This Week in Review | AI Debt, French Bond Yields, Oil Prices

Transcript

Alexander Leiken:

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they may mean for markets, and most importantly, the potential impact for investors. To stay up-to-date with our latest market insights, subscribe to our YouTube channel or visit Fisherinvestments.com. Now, let's review what happened this week.

First, AI debt.

Over the past couple of weeks, technology and AI-related stocks have seen some downside volatility, with the Nasdaq falling more than 5% from its early October high. Much of the attention has centered on the debt AI companies have issued to fund their infrastructure and data center buildout. Rising yields on several AI-related corporate bonds have some investors asking two questions: can these companies keep borrowing enough to fund their ambitious projects, and can they repay the debt that they've already taken on? Importantly, we believe today's credit stress appears primarily contained within the sector and is unlikely to pose a broader risk to the economy or this bull market.

So what's pushing AI bond yields higher? Part of it is global. Government bond yields have risen around the world this year. Because government bonds are more liquid and generally carry higher credit quality, corporate bond yields tend to climb alongside them as investors demand extra compensation for the added risk. Company-specific factors matter as well. Portfolio managers weigh a company's financial health and whether it can successfully execute the plans its bonds are funding. Right now, some are questioning the viability of AI infrastructure spending and how interconnected AI firms have become. Some fund managers are even buying insurance on AI-related bonds at a record pace to hedge against a potential bust. To us, it's healthy that investors are still paying close attention to risk. That's not what you typically see in a bubble when euphoria takes over and investors ignore the warning signs.

And AI isn't the only thing driving this bull market. It's much broader, with healthy growth in sectors and regions with little to no AI exposure. We have long said high expectations for tech make positive surprises harder to come by, but we see plenty of room for upside surprise in other areas, such as value stocks outside the US. For now, we view this as healthy scrutiny and a repricing, not a crisis in the making. But we remain diligent and closely monitor for bear market risks. We would encourage investors to stay focused on the fundamentals driving the broader market, rather than fixating on AI credit headlines.

Next, French bond yields.

This week, France's 10-year government bond yield hit 5%. Combined with the ongoing protests and budget worries, that milestone has headlines asking whether France is heading into a debt crisis. It sounds dire, but we believe these fears are likely overblown. In a true debt crisis, rates typically spike sharply, often into the teens or higher, and the jump usually stays limited to that one country. That's not what we're seeing.

Yes, French yields have risen a bit faster than some of its European peers, but yields are rising in many developed countries, driven largely by better-than-expected economic data. France's recent moves relative to those of countries like the US, Japan and Germany are explained, at least in part, by rising nominal growth expectations globally. That points to a global trend rather than a France-specific problem. Additionally, while today's interest rates appear high relative to the period following the global financial crisis, by historical standards, they remain well within a normal range. Still, higher yields mean higher borrowing costs for the French government, and that adds pressure to an already intense budget debate. The Prime Minister wants to trim the deficit from 5.4% of GDP in 2026 to 5% in 2027, which would likely require spending cuts and tax increases. At the same time, ongoing protests over affordability are pushing the government to spend more on social programs.

What many are overlooking is whether France can actually afford its debt. Debt servicing takes up roughly 10% of the French tax revenue. That ratio was higher in the late 1990s and in the early 2000, and it didn't derail the economy then. In short, France can manage its current debt load despite headlines suggesting otherwise. Markets have weathered sovereign debt scares before, and we expect volatility to fade as investors gain clarity on France's budget and political direction.

Finally, oil prices.

This week, Brent crude reached $115 a barrel, and some investors are wondering whether high energy prices spell trouble for this bull market. It's an understandable concern. Many of us feel it every time we fill up our tank. But the price of a gallon of gas doesn't necessarily tell us about where stocks or the economy are headed.

Markets have been dealing with higher oil prices for a while now, and have gone on to reach new all-time highs anyway. Think back to the start of the Iran conflict. Oil quickly crossed above $100 a barrel and peaked at $138 in April. Then prices retreated fast, falling back to pre-war levels within about three months. Yes, prices have climbed back since then, but there's nothing uniquely threatening about $100 oil. And here's why.

First, supply adapted. When the Strait of Hormuz shut down in the spring, producers found workarounds to keep oil flowing and ramped up production and infrastructure buildouts. Non-Gulf producers in North and South America raised output by 1.4 million barrels per day through August. China reduced its oil purchases and developed countries released strategic reserves. Together, this helped offset much of the lost supply that would have otherwise moved through the strait.

Second, $100 oil just isn't what it used to be. Crude first broke through $100 per barrel in 2008, and has crossed that line several times since. But adjusted for inflation since 2008, today's $100 oil is closer to just $65. Third, economies simply rely on oil less than they once did. The US and EU now use up to three quarters less oil to produce the same amount of GDP as they did in the 1970s. That structural shift limits how much high oil prices can weigh on growth compared with past eras.

All this is to say that worries about oil's economic fallout aren't new. They surfaced when the conflict began and have been widely discussed ever since. Combined with adaptable supply and more energy efficient economies, that familiarity reduces oil's power to negatively surprise markets.

That's it for this week. Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series Three Things You Need to Know This Week, released every Monday. You can also visit Fisherinvestments.com anytime for our latest thoughts on markets. Thanks again for joining, and don't forget to hit like and subscribe.