“It isn’t Halloween yet, but there’s a chill in the air – and in markets. An extended US government shutdown is delaying key data releases, regional bank stocks tumbled on critters in the credit market, and tariff risks returned. Meanwhile, doubts over the durability of the AI-led earnings cycle have investors whispering the “bubble” word again – though that talk may be more trick than truth.
“This week, let’s unpack the top questions on clients’ minds – from cracks in credit to AI exuberance:
1. Private Credit: Cracks, Cockroaches, and Cycles.
“Last week’s events capture how private credit’s narrative is evolving. It’s less a “bubble to burst” than a late-cycle phase where risks are rising unevenly. The asset class has grown roughly 13% annually since the 2008-09 crisis, maturing into a core institutional holding, and that maturity brings greater complexity.
“Recent headlines – and those “cockroach” analogies – capture the tension: when stress surfaces in one pocket of credit, it’s rarely alone. The combination of weak loan covenants and excessive investor demand contributed to the recent cracks, revealing the gap between disciplined and looser lenders – underscoring the need for deeper analysis, active portfolio management, and sharper differentiation between managers.
“Healthy fundamentals, supportive technicals, and attractive yields still argue for staying invested across the credit spectrum – but with tighter underwriting and a sharper focus on how capital is deployed, not just where. In short: the cockroaches aren’t everywhere, but a bit of insect repellent doesn’t hurt.
2. AI: Bubble or Productivity Boom?
“The economic impact of artificial intelligence is undeniable. Our macro team estimates US productivity could rise roughly 15% over time as AI adoption scales. But the path won’t be linear, and market bumps are inevitable.
“Still, it’s too soon to call a bubble. Today’s AI capex is being funded largely by cash-rich firms with solid balance sheets, not cheap credit or speculation. This is a boom built on real demand for cloud computing and data-center infrastructure – not leverage or hype. And return metrics remain solid, keeping our Global Investment Committee selectively overweight in US large cap growth/‘AI-centric’ investments.
“The greater risk isn’t a bubble bursting, but valuation fatigue – investors tiring of paying ever-richer premiums for AI returns that don’t materialize quickly enough.
3. So, can US Equities Keep Rallying?
“In short, yes. The Fed’s easing cycle, still-solid US growth, and resilient corporate earnings create a powerful mix for year-end performance, particularly with Q4’s seasonal tailwinds.
“But resilience doesn’t mean complacency. Dispersion is wide, valuations are elevated at roughly 23x forward earnings for the S&P 500, and our global CIO highlights how further upside depends on earnings delivery rather than multiple expansion. Our equity team also emphasizes that defending or potentially expanding margins will be crucial.
“Leadership remains concentrated in mega-cap tech, while sectors such as energy and staples face softer demand and margin pressure. So, selectivity remains key: quality balance sheets, visible cash flow, and pricing power will be the differentiators as the cycle matures. For now: keep calm, rally on.
4. Turning to Europe… mon dieu.. navigating French assets?
“Our caution around France’s fiscal trajectory deepened last week, given the lack of a credible path toward consolidation. Investors are demanding higher risk premiums for French sovereign debt, and we see scope for a roughly 70-80bp OAT-bund 10y spread to persist. Concerns over fiscal divergence are spreading too. Uneven fiscal discipline could become the next source of market volatility – particularly as fiscal activism looks to take over monetary policy as a key driver in 2026.
5. The Macro Setup as We Head Toward 2026?
“Fewer tailwinds – but stronger ones. Fiscal support, lighter regulation, and sustained investment in tech and infrastructure should keep the US growth pulse alive, while easing financing costs may spur M&A activity. In Europe, fiscal support should offset slowdowns in China and parts of Asia – keeping us constructive on the global outlook heading into 2026.
“Yet late-cycle signals are hard to ignore: rising energy and data-center costs could squeeze margins and household budgets, while fragile confidence and uneven spending persist. Not to mention ongoing inflation risks, geopolitical tensions, and central bank credibility concerns.
All told, there may not be bubbles just yet – but markets look set for more tricks with their treats into 2026.”
By Laura Cooper, Senior Macro Strategist at Nuveen
