EARNINGS WATCH

The Q3 2026 earnings season will kick off next week. Most of the hyperscalers are scheduled to report during the last week of October.

Goldman Sachs:

• Consensus expects S&P 500 year/year EPS growth of 27% in Q3. This compares with realized growth of 33% in Q2, excluding some accounting distortions. Analyst estimates show the beneficiaries of AI infrastructure spending accounting for over 50% of S&P 500 EPS growth this quarter alongside hyperscaler capex growth of 116%.

• We expect most companies will once again surpass consensus earnings estimates this quarter. For the median S&P 500 stock, consensus estimates show year/year EPS growth slowing from 14% in Q2 to 9% in Q3. Input cost pressures will likely limit the magnitude of sequential margin expansion in Q3, and the dollar should provide a modestly smaller tailwind to S&P 500 revenue growth this quarter than last quarter. However, recent economic growth data have been strong and S&P 500 earnings revision breadth has remained positive.

• Last quarter, hyperscaler cloud revenue growth accelerated to 48% alongside surging revenue backlogs, boosting investor confidence in the likely return on AI investments. Our equity analysts anticipate a further acceleration to 55% in Q3. Productivity gains from AI adoption remained in early stages based on company commentary last quarter, but we expect both commentary and income statements will increasingly reflect AI productivity gains in coming quarters.

• Analyst estimates show wide dispersion at the sector level, with Info Tech and Energy powering aggregate S&P 500 earnings growth. The two sectors combined are expected to contribute nearly 80% to this quarter’s earnings growth, and the median stock in each of those sectors is expected to grow EPS by more than 30% year/year. In contrast, bottom-up estimates are particularly pessimistic in the consumer sectors, where estimates show no EPS growth at the aggregate sector level.

• AI infrastructure stocks are expected to drive more than half of S&P 500 EPS growth in Q3. The top 10 contributing stocks are expected to account for over two-thirds of aggregate S&P 500 earnings growth this quarter, with Micron (MU) and Nvidia (NVDA) together accounting for more than 1/3 of index growth.

 

 

Factset:

Overall, 116 S&P 500 companies have issued quarterly EPS guidance for the third quarter. Of these companies, 44 have issued negative EPS guidance and 72 have issued positive EPS guidance.

The number of companies issuing negative EPS guidance is below the 5-year average of 62 and below the 10-year average of 57. This quarter marks the lowest number of S&P 500 companies issuing negative EPS guidance for a quarter since Q3 2021 (39).

On the other hand, the number of companies issuing positive EPS guidance for the third quarter is above the 5-year average of 42 and above the 10-year average of 40.

In fact, this quarter marks the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this metric in 2006 The previous record was 65, which occurred in Q2 2021.

As a result, the percentage of companies issuing positive EPS guidance is 62% (72 out of 116), which is above the 5-year average of 40% and above the 10-year average of 41%. This quarter marks the highest percentage of S&P 500 companies issuing positive EPS guidance for a quarter since Q2 2021 (71%).

At the sector level, the Information Technology sector has the highest number of companies issuing positive EPS guidance of all 11 sectors at 44. This number is well above the 5-year average of 23.6 and well above the 10-year average of 20.4 for the sector.

Note that 44 of the 116 S&P 500 companies that have issued a positive guidance for Q3 are IT companies. Note also that only 6 sectors are beating their 5-Y average. Five are not.

John Authers:

Smaller companies have now lost almost all their outperformance versus mega-caps since the start of the year (as measured by the Russell Top 50 and 2000 indexes), while value stocks (bought because they were cheap) have reached a fresh nadir for the decade compared to growth, according to S&P 500 indexes:

Bear in mind that orthodox market theory recognizes both a “size” and a “value” anomaly – over the long term, small companies and cheap stocks are expected to outperform. So this is very unusual. Putting these trends together, the gap between large growth stocks and small-cap value that has opened since the launch of ChatGPT is now yawning:

Earnings, of course, justify this. Growth companies should be expected to grow their profits by definition, but the way their earnings outstripped those of value companies in the second quarter was unprecedented in recent history.

This is not a world where small is beautiful. In fact, small is tough nowadays:

• You have to be big to navigate ever changing tariffs and various supply chain bottlenecks.
• You have to be big to quickly adjust your supply chains around the world.
• You have to be big to negotiate volumes and prices with stranded suppliers.
• You have to be big to absorb all the costs of the above.
• You have to be big to spend on AI and build software to remain competitive.

As a case in point, it’s no coincidence that sales of “nonstore retailers” (largely AMZN) have increasingly outpaced total sales since ChatGPT and, even more so, since tariffs and the US/Israel war with Iran.

Did you miss The AI Boost to S&P 500 Profitability?

AI CORNER

CoreWeave, a major data center developer, held its first Fully Connected Conference September 29-October 1. Frpm Goldman Sachs’ account (my emphasis):

• Industry conversations continue to point to a healthy AI demand backdrop, with both training and inference workloads expanding. Post training is one of the faster growing areas of spend, while robotics remains an emerging driver given the significant compute and data preparation requirements needed for simulation and model development.

• Participants also noted that cloud selection is often driven by access to available compute rather than meaningful platform differentiation, with customers sourcing incremental capacity wherever it can be secured.

• (…) demand for AI capacity continues to exceed available supply. Industry participants pointed to roughly 14-18 months from permitting to data center delivery, limiting how quickly new capacity can come online. (…) power availability, permitting, and site development remain key bottlenecks.

• CoreWeave specifically continues to see demand materially above available capacity, with qualified pipeline demand multiples larger than available infrastructure, growing backlog, and continued geographic expansion driven by customer demand. It reiterated 4.2GW of contracted power today and progress toward its 8GW 2030 target. [+17.5% CAGR]

• Commentary suggested pricing conditions remain favorable. Management reiterated ~5-10pts of contribution margin improvement in 2Q, a ~25% SKU price increase in July disclosed an additional ~10% increase since July; noting signed 3Q short duration contracts (3-6 months) are pricing around ~$40mn/MW. Roughly 70% of 2Q deals included customer prepayments.

• On unit economics, our industry discussions support the view that older generation GPUs may have longer useful lives than initially expected. While some of this demand may reflect ongoing industry capacity constraints, it is also tied to workload continuity, software optimization, and the benefits of staying on proven architectures that are already embedded within research and development workflows. The key debate is how much of the observed demand reflects genuine longevity of older architectures versus customers taking whatever capacity is available. In our view, the answer is likely somewhere in between: capacity scarcity may be extending the economic life of older GPUs, but these renewals also suggest that for certain workloads, the performance benefits of the latest generation may not outweigh the costs and disruption associated with migrating established infrastructure and workflows. CoreWeave customer examples include:

  • A100 (launched in 2020): an AI-native scientific discovery company signed a renewal with extending into 2029. The 3yr contract was signed at pricing in line with typical 1yr terms. This customer is leveraging A100s to produce and refine data sets and fine-tune models to accelerate scientific discovery.

  • H200 (launched in 2023): an early stage research lab renewed a 3yr contract at a premium to the original contract. This customer is leveraging H200s to support development and deployment of smaller families of models build for a specific architecture.

• Management highlighted growing traction across financial services, industrials, healthcare, sovereign deployments, and robotics.
• Security, compliance, and data governance remain the largest friction points for enterprise AI deployments.
• Regulated industries are an expanding customer base, with financial services emerging as a meaningful vertical (~10% of backlog came from financial services as of September). (…) quantitative trading firms such as Hudson River Trading and Jane Street cited as examples.
• Physical AI emerging as a meaningful demand vector, with several customers discussing how advances in multimodal AI are changing development economics. Brandon Hootman (lead of construction autonomy at Caterpillar) noted that development cycles historically tied to new machine launches and measured in years are now measured in months through direct field iteration. He highlighted multimodal systems that combine video, LiDAR, physics engines, and real-world operational data, noting that one hour of real machine data can now generate 100-1,000 hours of simulation data, significantly accelerating development and training workflows.

GS also updated its data center outlooK

• (…) we raise our year-end 2026 US data center capacity forecast by 5 GW to 64 GW, while reducing our year-end 2027 forecast by 5 GW to 90 GW.

  • We now expect US data center power demand to grow 38% (12 GW) in 2026 and 38% (17 GW) in 2027 (all assessed on a December vs December basis). This is assuming a utilization rate consistent with industry reports, as well as bottom-up regional models – where each market carries its own utilization assumption – that converge to a weighted average utilization rate of 70%.

• Effective peak spare capacity tightened across every key region this summer, in part due to record-breaking peak-summer demand.

Also from GS:

Consensus estimates show hyperscaler capex growing by 116% year/year in Q3 2026. This compares with 87% growth in Q2. We expect that hyperscaler capex spending will grow by more than 50% in 2027, surpassing current consensus estimates for spending of roughly $1.1 trillion next year, but also expect that the rate of both capex growth and upside surprises will diminish relative to recent quarters.

 

Last quarter, the hyperscalers reported accelerating cloud revenue growth and large revenue backlogs that signaled the monetization of their capex investments. Explicit management commentary discussing those returns complemented the strong results. Our equity analysts expect the trend of accelerating cloud revenue growth will continue this quarter, with year/year growth increasing from 48% in Q2 to 55% in Q3. Continued signs of AI capex monetization will be important both for the performance of the hyperscalers and for the outlook for capex growth.

 

David Rosenberg:

It may pay to note that there is only one sector at a new high, and it is tech. Increasingly, the market is running on one engine: a familiar cast of tech companies that are building out (and benefiting from) the AI revolution. (…)

But just about everything else is going down. Shares of healthcare firms, banks, and consumer staple companies are declining. So are small-cap stocks (down -0.6% yesterday and off -8% in the past two months). And blue chips, like the Dow industrials.

Over the past month, eight of the eleven sectors of the S&P 500 have dropped, weighed down by the rise in interest rates, while just three — the technology sector, energy, and communication services companies like Meta and Alphabet — have risen. (…)

Fewer than half of the stocks in the S&P 500 closed above their 200-day trendline.

Meanwhile:

The Atlanta Fed’s GDPNow real GDP estimate for 2026: Q3: 3.7%, thanks to AI.

• GS: Trade Deficit Widens by More Than Expected in August; Lowering Q3 GDP Tracking to +3.1%

Plague in Russia?

Last week, the Moscow Times (a non-state-controlled news organization) reported that a 28-year-old civilian anti-plague lab worker in Siberia died on October 1 after being exposed to the plague. Nearly 200 of her contacts are quarantined. Beyond that, the story gets very murky. Independent verification is not readily available in Russia, and there are all sorts of conflicts of interest here.

Plague? Like the Black Death? Kind of. Plague is a rare but serious disease caused by the bacterium Yersinia pestis, the same bacterium behind the Black Death in the 1300s. It lives in wild rodents and their fleas. Thankfully, it’s much less of a problem today because of improved hygiene and living conditions. There are three forms: bubonic (the most common, which causes painful swollen lymph nodes), septicemic (in the bloodstream), and pneumonic (in the lungs). Pneumonic plague is the most dangerous and the only form that spreads person to person.

If early accounts are correct, this story is about the pneumonic plague. It’s concerning, as any lab accident/leak is, but the risk of this becoming a Covid-19 pandemic is very, very low for a few reasons:

1. Pneumonic plague is not traditionally efficient at spreading. While it does spread person to person through respiratory droplets, in previous outbreaks, one infected person typically infected one to three other people. Transmission occurs in close, sustained, face-to-face contact (like household caregiving, crowded sleeping quarters, or unprotected clinical workers). This isn’t like measles, which can linger in the air for hours and hours.

2. We have antibiotics. They work really well. In fact, a few cases of pneumonic plague pop up randomly in the U.S. The last case was in July 2025 in Arizona after a man was exposed to sick cats. Forty-six of his contacts received antibiotic prophylaxis, and none became sick. Outbreaks with person-to-person spread still happen in places where plague is endemic, like Madagascar. In 2021 in Madagascar, for example, 22 cases were confirmed, and eight people died. But antibiotics stopped the outbreak.

3. The response seems very rapid. Nearly 200 of the deceased Russian woman’s contacts were in quarantine and under close medical monitoring. Some reports say five hospitals are also under quarantine.

4. This didn’t happen in a crowded megacity. The institute is in a small town, not Moscow, which means less contact between people and less potential for spread.

Dr. Marisa Donnelly, epidemiologist, and Dr. Liz Marnik, immunologist via Your Local Epidemiologist:

On a scale from 0 (not worried) to 10 (super worried), our worry that this will turn into something big is a 1. This will change if there are more cases or we find out if the pathogen was altered in the lab. (…)

We don’t have lice, fleas, and rodents everywhere in our living quarters anymore. And our medical systems are better. But plague is still around. It’s endemic in some places, like Madagascar, and sporadic in others, including the U.S. An estimated 1,000 to 2,000 people are infected worldwide each year. (…)

If this woman died from the plague, the risk of a pandemic is very, very small.

But no worries: Trump says he will speak with Vladimir Putin about pneumonic plague

We know that Putin always speaks the truth, particularly when speaking with Trump: “”President Putin says it’s not Russia. I don’t see any reason why it would be.”

Remember how George W. Bush, after his first meeting with Putin in 2001, responded to a reporter asking him if he could trust Putin: “I looked the man in the eye. I found him to be very straightforward and trustworthy… I was able to get a sense of his soul”.

Joe Biden recounted that during a 2011 meeting with Putin in Moscow, he explicitly referenced Bush’s comment, telling Putin: “I looked in your eyes, and I don’t think you have a soul.”

According to Biden, Putin smiled and responded, “We understand one another.”

S&P Global: Sharpest rise in service sector business activity since July 2021

The headline S&P Global US Services PMI^® Business Activity Index improved for the fourth successive month in September, rising to 58.8 from a reading of 56.5 in August. The index has now signaled increasing business activity in six consecutive months, with the latest expansion the most pronounced since July 2021.

For the first time in 10 months, output trended higher across all five broad sectors covered by the survey as transport & storage activity returned to growth. By far the sharpest expansion was seen in the information & communication sector, however.

The rapid increase in business activity was in line with a similarly-sized rise in new orders at the end of the third quarter. Here, the pace of growth quickened to the fastest in four-and-a-half years amid reports of particular strength in domestic demand. Although new export orders rose at a much slower pace than total new business, growth was recorded for the second consecutive month and the pace of increase was unchanged from August’s 20-month high.

With total new orders rising rapidly again in September and some companies able to fill previously vacant positions, workforce numbers increased for the third month running. Moreover,the rate of job creation was the fastest since June 2022.

Despite efforts to expand workforce capacity, the strength of the influx of new orders was such that volumes of backlogged work accumulated again, extending the current sequence of rising outstanding business to 19 months. Furthermore, growth strengthened since August, was the sharpest in almost four-and-a-half years and among the most marked on record.

Having eased to a 16-month low in August, input cost inflation accelerated sharply in September and was the steepest since November 2022. Higher gas prices and an associated rise in transportation costs were widely reported, with some respondents also mentioning increased labor costs. Similarly, output prices also rose at a faster pace, with inflation the second-fastest in just over a year (behind only July).

Having observed strong growth in business activity in September, service providers were increasingly optimistic that output will rise over the coming 12 months. In fact, sentiment hit a one-year high. Anecdotal evidence linked confidence to expected increases in new orders amid the introduction of new products, the securing of new clients and referrals from existing customers. Hopes for an easing of inflationary pressures were also mentioned.

Combined with the encouragingly solid manufacturing PMI, the strong service sector expansion points to economic growth of around 4% in the third quarter and 5% in September alone, the latter hinting at accelerating momentum into the fourth quarter.

Tech companies are reporting by far the strongest growth but the rising tide is now lifting all boats as far as the major sectors are concerned, with accelerating growth also reported for consumer-facing businesses as well as industrials and healthcare, alongside sustained solid growth in financial services.

• Technology sector growth accelerates to its fastest in over five years

All seven US sectors posted an expansion of business activity during September and the majority saw stronger growth than in August.

Industrials also outperformed at the end of the third quarter, with output growth accelerating to its fastest in over five years (index at 58.6, up from 54.5 in August).

September data indicated stronger momentum in both the Basic Materials and Consumer Goods sectors, with both registering robust rises in production volumes.

John Authers:

The 10-year Treasury yield, the most important number in global finance, has now broken through its high from 2007, when a bond sell-off triggered the Global Financial Crisis. It’s now the highest since 2002:

Services inflation is proving intractable, and the proportion of supply managers complaining about rising prices climbed to its highest since the post-pandemic surge. With the exception of a few months at the top of the oil price spike in 2008, and in the brief spasm that followed Hurricane Katrina in 2005, the reading is the strongest since the series began in 1997:

Bond yields are assumed to have an inverse relationship with stocks, so a move of this magnitude should be a problem for equities. It hasn’t been. (…)

Maybe it has been:

• The equal-weighted S&P 500 continues to lag the cap-weighted benchmark. The relative ratio’s deviation from trend is nearing levels last seen during the dot-com bubble.

From Almost Daily Grant:

Monday’s push above 5.3% for 10-year Treasury yields marked a new cyclical high, while posing a growing threat to a heretofore-bulletproof bull market in stocks. More than half the respondents to a Bloomberg investor survey conducted last month predicted that 5% to 5.5% on the 10-year would be sufficient to catalyze a 10% correction in the S&P 500. The benchmark yield stood near 4.8% at the time.

As nominal GDP expands at the fastest annual rate of the past two decades (exempting the post-Covid snapback) with the the 10-year breakeven inflation rate reaching 2.36% on Friday versus 2.21% in July,  the prospects of an overheating economy spurring more restrictive monetary policy grow increasingly realistic.

Those risks crystallize around a 2.5% 10-year breakeven rate, commensurate with roughly 5.5% on the 10-year Treasury, Bloomberg’s Edward Harrison writes today: “If yields get that high, inflation expectations are elevated and the economy is still booming, that would likely force a train of rate hikes like we saw in 2022.”

Meanwhile, seemingly inexorable selling pressure on long-dated debt could eventually elicit a drastic response from Washington. Terming a 6% 30-year yield – a level last breached in 2000 – as “inevitable,”  BMO Global Asset Management’s head of fixed income Earl Davis warned of a debt trap on Bloomberg Television this morning, whereby borrowing costs exceed nominal growth, spurring a vicious cycle of new borrowing just to service existing obligations.

Uncle Sam would not take such a development lying down. “It [would lead to] the Fed and Treasury working together to buy up bonds,” Davis hypothesized. “I think it is QE, without a doubt.”

While such a move would seemingly do little to contain the price pressures percolating over the past five-plus years, key constituencies evince little concern over such a potential trade off.  Behold a telling exchange from last week’s Time Magazine interview with President Trump:

Trump: Okay, and frankly, this [high rates] is hurting our country more than inflation is hurting our country. More than inflation.

Interviewer: Can you tell us about your meeting with…?

Trump: You know, inflation. Certain levels of inflation will also pay off that debt very rapidly. Very rapidly.

Following those remarks, White House communications director Steven Cheung interjected that the allotted one-hour interview time was nearly complete.

Canada: Activity and new business fall again as cost pressures intensify

Companies in Canada’s service sector continued to face a challenging business climate during September. Reflective of ongoing uncertainty due to tariffs and the war in Iran, both activity and new business fell, albeit at slower rates compared to August.

 

Tariffs and elevated energy/fuel prices also served to push up operating expenses more sharply, but strong competitive pressures restricted the degree to which firms could pass these on to clients and output price inflation fell to a seven month low.

Staffing levels were also reduced in response to lower activity and new business, although the downturn was exacerbated by difficulties in finding suitably skilled workers to fill vacancies.

Firms were nonetheless more confident in the outlook, with sentiment improving to its highest level since April.

Margins also came under renewed pressure as market competition restricted pricing power. With firms subsequently reluctant to replace any leavers at their units, the net result was a drop in employment for the first time since May.

Euro area growth hits strongest in almost three-and-a-half years

Demand for eurozone goods and services continued to improve in September, completing a full quarter of growth. Overall, the pace of increase ticked up to a 41-month high. Export* performances were supportive of this overall
demand expansion, with new orders from foreign clients rising at the sharpest rate in over four-and-a-half years.

The S&P Global Eurozone Services PMI Business Activity Index posted its highest reading since last November, rising from 51.6 in August to 53.0 in September. The latest figure – which was the third above the 50.0 no-change level in as many months – pointed to a sustained expansion in the euro area’s services economy.

New business intakes likewise rose for a third straight month in September. The rate of growth was the joint-strongest since last November (equal to July of this year and December 2025). Domestic customers were the main drivers of sales activity as new export volumes were unchanged from August.

The fastest growth of the service sector since last November indicates that the eurozone economic upturn is both accelerating and broadening out beyond manufacturing. The collective signal from the PMI surveys is one of GDP growing at a 0.4% quarterly rate, with momentum accelerating as we head into the fourth quarter.

While both Germany and France saw encouraging returns to growth of services activity for the first times since March and last December respectively, and Italy reported an expansion for a fourth successive month, the best performer by far was Spain, where a turbo-charged September rounded off its best quarter for five years.

Although the drivers of growth vary between countries, across the eurozone as a whole IT-related services are showing especially solid growth, buoyed by AI investments and supported by professional and commercial services growth.

Perhaps more surprising is the resilience of consumer-oriented services growth, given recent energy price hikes, notably driving the above-par growth in Spain.

A renewed upturn in price pressures signalled by the survey meanwhile hints at eurozone inflation running closer to 4% than the ECB’s 2% target. Combined with the acceleration of growth indicated by the PMI, the data will spur further speculation of more aggressive monetary policy tightening.

• Greatest number of sectors in growth territory since March 2023

September data signalled an expansion in output levels in 16 of the 19 monitored sectors, according to the latest S&P Global Europe Sector PMI®. This was the largest number of segments in growth territory since March 2023, up from 13 in August.

As has been the case for the last three months, Technology Equipment continued to register the steepest expansion in production in September. The rate of growth in output was the fastest in five years and marked overall. Similarly,
Software & Services recorded another sharp upturn in activity, as Technology remained the strongest performing broad category. (…)

Actually, not only is tech growth accelerating, it is spilling over most other sectors globally: “For the second month running, growth was signalled across each of the 21 sectors monitored by the S&P Global Sector PMI®. In fact, all but seven indicated faster expansions compared to August.”

As a result:

Global output rises at fastest rate for over three years

The upturn in global economic activity gathered momentum in September. Growth accelerated for the sixth month in a row to reach a 40-month high. The outlook also remained positive overall, with new order growth and business optimism about the year ahead both strengthening.

Economic activity and incoming new business rose across the six sub-sectors covered by the survey (consumer, intermediate and investment goods producers and business, consumer and financial service providers). Financial services registered the fastest rate of output expansion (despite being the only category to see growth slow) and consumer services the weakest.

12 out of the 15 nations for which September PMI data were available registered an increase in economic activity, with only Brazil, Kazakhstan and Canada seeing contractions. The US, Spain and India were at the top of the global PMI output growth rankings.

The level of incoming new business increased at the quickest pace since February 2022, with rates of expansion accelerating at manufacturers and service providers alike.

Part of the latest increase was underpinned by improved international trade flows, with new export business rising for the second successive month and to the greatest extent in over five years.

Business optimism about the year ahead rose to a seven-month high, with sentiment strengthening in the business services, consumer goods, consumer services and intermediate goods sectors. That said, the financial services category remained the most optimistic overall.

September data signalled an uptick in inflation, with rates of increase in both input costs and output charges accelerating.

Average input prices rose at one of the quickest rates in almost four years, beaten only during that period by the conflict-related highs seen in April and May of this year. Manufacturers and service providers both saw faster inflation of costs, with rates of increase hitting three- and 44-month highs respectively.

Part of the increase in input prices was passed on to clients in the form of higher output charges, with selling price inflation picking up from August’s six-month low. Rates of increase accelerated in both the manufacturing and services sectors.

The Surge in Rates Is Blowing Up Commercial Real-Estate Deals Property buyers are demanding sellers renegotiate terms because of higher mortgage rates, signaling broader market distress

A growing number of commercial real-estate buyers are threatening to walk away from recent transactions unless the seller offers better terms.

Rapidly rising interest rates are to blame.

Investors who agreed to a purchase price earlier this year when financing was cheaper are now demanding price cuts or other concessions before closing.  (…)

The typical six to 12 months between when a buyer signs a contract and when the sale is completed can make a substantial difference in financing costs when borrowing rates are rising as rapidly as they are now.  (…)

Commercial real estate—from offices in certain cities to shopping malls and hotels—had been enjoying a budding recovery. Reduced new supply, a pickup in workers returning to the office and a leveling off in interest rates in recent years helped boost property values.

Now, the sudden surge in interest rates is derailing that period of progress.

The fallout extends beyond property owners. Falling real-estate values and fewer sales squeeze property-tax and transfer-tax collections. Higher rates also make it harder for developers to earn their targeted returns. That cuts demand for construction workers, architects and building materials. (…)

Higher rates are also adding to landlord distress because mortgages made when borrowing costs were lower come due. Owners that can’t refinance or repay the loans at maturity are falling behind or being pushed into special servicing.

Data firm Trepp reported that in August, 11.42% of mortgages packaged into commercial mortgage-backed securities were being handled by special servicers, a sign that those loans were facing problems such as missed payments or difficulty refinancing at maturity. That is the highest special-servicing rate since February 2013.

It goes beyond real estate:

(…) Moody’s estimated last year that a record $1.45tn of US investment-grade corporate debt would come due between 2026 and 2030. Rising rates will put pressure on businesses to increase profits at a similar pace to rising borrowing costs. 

“That could be a real shock to the corporate debt system if rates stay this high through 2027 and through 2028 into the later half of this decade,” said Michael Zdinak, head of the US consumer markets service at S&P Global. (…)

“If profitability doesn’t grow with the borrowing costs, that’s where you’ll see a real credit issue,” said Moody’s chief credit officer Atsi Sheth. (FT)

Goldman Sachs:

Until recently, our financial conditions framework suggested that the drag from higher rates was roughly offset by higher equity prices, tighter credit spreads, and a weaker dollar. Adding up the effects on housing, consumption, and capex, we expect higher rates to subtract about 0.2pp from GDP growth in 2027, leaving the economy still growing close to our 2.3% potential growth estimate. If current rates persist instead, we estimate the drag would rise to slightly over 0.5pp.

We see two additional risks if current rates persist. First, higher rates could weigh on equity prices: our strategists expect equities to rise slightly over 10% by end-2027 but note that stable rates could limit upside. If equities were roughly flat through 2027 because of higher rates, the missing boost from wealth effects would lower consumer spending growth by just under 0.5pp.

Second, higher rates have revived fiscal sustainability concerns. The large primary deficit remains the main driver of the debt-to-GDP ratio, but persistently higher rates would boost interest expenses and push the ratio up faster—raising the odds that deficit reduction becomes necessary sooner to stabilize debt.

Meanwhile

Wall Street banks launch record $60bn chip deal for Broadcom and Anthropic

Wall Street banks on Monday began offloading part of a new $60bn debt package to fund Anthropic’s lease of Google semiconductors, the largest chip-financing deal to date as tech companies race to secure AI computing power.

Bank of America, Citigroup and Morgan Stanley, which have committed to fund the deal, have reached out to other banks to purchase portions of the debt, according to people familiar with the matter. 

The financing, guaranteed by Broadcom, is seen as a bellwether for appetite in AI debt. Investors in recent months have demanded a higher risk premium to lend to tech companies pouring trillions of dollars into developing sophisticated AI models, fuelled by concerns that their heavy capital investments might not translate into profitable businesses in the long run.

Much of the borrowing spree will fund the procurement of advanced chips that are getting more expensive by the day. The latest financing package follows Broadcom’s $35bn deal with Apollo and Blackstone just a few months ago, when the chipmaker announced a massive 20-gigawatt “AI XPV” platform to help the likes of Anthropic and OpenAI acquire computing capacity. (…)

With a lot more to come:

From Columbia University finance professor Stijn Van Nieuwerburgh. His paper was recently presented at the Brookings Institution.

(…) The resulting $10.3 trillion represents investment incurred during 2025–32, including pre-completion spending on projects that become operational after 2032. Assuming nominal GDP also grows by 4 percent annually, investment averages 3.63 percent of GDP over 2025–32. Table 1 places this estimate in historical perspective: it exceeds the corresponding investment shares associated with the canal, railroad, electrification, ighway, and telecommunications and fiber booms.

The scale of the AI infrastructure buildout raises a basic financing question: who supplies the capital and who ultimately owns the underlying assets?

(…) internal cash generation remains substantial, but it is no longer sufficient to finance the projected pace of investment without greater reliance on external capital or financing structures that shift assets and obligations away from the operating companies’ balance sheets. (…)

Debt financing has expanded alongside this third-party equity. Bank loans, comprised of mortgage loans backed by datacenter assets and syndicated lines of credit, remain important, but private credit and structured finance now provide a growing share of project funding, usually backed by long-term contracted revenues.

Financing is also extending beyond buildings and power infrastructure to the underlying IT equipment. GPUs and related hardware can be financed through leases or asset-backed structures, further broadening the pool of external capital available to AI firms and hyperscalers.

Yet this collateral differs from conventional real estate or aircraft: its economic life is shorter and rapid technological change creates substantial obsolescence risk, making its resale value less certain. (…)

The scale of external financing is already substantial. Morgan Stanley estimates that more than half of the roughly $2.9 trillion required to meet hyperscalers’ incremental compute needs over 2025–2028 will come from outside capital Across the full investment, it projects an approximate 60-40 split between equity and debt. Within the debt component, private credit accounts for the largest share—about $800 billion—followed by corporate debt of roughly $200 billion and structured finance of approximately $150 billion.

• “Spending by Alphabet, Amazon, Meta, Microsoft & Oracle is expected to jump from $412 billion in 2025 to $789 billion in 2026. That’s a 92% increase in just one year. By 2029, estimated capex from these 5 hyperscalers is nearly $1.2 trillion a year.” (@charliebilello)