Powering Forward

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

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