AI Dominates Global Economy, Overshadowing Macro Factors

Key Quotes

"the only thing that matters to the us and to the global economy is where the ai narrative is headed and there's a couple of reasons for that the first is obviously the extent to which ai has driven growth especially in the united states but not only in the us now i know there's been a lot of focus on ai capex but uh that's not the only part of the story the fact is that the us consumer the single most important global economic force has held up better than expected in 2025 even with a tariff war even with weak job creation even with uh a low savings rate and the reason is because equity wealth has kept rising and the equities that have kept rising are of obviously ai sensitive equities so ai capex has supported uh business investment but ai equities have supported consumption the rest of the economy is actually surprisingly weak so you know even though i i this is going to be the second straight year where all you're going to hear people talk about is ai the fact is that as an economy both for the us and for the world economy we're basically going to live and die by what happens to the ai narrative that is what i mean when i say there is no turning back"

Ajay Rajadhyaksha argues that Artificial Intelligence (AI) is the singular most important factor for the US and global economies in 2026. He explains that AI's influence extends beyond capital expenditures (capex) to supporting consumption through rising equity wealth in AI-sensitive companies. Rajadhyaksha emphasizes that the economy's fate is tied to the AI narrative, indicating a point of no return.

"the one big assumption we are using here is that even if the us supreme court strikes down i e tariff the united states will still get to the same place using sectoral tariffs the supreme court decision should come could come any day now and even if it goes against the administration it is not a macro game changer i'll also point out patrick that on the inflation front there was a lot of noise a lot of worry about goods inflation pushing up overall inflation because of tariffs and honestly it's been misplaced every single month that you get an inflation print which doesn't blow the roof off i worry less about goods inflation and this is a story that continues to fade and i think for 2026 we'll probably still talk about the odd tariff headline but it's not going to play as much of a role as it did in in 2025"

Ajay Rajadhyaksha suggests that trade policy, specifically tariffs, will not be a significant macro-economic game-changer in 2026, even if legal challenges arise. He notes that concerns about goods inflation driven by tariffs have been misplaced. Rajadhyaksha believes this inflation narrative is fading and will play a lesser role in 2026 compared to 2025.

"i think the bond market has been remarkably sanguine about fed independence so i'll give you an example the day that governor lisa cook in mid august was let go long end inflation break evens should have widened if the bond market genuinely was worried about fed credibility about fed independence instead they fell slightly collectively bond investors seem to be saying look we are the final arbiters just for argument's sake if every single fed member is replaced by a dovish voter and if the new if this new fed puts monetary policy at super low levels not justified by economics guess what happens inflation takes off as a result long end yields take off and those are the parts of the yield curve that matter to the us economy no administration wants that i just don't think this is going to be something that that poses a major risk"

Ajay Rajadhyaksha observes that the bond market appears unconcerned about the Federal Reserve's independence, citing the minimal reaction to a key governor's departure. He posits that bond investors believe they are the ultimate arbiters, as extreme dovish policy would lead to inflation and higher long-term yields, which no administration would desire. Rajadhyaksha concludes that Fed independence is unlikely to pose a significant risk.

"well the ecb is done they are on hold we think for all of 2026 they got to that levels inflation in the euro area is now much better state than in the united states really the only central bank to watch at this point of the major ones is probably the bank of japan they are still arguably behind the curve when it comes to inflation they still have room to go their mindset has always been to go very very gently and long end japanese yields have from time to time expressed discomfort with that so from a central bank standpoint i would argue that even the fed is going to be a little bit of a backseat story to what happens in japan that i think is the one traditional macro indicator to keep watching"

Ajay Rajadhyaksha states that the European Central Bank (ECB) is expected to remain on hold throughout 2026, with inflation in the Euro area being in a better state than in the United States. He identifies the Bank of Japan as the primary central bank to monitor among major economies, suggesting they are still behind the curve on inflation and are proceeding cautiously. Rajadhyaksha believes that developments in Japan will be a more significant traditional macro indicator than the Fed's actions.

"well you went through a pretty good laundry list patrick but if i had to pick one it is the long end of global bond yields so they are interconnected you know what happens in otomachi does affect what happens in in new york and vice versa and across the western world and i'm including japan here japan the united states the united kingdom france in particular these are all countries with large debt loads where fiscal profiles continue to worsen governments have shown little political will to do anything about it and one big risk to keep in mind again it's not a risk that we think will be realized because we do think that there are some levels still left to pull but one big risk to keep in mind for 2026 is if uh bond markets basically start to rebel if they say that there is so much supply coming down the pipe this is it we've had enough and long ends start to get unanchored again if it happens it's a very big deal"

Ajay Rajadhyaksha identifies the long end of global bond yields as a significant risk for 2026, noting the interconnectedness of markets and the worsening fiscal profiles of countries with large debt loads. He points out the lack of political will to address these issues. Rajadhyaksha highlights the risk of bond markets rebelling due to excessive supply, which could cause long-term yields to become unanchored, a scenario he considers a very big deal.

"us exceptionalism is intact number one and number two is big tech exceptionalism and the two are obviously related is intact so we think global equities outperform global fixed income for yet another quarter a view that we've had for about two and a half years now we think us equities do better than their counterparts across the atlantic and then zooming in we think that the big six big seven do better than the s p 493 these profit engines are so astonishing big tech is the miracle that keeps on giving now i will acknowledge that us equities did under