, probably to start with the view on the equity side. Because it’s going to be a rare situation where, if you’re bullish on equities, which you heard a positive case for that, that you’re going to come out with a view that fixed income is going to have a higher expected return than that. So, that certainly starts as our first component. So, if we’re bullish on equities and that’s leading to an overweight view on equities, we then start to look more at fixed income and how it’s going to enhance the returns of a multi-asset strategy and act as a ballast, very importantly, if something goes wrong on the equity side. So that’s certainly a big part of how we try to approach things when looking at stuff. So, don’t look at fixed income in isolation, but think about how it complements the overall return patterns for your investment strategy.

So, when we’re bullish on equities, we’re trying to think about can we enhance returns? Can we cushion the downside if we’re wrong about how the AI investment situation will pan out or how the economic forecast will pan out? And we’ve got that built into our strategy. Yes, we’re attracted to fixed income now because yields are higher than they’ve generally been over the last 15 years, and that means you’re getting more return. And importantly, there is more room if something turns wrong for the Fed to react aggressively by pulling down rates. And this will allow fixed income to act more as that cushion. So that’s how we kind of approach fixed income during a situation like today.

Castleton: Great. And speaking of Fed uncertainty, Jeremiah: So, we’ve had two cuts thus far this year. And from the Fed, how is the uncertainty on the path forward affecting equities and how you’re viewing the opportunities?

Buckley: So, you know obviously Greg and Mike are the experts. And Greg will have a view. I’m of the view that, with the progress that the Fed has made, and it’s certainly likely that there’s room for them to continue to, you know, reduce rates and get closer to normal, the magnitude of the change kind of going forward will not have a significant impact on equities because of where we come from, the strength of the economy. You know, we’ll certainly get some noise around, you know, Fed days, whether it’s 25 basis points or zero or 50 basis points. But overall, the magnitude of the potential reduction, I think going forward, won’t be as material for equities.

I think, and exciting for us, is that what’s going to be more important is the secular growth drivers and the company’s fundamental execution kind of going forward. And if we think about Q3 earnings, it was another great quarter. We’re shaping up for the S&P 500 to have low- to mid-teens earnings growth in 2025. We didn’t see any deceleration in that earnings growth in Q3 versus Q2. And so, we’ve continued to see this strong string of results. And given a lot of the secular themes that we’ve seen in the economy, we believe that that can continue into 2026.

And what encourages me is not only just the AI infrastructure companies that are driving, you know, really healthy earnings growth, but it’s really branching out. So, we’ve seen examples in commercial aerospace where commercial aerospace builders are improving the output after years of some supply chain challenges. The aftermarket is really strong. And so commercial aerospace has seen really strong growth. You see travel continue to see positive data points, where, you know, cruise line spending is, it’s really healthy. You’ve seen, you know, room net growth across the globe being quite healthy. And then lastly, you know, medical tech equipment has also been really healthy, where we’ve seen innovation drive consumer adoption and utilization of the healthcare system. And so it’s not just one part of the economy that’s driving that earnings growth, we’re seeing multiple parts of the economy. And so that encourages me that this is more sustainable than just a short-term blip.

Castleton: That’s great to hear. And these are all insights as a fundamental active equity investor, that your team and yourself out on the road and actually seeing this firsthand.

Buckley: Yeah, we’re fortunate enough to have a terrific team of analysts that are living and breathing all these industries, spending time throughout the ecosystem to generate those data points and give us that confidence not only in the fundamental drivers, but also how companies are using AI. And giving us examples, like I mentioned at the beginning.

Castleton: Thank you for that. And I ask that about economic data because, going to you Greg, we’re recording this on November 11, hopefully at the end of a record government shutdown. So let me ask you though, as we do get hopefully an end to this, what do you see as the impacts for all of the economic data that we have been seeing over the past couple of weeks?

Wilensky: Yeah, I guess I would take it from the perspective of the biggest impact is the, in many respects, the lack of the official economic data. So, assuming we’re correct that the shutdown is near an end, we’re very happy that the spigot will turn back on for the official economic data coming forward. So that is a good thing. We certainly have been looking at the private data, some alternative sources during this time period, but having the official data back will be good. Hopefully this will lift some of the fog that Powell referred to in his most recent FOMC speech. But I think we also have to be concerned that that fog is actually going to be replaced with, if you want to call it, illusions or mirages, possibly in the short run. While the longer term, there probably will not be a long-term economic impact from the shutdown, you will lose some economic output in the short run, but this generally gets made up pretty quickly over the following month.

But the economic data that we’re going to see over the next month or two will be influenced by the shutdown, because, for example, on the employment or payroll side, those furloughed workers are not going to be counted as working in the next payroll release. That means you could see a very large decrease in the number of jobs out there and a short-term spike in the unemployment rate. And the Fed and other policymakers will now have to look through that as they make policy decisions, and they’re going to be trying to do that. They’re not going to be thrown off by a 0.4% or 0.5% increase in the unemployment rate for one month, but it just makes the job a little harder.

At the end of the day, we still lean to, even after there were certainly some hawkish comments after the last FOMC meeting, we think the odds still do favor a December cut. I’d say maybe 60/40, we are, on the probability of that. But need to remember that the market’s actually pricing in about a 70% probability of that cut. So, we actually think the market’s a little optimistic there. At the end of the day, this makes the job of the Fed harder in the short run. But we don’t think it kind of changes the general path that Jeremiah was talking about. I’ve seen some continued normalization in policy rate and their ability to act more aggressively if necessary.

Castleton: So, harder for the Fed, probably harder for you as well as an investor that has to take in this data. So, I guess as you contemplate the Fed’s path going forward and just the onslaught of economic data that we might start to get in fixed income markets, where are you just finding compelling spread duration opportunities today?

Wilensky: Yeah. So let me start with the economic backdrop that I think we’re working on. We still believe we’re in a situation where we’re going to see moderate economic growth going forward. So that’s a good thing. Yes, there are headwinds in the area of slower labor supply growth, the impact of the tariffs on trade. But there’s also a lot of tailwinds as well, whether we’re talking about the impact of the rate decreases, we’ve seen already the fact that tax cuts will kind of be flowing into things, the impact of all the investment that Jeremiah has been talking about already, this we think will create continued economic growth. So that’s a good thing.

On the inflation side, we do think that the inflation numbers over the next few months are going to continue to be elevated at the headline level because of the tariff impact on core goods prices, but we don’t see this as kind of spilling over and creating second-order effects. So that’s not a bad backdrop at all for the economic environment. When we think about, how does this translate into our investment views, from a duration and rates perspective, we do think the market is being a little aggressive in pricing in cuts through the end of 2026, especially if we’re right that the economy continues to have that kind of traction. That leads us to make a little bit of an underweight duration call. But we want to be, we want to do that judiciously, because we want the benefit of that duration as a diversifier. That does lead us to prefer a steepening yield curve view, because we think that front end duration can protect us if the economy does weaken.

On the flip side, from a credit risk perspective, there’s no doubt that spreads are do look tight on a historical basis; especially true on the corporate side where they’re near 10-year tights. Securitized credit spreads are more like median levels, so there’s some relative attractiveness there. But we’ve got to put those valuation numbers in the context that fundamentals are still strong and will likely stay strong if we’re right about the economic growth prospects. And technicals are also strong: those higher yield levels that we were talking about before means there are strong demand for fixed income.

So, from that perspective, we’re looking to stay overweight spread risk, even with the tight spreads, but we’re trying to do it in a way where we can add yield and protect on the downside. We want to stay in higher credit quality securities, whether that be within corporate or shifting into securitized assets that offer that higher credit quality and stay relatively short in average life, because that kind of mitigates the downside risks. That allows us that … that securitized theme is really playing out because it plays into both of those aspects: Higher credit quality and shorter average lives; get the yield in the portfolio, but limit the downside given that spreads are on the tighter side.

Castleton: Thank you, Greg. So, I guess for both of you, as managers of a multi-asset portfolio, what are you looking for in terms of risks and opportunities into 2026? Jeremiah, I’ll start with you.

Buckley: Yeah. So, as you mentioned at the beginning, you know, we definitely have to be on our toes. There are a lot of exciting secular growth trends, but in some areas, that’s reflected in valuations. And so, we have to be aware of that. And so, you know, first and foremost, we’ve talked a lot about AI. And we still have to continue to talk about it because we need companies to get that return on invested capital for all the infrastructure dollars that are going into this transformation. And so, we need to make sure that companies are monetizing on the revenue side with the applications that are being rolled out. But we also need to continue to see that operating leverage that I talked about, where companies are seeing that operating expense, productivity that is warranting that investment. And related to that, we need to also make sure that the capital markets are funding this investment. And so that’s one of the benefits we have of having a team-based approach and working together is we’re constantly talking about whether the debt markets are digesting some of the issues that are coming out related to AI, to warrant that kind of investment going forward.

The second piece that we need to continue to really focus on is the health of the consumer. So, there are a lot of kind of mixed data points now, and AI is also going to have an impact on consumers over time. And so, we need to monitor whether companies who are using AI to become more efficient, are they using that incremental efficiency to invest further and try and accelerate revenue growth or are they realizing those cost benefits and reducing headcount? And obviously continuing to reduce headcount without compensating increases in wage growth would be a negative impact of that for the consumer. And so, we’re also paying attention to that. Fortunately, we, as Greg mentioned, the tax policy that’s been put in place that, you know, certainly had some corporate benefits in ‘25, but in ‘26, the majority of the consumer benefits will come. And so that will also help kind of going forward. And so those are a lot of the things that we need to continue to monitor and make sure that it is appropriate to continue to be optimistic about equities.

Castleton: What about you, Greg?

Wilensky: Yeah, I’d like to kind of riff off a little of what Jeremiah was saying when I talked about how there’s been great demand from a technical perspective on fixed income. What Jeremiah was alluding to is, we have recently been seeing pretty sharp increase in supply from the companies building out on a lot of this AI investment, whether it be in the corporate market or the securitized market. So that’s something that we’re going to continue to monitor, that balance between strong demand, technicals … could these be overwhelmed at some point by supply technical? So that’s another area that we’re going to continue to be monitoring.

At this point, you know, we’ve seen a little bit of indigestion on the day something comes out, but then the market pretty quickly rebounds after that. So that’s going to be a trend that we’re going to continue to monitor because that could be a risk to the market. But we don’t see that at the moment.

Beyond that, those high-level economic themes that Jeremiah was talking about are obviously going to be key for us to look at as we think about how it drives overall asset class returns and how the correlation between fixed income and equities move. So, we’re always continuing to look at how do we bring these two pieces together, that we’re not bolting on just … two separate … a fixed income allocation and an equity allocation. We’re talking about how what’s going on in the individual markets is impacting the whole strategy and what we can do to, especially, make the fixed income portion of the portfolio a good complement for our equity strategy. So that will continue to be what we drive to do every single day.

Buckley: Lara, if I could just make one more point … I think it’s important in periods where we have a transformation like this, it’s important for us as active managers, we have the opportunity because there will be winners and losers over time. And so, it’s important for us to not only hopefully have the winners in our portfolio to benefit from that capital appreciation, but to also avoid the losers. And then there are also opportunities in the market because, the market, you know, thinks forward. And so, they’ve proclaimed a number of high-quality companies as losers today, but if we can monitor them and find some of those names that can adapt their businesses to this new environment, they could be really attractive opportunities over time as well. So that’s why we think it’s such an advantage to be able to actively manage and be able to sort through those, kind of, winners and losers in periods of, you know, uncertainty or transformation like we’re seeing today.

Castleton: Well, thank you both. Clearly, no end in sight in terms of the uncertainty from a macro environment, but absolutely true that we are in a moment of transformation. And that is very difficult to grasp, but both of you, fundamental active managers, and at Janus Henderson, our team does this day in and day out. So, relying on our firm for active insights into how to manage this transformation is very important. So, thank you for being here.

And thank you to our listeners for tuning in. For more insights from Janus Henderson. You can download other episodes of Global Perspectives wherever you get your podcasts or check out our website at JanusHenderson.com I’m Lara Castleton. Thank you. See you next time.