My outlook for the final quarter of the year is based on one central idea: we are not facing a change in the cycle, but rather a change of regime within the same cycle. The global economy continues to grow, and corporate earnings continue to surprise on the upside. The debate is no longer whether a recession is imminent, but what is sustaining growth and what its implications are for inflation, interest rates and returns on capital.
A) Growth and employment
The macroeconomic backdrop remains reasonably constructive. Growth is broadening beyond technology and AI capex into services, inventories and more general business spending. In the US, services consumption remains resilient, and third-quarter growth is tracking at around 2.75% annualised.
The main anomaly remains employment: job creation is very weak despite solid growth. My interpretation is that this reflects a balance between cyclical momentum and structural change. Corporate earnings have risen very strongly by 35% year-on-year globally in the second quarter and by 23% in the US while job creation continues to lag.
Historically, this combination of solid growth, strong earnings, favourable credit conditions and weak employment has preceded a subsequent acceleration in hiring, rather than a collapse in employment. Leading indicators support this sequence: hiring-intention surveys are improving, and the flash PMI employment index for developed markets is at a three-year high.
I therefore expect global employment growth to accelerate towards an annualised rate of 1%, and monthly job creation in the US to return to triple-digit figures. Nevertheless, I cannot rule out the possibility that AI-related productivity will structurally reduce the need for hiring. The test will be whether the improvement in earnings translates into a genuine acceleration in employment my most likely scenario or whether the structural component ultimately carries greater weight. This same strength in earnings and breadth of the recovery is, as I discuss later, one of the pillars of my view on equities.
B) Fed
Warsh’s speech at Jackson Hole marked a change in tone. He reaffirmed the 2% target, rejected the use of the balance sheet to influence long-term yields and noted that financial conditions are not broadly restrictive.
My condition for an interest-rate increase remains clear: as long as core PCE remains around 3% and unemployment close to 4.1%, the Fed’s bias will be towards tightening. December remains my base case, although September may be equally likely if CPI and PPI surprise on the upside.
What matters is the change in framework: two quarters ago, we were discussing when rate cuts would begin; now we are discussing when rate increases might return.
C) Long-term rates and fiscal risk
I do not attribute the rise in long-term yields to a single cause. There is clearly a fiscal component: the US Treasury has expanded its long-term debt buyback programme in an unconventional manner, while fiscal deterioration and the growing weight of mandatory spending remain underlying concerns.
However, I do not believe this is necessarily the dominant force at present. The Treasury is competing for capital with an extraordinary volume of private investment related to AI. If that investment generates superior real returns, it is reasonable for the real neutral rate to rise for reasons related to growth and returns on capital, rather than solely because of fiscal risk.
My interpretation is that, for now, growth and investment factors outweigh a genuine shock to fiscal credibility as a short-term catalyst. This does not preclude fiscal dominance from remaining a structural medium- and long-term risk; indeed, it is one of the pillars of my view on the dollar, discussed below. It is simply not what is currently driving the long end of the yield curve. If the market were to conclude that monetary policy was becoming subordinated to fiscal policy, I would expect the first signs to appear in the dollar, the term premium and gold.
D) AI
For me, this is one of the most important shifts in the narrative. The question is no longer whether AI will transform the economy, but whether the enormous investments made will generate sufficient returns.
On the one hand, we are seeing the rally broaden to include technology companies that had previously lagged. On the other hand, the sharp decline in the cost of models supports adoption but puts pressure on margins in certain parts of the value chain.
The central idea is that AI may be disinflationary over the medium term through productivity gains while, at the same time, keeping real interest rates elevated by increasing expected returns on capital and investment demand. These are not contradictory forces; they are two consequences of the same phenomenon.
E) Dollar
I maintain a structural view of long-term dollar depreciation, supported by the combination of fiscal dominance understood as a structural risk rather than the dominant force currently affecting long-term rates the current account deficit and the gradual diversification of reserves.
This thesis appears much clearer to me against emerging-market currencies than against the rest of the G7. Against the euro, sterling or the Swiss franc, the position is more balanced and will depend to a greater extent on the monetary, fiscal and energy dynamics of each bloc.
A structurally weaker dollar can therefore coexist with periods of tactical strength.
F) Fixed income
In fixed income, I remain cautious on long duration. I prefer high-quality credit and intermediate maturities, particularly in the five- to ten-year segment, where carry remains attractive and sensitivity to interest-rate movements is lower.
For the time being, I would avoid significant exposure to the long end of G7 sovereign yield curves. I would also retain exposure to emerging-market debt, particularly in local currency, where high carry is combined with my structurally weaker outlook for the dollar.
The idea is simple: earn carry without unnecessarily assuming long-duration risk.
G) Equities
My interpretation remains that this is a rotation, rather than the end of the cycle: the earnings support described at the outset, together with improving market breadth and weaker relative growth among the Magnificent Seven compared with the rest of the market, underpin this view.
I remain positive on equities. Economic activity remains resilient, earnings growth continues to be very strong and positioning does not appear excessive. I therefore expect the bull market to continue, with greater sectoral dispersion and less dependence on the major technology winners.
Improving results in the US and Europe, together with broader participation from value stocks, small caps and cyclical sectors, reinforce this view. Within this framework, banks, mining, industrials and consumer cyclicals continue to offer an attractive combination of earnings growth and sensitivity to the economic cycle.
Conclusion
My central scenario remains one of reasonable global growth, inflation declining but still not sufficiently, strong corporate earnings and central banks being forced to maintain restrictive policies for longer than the market had priced in at the beginning of the year.
I do not expect a recession. The main variables to monitor will be the relationship between earnings and employment, the evolution of long-term interest rates, the Fed’s ability to remain on hold, monetary normalisation in Japan, the dollar as an indicator of fiscal and monetary credibility, oil as an inflationary catalyst and, above all, the actual monetisation of AI.
The fundamental question for the fourth quarter is whether this investment cycle is generating sufficient productivity and potential growth to justify a regime of structurally higher real interest rates without bringing the economic cycle to an end.