Summary

Gerard Minack opened by noting that while macro data has become less connected to market behaviour, his base case for the US economy is a “muddle through” scenario, though recession risk remains non-trivial. He argues that current rate market pricing is too dovish, as an independent Fed facing sticky wage and core service inflation is unlikely to cut as aggressively as priced. He identifies the Trump administration’s policy mix as a major adverse supply-side shock, citing three drivers: tariffs, tariff uncertainty dampening CapEx, and labour market constraints exacerbated by immigration policy shifts. While labour demand has cooled, labour supply has also declined, keeping wage growth firm, especially among lower-skilled cohorts, reinforcing sticky inflation.

On markets, Minack states that in a recession, the playbook is straightforward: Fed cuts more than priced and equities fall 30–40% from current elevated valuations. However, under muddle through, equity outcomes hinge on the AI thematic, which he believes has morphed from a MAG7 trade into a broader AI-led rally. He draws a parallel with the TMT bubble, warning that while AI may be transformative, the key risk is profitability of AI service provision, not technological impact. He expects current AI CapEx to eventually be dilutive, triggering a “show me the money” moment, derating the sector within months, not quarters. He maintains a structurally higher-for-longer rate regime view and sees better relative equity value outside the US, once the AI momentum fades.

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