Markets with Mike Webinar | October 2026

Good morning and welcome to my first new quarterly webinar. Really pleased that so many of you could join today. If you've got questions, you can scan this QR code or you can go to slido.com and enter the code MWMOCT.

It's probably easier just to scan the QR code, and then you can pop your questions in, and I'll leave plenty of time at the end to get to some of those questions. So please, as I go, have a think. I want this to be a discussion. But for now, let's jump in. There's no shortage of things to discuss going on in the world at the moment, and I want to talk about the broad macro-outlook for the major economies in the world, and of course, most importantly, what it means for markets.

So, when I look at the US, I think what's notable is the nominal spending growth shown here with the blue line has been accelerating quite meaningfully and is, if anything, running probably a bit too hot relative to real output growth, which is there in yellow.

Now, because employment growth is relatively moderate, nearly all of that growth in real GDP, the yellow line there, is coming from productivity growth. And that really stands out that the US economy is seeing actually quite decent productivity growth compared with many other places. But nevertheless, despite that reasonable real GDP growth you can see in yellow there, nominal GDP is accelerating relative to that, and that obviously creates inflation pressures as the economy runs somewhat hot.

Now, we all know that a big part of that acceleration in nominal spending is coming through because of all the CapEx that you're seeing from the hyperscalers deploying what looks like it's going to be over a trillion dollars next year in CapEx. And so clearly that is boosting both the price of things like semiconductors, but also boosting growth as those data centers get built. But you're also seeing decent consumer spending come through in the US helped by reasonable real wage growth. You've got nominal wage growth of about 4%, and the interesting thing is that consumers are actually bringing down the savings rate. So that's allowing you to see an increase in spending, which is slightly above nominal income growth.

So I show you this chart because I'm going to contrast it with what's going on in the UK in a moment. But first, let's look at the labour market in a little bit more depth.

If you look at the labor market, really, I think that the key story, yes, the latest payrolls data points to a relatively weak pace of hiring. But that's actually been the case for quite some time now. I think the most important measure to look at is this one. What it's looking at is non-seasonally adjusted payrolls excluding government health and education workers in the US and saying, is it higher than a year ago or not? And what you can see is that historically, prior to recessions, which are the grey bars on this chart, you tend to see a contraction in cyclical employment.

And what's going on at the moment is that if you go back about a year ago, you were actually seeing these jobs when you stripped out the healthcare jobs, which had been responsible for an awful lot of the job gains over the last few years. And it's worth remembering that even at the peak of the financial crisis in 2009, healthcare jobs were still being added. That's why I stripped them out here. But if you go back a year ago, most people weren't worried about the labor market, but this cyclical measure was showing that actually employment was contracting.

What's happened over the last few months is you've actually seen a stabilization in job growth in these cyclical sectors when you strip out, as I say, healthcare, education and government employment. So you've got a US economy where growth is holding up reasonably well. Nominal growth is running somewhat hot. Real growth is still expanding. And you've got a labor market that is stabilizing, not adding many jobs and where those jobs are being added, a lot of them are coming in the healthcare sector, but the cyclical part of the labour market, the bit that's really determined by the health of the economy, is actually, while not adding a lot of jobs, it's stabilizing rather than slowing in the way that some people think if you just looked at the headline data.

So I think that's really important, and again, I'll contrast it with what's going on here in the UK.

So overall, then, the US labour market looks quite tight still. It's nowhere near as tight as it was in 2022. You can see from this chart that's showing job openings in blue, so the number of job adverts, if you like, and they were far in excess of the number of unemployed people in 2022. You can see that as the economy reopened post-COVID, you saw an absolute boom in the number of job openings, labor demand was very strong. And there just weren't that many people available, of course, transmitted through into a very tight labor market, strong wage growth. Today, it looks rather different in the labor demand job openings here have come down materially since 2022 and the unemployment rate has gone up a little bit, but not that much, so it's a less tight labour market than in 2022, but still a quite tight labor market. You can see that, broadly speaking, the number of job openings is similar to the number of unemployed people. Contrast that with a period, say, post-financial crisis in 2009, when there were loads of unemployed people and very weak labour demand.

So there's not very much slack in the labour market, despite the fact it's not as tight as it was in 2022. And that matters if you're the Fed because you're seeing a labor market that's stabilizing, the cyclical component of that labor market not adding a lot of jobs but not deteriorating anymore. And then, of course, you've got upward pressures on inflation from the war in Iran causing higher energy prices and a tight labor market has seen on this slide, making you think, well, there's a risk that that could feed through into higher wages and therefore higher unit labor costs. And I think that's an important point because when you think about the inflation outlook, you need to think about unit labor cost growth, which is wage growth minus productivity growth. And historically, that's been a good predictor of what's going to happen to core inflation. And because in the US, productivity growth is running at about 2%, it's enabling wage growth of somewhere like 4% when you take that productivity of 2% off, it gives you only 2%.

So, unit labor cost growth in the US is not at the moment concerning from a medium-term core inflation perspective.

That contrasts very sharply with, for example, what was going on in 2022 and particularly during the 1970s. I don't have time to go into it all in detail here, but I recently published a thought piece called Inflation Back to the 70s, question mark. And I've gone through what I think are the key things to monitor when thinking about the outlook for inflation in the US in that piece. So I'd recommend you Google it on our website and can have a think about that in some more depth. Ultimately, I think the key drivers of medium-term inflation are unit labor cost growth, credit growth and disposable income growth relative to real output growth, and none of those at the moment are pointing to a world where one should be particularly worried about inflation at the core level in the medium term.

That said, I do think the Fed looking at the tight labour market are probably going to be thinking there's a risk that wages and hence unit labor cost growth could pick up a little bit and therefore it makes sense for them to be delivering some moderate tightening, but not, I think, and we think, as much as is currently priced in. So we do think there are upside risks to US inflation coming from higher energy prices and then eventually higher food prices. But fundamentally, we don't think that that medium term inflation pressure is as high as some people are worried about. And we don't think that the Fed will hike by as much as is currently priced. So yes, maybe a couple more rate hikes from the Fed, but not as many as is currently priced in.

Let's contrast that with the UK. Here in the UK, you can see that, again, a very different picture to what was going on in the 1970s. In the 1970s, you had nominal spending growth that was running at one point over 25%. Today, nominal spending growth is running at about 4%, which, as you can see from the chart, is not out of line with what we saw in most of that period from about 1995 onwards. So, we don't have excessive nominal spending growth here in the UK.

The problem the UK is facing is that productivity growth is much weaker here than in the US. Now, the ONS is struggling to measure it, but if you look at productivity on a per worker basis, it's broadly kind of zero at the moment. And so you've got real GDP growth that's pretty weak. And so total output growth is growing slowly, although still positively, and nominal spending growth, despite the fact it's weaker than in the US, is creating inflation pressure because it's growing by more than 2% above that real GDP number.

So I think the main inflation problem that you've got in the UK, apart from the upward pressure on headline inflation coming from, of course, energy prices and then down the line food prices, is that you've got nominal growth that's expanding at not particularly strong level, but very weak productivity growth. And that feeds through into higher unit labor cost growth. So again, in the UK, wage growth is currently running at about 4%, but if productivity growth is broadly zero, then whereas in the US, that 4% wage growth translates to 2% unit labour cost growth, in the UK, 4% wage growth with hardly any productivity growth translates to a much higher unit labor cost growth and hence put more pressure on core inflation.

So I think it's very important to understand both the differences with today and say 2022 and the 1970s, and also the differences between the UK and the US, where in the US you've got that higher nominal spending growth but with decent productivity growth. In the UK, you've got weaker nominal spending growth but with very weak productivity growth, and hence creating more of an inflation problem.

UK growth that said, has held up surprisingly well. And what I've done is broken down here the monthly real GDP growth numbers in the UK by sector. And you can see that the recent improvement is coming largely from the tech sector, which is orange bars down the bottom there. What's notable is if you contrast it with, say, that period before 2008, that there's very little growth coming from the financial sector, which is in dark blue.

So at the moment, UK growth is being boosted by the tech sector. The risk there, clearly, is that if what's going on is you're seeing tech businesses consulting for non-tech businesses on how to implement AI, that can near term boost real GDP growth, but clearly one of the things that probably the biggest question, not just for the UK, but for every economy in the world is, are we eventually going to get to a point where AI and that tech investment that's going on at the moment leads to net job losses? It's not the primary driver of job losses at the moment in the UK or indeed anywhere else. But that is clearly the most important risk for the economic outlook that we all need to monitor pretty carefully.

So if it's not AI that's leading to job losses in the UK, what is? And if you can see it on this chart here, this is showing the drawdown from peak by sector using the HMRCPAYE payroll data in the UK. And you can see that in some sectors, there's really quite a dire deterioration in the labour market already. So you can see information and communication roles there, down nearly 8% from peak. Broadly speaking, you're looking at a lot of tech type jobs there. Manufacturing, also weak. But then the biggest private sector employer by quite a distance in the UK is retail, which is that light blue line there. You can see that's now down more than 6% from the peak. And also, more recently, you've seen the significant decline in hospitality employment. Think restaurants, hotels, bars, etc.

Now, I think some of that tech decline is AI related. We all know that AI is very good at coding. But what's going on in retail and hospitality, which is where actually most of those job losses are coming from, given that tech employs a relatively small number of people, is that because wage costs, particularly after-tax wage costs, factoring in that you've seen significant increases in employer national insurance contributions because minimum wages are going up, which affects those sectors like retail and hospitality in particular, along with higher after-tax costs because of higher national insurance contributions. That is causing companies, think about a pub that isn't selling a lot more pints, but is having to put its wage costs up. The only way it can respond to that is by cutting workers. And that's what's going on in the UK.

You've got a very different backdrop to what's going on in the US, where wages are going up because you've got public sector wage growth, obviously determined by the government. You've got significant minimum wage gains, again, determined by the government. But not the productivity growth to justify that. So sales are not going up by as much as wages. And that is squeezing employer profits in sectors like retail and hospitality because, of course, workers are also now having to spend more on filling up their car, their energy bills are soon to rise meaningfully, food prices have gone up a lot over the years and look set to rise further. So people are getting squeezed, and let's not forget that, again, unlike in the US, where in the US the vast majority of people fix their mortgages at something like 3% for 30 years during the pandemic, and as mortgage costs have gone up, you've only felt that if you moved home. Here in the UK, most people only fix their mortgage for a maximum of 5 years. So a lot of people who took out mortgages in 2020, 2021 during that COVID race for space, lots of people were stretching themselves to buy a home with more space and a garden on the assumption that they were going to get to work from home, at least for a larger part of their careers than they'd been used to.

They took that out at a 5 EFX at very low interest rates, and now, 5 years on from that, those mortgages are needing to be fixed at much higher interest rates. So you've had this period over the last five years where wages had gone up but people's mortgage rate hadn't. But now all of a sudden, for the people who have mortgages, they're getting this squeeze on their earnings as well as having to pay higher food and energy costs.

So I think, you know, that helps explain why you're seeing retail sales, restaurants, etc, not see the sales growth come through, and yet their cost base is going up and causing them to have to cut jobs. So I think it's very important to understand the different dynamics at play in the UK relative to the US at the moment.

It also in the UK, the labour market is much less tight than in the US. So you can see that in 2022, the labor market wasn't as tight, but you still had a point where the number of job vacancies were higher than the number of unemployed people. Today in the UK, there are far more unemployed people than there are job vacancies. Contrast that with the chart I showed you for the US, where remember those two lines were broadly in line. So you've got this kind of crocodile jaws that have opened up in the UK with a less tight labour market, both compared with 2022 and, of course, compared with the US today.

So all, I think, very important to understand some of the key differences between the US and the UK, because I think a lot of people often assume that they're similar.

What about if we turn and look at Europe? Well, in Europe it's a tale of different stories depending on which country you look at. Germany, as you can see here, cyclical employment, which is stripping out healthcare, education, and government roles, which is in purple there, the cyclical employment in blue, you can see, has been contracting for more than two years. So the German economy is really struggling, and when you look at the composition of that, it started with manufacturing job losses and then it has spilled over into job losses in the service sector as well. Because obviously, if you lose your job working for a car manufacturer, you're then spending less eating out in restaurants, hotels, etc, etc.

Now, what's causing that weakness? If you look at this chart, I think it becomes quite clear that there's been a structural shift in the last five years as Chinese cars have gone from a tiny part of the global car market to now absolutely dominating global car exports. And that clearly is a major problem for European and indeed Japanese, but particularly for German car makers who are having to compete with Chinese cars. If you look, take the UK as an example, where we don't have tariffs, Chinese cars accounted for about 16% of new car sales here in the UK year-to-date, compared with broadly zero five years ago. And that's taking market share off of the Germans, off of the European car producers. And whilst those companies are relatively small parts of the European stock market, they and their suppliers, which is a key part of the equation too, make up a relatively large part of employment in Germany.

Germany is also struggling with the fact that higher energy costs are weighing on chemical production, which is causing, again, a kind of structural problem for the German economy now that they're having to compete with Chinese cars and no longer being able to rely on cheap Russian gas is meaning that they have a structural disadvantage when it comes to their chemical industry.

You can see one of the reasons why they're struggling to compete is that the Chinese over the last 20 years have just ramped up their R&D spending. So when I look at the global economy at the moment, to me, really it seems like a two horse race between the US and China, both of whom are investing strongly, and that's allowing them to pull ahead in terms of competitiveness, both in AI and obviously they're competing with each other there. But China has been investing in manufacturing capability. It's why it's able to produce those cars cheaper than in Europe, and likewise for things like solar, etc, etc.

So the failure to invest in R&D in places like Europe and Japan is making them structurally less competitive compared with their key competitor, China, who obviously benefit from lower wage costs as well.

So, when I look at this, it makes me think it's surprising that so many people have substantial European equity allocations relative to their emerging market equity allocations. When I look at this, I understand why people don't have as much in China and the emerging markets as they do in the US, but I don't really understand why so many people have so much more in European stocks compared with Chinese and some other emerging market economies, given that Europe is failing to invest and becoming, I think, structurally uncompetitive in several key industries.

If you look at the PMI data, you would think that actually there's cause for getting excited about what's going on in Europe, because if you look at that chart at the bottom here, you can see new export orders for Germany in the manufacturing sector after a period of significant weakness have finally gone into positive territory above that 50 line there, which marks the line in the sand between expansion and contraction.

But I think it's also important not just to look at the survey data, but to look at the hard data. And if you look at the number of tons of exports from Germany, which is the blue line on the top there, yes, you can see there's been a little bit of an improvement recently, but I think it's too early to get too excited about that. When you break it down by sector, what you can see is that there's been some stabilization in several of the key sectors and some pickup in exports of electrical goods. Again, it's partly related to AI. But I think it's unlikely that you're going to see a material turnaround here, given that structural lack of competitiveness that I mentioned both in the chemical industry, which is a huge part of German exports, or at least was historically, and the structural challenges that the car market in Germany continues to face.

Let's turn and look at France quickly. In France, you can see that the picture isn't as bad as in Germany, but you are still seeing cyclical job cuts and that they've been going on now for quite some time. Not the same magnitude as in Germany, but still weakness. And those job cuts, you're seeing weakness in the service sector in France. And I think that's something that is important to monitor, because clearly political risk in France is building, it's looking increasingly likely that Marine Le Pen could be the next president of France come the election next year. And as that raises French borrowing costs, that could continue to weigh on the French economy and the French service sector. And so I think that's something that's going to be important to monitor over the coming months as well.

Italy, by contrast, is holding up somewhat better. It's not growing strongly, but you are at least seeing positive cyclical job gains come through in Italy. And in Spain, you can see that Spain really is carrying the Eurozone economy. It's the fourth largest economy, quite a lot smaller than Germany and France, and behind Italy. But it's adding significant jobs and helping get to a picture where the overall Eurozone jobs data looks somewhat flattered by the job gains that are coming through in Spain.

Now, that's a positive. It will be important to monitor this, given that we've got Spanish elections that are being called. A lot of the job growth has been coming through, helped by significant immigration. If the politics was to swing more to the right, and you were to see some restrictions on a lot of the immigration that's been coming through in Spain, and that could slow the pace of job growth in Spain. But for now, Spain stands out as the clear winner within the eurozone when looking at the labor market.

Now, not wanting to be too gloomy, if you look at the employment components of the PMIs in Europe, you are seeing some sign of improvement. So you can see Spain again holding up ahead of the pack. Italy actually weakening in the latest data, but some positive news from Germany, which picked up. So really only France on the employment components of the surveys which is telling you that it continues to cut jobs. That improvement in Germany, I think is interesting and is being helped by, as I say, some of that stabilization that we're seeing in some parts of the manufacturing sector at the moment.

But given the weakness, the structural weakness in the car market, and the fact that there's still significant overcapacity in a lot of car factories in Germany, and indeed across much of Europe, I think one needs to watch the hard data, the actual jobs data, as well as the actual export data rather than just putting too much weight on the surveys.

If you look at the service sector, again, if you look at the new business component of the PMIs, it looks pretty positive. We've seen a significant pickup, which is the blue line on this chart. What I wanted to highlight, though, is that if you look at the expectations for future business rather than just the new business that they're actually seeing this month, you can see that an unusual gap in the service sector in the Eurozone has turned up in recent months. Normally, you can see those yellow and blue lines move together, and actually the yellow line, which is the future expectations, tends to move first.

So contrast today, for example, with 2021 or indeed that period in 2016, '17 when the economy was growing pretty well. Today, the new business orders have picked up, but expectations for future business remain weaker. And I think that's just an important caveat to monitor, particularly, I think, when we look at somewhere like France, where that political risk could be weighing on expectations for the future.

As you can see on the chart here, the market has started to wake up to the risk that Le Pen could be the next president in France. The borrowing cost for the French government relative to Germany has risen to one and a half percent at the 10 year point in the curve, which is not quite as high as it was during the sovereign debt crisis, but certainly heading in that direction.

I've marked on this chart Eurozone bank stocks, because it's notable that during the sovereign debt crisis, Eurozone stocks struggled as spreads widened. So over the last couple of years, Eurozone bank stocks have held up pretty well. Recently, they've dipped a little bit as sovereign credit risk in France has started to build. But I worry that if it becomes increasingly likely that Le Pen wins, then the spread on French government debt could widen further. We think it's possible it could widen to 2% over German 10-year bonds if Le Pen ends up winning, and that that could put some downward pressure on European bank stocks, for example.

So, something definitely to monitor over the coming months. Frankly, after both Brexit and then Trump, I would find it more surprising if Le Pen didn't win than if she does that kind of backlash against immigration, whilst surprising to many of the kind of liberal elites that work in finance has been going on now for at least 10 years.

When we look at the bond market, you can see that year to date, really the key driver over the move higher in bond yields has been the oil price. If you'd known what was going to happen to the oil prices over the last year, you would have known what was going to happen to government borrowing costs. And I think that's important to think about because a lot of people are talking about what's going on. And this is I've showed it for the UK, but same story applies basically everywhere. A lot of people have been talking about the drive higher in bond yields being driven by concerns about the fiscal situation. While I think in France that's true, because the bond yield has risen relative to, say, Germany, in the UK, I actually think there's very little political risk premium priced in at the moment. And the reason I say that is because the curve is quite flat.

So the move higher in bond yields, I'm showing it on the 10 year here. But if we look, I'm showing here in the US. But it's a similar story anywhere you look. The move higher in bond yields this year has actually come more at the front end. So two-year government bond yields have risen by more than 10-year and 30-year government bond yields. Now, you might argue there's some fiscal risk premium being priced in because normally, if you look at that period, say, in 2004 through to 2007, normally as front end rates rise, you would expect that to lead to a more significant curve flattening, and sometimes the curve inverts, and you've not seen that.

But you have, nevertheless seen the majority of the move be driven by the front end, which to me suggests that most of the move this year in bond yields has been driven by markets changing their expectation for the outlook for interest rates, rather than being driven by concerns around fiscal premier. All of which suggests that you could still see further curves deepening if concerns around the fiscal picture pick up from here. Now, that could happen with front end rates falling. And indeed, in the UK, that's what we expect. We think that the Bank of England won't hike rates by as much as is currently priced in, and so you could see front-end yields come down, but the curve could steepen as fiscal concerns build.

What does it all mean for stocks? And I think if you look at the equity risk premium, which is the difference between the earnings yield, which I'm showing in blue here, the earnings yield is just one divided by the 12 month forward PE and the 10-year Treasury yield. You can see that we've all lived for most of the last 20 years, most people's career, in a world where rising bond yields didn't make those bond yields competitive with the yield you got on earnings, the earnings yield in blue.

If you go back, though, to the 1980s or 1990s, what you saw is that when 10-year Treasury yields rose, it was pushing the earnings yield higher. So it was pushing valuations on stocks lower. Now, during the dot-com bubble, you can see that for a while the 10-year Treasury yield was able to move above the earnings yield on stocks, but as we all know, that didn't end very well when the dot-com bubble burst. Today, you look at what's happening. You've got to the point now where there is no equity risk premium. So move higher in the 10-year Treasury yield are putting upward pressure on that earnings yield. In other words, they're pushing the 12-month forward PE down.

So if we see the 10-year Treasury yield and indeed government bond yields elsewhere in the world continue to rise, then I think it's at a point where that puts further downward pressure on equity valuations.

Now, of course, the stock market isn't just driven by valuations. You can also see earnings go up. Now, before we get onto that point, I just think it's important to think about the earnings yield. What are you actually measuring? On the previous chart I was showing you earnings as shown on the income statement. Here, though, I want to focus on the free cash flow yield. So you've got the earnings yield in blue on this chart, and this is the free cash flow yield. This is just for the hyperscalers in the US.

So what's going on is those hyperscalers are spending, as we say, nearly a trillion dollars a year next year on CapEx. And that is causing their free cash flow yield to collapse. So when you look at the yield you're getting on stocks, I would think quite carefully about whether the earnings yield as reported on income statements is really reflective of the true earnings yield that you're getting when you think about it from a free cash flow basis for the market as a whole. Because obviously these hyperscalers make up an enormous part of the stock market. So if you compare the yield you're getting on 10-year treasuries with a free cash flow yield on the hyperscalers, then you're looking at a significantly negative equity risk premium rather than just zero.

Now, as I say, the stock market continues to ignore all this because it's focused on EPS growth, which continues to grow.

To understand what's going on, I think it's important to think about both earnings growth as reported on income statements, and free cash flow. So again, here, what I've done, actually, my colleague in Canada kindly produced this chart for me. What I've done here is taken the free cash flow for the hyperscalers and the free cash flow for the semiconductor stocks in the US and shown them against the EPS, the earnings are shown on the income statements for these companies as well. And so what you can see is that as the hyperscalers are spending a small fortune on semiconductor and memory chips, that is leading to a massive boost in both free cash flow and earnings for the semiconductor companies.

But it's coming at the expense of the free cash flow for those hyperscalers. But it's not showing up in the income statements for the hyperscalers because they don't have to depreciate all of that instantly. They get to spread that depreciation out over several years, and they don't even have to start recognizing that depreciation until the data centers are actually up and running.

So you're in this situation where, of course, if the hyperscalers spend a trillion a year on CapEx and that instantly flows through to free cash flow and the income statement of the semiconductors, but doesn't instantly flow through into their expenses, well, of course, aggregate EPS are going to go up. But you've got to think very carefully about the future and how that's going to change. Now you can see that consensus forecasts that hyperscaler free cash flow is going to pick up in the coming years. But without seeing a decline in semiconductor free cash flow and earnings. Now, that's possible, but it requires non-tech businesses to significantly ramp up the amount that they're spending on AI.

Now, the obvious question is if that's going to happen, where's the money going to come from? If the banks and law firms and all the businesses in the world that are not tech companies ramp up their spending so that you can see free cash flow growth for the hyperscalers rising at the same time that you don't get a sharp decline in earnings and free cash flow for the semiconductor stocks. Well, then where's the money coming from? And clearly, the risk is that that money comes from companies cutting costs and potentially jobs.

So, I think this is a very important chart and one to think through quite carefully, because there's various different ways this could play out, and I think it's absolutely critical to the outlook.

For the moment, though, the market doesn't care. The market just wants to focus on 12-month forward earnings. And historically, you can see that when 12 month forward EPS rather than free cash flow, when that 12 month forward EPS goes up, the stock market tends to go up, which is exactly what's been going on. So I wouldn't want to short the stock market while 12 month EPS are going up or indeed be underweight. But I do think it's very important to think about what's actually going on beneath the surface, what's driving that EPS growth and how sustainable it is when you think about free cash flow and when the depreciation is going to come through, and of course, also, if you did get AI job losses, what that would do to spending growth, people's ability to pay their mortgages, et cetera, et cetera.

US stocks overall are not cheap, right? If I look at the US stock market, the PE, which is the yellow line here, has come down from around 22 to just below 20. I sometimes see charts of this looking at the last five years or even the last seven years and saying, oh, well, it's now back down to average. I think you need to look at the PE over the longer term as we're showing here, and it's not as expensive as it was, but it's certainly not cheap by historic standards either.

The other metric I put on here, though, is the market cap of the S&P 500 divided by the amount of M2 money supply. So the amount, and that includes the amount of money in retail money market funds. So I think of that as the amount of money that available to buy the stock market relative to the stock market market cap. And what's interesting about that measure is you can see that most of the time it paints a very similar picture to just looking at a simple 12-month forward PE. And in 2022, both metrics were telling you that stocks didn't look particularly expensive.

Today, however, that metric of the S&P 500 market cap divided by the M2 money supply shows US stocks being as expensive as they were at the peak of the dot com bubble. So I think, as I say, wouldn't necessarily want to underweight or short the US stock market while 12-month forward EPS are going up, but one shouldn't shy away from the fact, and one needs to be aware that stocks are not cheap by historic standards in the US.

There's also, as we all know, you'll be more than familiar with this, the fact that tech just makes up an enormous part of the US stock market. So most people are heavily exposed to the US stock market within that, over 50% of that US stock market exposure is in broadly defined tech stocks, so I've just taken the tech stocks which aren't classified in the tech sector and added them back in, so you get a fair comparison, because frankly, they were taken out so that it made the tech sector not look too big. And you can see what's really going on here is that you've got a higher concentration in tech stocks in the US than you had even at the peak of the dot com bubble.

Now, as I say, there's lots of uncertainties about the outlook for the tech sector, AI, what it means. What I think you can say with a high degree of certainty is that no one knows for sure how this is all going to play out. And with that in mind, does it really make sense to have so much of one's portfolio being a bet that these tech stocks are going to continue to perform as well as they have done over the last 15 years, given that, as I say, many of them now have very little free cash flow. People often say to me, oh, well, they're very positive. A free cash flow basis, many of them are not very profitable.

Does it make sense to have such a large tech exposure given high valuations and weak free cash flow? To me, it doesn't make sense on a long-term view to have such a big concentration in tech stocks as most people have in their portfolios.

All that said. If you're thinking about the very near term, the growth outlook still looks okay, right? The new orders component of the US ISM surveys, if anything is re-accelerating. And you can see that plotted against real GDP growth here. And the labor market, as I said, is not shedding jobs. So you've got a backdrop where the US stock market looks expensive, you've got the potential medium term risk that AI could lead to job losses, and you've got the fact that free cash flow is a lot weaker than EPS in the US, particularly for some of those hyperscalers. But near term, the economy is accelerating, and jobs are not being cut.

So historically, what you've tended to see, and this is showing you jobless claims in blue. So when the blue line is falling, that means more people are signing on for jobless benefits in the US. And that's just not happening at the moment.

So I think one should have medium term caution and be realistic about the risks to particularly US stocks, given everything we've discussed, but also be conscious that historically, the stock market tends not to experience material declines until you get those actual job losses or you see valuations come down by more than EPS are going up.

So I think that helps explain why the stock market is so far proved resilient and some of the key things to monitor in terms of thinking about when that might no longer be the case.

So my key focus is on watching the labour market for potential AI job cuts. This just takes the US, but I would look at it in every part of the economy and focuses on the sectors which I think are most vulnerable to potential AI job cuts. And what you can see is that broadly speaking, you are not yet seeing job cuts coming from AI in these sectors. Some slight decline in finance jobs, but most of that seems to be coming because people fix their mortgages at 3% for 30 years, and now mortgage rates are much higher. And so if your job was to make mortgage loans, you've not got a lot to do at the moment. Clearly, going forward, there is a risk that AI could lead to job losses in all of these sectors. But really, it's only in that computer system design, the kind of tech part of the stock market, of the labor market, I should say, which interestingly, if you're a nerd at least, sits in the professional and business service sector, rather than in the information sector, as most people assume. It's really only the tech jobs that are seeing AI-related job cuts so far.

Sectors like legal, office admin, where you might expect it to be coming through, are not yet seeing meaningful AI job cuts. But this is the chart I watch most carefully each month when the labor market data comes out.

Right, I have talked a lot. So let me take some questions. I just wanted to finish, though, by pointing out that if we're at a point where you've got high valuations and particularly in tech stocks. And at the very least, significant uncertainty about the outlook for tech free cash flow, and what that will mean for EPS as you look ahead over the next few years. If you're worried that we might be in something like a dot-com bubble, similar to what we saw in 2000.

If you went back and placed yourself in 2000 and said, well, what would I have wanted to invest in in 2000? And of course, the future might look different to the past as compliance always remind me to say. But if you go back to 2000, what you can see is that actually it took you 20 plus years for stocks to catch up with emerging market debt, to catch up with high yield debt.

So I think it makes sense for investors to be thinking about what do you expect equities to deliver between now and the next recession? If the answer to that is somewhere in the region of 7% a year, then think about, well, what other asset classes could I get a 7% per year return on that might give me less downside when a recession eventually arrives, be it from AI or something else.

So I find it surprising, given the attractive yields available on things like EM debt, high yield, even on front end government bonds that so many investors are so heavily allocated to US tech stocks, where the outlook is, at best, highly uncertain, and the valuations are very stretched. Whereas while spreads are tight, the all-in yield on things like EM debt and high yield, and of course you're getting, attractive yields on front-end government bonds as well, look pretty attractive. So I think some combination of within the growth bucket of portfolios, the risk bucket of portfolios, owning some EM debt, owning some high yield makes sense. And then in the risk off bucket of portfolios, the bit that you want to help in a scenario where you get a recession, some front-end government bonds, some front-end IG credit, and perhaps some absolute return strategies can help diversify portfolios for that scenario where perhaps you do get a recession, be it caused by AI job losses, or for other reasons.

Right, let's take a few questions. If you haven't already, you can scan this code and type them in. Hopefully a few of you have asked some already. I can just check on my app here. Right, yeah.

Where does fixed income sit in a portfolio given the front end yield call? So our view is that looking across the major developed market economies at the moment, UK, US, Europe, central banks are going to tighten interest rates from where they are today. They're going to put interest rates up, but they're not going to put interest rates up by as much as is currently priced in. So that makes us think that the front end of yield curves currently looks attractive.

Now, it could still be volatile if you get attacks on Iran following the midterms and the oil price moves higher still than you'd expect front end bond yields to move higher despite that. So it could be volatile, but if you're buying on a hold to maturity basis, or indeed you don't mind some of that volatility and you're just looking for a kind of safe harbor in a portfolio, I think front end parts of curves look relatively attractive at the moment, both across the US, UK, and indeed in the Eurozone. Because curves are quite flat and because we have concerns about the fiscal position in many developed market economies, we are less keen to stretch out beyond the intermediate part of curve. We're less keen on the 10 and 30 part of government bond calves preferring to look at the front end of fixed income. But I do think that there's a place for short dated fixed income as the kind of buffer safe part of portfolios, at the moment.

Along with perhaps some absolute return fixed income strategies that can, for example, put on things like curve steepness, which, if you go into a scenario where AI led to job losses, the thing I think you can say with a pretty high degree of confidence is that that would lead to a steepening in yield curves, because front-end rates would likely fall sharply, the curve would steepen, and then there's a question mark around what it would mean for, say, the 10-year part of curves, given that tax take would deteriorate against an already somewhat precarious fiscal backdrop.

And as I say, I do think in the growth bucket, I think spreads are tight, so it's hard to argue that one should be buying high yield and EM debt relative to front-end government bonds. But relative to equities, I think there's a strong argument for owning some high yield emerging market debt. Some of the other extended credit asset classes, because I think they can deliver equity like returns between now and the next recession, whilst probably delivering less downside when that recession eventually hits. So I think a key role for fixed income, but just need to think about it in terms of absolute return and front-end rate positions, the kind of strategies that can put on curve steepeners in your risk off bucket, and I think you can include selective IG front end positions in that as well. And then in the growth risk on bucket, thinking about things like high yield emerging market debt, perhaps Cocos, that kind of stuff.

What else we got? Potential job cuts being a medium term risk to stocks. Do you expect this in 2027 or further out? Well, that is the trillion dollar question. I don't know. I think it's in my mind, probably more likely than not, the AI does eventually lead to net job losses. If not, why is the global economy spending a trillion a year on this? I think that that is the key risk to the global economy. But exactly when it happens, I don't know, so I think what you should be doing is monitoring that chart that I showed. I post it on LinkedIn every month when the data comes out. I'll do it for every major economy. Monitoring what's going on actually in that hard data, are we seeing job losses specifically from AI yet? And monitor that very carefully, because I think the timing is, the biggest uncertainty facing the global economy at the moment.

What else have we got here? Do you think German fiscal spend could be a game changer for Europe? I'm sceptical. I think you are seeing some fiscal spend come through. It hasn't been as significant as many had hoped for. I think, yes, some people who lose their jobs making cars because they're struggling to compete with the Chinese might then be able to get jobs in arms, factories, but I think when you think about how many people are employed in the auto sector, particularly in the parts, those kind of the Mittelstand, the smaller and medium-sized businesses in Germany, you're talking about an enormous proportion of German workers there. And I just struggle with the idea that all of them are going to be able to shift, not that they'd all lose their jobs, but as many could lose their jobs from having to compete with Chinese cars are going to shift into defense manufacturing. Again.

Can't say with certainty, I prefer to just focus on the data, look at that chart I showed earlier in the presentation showing the cuts in German cyclical employment. If that starts to improve, if the facts change, I'll change my mind. At the moment, the data continues to point they're pretty weak manufacturing employment that is getting worse, despite what the surveys are saying.

Right, take a couple more here. Where in EM would you be looking at, given the high technology benchmark weightings? I think that's a very good point. I think if you buy a passive EAM exposure, you end up with a very large exposure to AI semi and memory stocks. I personally would want to be some were underweight that AI tech exposure within emerging markets, if it allocating to them. And I do think that there's quite a strong case to be made for China. I can see why for political reasons, people don't want to have as much in China as they might have in the US. I totally get it.

But as I said, looking at Chinese R&D spending, when I look at the global economy, it seems like a two horse race between China and the US. And yet Chinese stocks are pretty cheap, US stocks are pretty expensive. Now, some Chinese stocks are cheap for a reason, right? You think about the demographic outlook, maybe the bank stocks, for example, deserve to be cheap. But when you think about some of the stocks that are going to go on to be the global leaders in manufacturing, and in many cases already are, it seems to me like many of those stocks sit in China rather than, say, in Europe. And so I think within the emerging markets, that looking at parts of China makes sense selectively. I also think that if we are going to use a lot of AI and the build out from that, as well as electrification, you're going to need a lot of things like copper, for example. So economies that produce a lot of the key materials that go into that, like production of copper, for example, could benefit in the medium term both their currencies and the producers of that. And in fact, our emerging market team have just published a paper on that, so if you want to read that, reach out to your salesperson, they'll be able to send it over to you, or it's on our website.

Productivity growth is often difficult to calculate. How confident are you that the UK figures are accurate, not super confident in all honesty. The way I would think about it, though, is just to think about what is wage growth and what's happening to sales growth? When I think about, for example, a pub, the key question is, if your wages are going up by 4%, because let's say that's what the government decide minimum wage growth will be. To me, that's the most important number in the budget. Unless they do something really radical elsewhere, it's going to be what happens with wage growth. If you see 4% minimum wage growth, the question you need to be asking yourself is, well, how many more pints are they able to sell, and how much are they able to put prices up. If the answer is actually they're not able to sell more pints and they're not able to put the price up, then you can look at it that way. And ultimately, that tends to come through in the labour market, because if unit labour costs are rising, you can either put that through in higher prices, which is where you get inflation, or some of it comes through in higher prices, but if you struggle to put prices up because consumers are being squeezed by higher mortgage costs, particularly here in the UK, where those 5-year fixes are expiring, well, then it might be that you're a pub and you feel like you can't put the price of a pint up, and you can't sell any more of them because people are already feeling a squeezed by higher mortgage costs, higher energy bills, higher food prices, and so you can't put prices up, but your wages are going up, your wage bill is going up, and therefore you get more job cuts. So I think in some ways, the best way to look at what's going on in productivity is to actually just look at, is that coming through in employment? Because if you're seeing job cuts in that sector, it generally means you're getting a squeeze on profits because the productivity is weak.

And then a final question. Oh, it's gone. Final question's gone. Okay, so thank you very much for dialing in. I hope you found it useful. If you have more questions, very happy to jump on calls with some of you if you've got a sales contact at RBC, just feel free to reach out to them. It'd be great to discuss some of this in more depth with you. Also look ahead to next year. As I say, I'll be doing these quarterly, these webcasts, so I hope you can join on a regular basis. The next one will be in January, that will be focused on our 2027 outlook. So for now, thank you very much for joining and I look forward to speaking to you in the not too distant future. Thank you.