Podcast Series Greater Possibilities

Join us for candid conversations with portfolio managers, market strategists, economists, political experts and more, about the possibilities they see ahead.

Listen to the latest

Rethink Now: What could the midterm results mean for markets?

00:00

00:00

00:00

Transcript : Disclosures

Jodi Phillips

Hi, I’m Jodi Phillips and this is Rethink Now, brought to you by the Greater Possibilities Podcast.

Today, the country is absorbing the results of the 2026 Midterm Elections, as the Democrats have won both the House and the Senate.

Conventional wisdom says that divided government is best for markets. But is that really the case? There are also assumptions that certain sectors should outperform under different party platforms. But what does history say about that?

Chief Global Market Strategist Brian Levitt has crunched the numbers on the midterms and markets, looking at results from 1900 to the present day. So naturally, we asked him to walk us through his key takeaways.

Jodi Phillips:

What message do you think voters were sending with this election result?

Brian Levitt:

Yeah. This was an election for change. We'll see ultimately what that means for 2028. We've had a little bit of a back-and-forth or, can we say, a fickle electorate. But this was a change message largely driven by affordability, cost of living, the heightened energy prices, and we have seen almost every election cycle, if the rate of change in real disposable personal income is slowing or gone negative, it's been bad for the incumbent or the incumbent's party, and this time was no different.

Jodi Phillips:

Does the conventional wisdom about divided government have merit?

Brian Levitt:

Look, the reality of a divided government, it generally means you're not going to get anything big done that's going to meaningfully change the direction of the economy, that's going to meaningfully change what the Federal Reserve may or may not have to do. So it generally means that the economic trends that you're currently dealing with will continue.

Now, this whole idea of divided government works best... Look, the reality is you just don't have enough years to look at each of the combinations. There's just not a big enough sample size. When you work at a company like Invesco, you can use the S&P 500 back to 1957. Right? That's the live start date of it. If you want to use the Dow, you can go back to 1900. Even then, there's not a significant number of combinations. So some of these things get skewed.

For example, what you're going to have now is a Republican president and a Democrat Congress, and that hasn't been great actually from a historical perspective, but the reason why is because it included 2008. So it just significantly skews the data. So these things aren't all that statistically significant, but I would argue that if you're in a good economic backdrop, but also grappling with inflation, an environment where not a whole lot gets done on the stimulus front isn't necessarily the worst thing.

Jodi Phillips:

You’re talking about markets as a whole here, but what about specific sectors or specific regions? Can we make assumptions about what could outperform based on a party's platform?

Brian Levitt:

I'm very cautious about using a political market playbook, and the reason for that is because it's often wrong. So let's just go through a couple of recent examples. When Joe Biden won in 2020, he had campaigned on a Green New Deal. The assumption was that clean energy would outperform traditional energy by a lot. The exact opposite happened. Clean energy significantly underperformed traditional energy.

Now, fast-forward to 2024 with Donald Trump and Make America Great Again, expectation was that the US would be the big outperformer, and the opposite happened. So I'm cautious about making these big sector, industry, region calls based on who our political leaders are going to be.

I like to make those calls on whether the direction of the global economy is changing, the rate of inflation is changing, what the central banks are going to do. And in this environment with a divided government, my expectation would be that we don't meaningfully change any of those trends over the next two years.

Jodi Phillips:

So in your view, what really does matter to markets if it's not politics?

Brian Levitt:

What really matters is going to be the state of the economy, which tends to translate to earnings growth, and earnings growth has been quite robust. We're also in an environment right now where inflation is elevated, but the rate of change is likely to slow, and what I mean by that is price levels are high right now. Yes, it's $5 to fill up your car per gallon, but it was $5 a year ago.

So the rate of change starts to slow even if the price level is elevated. So a reasonably good economic backdrop, strong earnings. The base effects suggest that inflation should moderate, and maybe the Fed doesn't have to raise interest rates as much as many believe. So that continues to be what we believe is a good backdrop for risk assets, in particular equities.

Now, what also is going to matter is, of course, this artificial intelligence trade. We've been talking about this virtuous cycle that can be happening where greater demand is leading to capacity constraints, which leads to greater investment, which then creates greater capacity and additional revenue.

So anything the politicians decide to adjust here, greater regulation around AI or a slowdown in the data centers being built, that could certainly matter, but I think that, ultimately, data centers will be built. I don't think necessarily the outcome of this midterm election changes that.

Jodi Phillips:

What's your most important takeaway from your research in the politics and the markets over history?

Brian Levitt:

We look at the Dow Jones Industrial Average back to 1900, a $100 investment, if you had just stayed the course, would be somewhere close to $10 million today, which is far better than if you were trying to get in and out based on whether there was single-party Republican control, single-party Democrat control, divided government, et cetera. You were far better off staying the course, looking beyond the political headlines, and focusing on the fundamentals of the global economy.

Jodi Phillips

Thank you for joining us, Brian, and thank you for listening.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Now.

The opinions expressed are those of the speakers, are based on current market conditions as of November 4, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

Artificial intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there's no guarantee these protections will be sufficient. Significant research and development (R&D) spending doesn’t ensure product or service success.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Statements about sector and regional performance under the Biden and Trump administrations sourced from Bloomberg, L.P. From November 2020 to November 2024, the S&P 500 Oil & Gas Refining & Marketing Sub Industry Index returned 246% while the S&P Clean Energy Transition Index returned -32%. From November 2024 to October 2026, the MSCI ACWI ex-USA Index returned 47% while the S&P 500 returned 35%.

The S&P Clean Energy Transition Index is designed to measure the performance of companies involved in global clean energy-related businesses.

The S&P 500 Oil & Gas Refining & Marketing Sub Industry Index is designed to measure the performance of S&P 500 companies engaged in oil and gas exploration, production, refining, and marketing.

The MSCI ACWI ex USA Index is designed to measure the performance of large- and mid-cap stocks across developed and emerging markets outside the United States.

Statements on the growth of $100 in the Dow sourced from Bloomberg L.P., as of Dec. 31, 2025, based on Dow Jones Industrial Average Index price-only returns from 1900–2025.

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

Statements on earnings growth sourced from Bloomberg, L.P., as of November 2, 2026. Based on the earnings per share growth of the companies in the S&P 500 Index.

Comments about the rate of change in real disposable personal income and midterm election results sourced from the Bureau of Economic Analysis and Reuters/IPSOS as of June 30, 2026.

Base effects refers to the way the starting point for a comparison can influence the reported rate of change.

Rethink Now and the Greater Possibilities Podcast are brought to you by Invesco Distributors, Inc.

The voters have spoken. Brian Levitt discusses what message they sent, why the conventional wisdom about governments and market performance doesn’t always hold true, and what really matters to markets.

Rethink Now: What could the midterm results mean for markets?
Rethink Portfolios: Senior loans with Scott Baskind

00:00

00:00

00:00

Transcript : Disclosures

Brian Levitt:

Hey, I'm Brian Levitt. This is Rethink Portfolios. It's a podcast where we go inside the decision-making process of portfolio managers to explore how risks are managed, and more importantly, how opportunities are identified. I'm filling in for Danielle Singer today, which was actually great because I got to pick the brain of our guest, Scott Baskind. He's the head of Global Private Credit. He's a chief investment officer for Invesco's global private credit team. Covers a lot of ground, but my conversation with Scott, which you're going to hear in a minute, focus specifically on senior loans. And of course, that's because rising short-term interest rates have really renewed interest in the loan space and their floating rate structure. And so we talked about the yield opportunity, but also the health of the issuers. And that's the crux of it. That's what we discussed with Scott about. I really enjoyed the conversation and enjoy the listen. Thank you.

Brian Levitt:

Scott, I'm in Sonoma, which by the way, yesterday, six hours of flight time and then two-hour drive, not ideal. And then I figured the one thing I want is a coffee this morning and I go down at 6:00 a.m. And the DoubleTree in Sonoma does not serve coffee at 6:00 a.m. You believe that?

Scott Baskind:

So when I stay at hotels, it's one of my biggest gripes is hotels that do not have coffee early in the morning, ready to go, and that's available for all customers. I struggle with that across every place I go to.

Brian Levitt:

I was going to start flipping things and then I remembered my count to 10. And then I also remembered I could go up in the room and make my own coffee.

Scott Baskind:

They all do have coffee machines, right?

Brian Levitt:

Yes. Actually not bad.

Scott Baskind:

It's not the worst. It's the life of travelers.

Brian Levitt:

Yeah. A lot of interest in the loan market right now. Is that what tends to happen when the Federal Reserve is raising interest rates? Everybody looks for their less interest rate sensitive assets?

Scott Baskind:

Well, it's interesting. I think the interest rate environment across, whether it's tightening or easing is always debatable. And I would say flows do not always mirror expectations. And it's been a few decades now that I think the data would suggest that while interest rates are without question influential, they are not always a leading cause of directional activity for investors. Tends to be a little bit more geared towards both risk assets in terms of more macro considerations and then also opportunity set in terms of where relative value tends to be across the different non-investment grade markets in particular. And we could talk more about that as we go through the morning.

Brian Levitt:

I'm actually not upset to hear that. I always got the sense that people wanted to jump in when we're raising rates where obviously they want less interest rate sensitive assets, but at the same time, the Fed's potentially making things harder for these types of businesses. So it's nice to hear that investors are looking at it from the perspective more of corporate fundamentals than necessarily just banking on higher rates being a reason for them to own the asset class.

Scott Baskind:

Yeah, I think there's clearly two large constituents in a market, whether it's institutional investors or wealth platforms and traditional retail. The retail investors absolutely are, I would say, a little bit more following the Fed, if you will.

Brian Levitt:

Okay. So back to what I was thinking. Yeah.

Scott Baskind:

But they're also a much, much smaller component in the loan asset class. Just to put it into context, mutual funds and ETFs account for about mid-single digits. So call it like 6, 7% of the overall market today. So it's a fairly de minimis, however influential in the short term, investor in the asset class.

Brian Levitt:

Does anything change in your mind as the Fed's raising rates? I mean, you've started to see spreads in certain places climb a bit, certainly the lowest rated parts of the high yield bond market, mostly benign elsewhere. Do you start to get concerned or think about businesses differently?

Scott Baskind:

Absolutely. Interest rates are a tremendous component to the leverage, particularly higher leveraged borrowers and corporates on a go-forward basis. And it's one of the key fundamentals that we're facing today, in particular for borrowers, issuers that came to market in 2021 and 2022 when their capital structures were developed around a zero interest rate environment. Fast-forward to where we are today where interest rates are 400, 500 basis points wider than where we were when those balance sheets were constructed, that really degrades cash flow by 20 to 25%. Call it five times leverage structure, 4 to 500 basis points increase in base rates. That's a significant component of cash flow that these borrowers no longer have. So as we move down the risk spectrum into more highly leveraged balance sheets, those considerations are top of mind and it impacts different sectors and as a result, different issuers more consistently through the cycle. So higher interest rates positive for potential, how investors are considering asset allocation, generally a negative for fundamentals for the lower quality component of the asset class.

Brian Levitt:

Yeah, it's sort of interesting. I remember thinking or being asked by investors five, six years ago, how do we even contemplate getting 4% in a portfolio? I think back then you had to lend money to the Russian government to get 4%. Now these yields look quite nice. So how do you think about constructing portfolios in that type of environment? I guess I also want to get to more of an overarching, if we think about credit cycle leading, giving us sort of early warning signs in terms of where we may be going with equities and where we may be going with the business cycle, would you categorize this as mid, getting a little bit later, and are there still plenty of good opportunities given that what we've been told is corporate fundamentals are generally sound?

Scott Baskind:

Yeah, I would say there's no question about it that the ability to predict where we are in the economic cycle or credit cycle has become materially harder today than it probably ever has been. There's a fairly significant divergence between corporate earnings and corporate fundamentals and the health and strength of the consumer, which is one of the biggest drivers in particular of the U.S. economy. So as we think about that, there's this real bifurcation that's driving fundamental performance, loans and many risk assets depending on sector. So if we break that down a bit to cyclical sectors, interest rate sensitive sectors, even the consumer sectors that are discretionary, if you will, those are struggling and even corporate earnings within those sectors are facing significant headwinds. And as a result, those three core components are really underperforming the broader markets. That being said, the broad economy and corporate earnings in particular driven not only by AI and productivity gains and clearly spending, but consumer non-discretionaries are doing fairly well.

So there's this big bifurcation of how we think about building and managing portfolios, and it's really critical from our perspective to have an active approach to thinking about risks not only today, but more importantly over the next 6 to 18 months in terms of repositioning portfolios within sectors and repositioning and have a quality bias within that given the volatility and given the broader geopolitical macro environment that we're facing.

Brian Levitt:

Would you have said that coming into the year or is this more of an oil shock interest rate move? Because I remember coming into the year, I don't think compliance wanted me to use the word Goldilocks, but it felt pretty Goldilocks. And our colleague Matt Brill and I used to joke, if they don't want us to say, "Goldilocks," we'll say "Platinum locks." And so okay, fine, you can say Goldilocks because it felt pretty nice with oil at 55 a barrel and expectation was Fed funds was going to 3. Has our view on the consumer and discretionary and those types of things changed as a result of whether it's the war in Iran or tariffs or whatever else we've been grappling with?

Scott Baskind:

Yeah. Well, I guess when you talk about Goldilocks, I guess that's a repeat theme that's really occurred in January, February of the last many years. And as we've gotten into March, April, there's been significant macro headwinds that have been driven by geopolitical events. So as we peel that back, this year in particular, given the consensus view was that we were going to see three to four rate decreases, if you will, that very much would benefit broader consumer, broader corporates as it relates to the health of their balance sheets, that was certainly more constructive than we are today. And you're absolutely right, oil being higher in expectations, I would say broadly from our perspective is even with potential positive outcomes that could come through the midterms or after the midterms as it relates to oil prices, it's going to take significantly longer than what most expected for the price of oil to come down, for commodity prices to stabilize and as a result have a positive impact on where we are today.

Layer on top of that, interest rates which clearly are not only higher but will be higher for longer, that's going to have continued implications for not only highly leveraged balance sheets, but for consumer spending. So when we think about that combination, the tone of stability has without question deteriorated to a degree that we did not anticipate. Now that being said, when we think about portfolio positioning across the board, we tend to be more conservative and we favor higher quality borrowers in most sectors that we invest in. And when I think about the loan asset class, it's really divided what I would suggest into mid-single B and higher quality, so up through double Bs, and then weaker single Bs and triple Cs. And there's a real bifurcation, if you will, not only in terms of how we look at risk and underwrite risk within those two broad risk segments, but also performance.

There's been an absolute void of demand in the weaker component of the asset class. We've seen material deterioration underperformance in that sector, if you will, or that component of the asset class. Double Bs and strong single Bs have performed quite well this year, and that's been the backbone to, in particular, how investors are looking for access and what they're looking for in allocation to the asset class. It's very much an income oriented strategy, which really benefits investors with great stability.

Brian Levitt:

Yeah, you've seen that too in the equity market. I mean, it was the so-called broadening trade and then the broadening trade, kind of, not kind of deteriorated as I think it was really once that Saudi East-West pipeline got hit and oil re-accelerated back up. Very similar story. When you think about that higher quality space within the loan market that you're investing, is that broad-based across sectors and industries or are there specific opportunities that you focus on?

Scott Baskind:

It's very broad, very much mirrors the GDP of the U.S. economy. So it's quite broad. Clearly the largest sector in the asset class, which has been very well covered by the media and to no surprise is technology. So that's clearly been the largest component. Healthcare is probably the second-largest component. So when you think about the U.S. economy, it very much mirrors. So very diverse asset class. The U.S. market's 1.5 trillion plus in terms of size. There's probably 14 to 1,500 plus unique issuers in the market. Many of the higher quality borrowers are incredibly well-known borrowers to all investors.

Think about the likes of some of the airlines, United Airlines, American Airlines, some of the more retail oriented companies like a Burger King or Dunkin' Donuts. So there's tremendous not only accessibility to the asset class today that continues as the benefit of liquidity has grown over the last decade plus, but also recognition of the types of borrowers that are utilizing the asset class for their financing opportunities and financing needs. So it's not just smaller private equity owned businesses. There's many public corporates that are really well known, and those tend to be the higher quality assets within our industry.

Brian Levitt:

My whole life is United Airlines and Dunkin' Donuts.

Scott Baskind:

I feel like I live on a plane.

Brian Levitt:

Yeah. So I am doing my best to support their business so they can continue to make their payments. Obviously a lot of talk about the issuance coming from the tech space. I guess I have two questions. How should investors get their heads around the amount of loans or the amount of bonds being issued by the tech companies with regards to this AI build out? And I guess the second part of that is how much do we now have to contemplate which business models become disrupted by this?

Scott Baskind:

Yeah, that second part of your question is probably the most important in reality. So let's come back to that in a minute. Technology is one of the biggest drivers just of the U.S. economy and has been for decades now. So it should be no surprise that it has grown to be such a large component of the U.S. economy, and that flows from investment grade all the way through non-investment grade. So it's very much driven spending, capital expenditure plans from the hyperscalers is clearly one of the biggest headline numbers that we've ever seen in any industrial change to the global economies, if you will. That being said, when I think about issuance, it's very heavily geared towards investment grade companies, the really strong balance sheet hyperscalers that have come to market in quite significant size. A lot of that's been funded by both the investment grade market, the investment grade private placement market, as well as the private credit space that is funding these transactions.

When I think about issuance within the high yield bond market and the non-investment grade leverage loan market, there's been issuance, no question about it. However, it pales in comparison to the private credit side and/or just the investment grade private placement side, which I think is a good thing. So when I think about the liquid end of the markets, the loan and bond marketplace, there tends to be significant or more issuance that has occurred in service-like companies. So SaaS, which has been quite thematic in the market-

Brian Levitt:

Software as a Service.

Scott Baskind:

Software as a Service. There are a significant number of issuers in our marketplace. So this really comes to the second part of your question in terms of both where's disruption been and who are the winners and who are the losers? And what I would generically say is it's very difficult to pick the winners and losers. And as a creditor where you have very little upside and you're generally lending to investors at par and your expectations and your investment philosophy has to be around capital preservation, it really rewards managers and therefore their clients and investors to be conservative and to invest only in the top performers, the most stable cash flows, defensible businesses, and you have to pick and choose those quite prudently. But their implications are not strictly within technology. So the offshoots of the entirety of the ecosystem for AI really lends itself that there's implications across almost every single industry.

So within those disruption is really critical, Brian, to your point around making sure you can identify the areas of stability and identify the companies that ultimately will benefit from AI and our market leaders in that evolution. And it's not only around productivity, it's around how their products fit within the broader ecosystem. So we spend a tremendous amount of time not only looking at the risks, but also the opportunities that can play through in those different sectors and that ultimately we believe will be one of the leading areas of success for managers.

Brian Levitt:

Did you have your own SaaSpocalypse in the loan market or was that generally just tied to the equity market?

Scott Baskind:

No, absolutely. And I think it's actually been more headline-driven than anything, to be fair.

Brian Levitt:

Yeah, those stocks recovered for the most part.

Scott Baskind:

Stocks have recovered for the most part. Loans and bonds for companies that are actually going to benefit have recovered as well. However, in any single disruption within any market, you're always going to see companies that suffer. And there's no question about it that the weaker component of the asset class, in particular for service-like companies that have very little asset base and coverage have traded off in our distressed companies today. So there's been winners and losers to come of this. That's been a key focus for us as a management organization, but thematically the media has covered it quite well and has been implications and it has caused what I would suggest to some liquidity considerations across many of the public funds, and we're seeing that play out as we speak.

Brian Levitt:

Give an example. So you know how people write these letters to the younger selves. I don't know if you've ever done that. I've had to write a letter to my younger self. What letter would you write to Scott Baskind in 2019? In terms of, I can't believe where we are right now, look at this opportunity or these couple of opportunities and look at the yields I'm able to get, and I'm fairly certain these are pretty good opportunities for investors.

Scott Baskind:

Yeah. Well, I would say the number one theme in my mind is ensure that you do not encounter style drift. And as a result, you stick to what you're really good at and avoid situations that look attractive and ultimately turn into a chase of yield or a chase of return. So diversity, absolutely critical, investing in strong and stable and appropriate capital structures, and ultimately being willing to underperform for a period of time for longevity and the best outcomes for clients.

Brian Levitt:

Don't you want to surprise that guy though, younger Scott, and say, "Look, we can lend to this business at 7% today or 8, whatever it is, or 300 basis points above Fed funds, which is now heading towards 5?" Is there anything you want to tell to that younger man?

Scott Baskind:

Well, I would say the most important element there, once again, is investors don't get rich by chasing the risk. And so be conservative. I think it would be a different mentality and a different conversation if I or we within my organization were invested in equities where you actually do get paid for taking that risk. And the reality is you need to get a few really good investments right and you can afford to get some wrong because you can make up for it. In credit, you get one wrong and that can have real negative implications for your entire strategy.

Brian Levitt:

Let me ask you a question about, I think it was coming into the year, maybe early in the year with first brands and moving over to the private credit space. Investors, there's just so much noise around that. And I got the sense people felt like there was a huge comeuppance coming, this was the next big thing, and it just sort of dissipated. I remember speaking to guys like you at that time saying, "No, this feels more like idiosyncratic events and people wanting their money out rather than anything really happening in the corporate fundamentals." Is that ultimately what ended up happening? Is that how you still feel?

Scott Baskind:

Yes. Well, I think the media and some participants in investment world like to try to think everything is systemic. And at the end of the day, when we think about the corporate markets within sectors, there's clearly commonality from themes that impact issuers within certain sectors. However, the correlation across sectors and across the diversity of the economy tends to be materially lower than what ultimately can be viewed as systemic risk. So when I think about First Brands, Tricolor, some of the other defaulted high profile names, you think about some of the comments from some of the pundits in the market around cockroaches and other things.

Brian Levitt:

Cockroaches, right.

Scott Baskind:

Yeah, that were clearly felt pretty hard by market participants because of where those words came from. The reality is one, fraud is almost always idiosyncratic. Two, elements of individual corporate activity that we have seen has been idiosyncratic except for some of the themes that we spoke about before, impacts of inflationary pressures, interest rates, higher oil and things like that that can impact broader... But those are common fundamental challenges that occur that impact all markets, all risk assets, if you will. So I think as we look forward, and even over the last several years, defaults have remained fairly benign. They're quite consistent with historical levels, and that is ranged between 2.5 To 3.5% over multiple decades with spikes and peaks really occurring in the global financial crisis 2008 through 2010 over COVID, which was very much sector specific, but also very short period of time, which were two of the highest periods, if you will.

Generically, post-COVID, we've been in a benign and below historical default of art, even with these headlines. And our expectation is that we will continue to be quite constructive and with good corporate earnings supporting those fundamentals, we remain quite positive on the markets going forward.

Brian Levitt:

Good. And even through those environments, if you held on and you just focus on the income, you generally did just fine, right?

Scott Baskind:

That's right. I mean, it's been quite amazing and quite resilient as an asset class. There's really only been three years of negative performance in the history of the asset class, which now dates back over three decades. The global financial crisis 2008 was clearly one of them. But if you invested in the asset class the beginning of 2008 and held that same investment into 2010, you actually had a positive return. So the other periods have been quite de minimis in terms of negative performance. And the basis for that is it's a high income oriented investment. So the income that's generated tends to be the vast majority of your return and tends to offset any type of shorter term volatility that occurs in the asset class. And that's one of the true benefits of the loan asset class. It's not only being senior and secured in the capital structure and secured by all of the collateral of the underlying issuers, but the floating rate nature really helps to protect in environments that there are implications for longer duration assets in rising interest rate environments.

So the benefits of those three key characteristics of the asset class tends to hold firm through periods.

Brian Levitt:

Most powerful force in the universe, right? You know what it is. Compound interest. I'm not sure if we actually know who said that. I think they said Einstein said it, or they have no proof that Einstein actually said it.

Scott Baskind:

But it's truly amazing. If you look back over time, time value is so critical and income orientation that comes with that compounding, Brian, that you just mentioned provides really good outcomes for investors over a cycle.

Brian Levitt:

I hope I become famous enough where there's quotes attributed to me that I didn't actually say.

Scott Baskind:

Well, I think you're mostly there already. I mean, you're on TV all the time. So you're well on your way. We look forward to that one quote that stands out that we can stick on our walls.

Brian Levitt:

Yogi Bear had the book, I Never Said the things I Said.

Scott Baskind:

Oh my goodness. That's right. I love that. Pretty amazing. The quote, hundreds of quotes.

Brian Levitt:

What do you watch? You say you're constructive. We like to hear it. I always like when the credit guys are constructive, makes me feel good about a lot of the other calls. What do you watch to determine if you're becoming less constructive or what does the end of a cycle look like to you?

Scott Baskind:

Yeah, so there's no question about it that macro considerations are influential. However, from our perspective, what we always look towards as the biggest drivers is corporate earnings performance, and we look at that on an ongoing basis, both as it relates to Sort of trend lines and historicals, more importantly, how companies are forecasting expectations on a go-forward basis, particularly as it relates to capital expenditures. So when we start to see any pullback on spending, clearly that's concerning, that's giving a negative signal, if you will, from CFOs around certainty, if you will, or uncertainty in their end environments.

While we invest around these geopolitical risks and alike, we tend to view spikes in whether it's input costs, commodity costs as temporarily, not as long-term. And what we have to ensure is that we're developing and constructing balance sheets and lending to companies that can withstand certain levels of volatility in both from a supply perspective in terms of supply shocks or input costs, but also as it relates to their customers, their consumers in terms of strengths there that can withstand that on a go-forward basis. So that's really critical. So CapEx absolutely near the top of the list, stability of cash flows, if you will. We're always going to be looking at those macro themes. Oil I do think is an important one because the implications in terms of the full cycle of earnings, whether it's at the input level or the output level and the impact on consumer and the like.

So sentiment is quite important, but we look a lot more towards corporate sentiment than consumer sentiment of driving how we're investing.

Brian Levitt:

Can I be the first phone call when you start to get more concerned?

Scott Baskind:

Well, we'll always be out to our investors and alike, and you're clearly one of our key constituents.

Brian Levitt:

Well, that didn't sound necessarily like first, but I'll work on that.

Scott Baskind:

I can't commit anything.

Brian Levitt:

Well, thank you, Scott, very much for the conversation.

Scott Baskind:

Yeah, absolutely. This was great. I appreciate the opportunity, appreciate great dialogue here.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of October 7, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

References to specific companies aren’t buy/sell recommendations.

Comments on the investor composition of the senior loan market sourced from JP Morgan as of September 30, 2026.

Comments on the impact of rising interest rates on cash flows sourced from PitchBook Data as of September 30, 2026.

Double B and Single B loans had year-to-date returns of 3.61 and 3.67, respectively, as of October 14, 2026. Based on the S&P UBS Leveraged Loan Index.

Comments on the size of the loan market based on the S&P UBS Leveraged Loan Index as of September 30, 2026.

Comments on the size of defaults in the loan market sourced from PitchBook Data as of September 30, 2026, based on the Morningstar LSTA US Leveraged Loan Index.

The US senior secured loan market has had three years of negative returns over the past 34 years, based on the S&P UBS Leveraged Loan Index as of December 31, 2025. Those years were 2008, 2015, and 2022.

The S&P UBS Leveraged Loan Index measures the market-value-weighted performance of the investable universe of USD-denominated leveraged loans.

The Morningstar LSTA US Leveraged Loan Index tracks the performance of the institutional US leveraged loan market using market-value weighting.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

There is a risk that the value of the collateral required on investments in senior secured floating rate loans and debt securities may not be sufficient to cover the amount owed, may be found invalid, may be used to pay other outstanding obligations of the borrower or may be difficult to liquidate.

Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid.

High yield bonds, or junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Artificial intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there's no guarantee these protections will be sufficient. Significant research and development (R&D) spending doesn’t ensure product or service success.

Investments focused on a particular industry or sector are subject to greater risk and can be more impacted by market volatility than more diversified investments.

A basis point is one-hundredth of a percentage point.

Capital expenditures (or CapEx) is the use of company funds to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

Correlation is the degree to which two investments have historically moved in relation to each other.

A credit cycle describes the phases of access to credit by borrowers. In earlier stages, credit is relatively easy to obtain. In later stages, the availability of funds contracts.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates. Duration is expressed as a number of years.

Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.

Hyperscalers are large cloud service providers that can provide services such as computing and storage at enterprise scale.

Idiosyncratic developments refer to unique events that do not affect an entire market or portfolio.

Inflation is the rate at which the general price level for goods and services is increasing.

Leverage measures a company’s total debt relative to the company’s book value.

Net interest margin (NIM) is the difference between interest earned and interest paid, which gauges how successfully a company, typically a bank, made its investments relative to its debt situation.

A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. NR indicates the debtor was not rated and should not be interpreted as indicating low quality. For more information on rating methodologies, please visit the following NRSRO websites: visit www.standardandpoors.com and select 'Understanding Credit Ratings' under 'About Ratings' on the homepage; https://ratings.moodys.io/ratings and select 'Rating Methodologies' on the homepage; visit www.fitchratings.com and select 'Criteria' under 'Resources' on the homepage. Then select 'Rating Definitions' under 'Resources' on the 'Contents' menu.

Rethink Portfolios and the Greater Possibilities Podcast brought to you by Invesco Distributors, Inc.

Why are investors taking a fresh look at senior loans? Brian Levitt sits down with Scott Baskind, Head of Global Private Credit at Invesco, to explore how floating rates, attractive income potential, and shifting corporate fundamentals are shaping the asset class. They discuss the importance of credit quality, the risks of chasing yield, AI-driven disruption, and the signals that could indicate a turn in the credit cycle. Plus, Scott explains why he believes disciplined underwriting, diversification, and downside mitigation remain essential in an uncertain market.

Rethink Portfolios: Senior loans with Scott Baskind
Rethink Markets: AI. The surge, the spending spree … and a slowdown?

00:00

00:00

00:00

Transcript : Disclosures

Brian Levitt:

Welcome, this is Rethink Markets. It's a series from the Greater Possibilities Podcast. I'm Brian Levitt. Jodi Phillips is here as always. Ready to get going, Jodi?

Jodi Phillips:

I sure am, Brian. So today I'm really looking forward to this conversation. We have Ashley Oerth, who's a senior investment strategist at Invesco, and we're going to have a conversation on artificial intelligence and what she believes the future is likely to hold for investors.

Brian Levitt:

Good. It's in the news. I think AI's not a fad at this point.

Jodi Phillips:

No, no. Maybe AI even wrote this podcast.

Brian Levitt:

Yeah, we're talking about it slowing down. There's scary letters coming out. But yes, we wrote this podcast or at least the outline for this podcast. So this is pure Brian Levitt and Jodi Phillips.

Jodi Phillips:

Yeah, yeah. You get what you get with this one. So anyway, Brian, how would you describe how investors are feeling about AI?

Brian Levitt:

Yeah, I mean probably conflicted.

Jodi Phillips:

Yeah, you sound conflicted with that answer a little bit also, but-

Brian Levitt:

No, look, I'm excited and we're all understanding more the benefits of all of this. I'm excited about the potential of it, what it can mean really for all facets of the global economy. But I think there are also investors are struggling to understand how we get there from here. Is it a mania? Are we slowing it down? That's what I mean by conflicted.

Jodi Phillips:

Well, sure. No, that makes total sense. And you used a very interesting word that I don't think I've heard you use before, although I've certainly read it in headlines, "mania." What do you think about that assessment?

Brian Levitt:

No, I don't think it's a mania. I mean I'm not going to be the first strategist to note this, Jodi, but earnings have been so robust this year, and the market hasn't advanced at that same pace. So that's not a mania, right? A mania is usually when the market is advancing far beyond the fundamentals.

Jodi Phillips:

Yeah. And of course that combination of elements you're talking about before that brought valuations down.

Brian Levitt:

Right. No, exactly. Price to forward earnings in the high teens. Maybe that's a little bit high compared to the history of the S&P 500 index, but it's not high compared to the last five years, or the last even 10 years. And that's when the S&P has increasingly looked more like a growth index given the concentration of it. So yeah, price to forward earnings in the high teens, to me, that's not mania.

Jodi Phillips:

No. And of course, I mean, look, we know that fear sells, dramatic headlines and whatnot. But we do also know that there is a substantial amount of investment that's being made right now in this AI space without having a full understanding of when the returns on that investment might fully arrive.

Brian Levitt:

Yeah, biggest debate. Biggest debate we have. What's the bullish side of that? The demand is only just starting to get going and it's growing at rates that we haven't seen before. This isn't a software upgrade, this is AI embedded in all we do. And so the question that investors really need to contemplate is when, if ever, does the supply of chips, memory, compute catch up to that demand? That's the big debate.

Jodi Phillips:

It is. And of course, another element of that debate is maybe we all slow it down as Anthropic's Dario Amodei recommended very recently.

Brian Levitt:

Or we all go extinct, that'll slow it down.

Jodi Phillips:

Yes.

Brian Levitt:

Or maybe not.

Jodi Phillips:

That'll slow demand down for a lot of things. A lot of things.

Brian Levitt:

We joke. We joke. Anyway, these are great questions to ask of Ashley. That's why you and I phoned friends, right? I mean we have our ideas, but there's always people around... That's why I love working at Invesco. There's always people around the firm who we dial up, either figuratively or literally, and ask them the questions. So I'm looking forward to that.

Jodi Phillips:

And we are going to get to Ashley in just a minute or two, but first we're going to just stick with you as the expert right now, Brian, and talk about

Narrator:

Trending Conversations

Jodi Phillips:

So Brian, what is it? I mean AI clearly, but there's a lot of other things in the world that are top of mind for investors right now. So what are you hearing about?

Brian Levitt:

The most is interest rates, so 5% on the 10-year, but I'll also add that to 4.75 or so on a two-year, what the Fed's ultimately going to do after their first-rate hike. So that 5% I think is really on people's minds, give or take a few basis points or two on a given day, about what's been going on with the 10-year treasury rate.

Jodi Phillips:

All right. Well, we talked about mania earlier, another buzzword for this conversation might be breaking point.

Brian Levitt:

Breaking point. Is this the breaking point?

Jodi Phillips:

Mm-hmm. So is it?

Brian Levitt:

No, it's hyperbole. That's hyperbole.

Jodi Phillips:

I figured you'd say that, but I had to ask.

Brian Levitt:

Breaking point of what I think is the question. Look, I'll date us a little bit, Jodi, but you and I are children of the '80s and '90s, right?

Jodi Phillips:

The good old days.

Brian Levitt:

Yeah, the good old days. Over those couple of decades, the 10-year rate was always above the nominal growth rate. So that only changed after the financial crisis when rates were persistently below the nominal growth rate of the economy. So yeah.

Jodi Phillips:

Yeah, so hyperbole.

Brian Levitt:

Hyperbole.

Jodi Phillips:

But bringing it a little more into the here and now, I mean the US grew 6.6% last quarter in nominal terms, and the 10-year was still below that nominal growth.

Brian Levitt:

Yeah.

Jodi Phillips:

So important to keep that in mind, but of course we can't expect 6.6% to be the trend rate.

Brian Levitt:

No, that's a fair point. That's a fair point. But what is the trend growth rate over the next 10 years, and shouldn't the 10-year address that? So if it's 2.5% Real growth seems reasonable, that would be up a bit, but we'll give some AI boost. Maybe 2.5% Inflation seems like a reasonable target. So there's your 5%. That seems reasonable. I mean I know Trump said it should be one. It's not going to trade like a credit, people need to get paid something that outpaces inflation, so it's not going to be one. But 5% seems reasonable.

Jodi Phillips:

All right, fair. So you view this more as a reset of rates in a better growth backdrop?

Brian Levitt:

Yeah, it's a reset like it's a better growth backdrop. But there's also bond issuances from the hyperscalers, so better nominal growth, more supply of bonds, that seems to be the story.

Jodi Phillips:

All right. And not a breaking point?

Brian Levitt:

No. No, like what do we mean by breaking point? So think of it this way. Jodi, I presume you have a fixed rate mortgage?

Jodi Phillips:

Yes.

Brian Levitt:

Or did you pay off the home? Did the Phillips family pay off the home?

Jodi Phillips:

Let's just presume there's a fixed rate mortgage in this conversation.

Brian Levitt:

Same with the Levitt family, unfortunately. So higher rates doesn't break that for us, we've got our fixed rate mortgages. Doesn't change it. It makes housing slow down, but for the Americans who own homes, for the most part it doesn't change it. Same thing with businesses. The businesses have done a pretty good job of locking in low rates. So investment grade and high yield spreads are tight because the businesses aren't over levered.

The other thing people talk about, maybe 5%, is it a breaking point? Maybe they mean equity valuations have to come down? But like we already talked about, it seems like that's already happened. Why isn't the market advancing as much as earnings have advanced? Is it possible that the markets have already priced for an environment where rates were going to go up? So yeah, that's not a breaking point. And we record this with the S&P 500 a couple of percent from an all time high, spreads tight. I'm not going breaking point.

Jodi Phillips:

Good. Well, now this brings us to our conversation with Ashley on AI. And so we asked her multiple questions and got really in depth into what she thinks about the current atmosphere and different concerns that you hear, and so let's get to it.

Narrator:

Phone a Friend.

Jodi Phillips:

First, we asked Ashley if AI is living up to her expectations, and here's what she had to say.

Ashley Oerth:

I guess first, it depends on who you ask when you ask how this is living up to expectations. To me, if you look out there, AI still has a lot of doubters, a lot of skeptics, but really I think it's beating expectations. So if we measure by adoption, for instance, it's progressing as one of the fastest technologies ever adopted. We're looking at somewhere around two billion, and some figures pushed as high as three billion individual users of AI globally. So really quite big numbers. Business surveys similarly, at least in the US, point to around one in five businesses are using AI, somewhere around 80% of large corporates. So it's really going through a massive adoption story, and I would say it's still very much early days.

If we measure by economic impact, I think it's a bit early to tell. But at least for some of the studies that I've seen, it suggests that there is a sort of productivity story that's beginning to build here, especially with industries with high exposure to AI. Really, it'll probably take a few years before we know the true direction of where this lands, but at least the direction of travel I think is going in the right way.

So I guess the one place where maybe we have some question marks is really around the monetization of these tools. And here the data is a bit more tricky to work through, primarily because a lot of the monetization is happening at the private side, and it makes it a bit more challenging to really understand precisely what the demand looks like, versus how much is being say subsidized by these AI labs versus really its users that are paying to make use of this. But I think overall, these companies, or what they're reporting in the media at least, huge eye-popping numbers in terms of their annualized revenue growth. So the inklings are there to say that this is also making money.

So broadly I'd say yes, AI is progressing as I would hope it to be. I think that for the level of capital being deployed, this is a very positive story. And it's showing up in earnings as well, especially if you look at the tech sector, those beneficiaries, the AI infrastructure boom, this is probably the single biggest story in markets, at least if we're looking at the sectoral breakdown of performance.

Jodi Phillips:

Next, we asked her to give us a little bit of context into the level of investment that's being made compared to the future potential for returns on that capital. So like trying to get to the point of when it might make sense to get concerned about that, and here are her thoughts.

Ashley Oerth:

This is probably, I think, the biggest question facing the AI theme. So as I mentioned, the sort of AI infrastructure boom, it's carried on. This is really all about building up the sort of computing capacity to power AI. And we have a good sense of the level of spend that we're seeing, so say sizing of data centers, the overall pipeline, but ultimately all the supply we're standing up it's about meeting what we think should be the explosive demand for computing power. And so far it has been, but forecasting that into the future I think is challenging. We don't quite know where that lands. We have comparatively less insight into the monetization trends, as I mentioned, how lucrative adoption has been and how much compute we'll need in the future to power these models. We just know it'll be a lot. So if we were to freeze today at the current levels of demand and say supply continues, it's built out, that this infrastructure boom plays out, then sure, return on capital likely to miss the mark. But that's of course not the story that we're seeing.

The way I like to frame this is that this computing demand, it's driven by two forces. So number one, there's the adoption of AI, which I touched on. And number two is that the technology itself continues to improve. So if we think about these forces, as adoption grows we need more computing power to meet that use, to meet that economic adoption. On the other hand, capabilities are still improving and cost to access those capabilities are also falling at the same time. So the demand for compute, it's growing because intelligence is becoming cheaper, and when we can do more with more intelligence and we pay less, we use a lot more of that. So there is your computing demand story. Now of course, as I mentioned, forecasting where this ends up is extremely challenging, and hence why we have so much angst around stories like DeepSeek last year, the recent talk around an intentional slowdown of AI progress, which I'm sure we'll touch on, and the other potential shocks that we could name for shocks to computing demand.

Jodi Phillips:

Next, we asked Ashley about agentic AI, and whether it's possible that the growth of AI agents could mean that supply constraints just never catch up to demand. And here's that discussion.

Ashley Oerth:

Yeah, I think this is also another good question, and I think that this agentic AI story is really an important one. So if you think about the history of AI, we've gone from models that were Q&A, we could play around with them, maybe write some poems, fool around a bit with just what it could give us in terms of creativity or maybe it would give us nonsense. It was more fun rather than productive. But now with the age of agentic AI, we have these models that go through various reasoning steps and are able to go off and give themselves a task list for how to accomplish the objective you've given them. So maybe they need to build a program or build a workbook and do some actual analysis and come back to you. And that's what agentic AI is really all about, is how we can really impart some agency really into what these models can do, that they can actually carry out this extra work and get to the ultimately better outcomes.

Now, in terms of the supply constraints versus catching up to the level of demand, I mentioned this already a little bit but AI is interesting really because ultimately what we're trying to put a price on is intelligence. So suppose we take a cheap, low performing, really plain AI model, maybe those earlier generations I mentioned before. Say what your mobile phone can run when it's not connected to the internet, maybe you're editing an image or something like that. Realistically, it's quite limited and you'll probably not value it very highly. Now, if we turn to the stuff of what we're talking about today of what's going on in the data center story, these more expensive kinds of AI that run on these sort of dedicated computing centers, these are much more powerful. And here we have the sort of complex reasoning models, the agentic AI, all kinds of impressive achievements. And as we explore, right now, and implement all of the potential use cases of what this intelligence can do for us, we're still going through this process where we're hard at work of seeing where this is economically useful, where it's profitable. And as we play out in a story, when its price changes, when the price of intelligence falls, when it becomes more accessible, we see more uses of it.

So as we progress through this AI story, we keep revising really three things. Number one, what is AI capable of? Number two, what we think it will be capable of. So in other words, the progress has continued, these models have gotten better. And then number three, how efficiently we can actually achieve those capabilities. So in other words, falling costs. So in the process of trying to really price intelligence and determine the demand of it, it's increasingly more powerful, it's increasingly cheaper. And at some point, I imagine we'll reach some kind of equilibrium where there's a price that is reasonable for how much intelligence we're getting versus the actual price of that computing power that goes into serving that. But we're not there. We keep revising it, as I mentioned, models keep getting better and more powerful. And even at the cutting edge, seems expensive at the time when it's first announced, but then just months later, those costs have tended to fall dramatically. Take the first instance of ChatGPT. Its costs fell by about 99.7%. That's really, I think, highlighting just how much more accessible this gets. And that's been playing out time and time again with future generations of models.

So really when we're trying to price how expensive AI is to access versus its abilities, it's really difficult to price intelligence versus the kind of marginal cost of compute. But we keep moving the goalposts because computers are getting more efficient, models are getting more efficient and they're getting more powerful. So it's really, I think it's a long way of answering a question to say we don't know.

Jodi Phillips:

Then we asked Ashley to put her investment strategist hat on and talk about where she thinks the focus should be right now between cloud compute providers, service providers, chip manufacturers, downstream beneficiaries, and here's how she thinks about that.

Ashley Oerth:

Well, I do think that there is the short answer there, that yes, it is all of the above. But it really is about picking and choosing at this moment. Where in the early days, the AI trade seems like everything went up, whereas today there's more selectivity that's out there. So first it was hyperscalers were the place to be. Now those hyperscalers are going through things like they're loading up on debt and the cost of capital is shifting against them. And once you get to a certain size, it's difficult to keep growing at the same growth rates. So they've become less stellar in the story and I think subject to more investor scrutiny, but still they are spending, they are investing, and that's where the downstream beneficiaries, at least insofar as the supply chain side for what goes into a data center, that's still, I think, quite healthy.

So if you think of it year-to-date perspective, it's been a phenomenal story. But as you mentioned, there's been some trials along the way. I think that the sort of rerating that we've gone through in recent months is not to say that this AI story is over or dead in the water or reversing, I think it's more about taking a breather after a phenomenal growth rate. But I still very much see this kind of structural story in play, that we remain compute constrained, that there's a narrow set of companies that are really able to deliver what goes into data centers, the chips, the networking equipment, the power generation equipment. So really, I think that supply chain can continue to benefit. But equally, we're understanding how to use this technology better and better. So we're seeing more implementations, and I suspect that we'll see some companies that just get it right, that they'll have AI-driven products or services, and we'll see some increasing dispersion as a result of that outside of the tech sector, outside of the data center story.

Jodi Phillips:

Finally, we asked her about Dario Amodei and other tech leaders who are advocating for an intentional slowdown of the pace of AI development, and what the market implications could be of that. And here are her thoughts.

Ashley Oerth:

It's I think a very interesting story, and one that we've seen come up time and time again over the past few years. So as I mentioned, AI keeps getting better, and now that it's gotten to a point where it's so good that we're starting to ask questions of maybe slowing the rate of development here, and that's what this letter is all about. But if we back up, really this comes back to security concerns that it spawned. That as AI has improved, these labs have been experimenting with just what it can do, trying to lock these AIs in a box where they can't access the internet and give them a task, oftentimes an impossible task, and seeing what they do with it.

And this is where this story really came out of, is that we have these models that we're actually able to break out of the sort of containment that we built for them, and they were going off and doing things that we did not expect, that we did not program them for. That they went off and, for instance, hacked other companies and were breaking into other tools or other databases that they should not have had access to. And that's really, I think, the crux of this story. Is that the behavior that they're exhibiting is different than what we would expect and what we would want, what the parlance of the industry would call alignment. These models are looking misaligned, and that's what this essay that Dario Amodei put out about is really about an intentional slowdown of the pace of development so we can get a better handle on this.

Now, like I mentioned, this has happened before. These concerns, these cautions have been flagged in the past, but what's different about this moment is that it's a variety of tech leaders that have agreed to this. So Sam Altman of OpenAI, Elon Musk of SpaceX, Satya Nadella of Microsoft, they've all agreed to the broad framework of trying to slow the pace of development, try to embed human reviewers into these companies, these AI labs to try to make sure that the story isn't going off the rails, to develop AI ultimately more safely.

Now for markets, why markets care, and really what this is a market story about is does this affect compute demand? Does this mean that we slow those ever-expanding horizons? Do we stop doing that? And therefore, do we need less computing power? Personally, I'm not so concerned about that. I think that there's already a very healthy pipeline of demand because, again, adoption is still early days. It's still growing, we're still learning how to use this technology. And even if we froze progress today, it's still wildly powerful and I think that we're just still trying to get our heads around how to implement this, how to use it, how to expand it into businesses, into the economy. And that's really, I think, what the story is all about, at least insofar as the AI investment boom goes.

Jodi Phillips:

Thank you so much, Ashley, for joining us. And now we're going to move on to...

Narrator:

I Disagree.

Jodi Phillips:

And this is where Brian chooses a quote that's been in the news lately, or maybe from decades ago, you never know, but Brian disagrees with it. So what is it this time?

Brian Levitt:

Yeah, and it's not going to be disagreeing with Ashley.

Jodi Phillips:

Certainly not.

Brian Levitt:

Certainly not. Okay, so I'm going to go with Ray Dario. They've been in the news a lot lately, and he said recently, "I am confident that the government's financial condition is at an inflection point, because if this is not dealt with now, the debts will build up to levels where they can't be managed without great trauma."

Jodi Phillips:

All right, so you disagree?

Brian Levitt:

I disagree, vehemently.

Jodi Phillips:

Very good. So this is Ray Dalio, correct?

Brian Levitt:

What did I say, Dario?

Jodi Phillips:

Yep, Dario. Dario Amodei's on our mind, I know.

Brian Levitt:

Oh my God. Yes, Ray Dalio.

Jodi Phillips:

All right, all right. But now we know who we're talking about. But why do you disagree?

Brian Levitt:

Well, and since I'm one-take Levitt, we're not editing that out. We're keeping that.

Jodi Phillips:

Yeah.

Brian Levitt:

So I heard the inflection-

Jodi Phillips:

This is how you know AI didn't write it.

Brian Levitt:

Or record it. So I heard the inflection point was when the boomers all turned 65. Okay? That was going to be the inflection point.

Jodi Phillips:

That was. Well, now the oldest baby boomers are 80.

Brian Levitt:

Yeah, and the median's 71. So that wasn't the inflection point.

Jodi Phillips:

No. I mean, if anything interest rates were historically low when most of the boomers were 65.

Brian Levitt:

Yeah, dollar was strong too. Okay, so not that.

Jodi Phillips:

All right. So why does Dalio think that this is an inflection point?

Brian Levitt:

Dalio, not Dario. Right, Jodi?

Jodi Phillips:

Correct.

Brian Levitt:

You got it right. You got it right. Well, I think because the country's running very large deficits during good times, we're bringing in about five trillion in revenue, we're spending seven trillion. Okay, so that's usually reserved for a recession, and it's happening at a time when interest rates are rising, so that's why it's getting a lot of attention.

Jodi Phillips:

Okay. But the US is now, for example, paying more to service the debt than paying to fund the defense department. So yeah, I'll ask again, why wouldn't that be an inflection point? That seems big.

Brian Levitt:

Yeah, those are inconvenient truths, right? Is there anything to suggest that it must be dealt with now? We already talked about rates moving up with stronger nominal growth. I guess the question is, what is Dalio asking investors to do? Because it's a pretty bold comment to say, "We're at an inflection point." What does that mean? What are we supposed to do? I mean he's made his money, are we supposed to take our chips off the table because there's an inflection point coming?

Jodi Phillips:

Yeah, yeah. Seems like a risk for investors to think that way.

Brian Levitt:

Yeah. Let me ask you this: is it more likely that the US will sit idly by if there's a huge debt challenge and it's going to cause irreparable damage? Or is it more likely that the US will take steps to stave off the challenge? You might say, "What are those?" I mean we've seen the Treasury get involved a bit to not a lot of effect, but Congress could act. We're not just going to sit there and let the crisis happen. There's a lot of tools at our disposal to address a crisis.

Jodi Phillips:

Understood. And as you also like to say, yeah, the debt's risen from 20 trillion to 40 trillion over the past 20 years, but during that time, household net worth has climbed from 85 trillion to 180 trillion.

Brian Levitt:

Yeah, I'm glad you listened. And maybe it's that 180 trillion that's driving all of this growth and causing interest rates to go higher. So no, I don't think this is our comeuppance. I'm glad you listened to me though, Jodi. Thank you.

Jodi Phillips:

Always. All right, so now we're going to put Brian on...

Narrator:

The Hot Seat.

Jodi Phillips:

We just got our first Federal Reserve rate hike in three years, Brian. Are you concerned?

Brian Levitt:

No, it's not an over-levered economy. We talked about that with our mortgage rates. Also comforted that inflation expectations in the bond market are contained, and also comforted that the two-year treasury is up at 4.75, so that's already priced in additional rate hikes.

Jodi Phillips:

All right. Oil prices have spiked again, so what's driving that?

Brian Levitt:

Yeah, we were doing a decent job as the... Well, not we, I don't drill for oil. But the world was doing a decent job making up for those 15 million barrels per day that were going through the Strait of Hormuz. Some of that makeup were the five million of barrels coming from the Saudi East-West Pipeline. Unfortunately, that was hit by a drone in September, so that's offline for a bit. Fortunately, there are estimates that it could take days or weeks to get repaired, but importantly, not months or years. But that's what drove it.

Jodi Phillips:

Okay. So next question, there's a lot of negative crosscurrents, the rates, oil, war, AI fears. So why is the US stock market still near an all-time high?

Brian Levitt:

Earnings. And you also make a good point about being near an all-time high. I think people have been feeling like there's been a huge correction in the market, it's just not the case. And historically, a wall of worry isn't the worst thing for stocks. You just named a pretty big wall, so we're climbing it.

Jodi Phillips:

All right. Sounds good. So what would it take for you to get negative on stocks?

Brian Levitt:

Yeah, earnings begin to disappoint, analysts revise lower, hyperscalers scale back AI investment, bond market pushes back against AI issuance. Those are the types of things. None of those really seem to be happening.

Jodi Phillips:

Okay. Well, you are now off The Hot Seat. And we're going to conclude with our newest segment, Think Rethink. So Brian, tell me something that you believe people are thinking right now, but you believe they should rethink.

Brian Levitt:

Yeah. So can we think what we talked about earlier about manias?

Jodi Phillips:

Mm-hmm.

Brian Levitt:

People think the stock market advance is a mania.

Jodi Phillips:

Okay.

Brian Levitt:

Can we rethink and I'll tell you what a mania might look like?

Jodi Phillips:

Yes, help us rethink that.

Brian Levitt:

Okay. So stock market is up 127% since the last time we had a 20% decline. That was around 2022, coincidentally about the same time ChatGPT came out. So we're up 127% over 3.9 years. In the 1990s, we advanced over 500% over 10 years without a 20% decline.

Jodi Phillips:

Oh, okay.

Brian Levitt:

So just by definition, I mean that pales in comparison…

Jodi Phillips:

The comparison.

Brian Levitt:

Yeah, it's just not a mania.

Jodi Phillips:

All right. So before we go, Brian, where can our listeners follow you for more insights?

Brian Levitt:

Please visit invesco.com/brianlevitt to read my latest commentaries. And of course you can follow me on LinkedIn and on X @brianlevitt. I'm hearing I am now being paid by the click, so please go do that.

Jodi Phillips:

Huh, all right. You have to tell me about that deal after the show.

Brian Levitt:

I don't think it's a good thing.

Jodi Phillips:

Oh no. Thanks for joining, we'll see you next time.

Brian Levitt:

Thank you.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of September 18, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

References to specific companies aren’t buy/sell recommendations.

Artificial intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there's no guarantee these protections will be sufficient. Significant research and development (R&D) spending doesn’t ensure product or service success.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Booming AI investment is illustrated by hyperscaler capital spending, which has more than tripled since 2022, based on Bloomberg consensus analyst forecasts as of March 2026. Hyperscalers include Amazon, Google, Meta, Microsoft, and Oracle.

Estimates of US business usage of AI sourced from the Organisation for Economic Co-operation and Development and the US Census Bureau.

Discussions about robust corporate earnings sourced from Bloomberg, L.P., as of June 30, 2026. Based on the operating earnings of the companies in the S&P 500 Index.

Comments about the price-to-forward earnings of the S&P 500 Index sourced from Bloomberg, L.P., as of September 17, 2026.

The 10-year US Treasury rate sourced from Bloomberg, L.P., as of September 17, 2026.

The US nominal growth rate sourced from the US Bureau of Economic Analysis and Bloomberg.

Comments about equity valuations sourced from Bloomberg, L.P., as of September 17, 2026. Based on price-to-forward earnings of the S&P 500 Index.

Discussion about spreads sourced from Bloomberg, L.P., as of September 17, 2026. Based on the option adjusted spread of the Bloomberg US Corporate Bond Index and Bloomberg US Corporate High Yield Bond Index.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.

The Bloomberg US Corporate High Yield Bond Index measures the US dollar-denominated, high yield, fixed-rate corporate bond market.

Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

Comments about the age of Baby Boomers sourced from the US Census Bureau, 2026.

Comments about interest rates and US dollar strength when boomers reached 65 sourced from Bloomberg L.P. Based on the 10-year US Treasury rate and the US Dollar Index from 2010 to 2025, respectively.

The US Dollar Index measures the value of the US dollar relative to the majority of its most significant trading partners.

Comments about the size of the US deficit compared to the Defense Department budget sourced from the Congressional Budget Office.

The growth of the US debt sourced from the US Treasury.

Data on US household net worth sourced from the Federal Reserve.

Comments that the economy is not over-levered sourced from Bloomberg L.P., Macrobond, and the Federal Reserve as of June 2026. Based on household debt to household net worth.

Comments about inflation expectations sourced from Bloomberg, L.P. as of September 17, 2026. Based on the 5-year US Treasury inflation breakeven.

Breakeven inflation is the difference in yield between a nominal Treasury security and a Treasury Inflation-Protected Security of the same maturity.

Comments about global oil supply sourced from the US Energy Administration.

Data on the advance of the US stock market sourced from Bloomberg, L.P., as of September 17, 2026. Based on the S&P 500 Index.

Estimates on individual and business use of AI based on various company and media-reported estimates. For illustrative purposes only.

The cost decline of the ChatGPT model sourced from the Stanford AI Index 2025 report, Epoch AI, and LMSys Chatbot Arena. From November 2022 to April 2025.

A basis point is one-hundredth of a percentage point.

The cost of capital is the opportunity cost of an investment or the rate of return that a company would otherwise be able to earn at the same risk level as the selected investment.

Dispersion measures the degree of uncertainty, and thus risk, associated with a particular security or investment portfolio.

Hyperscalers are large cloud service providers that can provide services such as computing and storage at enterprise scale.

An inflection point is an event that results in a significant positive or negative change in the progress of a company, industry, sector, economy, or geopolitical situation.

Price-to-forward earnings is a valuation ratio that compares a company's current share price to its expected earnings per share over the next 12 months or next fiscal year.

Agentic AI refers to artificial intelligence that can independently plan and carry out sequences of actions to achieve a goal, often using software tools, data sources, or other systems, with limited human supervision.

A spread is the difference between two related values, such as prices, rates, or yields.

Rethink Markets and the Greater Possibilities Podcast are brought to you by Invesco Distributors, Inc.

AI investment is booming — so when will companies fully realize a return on their invested capital? We explore this and other questions about the rise of AI agents and the market implications of a potential slowdown in AI development. We also rethink fears about government debt and the Federal Reserve’s first rate hike in three years.

Rethink Markets: AI. The surge, the spending spree … and a slowdown?
Rethink Portfolios: Investment grade bonds with Matt Brill

00:00

00:00

00:00

Transcript : Disclosures

Danielle Singer:

Hello. I'm Danielle Singer, head of wealth management platforms for Invesco, and this is Rethink Portfolios, a series from the Greater Possibilities Podcast. This show brings you inside the decision-making process of portfolio managers through in-depth conversations that explore how our experts manage risks, identify opportunities, and navigate changing markets.

Our guest today is Matt Brill. He's the head of North America investment-grade credit and senior portfolio manager at Invesco. Getting Matt's perspective on credit markets could not be more timely. All eyes are on the Fed ahead of its September meeting. The amount of borrowing from hyperscalers has some wondering if AI concentration risk in equities is going to seep into credit markets. And some investors are waiting for that, quote, "perfect" moment to extend the duration of their cash portfolios. Welcome, Matt.

Matt Brill:

Hey, Danielle. Thanks for having me.

Danielle Singer:

Of course. Now, Matt, we've worked together for a long time, but let's start off with that title. Can you tell our listeners what you do at Invesco?

Matt Brill:

Yeah. So as the head of North American investment-grade, basically, what I do is lead portfolio manager for a lot of different strategies that involve high-quality credit, so investment-grade-rated bonds. Now, we do use some high-yields, some emerging markets, but at the base, the large majority of the portfolios that we're going to manage on my team are going to be investment-grade-rated. That doesn't just mean investment-grade corporates though. I think a lot of people immediately think corporate credit. That will be a part of it, but we'll include some structured credit, we'll include some things like agency mortgages.

Danielle Singer:

This is great. So it sounds like we're going to have a lot of different spaces to talk about. Let's dig into some of those areas. So one of the first questions we get a lot when speaking with clients, especially here in the US, is about the state of the US economy, and there's been no shortage of headlines this year. We are thinking about what are the data points the Fed might be looking at, and what do you think might happen to short-term rates here?

Matt Brill:

Yeah. So the Fed has a dual mandate. They care about the labor markets, and then they care about inflation. And so when we look at the labor market, it continues to do well, and I think that it's been a little bit of a surprise to many investors. They thought AI was going to come in and just put everybody out of work, and that hasn't been the case, at least so far. So so far, encouraging signs there. And the job market, I think it's 4.2%, 4.3% unemployment rate, so it's pretty tight. There's not a lot of unemployment right now. We do call it a no hire, no fire, or a low hire, low fire job market, meaning there's not a lot of activity. Companies are kind of nervous to let go of anybody, but they're also nervous to hire a lot of people. So the labor force is pretty stagnant, but it's good, it's pretty good overall. So the Fed is not in a hurry to do anything one way or another in terms of the job market.

But their other side of their dual mandate is the inflation side. We've gone through periods of inflation. We started back in 2021 and 2022, and the Fed had kind of slayed the inflation beast, and then it's sort of resurfaced here. And we're trying to figure out, is this going to go back to these 2022 levels of 5% inflation, or are we just going to remain in this slightly elevated, a little bit uncomfortable for the Fed zone that we've been in for too long, too long according to Kevin Warsh and the Fed? So they think that this is too much where we are. But what are they going to do about it, and why is it even happening?

So I think the first reason is obviously the war, the conflict in the Middle East has elevated commodity prices. Everybody's aware of that. That's something that had kind of gone away for a little bit with the truce, or the ceasefire over there, but it's come back a little bit and oil prices are elevated again, and we'll see if that flows through the economy and does create more inflation. To date, it's been marginal on the core PCE. It's increased, obviously, oil prices, but in terms of really flowing through into other parts of the economy, it hasn't happened yet.

But overall, the build-out of AI has two parts to it. One is the build-out, and then two is the actual implementation or the use of AI. So the near term is the build-out of it and all the spending that's going into that, and that is inflationary. That's driving up costs in a lot of different places. Think about land prices for data centers. Think about copper being bought for all the wiring. You think about just every dollar for construction equipment around the country that's going into this, that is inflationary. But if you believe that AI will be productive and actually result in positive things, it is going to be deflationary down the road. It's going to save you cost by being massively improving from a productivity standpoint.

So we'll see. And the Fed is going to probably argue, or at least Kevin Warsh is probably going to argue that the productivity is coming, and we just have to live through a little bit of the pain near term, and then we're going to start to see the gains of all this AI investment not too far down the road. But for me, I would say don't worry too much about the inflation from commodity prices and some of the war and the conflict over there. I would worry more about is this a longer term effect from the AI or not? And my general view is that it is not. And so because it is not inflationary longer term, I tend to believe that this is going to be fixed, and we're going to have a very good outlook, and the Fed is not going to have to hike rates.

Danielle Singer:

So we're going to keep talking about macro, and specifically thinking about economic growth being both a function of businesses and the consumer. When I've heard you speak, you talk about, in the past, it's been a K-shaped economy, where there's quite a bit of dispersion among income levels. Is that still the case? And does any of this have impact in the level of interest rates?

Matt Brill:

Yeah. So I think it's a very challenging question, just simply because the top of the K is absolutely doing well. The top of the K has asset ownership, they own stocks, they own houses, they own other goods or other assets that go up with any inflation and go up with obviously the markets improving. So the top part of the K continues to do well. The AI build-out generally is good for the top part of the K.

The bottom part of the K is a lot more complicated, and I think, as I stated earlier, a lot of investors really thought that AI was just going to be very negative for the bottom end. And I don't want to say that there's not problems on the lower end consumer. There certainly are. There are certain people that continue to struggle to make ends meet. But with the labor market where it is, and at 4.2%, 4.3% unemployment, the bottom end of the economy continues to actually be pretty good. You go to restaurants, they're busy. Low-end restaurants are busy. High-end restaurants are busy. You go travel, first class is busy, the back of the plane is busy. Everywhere, people are spending.

And I think that the consumer confidence remains a little bit tricky because it gets very politically motivated. I think a lot of times, the people do surveys and they ask them how they think their economy is, and they'll base their opinion on a lot of their political views. But overall, the economy is actually really good. So we do think that it's a good spot. We want more people to participate in it. We want more workers, more consumers, more of the population to be benefiting from this AI boom and this overall strong economy. But overall, we do think it's pretty good. So we are not of the opinion that you need to avoid subprime lending, things like that. It's not a huge part of our portfolio, but we're just not really seeing the cracks there that tell us that there's some sort of credit crisis at the low-end consumer that will spill over to the rest. So we feel pretty good there.

But to me, the overall driver of the economy is this AI, and so as long as these hyperscalers are spending at the numbers that they are, it is going to be a rising tide generally for the economy, which is creating this productivity boom, but also just creating a lot of overall economic development. So even if the lower end of the K lags behind a little bit, we think it's not really getting any worse, and we think the top end is doing very well, which produces an overall strong economy.

Danielle Singer:

This is great. And I'm going to let you keep talking about hyperscalers in just a moment. But first, I want to pivot for a moment from macro to the fundamental outlook for the sectors you cover. Let's start with what's the general health of the companies that you invest in right now?

Matt Brill:

Yeah. So from a company balance sheet standpoint, it's very, very strong. It's probably about as good as we've seen in the last 20 years, in terms of things like debt-to-EBITDA, overall ratings upgrades versus downgrades, lack of what we call fallen angels of companies going from investment-grade to high-yield. So the fundamentals overall we think are very, very strong.

Now, there are subsets of it that are not doing as well. But overall, you're seeing most earnings beat right now. All companies, whether they're a tech company or a healthcare company or an industrial, they generally are doing well. So the fundamentals are good. We feel like we're in a position that we want to be investing in credit because the balance sheets are good, and the overall, as I stated, the trajectory of ratings is very good. So it's not as if there aren't risks right now, but overall, the consumer's healthy, and the balance sheets of large corporations is healthy, which is a good environment to investing in credit.

Danielle Singer:

All right. I'm going to let you get back to the buzzword of hyperscalers. And we've allowed every guest on the show to talk about how it's impacting their various asset classes. We know from an equities perspective that indices remain dominated by hyperscalers, but how does this play into credit markets, and are we starting to see any cracks?

Matt Brill:

Yeah. So the hyperscalers, it probably wasn't a word that was even in anybody's dictionary not that long ago, right? But hyperscalers have come out of nowhere. And just so everybody knows, hyperscalers are the large tech spenders, the large investors in CapEx out of the tech space. It's going to be Alphabet, Amazon, Meta, Microsoft, and Oracle. Those are the designated five hyperscalers. There are others that have are fringe hyperscalers. SpaceX is entering that conversation. Nvidia might even be entering that conversation. But at the end of the day, most people refer to it as the five big ones, but these other large names are borrowing as well or investing as well, and in order to invest, they're often borrowing.

So when we think about what this is doing, I'll start with the good. It's very good for a lot of other sectors, not just tech. So the good that it is flowing over to is in the banks. If you think about the banking activity, the banks do well when the economy does well. They're essentially derivative of the economy, and the banks are doing very well right now. But the banks also do well when there's IPOs, when there's large debt issuances. They make a cut. They have almost a commission-like structure from the investment banking world that they're doing very well off of all the capital markets activity that's happening, and their earnings are very, very strong, and their balance sheets are very robust as well as the economy continues to do well. So we like the banks, the banks are doing well as a function of what all is happening with the hyperscalers.

Second, if you think about who is benefiting from this outside of technology, the power companies. Power is one of the biggest roadblocks for the build-out of AI. The power companies, we need more power, we need more power, we need more power. You hear every executive... Jensen Huang was on CNBC the other day talking about how much more power we need in this country. And you have all these big infrastructure companies that are building things out, and with that, the demand for power is very, very high, and we continue to believe a lot of the utilities will do well due to this.

But the third area that isn't involved with tech is the classic industrials. So your companies that are building out the data centers, they're moving the dirt, they're constructing the walls, they're putting the copper and they're wiring it throughout the data centers, and they're putting the coolant on all the data centers. All this is happening around the country right now, and it is a massive boom to classic middle America industrials. So your banks, your utilities, and your classic industrials are doing very well as a function of all the AI demand.

In addition, you're getting the early stages of the productivity increases are spilling over to all areas of the economy and all sectors. So companies that are investing and using AI are finding themselves to be more productive, they're getting more profitability, they're expanding their margins, and we're seeing that in earnings report after earnings report, which is very strong to see. So everything looks really good. Now, some people say it's all one big trade, and maybe it is, maybe it isn't. But I think that's the longer term trend that you're going to continue to see, that productivity do well and benefit all corporations regardless of the sector.

But if you look at the technology specifically, the question you asked was, is it too concentrated? Are we seeing this happen in the fixed income market, like we've seen in the equity world? And when you think about equity world construction, a lot of the equity indices are based on market caps, and the bigger the company gets, the bigger they become of the index. The bond market is similar, where the more that you borrow, the larger you are of the index as well. But just because you have a large market cap, doesn't mean that you're going to have a lot of debt, but they often can be correlated.

Until recently, these tech companies did not borrow really at all. They had so much cash, they didn't have anything that they were really spending massive capex budgets on, so they bought back some stock generally, some paid a small dividend, and they did some capex projects, but they weren't massive to the point where they had to be called a hyperscaler. That's changed. So you have the tech business, or tech part of the fixed income indices in the pure corporate world was maybe 2% to 3% just a few years ago. It's still single digits, so it has increased significantly, but it is still single digits. Depending on how you classify some of the key credits, it's somewhere between 6% and 8%. So it's up versus where it was before, but you are still materially more diversified in fixed income than you are in the equity world, where some of these concentrations, depending on the index, can be 35% to 50%.

So overall, there is more tech debt, absolutely. We think that these companies, we'll talk maybe about the credit quality of them in a little bit, but credit quality generally is still very, very strong. But the concentration risk is not quite there in the fixed income world that it is in the equity world, and there's a reason for that. When you buy a stock, you can make an infinite amount on that stock. We have limited upside by owning fixed income. We get our coupon, we get more maturity. We don't have the upside that you get in the equity world, so because of that, we want to stay defensive, we want to stay diversified, and it actually fits our market much better to be less concentrated. And so far, that's been very positive for the fixed income world, and it's something we're monitoring very closely. But you can sleep well at night knowing that your fixed income is not the same concentration level that your equity portfolio is.

Danielle Singer:

That is absolutely fascinating. And it's so important, I think, for our listeners to understand the diversification benefit, and that you can be having tons of concentrated conversations around something like hyperscalers, but when you start to peel back the layers of the onion, there's a lot more to it, especially for credit investors. Maybe we start to think about then the different areas that your team looks at to evaluate different investments. We've talked about fundamentals. I think you gave some things A ratings before. But if we look across those three different areas, fundamentals, technicals, and valuations, how would you rate each of these in your process currently?

Matt Brill:

Yeah. So if we think about a three-pillar stool, essentially, they're all important, whether it's valuations, technicals, or fundamentals. There are certain times in the market where some are going to be more important than others. We tend to say things like valuation is not a catalyst, so things don't just immediately get better in price because they got cheap. You have to have some reason for them to get better, and that's usually going to be fundamentals, but oftentimes it's technicals. And right now, the technicals, I would say, are generally a negative for the fixed income markets, particularly within the investment-grade space because of the amount of debt being issued. You have debt being issued, obviously, by governments, but you have a lot of debt being issued by these hyperscalers, these large tech companies that is putting some technical pressure on the market. So we are less positive on the credit markets from a technical standpoint, simply because there is so much supply being issued by these large hyperscalers.

The good thing is the demand is generally there and equal in terms of its strength because of the valuations, and the valuations on a yield basis are very attractive. So valuations on a yield basis, you're close to your 20-year-highs in all-in yields on pretty much all fixed income, depending on which part of the curve you look, which part of the credit quality you look at. But all-in yields are pretty close to the highs. In our opinion, they're attractive. And they're bringing in large pension plans, insurance companies, endowments, things like that that are really trying to immunize long-term liabilities by buying high-quality fixed income. So the demand is there, but the technicals are not as good, simply because there is a lot of supply.

The valuations on a yield basis, very attractive. Valuations on a spread basis, not so attractive. So when we talk about spread, that's the additional yield, or the additional incremental pickup you get by owning something other than a Treasury. And right now, that's pretty low in all fixed income asset classes, whether it's investment-grade, high-yield, EM, or structured credit, it is on the lower end. And we think it's justified because the fundamentals are so strong. The technicals are starting to loosen things up a little bit, and we continue to get more issuance out of some of these hyperscalers. That might actually spill over and create a great buying opportunity. We'll have to see.

But overall, we look at things on the three-pillar basis, and the fundamentals are very, very good. The technicals are not as good because of the amount of issuance that's being done to fund this CapEx growth. And then, the valuations are twofold, on spread, not so attractive, on yield, which is what most investors care about, most investors really only care about the all-in yield, that yield is attractive, in our opinion.

Danielle Singer:

So you've got these three pillars, they're not always all telling you the same thing. My guess is that risk management then becomes very important. So let's make that this next natural topic. If you think about how you're taking risk today compared to, let's say, last summer, how might that look?

Matt Brill:

Yeah. So I think a lot of people have been calling for a recession for five years now, basically. So a lot of people have been saying, "A recession's coming, a recession's coming." And we've taken the other side of that for pretty much the entire time, all the way back to 2021 and 2022 when that first came up. So our risk profile was a little bit more risk-seeking, because we continued to believe that the US economy was more resilient than most investors thought. That was more like 2022 and 2023.

And then, we looked at '24 and '25 and we started to see the build-out that was happening in AI, and we said this is going to be what propels the economy from here. The fundamentals are going to be very good because of the AI build-out, and this is going to be a good thing for the US economy. Therefore, we want to own high-yield, we want to own US-centric investment-grade credit, and we'll own a little bit of EM, depending on whether it's commodity-related and how it's positioned in the global markets. But overall, that gave us a positive trend and a positive feeling for owning fixed income, what we call spready assets or more risky assets than Treasuries. So that was good.

We entered this year, and all of a sudden, we've seen the market... Spreads got a little bit tighter early in the year. We did reduce risk down into this a little bit. So we took some risk off the table on valuations, and we said, "Look, valuations have gotten to the point where maybe they're not pricing in perfection, but they are pricing in things to be a little bit on the rosy side of things." And while we do think the economy's going to do very well, we did see some negatives that were potentially on the horizon. And then, sure enough, you had this conflict over in Iran, and spreads did go wider. We used that as an opportunity to add risk back. And then, spreads, sure enough, kind of came right back, and the market kind of said, "You know what? There isn't going to be a recession after all." So we've been wrong in predicting the recession for five straight years. The market conceded that, and we were on the right side of that, and so we took down risk again.

So I would say right now, I wish that spreads were a little wider so we could have more risk on, but the spreads are softened up a little bit. But overall, our view is that the economy is very, very strong, so we want to be overweight credit marginally. But we are still aware that spreads aren't giving us as much as we would like outside of technology. Within technology, it is cheap enough, quite considerably, it is potentially an opportunity here, but the supply keeps coming. I think one of the interesting stats of the year is we've had seven $25-billion deals so far, $25-billion or more deals in the investment-grade market so far in 2026. We had seven for the last seven years combined.

Danielle Singer:

Wow.

Matt Brill:

So just one per year in the past. So we used to get an occasional large M&A deal. Now, we're getting these large deals, not even for M&A, they're to fund capex. So from that standpoint, we've reduced our risk, and we're waiting to see if this softens up a little bit. We want to have dry powder to take advantage of some of these opportunities that we think are coming, which should usually happen after Labor Day. There's usually a lot of large investment-grade deals. There should hopefully be some interesting emerging market deals, and we want to have dry powder for that. So that's where we are right now, where it's not negative on the economy, but it's potentially tactical to try to take advantage of some potential weakness from a spread standpoint in the start of September and use that as a chance to get long risk again, because we do feel like this is a multi-year cycle for the economy.

Danielle Singer:

Really dynamic. And what seems really cool is your team's ability to look through the headlines and stay very focused on those key three pillars and how to deploy risk around them. You've probably gotten a lot of our listeners very excited now about all the things they can be touching as bond investors.

Now, in the last few minutes, I want to ask some fun questions, a little bit of a lightning round maybe, if you're game.

Matt Brill:

Yeah. Go for it.

Danielle Singer:

Great. So midterm elections are right around the corner. Should we expect elevated volatility or simply consistent with the September to November time of the year?

Matt Brill:

You should always expect some volatility around the midterm elections. I think longer term, they don't really matter a whole lot, but over the near term, they will matter from a headline standpoint. The two things that we are going to be watching, does anybody have, on either side of the aisle, some views on the budget deficit, trying to keep the budget deficit lower, tighter? That is good for fixed income if anybody wants to do that.

The second thing we're looking at is really the data centers, and it's an interesting topic because there's so much capex around it. But historically, some investors may have been in favor of it, some investors may be against it. Right now, it's become a political hot button. So I'm not going to have an opinion one way or another, but it is going to impact the capital markets by, if voters are in favor of having more data centers, that's going to lead to more capex. If voters are against it and there's somewhat of a moratorium on it, that actually could lead to a lot less capex. So there's some interesting things that can come from a budget deficitary standpoint, but also from the data center build-out standpoint.

Danielle Singer:

Very interesting. Now, we're audio only today, but a lot of times, you're on video, on TV. What's the best thing you've ever worn on TV?

Matt Brill:

Well, I try to be interesting sometimes. During the summer of soccer, I did wear a US jersey the day after the Flo Balogun red card and I gave out a red card on air. But I liked one time, I'm a baseball fan, and back in 2021, the Braves went on to win the World Series. And this guy by the name of Joc Pederson, a player for the Braves, he wore this pearl necklace throughout the run, and I went on one of the TV shows and I wore the pearl necklace, and it was quite empowering to wear that pearl necklace. He led us, the Braves winning the World Series, and it felt like a great market for fixed income there for a little while as well. So that was fun because I'm not normally a jewelry-wearing guy.

Danielle Singer:

It's great to see people that can have fun at work. So maybe staying on that thread, what's one of your favorite things about being a fixed income portfolio manager?

Matt Brill:

So I think what we've talked about a little bit today, and maybe I didn't hit on it so much, but what I love about it is literally everything that I see on a day-to-day basis is fueled by debt. You look at cars, there's generally loans on them. Houses, there's generally a loan on them. Corporations are borrowing to build factories to put people to work. So everything that we're doing, we feel like is helping companies and helping people get access to capital to buy things and do things that they wouldn't be able to otherwise, and I think that's great. I like to turn on the TVs in the morning, and I hear about all these different companies and what's happening in the world, and everything, whether it's a positive or negative, that the news is talking about that day is going to impact our portfolio in one shape or form. I love that.

And then, I just love seeing the capital markets at work and being a part of it. And right now is one of the most exciting times that we've seen in terms of CapEx being spent in this country, the build-out of all this AI. And I'm hopeful that it's going to be in a very positive way, creating a lot of jobs for this country and for the world. And to be any part of it is a lot of fun for us, and we get to see it on a day-to-day basis. And I just enjoy coming into work every day and seeing what things are going to be brought from all over the world. And we invest in every which way and in a lot of different asset classes, and I just love being a part of it.

Danielle Singer:

That's very cool. Thank you for sharing. And as a final takeaway, if there's one thing you want listeners to remember about today's episode, what would it be?

Matt Brill:

Yeah. So I think the one thing, or maybe two, is that bonds can be fun, bonds can be interesting. Hopefully, this has come across as somewhat interesting, what we do on a day-to-day basis. But bonds can be fun, bonds can be interesting. But last would be there are yields in fixed income right now. So for years, it was really hard to get above 2% or 3% in high-quality fixed income. You had to take massive risk in order to get those types of yield or you had to do other parts of the market.

But overall, right now, yields are very high. The path to get here was a little painful for investors. I get it. But overall, yields are pretty attractive, and investing in fixed income could be pretty interesting because you're supporting a lot of different ways. And it's not all about the 10-year and it's not all about the Fed. Those are key things we're going to talk about, but fixed income is so much more three-dimensional and more interesting than that.

Danielle Singer:

Very cool. And what I learned today is portfolio managers can do more than sometimes think about a boring blue suit. So thanks, Matt. And as for the rest of you, catch you next time.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of August 18, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

References to specific companies aren’t buy/sell recommendations.

Diversification does not guarantee a profit or eliminate the risk of loss.

Unemployment statistics sourced from the US Bureau of Labor Statistics, as of June 2026.

2022 inflation levels based on the core Personal Consumption Expenditures (or PCE) Index, which

measures price changes in consumer goods and services, excluding food and energy prices.

Oil price information sourced from Invesco and Bloomberg, based on Brent crude prices as of August 18, 2026.

Comments on consumer spending sourced from the Bureau of Economic Analysis.

Comments on US economic strength based on the ISM Manufacturing and Services Purchasing Managers Indexes, which were 55.6 and 54.1, respectively as of August 2026. Above 50 is expansionary.

Comments about strong earnings and company balance sheet strength sourced from Bloomberg Intelligence, based on factors including earnings per share growth, revenue growth, and operating and net margins.

Comments about the strength of banks reflect that JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, and Wells Fargo collectively earned more than $49 billion in the second quarter of 2026, a 39% jump from a year ago, as reported by the Wall Street Journal as of July 14, 2026.

Comments about the boom in industrials reflect that 31 out of 48 large industrials companies (with market cap of more than $32 billion) have seen upward earnings revisions since the start of 2026, according to Bloomberg.

The six major hyperscalers (Amazon, Apple, Alphabet, Meta, Microsoft, and Oracle) collectively represent 4.73% of the Bloomberg US Credit Index, with the entire technology sector allocation roughly 7%. In contrast, the technology allocation of the S&P 500 Index and the Russell 1000 Growth Index is 37% and 54%, respectively. Sourced from Bloomberg as of August 11, 2026.

The Bloomberg US Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate, and government-related bond markets.

The Russell 1000® Growth Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap growth stocks.

Comments about all-in yields sourced from the US Treasury and Bloomberg as of August 18, 2026. 10-year yields across all major markets sit materially above their 10- and 20-year averages.

Comments on $25 billion-plus deals in the investment grade market sourced from Bloomberg News and the Dow Jones Institutional News Feed.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Artificial intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there's no guarantee these protections will be sufficient. Significant research and development (R&D) spending doesn’t ensure product or service success.

Investment in infrastructure-related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors.

Investments focused on a particular industry or sector are subject to greater risk and can be more impacted by market volatility than more diversified investments.

Capital expenditures (or capex) is the use of company funds to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

A coupon is the annual interest rate paid on a bond, expressed as a percentage of the face value.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates.

Earnings per share (EPS) refers to a company’s total earnings divided by the number of outstanding shares.

EBITDA is the acronym for earnings before interest, taxes, depreciation, and amortization.

Hyperscalers are large cloud service providers that can provide services such as computing and storage at enterprise scale.

A K-shaped economy is one where recovery or growth splits into two opposite paths at the same time. One group benefits and expands, while another stagnates or falls behind.

A spread in finance is the difference between two related values, such as prices, rates, or yields.

Rethink Portfolios and the Greater Possibilities Podcast brought to you by Invesco Distributors, Inc.

From hyperscaler borrowing to higher yields, there’s a lot happening beneath the surface of today’s bond markets. Matt Brill breaks down what it all means for credit investors — and why fixed income may be more dynamic than many people realize.

Rethink Portfolios: Investment grade bonds with Matt Brill
Rethink Markets: Midterms, youth unemployment, and the next phase of the AI trade

00:00

00:00

00:00

Transcript : Disclosures

Brian Levitt:

Welcome to Rethink Markets, a series from the Greater Possibilities podcast. I'm Brian Levitt. I'm here with Jodi Phillips, as always. Jodi, you ready to get going?

Jodi Phillips:

I sure am. Today we're going to be connecting with Jennifer Flitton, who is Invesco's Head of US Government Affairs.

Brian Levitt:

Never a bad time to talk about politics, Jodi.

Jodi Phillips:

No, no. I mean, unless you're at a family reunion or cocktail party.

Brian Levitt:

Yeah, good point. Definitely the family reunion. Well, fortunately, this is not a family reunion or a cocktail party, so I think it'll be okay to connect with Jen.

Jodi Phillips:

Absolutely. So let's dive in. Invesco recently polled US wealth advisors to find out their top concerns, and of course the top concern to their clients. And the top three, maybe no surprise, inflation, foreign conflicts, and tech valuations. But coming in at number six is domestic politics, and number eight is the national debt. So definitely things that, looking forward to in this conversation.

Brian Levitt:

Yeah, probably no big surprises there. Jodi, should we talk to Jen about tech valuations? Or should we just stick to foreign conflict, domestic politics, midterm elections, those types of things?

Jodi Phillips:

Yeah, you stay out of elections. We'll leave that to Jen, but you get the tech valuation question for sure.

Brian Levitt:

Yeah, I'll do the tech one. And the interesting thing about the politics, you and I have talked about this so much. Do you know what I'm going to say here, Jodi?

Jodi Phillips:

Yes. Yes, I do.

Brian Levitt:

Yeah. I mean, investors put so much focus on this. I keep compounding, or coming up with more evidence, to suggest that it doesn't necessarily matter as much as people think it does. Can I give you a couple of new statistics that I have?

Jodi Phillips:

Oh, yes, please. Let's freshen the statistics, for sure.

Brian Levitt:

All right, so let's go with this one. S&P 500 was up 15.73%. That's annualized, from the day that Biden was elected in 2022, until the day Trump was elected in 2024. So that's 15.73. Let's go, this S&P 500 is up 16.58%, annualized from the day that Trump was elected in 2024, through the middle of July 2026.

Jodi Phillips:

All right. Stats hot off the presses. So what is your bottom line, then, with these freshened statistics? Do they mean that that 0.85% difference means that Trump has been better for markets-

Brian Levitt:

Yeah, exactly.

Jodi Phillips:

... or what is your key takeaway?

Brian Levitt:

No, I think it's again, just very similar patterns. Think about the timeframe we're thinking about, it's a less than 1% difference between the two.

The reality in these patterns, in both instances, you've had to deal with inflation concerns, and in both instances you've seen the US economy remain resilient, and US earnings growth continue to drive markets higher. So Biden or Trump could take blame for inflation, they could take credit for earnings growth, whichever they want. The reality is, these markets ignore the executive branch, and thus far have continued to press higher.

Jodi Phillips:

Absolutely. Well, you've been very consistent as long as I've known you, as saying that politics don't matter as much for markets as investors might think. So you still want to phone Jen, and talk about the midterms, then.

Brian Levitt:

I do. And that's because of that poll that we just saw, where people are asking about conflict, people are asking about domestic politics. Look, investors can only benefit from investing if they're willing to invest, or they're willing to stay in the markets. And so, hopefully Jen can provide some color for us.

Jodi Phillips:

Oh, great. Yeah, for sure. To get to that comfort level, context is necessary. Bring context to their concerns.

Brian Levitt:

Context is necessary. Exactly.

Jodi Phillips:

Well, let's get to our first segment.

Narrator

Trending Conversations.

Jodi Phillips:

All right, Brian, what are you hearing most from advisors and investors right now?

Brian Levitt:

Current moment, that the tech sector doesn't appear to only go straight up.

Jodi Phillips:

Oh, no, it doesn't.

Brian Levitt:

Yeah, I guess it doesn't. Even technology can pull back a little bit, I suppose.

Jodi Phillips:

Yeah, everything has its ups and downs. But still, the sector is up over 17% this year, as of mid-July. So is this trending conversation a case of, "what have you done for me lately"? Are people forgetting the bigger picture?

Brian Levitt:

Yeah, maybe. I mean, there's also this fear that something has to break, so anytime it's not working every day or every week. I would say the first phase of the AI trade was driven by investors really underestimating just the amount of demand, and revenue growth, and adoption, and capital spending. Remember, people were talking about a bubble last year. They just underestimated this amount of demand.

And I guess now your expectations have gotten higher. So the expectations of the market have caught up. We know that investors are heavily positioned here. So you're looking for signs now. Investors, perhaps the bars are risen, and they need more confidence that growth can compound for years. That this isn't just a flash in the pen, which I don't believe it is.

Jodi Phillips:

Yeah. And as we just noted, confidence requires some context. So help me with that. Here's some facts that may need some bigger context, but year to date, the return of the Mag 7 is roughly 2%, and the Philadelphia Semiconductor Index has dropped about 16%. So what's the story there?

Brian Levitt:

First, the Mag 7. Remember, these were monopolistic businesses in the past, with light investment. What I mean by that was, you knew where you were going for social media, you knew where you were going for search. And so, monopolistic type businesses, with significant cashflow. That's not changed. They're all competing in the same space, and they're all spending a lot of money. Now, though, that's not to be an individual stock suggestion for me. Rather, just to say, investors are assessing all of this investment. The business models have changed.

Jodi Phillips:

Yeah. And we definitely remember when the bigger question was, what would happen if the Mag 7 couldn't carry the market on its own anymore?

Brian Levitt:

Yeah, that's all we heard in 2024. And I guess something's always wrong, to quote one of my favorite Toad the Wet Sprocket songs. Something's always wrong. 2024 was only seven names, now it's the other 493. What happened to the other seven? So I would say this is healthier, but yeah, something is always wrong with those focusing on investments.

Jodi Phillips:

All right, so that's the Mag 7. What about the Semiconductor Index?

Brian Levitt:

Yeah, you're right, that there's been a little bit of pullback. I think it peaked on June 22nd, but let's also remember that index up 75% year-to-date, through the middle of July. So yeah, a pullback, but talk about needing context, Jodi. There's the context for it.

Jodi Phillips:

Okay. All right. So bottom line, what's your bottom line on this?

Brian Levitt:

My bottom line on this is, we're moving to the next phase of the AI trade. I don't think it's going to be all about who beats their quarterly earnings estimates, because the bars have risen. But who are the companies that are best positioned to capture value, from what we continue to believe, will be the rapid expansion of intelligence? This is really a new economy, a new economic layer of the global economy. And that feels like early innings, to me, and a modest decline from a very strong gain in the chip sector is not changing my mind on that.

Jodi Phillips:

Okay. Well, I'm pretty sure we settled the question at the top of the podcast, that you get the tech valuation concern question and not Jen. So what do you make of that?

Brian Levitt:

Well, look, S&P 500, which is tech heavy right now and somewhat concentrated at the top. The forward price to earnings ratio is currently around 20 to 21 times. And I think those numbers may give investors some pause, because they were used to hearing 16.5 as the average. That's a long-term average, in a different economy. Over the last five years, the average is 20 times. So point being, is that these markets have gained as much as they have over the last five years, and yet valuations on forward earnings haven't changed. So no, not particularly overvalued, where I come from.

Jodi Phillips:

Okay. And that brings us to-

Narrator:

Phone a Friend.

Jodi Phillips:

So we caught up with Jen Flitton to talk about US politics, not tech valuations. And we asked her a couple of questions regarding the upcoming midterm elections, and some bigger picture issues. So first, we tackled the midterm elections, her opinions on the state of those elections and what could potentially happen. And then the broader question of, if divided government happens, then what would be her expectations for policy over the next two years? And here's how she broke that down for us.

Jennifer Flitton:

We're entering the sort of final stages of the primary season. We have one really big primary that we're paying pretty close... Well, two now, that Graham Platner in Maine has just dropped out. So we're really watching Maine, and Michigan in August, to see how those primaries play out. Because right now, in the Senate, the Senate map is really positioned to Republican advantage. And so for Democrats to take control of the Senate, they need a net four seats. So what does that mean? Well, they have to keep Georgia, they have to keep Michigan, which is an open seat. And then they need to pick up North Carolina, which is a pretty good bet right now, on the Democrat side. And then Maine, which is now completely in flux, now that their candidate has dropped out of the election, and they have to stage another primary.

So that means once they sort of keep their, if it's a good night, they keep their Georgia, they keep their Michigan, and then say they win North Carolina, they win Maine. They still need two more seats. So then you're looking at red states, red states where Trump won 10 plus, in the last election. So you can start to see where it gets difficult. Now, they're really going to play well, because they have strong candidates in Ohio, and Iowa, and Texas, and Alaska. But it's still an uphill battle because these are red states.

House is a little different. Right now, the Republicans have a majority in the House of just three votes. Traditionally, I think 11 out of the last 13 elections, you've seen some shift, some change in the chambers in the House or the Senate, or in the White House, in the last 13 elections. So it is advantage Democrats, that historical trends in a midterm election, tend to take out the White House's party. That being said, even with the political winds at their back, there's still some structural disadvantages the Democrats have. One, money and the Supreme Court decision two weeks ago really solidified that, in the way that money can be shared across candidates. And then, the redistricting efforts that have been underway now for the last year, and really positioned the White House to play a central role in getting state legislatures to mid-year change their districting in their state. So that could be a net of five to nine seats right there.

So then you're looking at a potential, although not super likely, but a potential of Republicans keeping both the Senate and the House. Right now, consensus in Washington is that Democrats will take the House. But as we get closer to the election, meaning September, when kids go back to school and people actually start focusing on the general election, that's when we're going to get a better sense as to which way these winds are blowing.

Jodi Phillips:

So then to touch on the second half of the question, about expectations for policy over the next two years. If divided government does come to pass, how do you think that would have an impact on how things get done, or don’t?

Jennifer Flitton:

There's two very different scenarios. If there's a division in the chambers politically, all of a sudden, you have gridlock. That means oversight, investigations, the subpoena power really comes into play, which slows down a lot of the deregulatory movement in the White House and the broader executive branch, just because their focus has to be divided. There's also not a lot of legislative work that can be done. That could make the executive focus more on their discretion for deregulation or re-regulation, but even that is somewhat constrained without additional statutory authority.

So then you likely see a White House, as we often do in the last two years of a two-term president, shifting his focus internationally. Now this president has already been very focused internationally, surprisingly focused internationally, in a world in which his promise was much more domestic related. So we do expect that focus to continue.

And if we do see Republicans keeping both the House and the Senate, in that scenario, there's going to be a lot of pressure to continue along the reconciliation process, which is that partisan process in which Republicans can make significant changes that have revenue impact. So you could see additional tax reform, and additional defense spending. They're working on a reconciliation bill right now that's going to, in their minds, hopefully allow for the Pentagon to receive at least $60 billion more in funding, which will allow them to bring up their coffers and ammunition. Especially due to the fact that we've been in conflict, for the past several years actually, if you include Ukraine and providing them with ammunition.

Jodi Phillips:

And then last, we asked Jen to describe for us some of the bigger issues that investors may want to be focused on, but maybe aren't as in the spotlight as some of these other issues that we've already discussed. And here's what she had to say.

Jennifer Flitton:

What's most obvious, of course, is the midterm elections, because the world looks completely different depending on whether or not Republicans keep this trifecta, or whether we're in divided government.

But past that, we start to look at the next election, quite frankly, in 2028. And what are the major issues that are going to be focused on, and are really going to, I don't know, sort of redefine the dynamic of the electorate? And, as the markets are already very focused on, AI. And the role that AI plays in the job market, and in the everyday lives of our children most notably, but also what does it mean for the labor, and the environment, and the data centers, and the NIMBYism? I mean, there's so much around this, on top of this existential question of US versus China. How does that play out in both parties? Because there is a push-pull in both parties. There's factions in both parties. And so watching that sort of messaging be redefined, as we enter into the presidential general, and as the two parties go to convention and start to reformulate their mission statements, if you will. I think AI is going to be a really interesting political dynamic to watch.

Jodi Phillips:

Thank you, Jen, for joining the podcast. And now we're going to move on to-

Narrator:

I Disagree.

Jodi Phillips:

All right, Brian, who do you disagree with this time?

Brian Levitt:

I'll go with John Williams, a newcomer to the I Disagree section, I generally agree with him. President of the New York Fed, Vice Chair of the Fed Open Market Committee. His quote was, "Inflation remains far too high." Although I think he's gotten a little bit more dovish since he said that. But yeah, I'm going to go with "Inflation remains far too high."

Jodi Phillips:

You disagree.

Brian Levitt:

I disagree.

Jodi Phillips:

There you go. All right. So of course, John Williams isn't the only member of the FOMC to sound the alarm, but it is notable because we wouldn't expect him to be persistently hawkish.

Brian Levitt:

Yeah, maybe that's why he's backing down a little bit. Look, my point isn't to say that the rate of inflation hasn't been elevated. It had been. But we knew where it was heading once the war began, and oil prices jumped. I think it's important to remember that annual consumer price index was only 2.4% in January. So before the war started, we were in a very, well, I would categorize as a benign inflation environment.

Jodi Phillips:

Yeah. And we all saw how quickly oil prices could fall when the ceasefire was first announced.

Brian Levitt:

Correct. And I enjoyed that, actually, from my gas pump experiences. But I don't want the Fed to be setting interest rates based on supply shocks, that seems like a recipe for bad outcomes. What we've seen with goods prices, not extreme. Shelter costs are gradually declining. Wage growth has been generally weak. Do we really want to raise interest rates in that type of an environment?

Jodi Phillips:

Well, what about the Fed's price stability mandate? What have inflation expectations in the bond market been doing?

Brian Levitt:

Yeah, I'm glad you asked, and you know that this is one of my favorite indicators for this cycle. The five-year US Treasury breakeven is now below 2.3%. That's down from nearly 2.75 in early May. And so again, if you have the bond market telling you there's price stability, job markets sort of meh, using the technical term. Again, do you really want to raise interest rates in that environment?

Jodi Phillips:

Okay. So now, it's time to put Brian on-

Narrator:

The Hot Seat.

Jodi Phillips:

All right. So we're going to have a few rapid fire questions for you, Brian. Are you ready?

Brian Levitt:

Let's do it.

Jodi Phillips:

First, what are your expectations for the US bond rates?

Brian Levitt:

Let's go with the 10-year, that's the benchmark rate. US rates have been bouncing somewhere between 4 and 4.75% over the last 12 months or so, so it's been in this range. I think anytime you push higher towards that range, that's a buy on US Treasuries. And so, I think anything over 4.5%, which we had gotten to over concerns about inflation tightening. To me, that's attractive.

Jodi Phillips:

Okay. Next question. We've all definitely seen the expectations that the US dollar is going to weaken, but that weakness hasn't materialized. So is that going to happen?

Brian Levitt:

I think so. We have to remember the dollar was moderating against the trade weighted basket of currencies at the start of the year, it only rallied once the war in Iran started. So I would actually say, Jodi, that it's more notable that the dollar hasn't rallied more than it has. And I'd argue that's a pretty good testament to the health of the global economy.

Now, how does the dollar decline from here? How do we get back on that path? Likely, with an easing stance from the Fed, and I think we will be on an easier policy stance as we move into 2027.

Jodi Phillips:

Well, here's a softball question for you, Brian. What's the biggest risk to the US economy?

Brian Levitt:

That's a softball?

Jodi Phillips:

Sure. Why not?

Brian Levitt:

Yeah, that's a fastball, high and tight. Probably one of the bigger questions I get. The good news is, it's not things like an over-levered economy. It's not, in my opinion, a situation where the Fed's going to have to jam on the brakes significantly. I would say that the biggest risk right now to the economy would probably be a wealth effect, to the wealthiest Americans. I'm not saying that's the base case, I don't believe that to be the base case, but a lot of the consumption is happening in the upper income quintiles. And a lot of that is because people feel quite good about where their portfolios are, and people feel good about their home valuation.

So let's say you were to get some earnings disappointments at some time, and the market corrected. I'm not just saying a few days. If you sustained lower, for a bit, spending will slow at the upper end. I still don't think it would be a recession, because again, it's not an over-levered economy. There's not a lot of healing that would have to be done. But that, to me, is a risk. And a risk that I don't expect, but one that at some point could materialize.

Jodi Phillips:

Okay. And now you're off the hot seat. So let's conclude with one of our newer segments, Think, Rethink. So tell me something that you believe a lot of people are thinking at the moment, but you believe they should rethink.

Brian Levitt:

I'm not sure if our young listeners will like this one, but the think is that youth unemployment at 10% is historically high. Ten percent does sound like a high number, and if you think about the population at large, the unemployment rate's in the fours. So this is more than double that.

Here's the rethink, Jodi. If you go back to 1958 and look at the youth unemployment rate, which is defined as ages 15 through 24, the average is 12.1%.

Jodi Phillips:

The average, from then to now.

Brian Levitt:

The average. From 1958 to 2025.

Jodi Phillips:

Wow. Okay.

Brian Levitt:

So 10% is not particularly high for that index, or for that rate. I know it doesn't feel great for a lot of younger Americans, and concerns about AI. But the idea that the youth unemployment rate is meaningfully higher, let's rethink that.

Jodi Phillips:

Okay. So before we go, Brian, where can our listeners follow you for more?

Brian Levitt:

Thanks, Jodi, invesco.com/brianlevitt. On there, you can read my latest commentaries. Please follow me on LinkedIn, follow me on X, that's @BrianLevitt.

Jodi Phillips:

Thanks for joining. We'll see you next time.

Brian Levitt:

Thank you.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of July 15, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

Artificial intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there's no guarantee these protections will be sufficient. Significant research and development (R&D) spending doesn’t ensure product or service success.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Discussions on Invesco’s poll of wealth advisors based on proprietary Invesco research as of June 2026.

Data on the S&P 500 Index during the Biden and Trump administrations sourced from Bloomberg as of July 13, 2026. Based on data from November 7, 2020, to November 8, 2024, and from November 8, 2024, to July 13, 2026.

The 17% rise in the tech sector sourced from Bloomberg L.P.as of July 13, 2026. Based on the year-to-date return of the S&P 500 Information Technology GICS Sector 1 Index, which tracks the information technology companies in the S&P 500 Index.

Year-to-date returns of the Magnificent Seven, or “Mag 7”, sourced from Bloomberg L.P. as of July 13, 2026. The Magnificent Seven are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.

Discussion of the Philadelphia Semiconductor Index sourced from Bloomberg L.P. as of July 13, 2026. The index tracks the performance of major companies involved in the semiconductor industry.

The forward price-to-earnings ratio of the S&P 500 Index sourced from Bloomberg L.P. as of July 13, 2026.

Forward price-to-earnings ratio is calculated by dividing the company’s current share price by its expected earnings.

Statistics on the Consumer Price Index, shelter costs, and wage growth sourced from the US Bureau of Labor Statistics as of June 2026.

Discussions on oil prices based on the price per barrel of West Texas Intermediate oil from its peak on April 7, 2026, to July 13, 2026.

Discussions on the 5-year US Treasury inflation breakeven sourced from Bloomberg, L.P. as of July 13, 2026.

A breakeven inflation rate is a market-derived estimate of future inflation, calculated by comparing the yield on a standard government bond to the yield on a Treasury Inflation-Protected Security of the same maturity.

The 10-year US Treasury rate has ranged between 3.9% and 4.7% in 2026, sourced from Bloomberg, L.P., as of July 13, 2026.

Discussion on the US dollar based on the US Dollar Index, which measures the value of the US dollar versus a trade-weighted basket of currencies.

Statements that the US economy is not overlevered based on ratio of liabilities to net worth of US households. Sourced from the Federal Reserve as of June 2026.

Data on youth unemployment sourced from the World Bank Group, based on the US unemployment rate ages 15 to 24 years.

All political and election data sourced from Invesco, unless otherwise stated.

The Consumer Price Index (CPI) measures the change in consumer prices and is a commonly cited measure of inflation.

Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.

The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.

Dovish refers to an economic outlook that generally supports low interest rates as a means of encouraging growth within the economy.

Hawkish describes a central bank or policymaker's preference for a tighter monetary policy, typically to combat inflation.

NIMBY stands for “not in my backyard.” it refers to opposition from communities to a proposed development near them — even if they may support the idea in general.

The wealth effect is the tendency for people to spend more when they feel wealthier, even if their income hasn't increased.

Rethink Markets and the Greater Possibilities Podcast are brought to you by Invesco Distributors, Inc.

How might a divided government impact policy over the next two years? How does a 10% youth unemployment rate compare to history? And how is the artificial intelligence trade evolving? (Hint: It may not be enough to simply beat quarterly earnings estimates anymore.) We tackle these topics and much more in our latest episode.

Rethink Markets: Midterms, youth unemployment, and the next phase of the AI trade
Rethink Portfolios: US value stocks with Kevin Holt

00:00

00:00

00:00

Transcript : Disclosures

Danielle Singer:

Hello, I'm Danielle Singer, Head of Wealth Management Platforms for Invesco, and I'm very excited to bring you what is now the third episode of Rethink Portfolios, a new series from the Greater Possibilities podcast. This show will go inside the decision-making process of portfolio managers, where we will bring you in-depth conversations that explore how our experts manage risks, identify opportunities, and navigate these ever-changing markets.

Our guest today is Kevin Holt, Chief Investment Officer and Senior Portfolio Manager for Invesco's US Value Equity Team. I'm very excited to have this conversation with Kevin today. As an active equity manager, Kevin has to navigate rate volatility, macro uncertainty, and technological disruptions that are transforming businesses and industries. And of course, as a value manager, he has to determine the difference between undervalued opportunities and the dreaded value trap. So let's welcome Kevin to tell us how he approaches these challenges.

Welcome to the podcast, Kevin.

Kevin Holt:

Thank you, Danielle. Good morning.

Danielle Singer:

So let's start big picture. For investors who may be less focused on style boxes day-to-day, how would you explain the role of US value equities in an overall portfolio context?

Kevin Holt:

Yeah, I think what we're trying to do is add numerical analysis, which hopefully protects your downside, while we're looking at stock selection and portfolio construction. Whereas a growth investor is going to be more thematic, more interested in the concepts, we're going to be more interested in saying, okay, we believe in this concept, but what are some of the numbers and assumptions we can put around it to where we can actually quantify the valuation of the stock and quantify what we think could be the downside and the upside in the stock. So really trying to put a conservative bent on your portfolio on that portion that is value oriented and try to round out your portfolio so you're not assuming too much risk/return within your overall asset allocation.

Danielle Singer:

And one potential challenge for value investors today like yourselves is that really value looks different because companies are creating value through things that you can't maybe as easily see or touch like ideas, data, technology. So how do you think about defining value today given that? And maybe talk about where you're finding some of the most compelling opportunities.

Kevin Holt:

Yeah, so I like to challenge the team and I think we're always learning in this business. So two or three years ago, I go to this annual think tank conference in August. And AI really started to be a theme. And ironically, this was at an energy conference and the last two years have turned into AI as 80% of the conference and energy is a actually a very small part of the conference. So I think it's constantly challenging ourselves. But at the end of the day, any investor, we are paid to predict the cash flows for the next five years of these individual companies. We're bottom-up, we're not top-down. So you have to understand how the world is changing. And I think we're in a period where this is really a once in a lifetime phenomenon. I think this makes the internet look small, which is hard to think about.

But I put this with the railroads, then industrialization of America, and then the launch of the mainframes. Again, this is a once and probably a 40-, 50-year phenomenon in terms of, I think, the impact on the overall, not only economy, but on individual companies. There are certain industries where we think things are less affected. So looking at bank stocks, for instance, we can look at traditional trading ranges, we can look at traditional valuations and pretty much hone in on the bank stocks. Obviously, there's some things always changing, deregulation, things like that, which are beneficial at this point in time. But when you're looking at the technology stocks and if you think about this, technology, a part of this innovation started say 12, 13 years ago with Google and Meta. They, I always like to say, graduated from the technology sector into communication services.

They're advertising companies, for all practical purposes. That's what they do, at least at this point. And that's how they monetize themselves. A lot of the industrial companies now are plays on AI and a lot of the end markets that they sell into, whether it's cooling for data centers, construction for data centers, these are end markets you have to think about and what are the size of these end markets given it's a once-in-a-lifetime phenomenon. So it's really challenged us, as value investors, to say, okay, certain areas of the market really haven't changed and we can use our traditional framework in this. And there are others I'll throw out one just for instance, a semiconductor.

The total adjustable market for semiconductors when it was just PCs 30 years ago, it's far different today that these are now being used in data centers and will be used on a continuous basis in data centers. So the amount of memory that we need is going to be vastly different than what it's been the last 25 years. And that needs to go into our models and into our cashflow assumptions to determine if a stock is cheap or if it's expensive.

Danielle Singer:

The AI conversation is certainly everywhere. And I think you've probably answered this, but when we think about that narrow set of mega cap leaders that have really led the markets over the past several years, is this then, based on your comments, a durable structural shift in market leadership? Or is there some elements, are there some elements of potential late cycle concentration risk?

Kevin Holt:

Yeah, it's really a fascinating time. I honestly probably would've answered this question differently 24 months ago than I am right now. Because if we look at the hyperscalers, which is really what we're talking about, the Metas, the Google, stocks like that, within the advertising realm, it was really Google and Meta. Well, now you have other people getting into the game of AI, Anthropic, various other people that we're looking at, ChatGPT. It's just a variety of companies. And there will likely be a couple winners and there'll be a lot of losers.

So what we've seen over the last 24 months is the return on invested capital and, at the end of the day, that's a driver for most value people, is we want to make sure that when somebody is spending money that they're getting a return on that incremental dollar. And what we've seen out of the hyperscalers is the return on invested capital has dropped dramatically for a lot of those companies because they're betting on the future, which has just made them more risky investments as we move forward. And those happen to be the largest-cap companies. So I do think we're seeing a spreading out of the market. I think there's a lot more risk at that high-end and you have to account for that risk because the return on invested capital is coming down, so the valuations those companies deserve, say, 24 months ago are different today. And then we need to make a judgment in our five-year assessments, whether those returns will stabilize, go back up, go down to reach our intrinsic value estimates.

Whereas the bricks and mortar guys, or the picks and shovels, as we like to call them, those are much more predictable businesses in terms of we know what the data center build out looks like for the next five years. They're going to be positive ROIC investments and/or business propositions for these companies, a lot of industrial companies and/or energy companies for that matter. So that's probably a little bit better way to play it. At this point I think feeds into a broadening market over a period of time.

Danielle Singer:

We're going to stay in the weeds on value investing, but first you mentioned growth investing. So you're a value manager, but how do we think about value and growth in a portfolio? Is it an either or decision for investors or is there really a role for both?

Kevin Holt:

Yeah, so I would say, one, I'll talk the Invesco book a little bit. But I think as a value investor, having access to growth investors who think differently and are probably pretty good at the cutting edge of innovation is helpful because it helps us challenge us as if we were just strictly a value firm. I think sometimes you can get a little too narrow-minded in your view. So I'll say that.

I'll say, two, I'm a big believer in diversification. I think there's a role for innovation, there's a role for new concepts, and growth investors are much better at that. And then again, you want to have that stability, particularly with inflation having ticked up a bit now, which, historically at least, puts pressure on valuations, you want to have that value balance in the portfolio that you can look at to say, okay, I have the aggressive nature of the growth, but I also have the conservative nature of value to balance things out in the portfolio.

And I think both play a key part. And frankly in my personal investments, I have both and I think that's a responsible way to go about it. And then you can overweight or underweight depending on what your leanings are at that particular time.

Danielle Singer:

I think those are great points and I want to continue talking about something that is facing all probably active equity managers today, whether you're on the growth or the value side, and that is the persistent rise of passive investing. Where might you see the clearest inefficiencies today as an active manager and are there specific conditions that may favor stock picking from active managers like yourselves?

Kevin Holt:

Yeah, I'll be honest with you, I think it's a lot easier conversation going against value passive index as opposed to growth because as you've alluded to at the beginning, the growth indicies in particular that are more weighted to these technology stocks have become very top-weighted, which it's very challenging when you have a very narrow market to beat those indices. On the value side, it's a little bit more of a broad conversation. And I think when people look at the Russell 1000 Value, it has a very high reliance on price-to-book value in terms of its constitution.

And we would argue, outside of deep cyclicals and/or banks, price-to-book really doesn't have a role historically in defining value across different industries and sectors. So for us, I think it's a lot easier and I would expect our teams to be able to beat, over 3-, 5-, 10-year periods, beat the passive value indices regularly because honestly, up until recently it had really over or really overweighted cyclical areas and underweighted technology. That appears to be an anomaly over the last year because of some of the semiconductors that were low P/E and pseudo low price-to-book, they've increased, but now they're going down again in the RLV.

So if you believe in technology over time, typically the RLV will underweight it. And I think we've had a strong ability to be very successful given our multidimensional approach to valuation.

Danielle Singer:

So that's a perfect segue because I think one of the biggest concerns investors often have is really the difference between what is a mispriced company and a stock that's cheap for a good reason. So continuing on talking about some of these valuation metrics, how do you distinguish between the two?

Kevin Holt:

Yeah. So I think, starting off when looking at value traps, which I think where we're going here, is starts fundamentally primarily, and that is, okay, the stock is selling at a discounted valuation relative to history. And then it's up to us as fundamental investors to determine, okay, what are those three or four key issues that investors are concerned about, say on a 3- to 5-year time horizon and why is this selling at a discounted valuation? So it's really understanding the fundamentals of the business and understanding why it's trading like it is that I think ultimately leads you in the direction of being able to identify value traps.

With that said, we have implemented things across the different teams over the last 10 years to say, okay, are we being honest with ourselves? Are these issues drifting more than maybe what we think they are? And then it'll assess strategic reviews. Each of the teams has their own way of going about this. But if the stock's underperforming by what we think is outside an acceptable amount, we will do a strategic reassessment of those three or four key issues and then the fundamentals to say, hey, have things changed? Now I'll give you one example right now. Across the cable stocks, which are video, but really no one owns cable for video, quite honestly, I think we all own it for our internet primarily. But then the key becomes the phone companies have built out fiber more aggressively over the last few years. And on a very timely basis, SpaceX with Starlink has launched satellite internet, which we can get on United flights now, you can stream video on it.

The end of the day is we knew it was a mature business, but everyone has lost pricing power. So it was a very inexpensive stock. We thought those stocks could be good investments. They've lost pricing power. We've acknowledged that because it was one of our three or four key issues, quicker than we would've thought. So we reduced our positions in those. And again, it's understanding why you own something in terms of trying to identify value traps.

I like to turn it, and you didn't ask this question, but I'm going to offer it up anyway. What is a growth trap, which is something that I coined five years ago. And in this changing environment that you highlighted, it's important for value investors not to become too reliant on history in these areas that are changing. And there are two sectors, technology, which we hit on earlier where with AI things are changing. And then healthcare, which things have always changed, particularly in the pharmaceutical industry, you have patent expirations, you have pipeline products. It's vitally important that we look at the next five years projections for these companies and we can use history as a guide. But in those two sectors in particularly, it's very important that we hone in on each of the next five years what projected cash flows are because they can be, and at this point in time, are very different than what history has shown us.

Danielle Singer:

I like this. You've coined a new term, growth trap. Maybe just one last thing to round out the conversation on value and valuation specifically. And I think you maybe answered this talking about the fundamental work that you do beyond this. But are there areas where valuations are still difficult to justify? Are there areas where investors may be overlooking some compelling value opportunities? Where's the story not as clear?

Kevin Holt:

Yeah, I think there are always pockets in technology that don't necessarily generate cashflow. But they're very conceptually interesting. A couple stocks historically that just have not fit our process and probably never will a Tesla or a SpaceX. They just don't, even if we project out five years, we can't project the cash flows to get to a level where we like to say the market cap of the stock or the enterprise value, if you include the debt, are selling at an acceptable level relative to the amount of cash flow that they're generating. So I would say that's one. With that said, I think 90% of the technology stocks periodically do hit our radar. And as we predict things out and we project our cash flows, I think they can be interesting. So I'll say that on the more expensive stocks.

Things that particularly look interesting right now for us is healthcare. I'm pretty much looking at any time period, you can go 10, 20, 30, 40 years, healthcare as a sector is trading at the lowest relative P/E ratio that it ever has. So then you have to ask yourself, so there's a lot of negative discounted in. So we ask ourselves, are we going single payer system? I think that's something you always have to ask yourself. Have the return on invested capital profiles based on today's cash flows, assuming we don't go single payer, changed demonstrably? Which they have not. But I think a lot of investors who look for innovation used to look at healthcare and technology. I think a lot of those dollars have gone to technology recently. So healthcare has become very inexpensive. You do have government reimbursement not only here, but in China that affected some of the fundamentals of companies. So I think they're selling for extremely low valuations right now. But when you can buy the highest quality companies in industry groups across healthcare, which is frankly what we're in the midst of right now, I think that's very attractive when we have a time arbitrage 3- to 5-year time horizon on our side. And these are very attractive businesses with very attractive cash flows and very attractive return on invested capital profiles.

Danielle Singer:

I love that. I think we'll zoom out a little bit now. Let's try to put it all together for our listeners and discuss portfolio construction. So with the volatility in markets, macro uncertainty, the technological disruption that we've spent a lot of time talking about, how do you balance conviction and risk to build a portfolio that is opportunistic, that tries to drive added return for investors, but is also resilient across different market scenarios? Because at the beginning, you touched on the fact that a lot of value investing really is about managing that downside risk.

Kevin Holt:

Yeah. And I think a lot of it comes into our assessment of cash flows and conviction, but also understanding. And I think the reality is probably over the last 10 years, the markets have become extremely volatile. And geopolitical risk I think is up quite a bit. I think we're starting to, post-COVID ,feel the effects of what was a very contrived monetary policy post-global financial crisis that allowed us to get out of the global financial crisis, but probably created some long-term inflationary tendencies that we're now dealing with across the economy that was inevitable. So that's created a lot of volatility I think within those two factors across sectors. So I think we've noted that in our taking. Still, I always say we can take bigger bets than 90% of our peers. We don't need to take bigger bets than 100% of our peers.

So across the different portfolios, we implement different risk guards. But we are constantly looking at what our under overweights are to certain sectors. And I think in industry groups, if you think about one of the conversations we've had recently is you think about technology, used to have a very high correlation within the industry groups. Software and AI are anti-correlated. So now we have to even peel that onion back a little bit further when we're looking at tech because not all tech is the same. Used to be or used to be have a very high correlation, now it doesn't. So we are monitoring our risk probably tighter than we have historically given a lot of the things that we just discussed. And I think it's important that ultimately if we can generate some return off sector selection, that's great, but we want the primary attributes to be stock selection within that framework.

It's hard to predict where the world's going on a daily basis. If you found that person, I'd love to meet them, but we have not. So we will take sector bets like in healthcare right now, but we're not going to go extreme. So we are trying to control risk and respect a lot of the volatility that's been inherent in the market over the last 10 years.

Danielle Singer:

So given all of that complexity that you just talked about, are there additional important questions that you think financial advisors or investors should be asking managers in this environment?

Kevin Holt:

Yeah, I think it's important to understand. Our investors, and I talk a lot about this within the team and actually even at the firm level here with the other CIOs, intellectual honesty is something I think that we all need to be very aware of. And the reality is, whether it's volatility, which we just hit on, and/or the proliferation of AI, the world is changing. And in value land, we all like to look at historical valuations, historical attributes. I think for your value managers right now, and I would look at your 3- and 5-year numbers on your value managers right now, are they being intellectually honest with what's changing in the environment, what's changing in the world to say, okay, what used to happen in X, Y, Z semiconductor stock, the past isn't necessarily indicative of future cash flows and future returns. So I think within value portfolios in particular, do the numbers show that these teams are being honest with themselves in terms of the world is changing. And you want to have your investment discipline and that does not change.

Our investment process does not change, but we have to realize if the cashflows are going to change based on changing fundamentals, we need to be out in front of that. And we always say it's where the puck's going, not where it's been. And I think value guys more than growth guys can fall into complacency on that issue. In my role as CIO, and I always say I'm air traffic controller, trying to make sure that all the teams are looking at what the future looks like, not just what the past looks like.

Danielle Singer:

I think that is sage advice. I think we're about ready to wrap up. So what is one takeaway you'd want our listeners to remember from this conversation?

Kevin Holt:

Yeah, I would say that value isn't necessarily one metric. So post-COVID, we had a lot of clients who hadn't been interested in value in a number of years and we explained our process where in growth industries we're looking at cashflow and then more cyclical industries, we will look at book value, i.e. basic materials and financials and they're like, well, if you're a value investor, you only look at price-to-book. And I'm like, that price-to-book really doesn't work when you're looking at growth of your industries, i.e. consumer discretionary, technology. Cashflow historically has a relevancy.

So you need to make sure that you have a dynamic process that basically works through the test of time when you're approaching investing. And if anyone has any single metric, they'll probably be good for short periods of time because those metrics are more apt to work. If you're a price-to-book investor, when financials work or when you go into an upturn, they work. We want to be able to work over all cycles.

Danielle Singer:

Well, I think it is great timing certainly that we had you today as our speaker. Value investing only seems to be getting more complex. So Kevin, it has been an absolute pleasure. Thank you and catch you all next time.

Kevin Holt:

Thank you so much, Danielle.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of June 9, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

Diversification does not guarantee a profit or eliminate the risk of loss.

References to individual securities are for illustrative purposes only and are not intended to be, and should not be construed as, recommendations to buy, sell, or hold any security.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Artificial intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there's no guarantee these protections will be sufficient. Significant research and development (R&D) spending doesn’t ensure product or service success.

Businesses in the energy sector may be adversely affected by foreign, federal, or state regulations governing energy production, distribution, and sale as well as supply-and-demand for energy resources. Short-term volatility in energy prices may cause share price fluctuations.

The profitability of businesses in the financial services sector depends on the availability and cost of money and may fluctuate significantly in response to changes in government regulation, interest rates and general economic conditions. These businesses often operate with substantial financial leverage.

The health care industry is subject to risks relating to government regulation, obsolescence caused by scientific advances, and technological innovations.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

RLV is the ticker symbol for the Russell 1000® Value Index.

The Russell 1000® Value Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of large-cap value stocks.

Discussions about the relative value of the health care sector versus the broad US market is based on comparisons of the S&P 500 Index and the S&P 500 Health Care sector from 1979 through 2025, sourced from Worldscope, IBES, and GMO.

Discussions about the correlation of the software industry to artificial intelligence companies becoming lower over time is based on the S&P North American Expanded Technology Software Index and an AI proxy consisting of equal weighs of the Magnificent 7: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Sourced from Morningstar Direct as of June 9, 2026.

The S&P North American Expanded Technology Software Index tracks companies in the Application Software and Systems Software sub-industries, as well as applicable supplementary stocks.

Book value is a company’s total assets minus liabilities and intangible assets.

Cash flow is the net amount of cash and cash equivalents generated by a business.

Correlation is the degree to which two investments have historically moved in relation to each other.

A discount measures how much less one stock (or index) is trading compared with another stock (or index).

Enterprise value is the theoretical takeover value of a company. It is calculated by summing the market capitalization, total debt, preferred stock, and any minority interest and subtracting cash.

Hyperscalers are companies that provide massive-scale cloud computing services and infrastructure.

Intrinsic value represents the inherent business value of portfolio holdings during a two- to three-year investment horizon based on their estimates of future cash flow.

The price-to-book (P/B) ratio is calculated by dividing the market price of a stock by the book value per share.

The price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share.

Return on invested capital (ROIC) is a measure of how efficiently a company is using its capital to generate returns.

A value trap is a stock that appears cheap based on valuation metrics but continues to underperform because its underlying business fundamentals are deteriorating.

CIO stands for Chief Investment Officer.

Rethink Portfolios and the Greater Possibilities Podcast are brought to you by Invesco Distributors, Inc.

Kevin Holt, Chief Investment Officer and Senior Portfolio Manager for Invesco’s US Value Equity Team, talks about value investing in today’s rapidly changing market. From AI-driven disruption and concentrated market leadership to the role of active management, Kevin shares how he evaluates opportunity, manages downside risk, and distinguishes true value from potential value traps. He also explores where he sees compelling opportunities today — including health care — and explains why a dynamic, forward-looking approach to valuation may matter more than ever.

Rethink Portfolios: US value stocks with Kevin Holt
Rethink Markets: Chinese AI, small caps, and the space economy

00:00

00:00

00:00

Transcript : Disclosures

Brian Levitt:

Welcome to Rethink Markets, a series from the Greater Possibilities podcast. I'm Brian Levitt, and with me as always is Jodi Phillips. Hey, Jodi.

Jodi Phillips:

Hey, Brian. So today we're going to be connecting with Michael Oliveros, who is the head of global small cap equities at Invesco. And we're going to have a conversation on Chinese AI, European space travel, and any other futuristic topics we can think of.

Brian Levitt:

Futuristic? Feels like the future is now, Jodi.

Jodi Phillips:

It does feel that way, doesn't it?

Brian Levitt:

Yeah. Maybe this isn't even us speaking on the podcast. Is the real Jodi sitting on a beach somewhere?

Jodi Phillips:

Oh my goodness, how I wish. Sipping a nice cocktail. That sounds glorious. But no, it's me. I'm here.

Brian Levitt:

You're here?

Jodi Phillips:

And to prove it... Yeah, I'm here. So to prove it, I will not be doing this podcast in 27 different languages as a proper AI avatar would do, but-

Brian Levitt:

Yeah, I think my avatar might even be above 27 now, if I can one-up you.

Jodi Phillips:

Oh, nice. Well, yeah, go ahead. I mean, I'm probably going to stumble over half of these English words myself. So sorry, no avatars.

Brian Levitt:

This is really us, and I do like the idea of talking about exciting things. I'm looking forward to this. There's just way too much negativity in the news flow. When you speak to people like Michael, you realize how many positive things are happening in the world.

Jodi Phillips:

No, that is very true. But even when we are presented with exciting developments and exciting topics of conversation, some people may feel it's all too good to be true, inserting that negativity back in.

Brian Levitt:

Yeah. Actually, I'm feeling that way about the New York Knicks right now. It's all too good to be true.

Jodi Phillips:

Well, we'll find a definitive answer to that shortly. See how that turns out. But what are you hearing in terms of investor sentiment?

Brian Levitt:

Yeah, some of it was just conversations I was having with people at the proverbial Memorial Day barbecues or early June days on the golf course, comments like, "It can't keep going like this," or when I'm looking at my business-related social media feeds, the permabears seem all too happy to tell us that we're going to have high oil prices forever or high interest rates forever or high inflation. It's all here. They've been waiting for it forever. They've been warning us. Henny Penny, the sky is falling. It's all happening.

Jodi Phillips:

Wow, you throw a really fun Memorial Day barbecue, Brian, I have to say. You couldn't just keep talking about the Knicks?

Brian Levitt:

Yeah, seriously.

Jodi Phillips:

Yeah. Look, no, I certainly don't want to sound like a permabear, but each of those things that you just mentioned, the higher oil prices, the higher rates, the higher inflation expectations, that all did happen.

Brian Levitt:

Yeah. Operative word, happened. I like that you put that in the past tense. They did all happen. The interesting thing, though, is in the past weeks, they've all peaked. Hopefully we don't have to edit that by the time this comes out. But no, they've all peaked and come down, oil prices, inflation expectations, and interest rates. And so what makes the current pessimism particularly puzzling is that a lot of it's happening at a moment when a lot of the key macro pressures seem to be easing.

Jodi Phillips:

Well, and a lot of people would say, and I've heard you say it before, that the pessimists do tend to sound smart.

Brian Levitt:

Oh. Oh my God, yeah. When I'm an optimist in the world, I feel like people think I'm hiding something or making things up. Yeah, they for sure sound smart. And look, one day they will be right. I mean, that's the thing about it is that the permabears are always right at one moment and they become famous for a brief moment. But the problem is that by the time that moment arrives, markets can be significantly higher than where they are today.

Jodi Phillips:

Okay. And that brings us to our first segment...

Speaker 3:

Trending conversations.

Jodi Phillips:

All right, Brian, what's trending?

Brian Levitt:

I think it's the market moves. Talk about from negativity to positivity, the 18.5% move in the S&P 500 Index in April and May.

Jodi Phillips:

Yeah, let's dig into that. I mean, this goes back to your point about the naysayers. By the time they were getting negative about Iran, the Strait of Hormuz, oil prices, the market had already bottomed.

Brian Levitt:

Yeah, that's what makes it hard. I mean, that's how it usually goes, and that's what makes it so hard to time the markets. And then by the time it happens, now they're skeptical that it can happen again.

Jodi Phillips:

So have they missed it? I mean, an 18.5% gain is a big one.

Brian Levitt:

Well, so look, we looked at... I knew that this was going to come up with investors, and so we looked at the 18 prior periods since 1957 when the S&P 500 Index rose by 18.5% or more over a two-month span. Returns were positive, Jodi, over the following six months in 16 of those instances. So 16 of 18 instances, you were positive six months after gaining 18.5% in two months. That's a pretty good hit rate. And the average gain over those subsequent six months was over 10.5%. Again, not too shabby.

Jodi Phillips:

No, not at all. Sometimes facts do get in the way of a naysayer's good story then.

Brian Levitt:

They almost always do.

Jodi Phillips:

Well, so then what are they missing? What are the naysayers not seeing?

Brian Levitt:

Yeah, two things. Number one, earnings, earnings, and earnings.

Jodi Phillips:

Is that the equity investor equivalent of location, location, location?

Brian Levitt:

Yeah, exactly. And no, that's not three things. That's all number one is earnings, earnings, and earnings. I mean, look, we've said this before, we said it in the last episode, US corporate earnings grew by 28% in the first quarter. Stunning. You usually don't get that type of move unless you're coming out of a recession. That's like coming out of COVID-level of earnings growth. That was way above market expectations that were in the mid single digits. And prices are up, but they're not up 28%. So prices haven't climbed at the same pace. That means valuations have actually fallen over that time period.

Jodi Phillips:

So if earnings are clearly number one, what's number two?

Brian Levitt:

Well, I would say the discount rate. I mean, look, market came into this year expecting lower interest rates, and so we had to adjust to a less accommodative Fed path. Now, you even went from pricing in a less accommodative Fed path to maybe even one rate hike, with very little incident for the market. And in actuality, inflation expectations have generally been moving lower. We talked about how things have peaked. So it's very difficult for me to see the Fed raising rates in this environment.

So that's what the naysayers are missing. You've got strong earnings growth and a Fed that's relatively comfortable with price stability. They're not convinced, but they're relatively comfortable.

Jodi Phillips:

Well, you've always said that market cycles tend to end when the Fed kills them with rate hikes.

Brian Levitt:

Yeah. I don't think we're killing this thing anytime soon.

Jodi Phillips:

Good. All right. And that brings us to...

Speaker 3:

Phone a friend.

Jodi Phillips:

So we caught up with Michael Oliveros on investing as a global small cap manager. And so first we asked him about the changing macro environment and how that impacts his view as a small cap manager. And here's what he had to say.

Michael Oliveros:

Two ways to answer that. One is it's made the job harder in one respect, and the other, it's made the job way more interesting. Why is that?

If you kind of take a step back, we have geopolitics. Geopolitics, what is that really ultimately going to be? It's a supply constraint. So you're interrupting the free flow of goods and services. And if we take a step back, a really obvious example of that is Strait of Hormuz. So you can't get goods to where things need to be, it becomes a bit more expensive ultimately because you don't have the supply.

Why does that matter? Why does it matter? Ultimately the effect of it is diseconomies of scale, typically more constraint for large companies. So if you were a large company, you had a factory in China, you were exporting to the rest of the world, that was a good thing. All of a sudden, you can't do that anymore because you have post-COVID and you have a situation where it's not necessarily a guarantee that you'll be able to get goods out of the country, but then you sort of layer on top of that tariffs. So what does that ultimately mean? It means that you're going to have to have additional supply that's coming from additional factories, and that's code for diseconomies of scale. And that's ultimately to the disadvantage of big companies.

The opposite is actually happening for smaller companies. So you had a situation where... I'll take an example. Not going to talk about names, but you'll have, and I know this company quite well, it's a German manufacturer of a component that goes onto a transformer. It's a little piece that connects the high-tension wire to the cable, and it's a very critical component. Used to source that from China primarily. As we all know, you have significant build-out of electrification across the world, the US, Europe, India, and you suddenly have 150% tariff on that Chinese part. If you were a German supplier in the previous world, you couldn't compete on that cost space. Now you can. And you layer on top of that the concept of “friend shoring,” so preferential agreements, and all of a sudden your economic profile changes like that. And why I'm saying this is these two things are happening at the same time, but they're driven along the same axis, which is sort of an acknowledgement that we have to think about where the goods are coming from. So what does that mean? It just means that the economic pie is shifting, and that's a really interesting place to be as an investor.

Jodi Phillips:

Next we asked him about his recent trip to China where he spent a week, asking him what brought him to China, what he was there to learn, and what did he come away with. And here are his thoughts.

Michael Oliveros:

The direct answer, why I was there was because I knew that I had to see for myself what was happening. I can see the effects of China, let's call it Chinese technological advancement and just Chinese industrial capacity, impacting European markets in a very direct way, and I needed to understand why that was happening. So it wasn't just share shifts between competition; it was actually one step removed. It was the customers of customers that were being disrupted. And there was something happening, I didn't know what it was, and I had to go see it for myself.

So it was two parts. One was to meet companies, and it was a range of companies from everything from yeast manufacturing to robotics and AI. And I had the great fortune of going on an AI tour around Shanghai where I met large language model companies and autonomous driving companies, and I got driven around, taxied around the city by a car with nobody in it except myself, which was scary. It's scary for two minutes, and then it's pretty fun, actually. And then it's just a ride in a car. But yeah, that was the reason for being there, and I learned all kinds of things from that experience.

Brian Levitt:

And what were the biggest takeaways from it?

Michael Oliveros:

Yeah, so what I would say, super important to understand, and I'll speak specifically to artificial intelligence, one, very different approaches. If we talk US frontier labs, and there are other friends that you can phone that are the experts on the US labs, but ultimately at the end of the day, the US labs are very much engaged in a race for super intelligence and AGI. So it's universal scaling principles, trying to throw more compute, more parameters to get to the AGI, and then we'll figure out what we're going to do with it later.

Chinese labs are different, and I think it's at least partially because they can't compete in that race. They don't have the chips. They don't have the compute. So they have to be resourceful for what they can do. And what they do have a lot of is a lot of engineering talent. And they also have quite an advantage, and I learned this, with visual data, and specifically training visual systems. And so the approach that they have taken is much more multimodal, so not just text-based, but visual, audio, touch. And their view is ultimately that AGI will end up being embodied. So it's not an AGI in a box that you speak to, it's an AGI that is walking around doing things. And that's going to require the ability to move around in physical space, which ultimately needs multimodal.

And so that leads me to the second thing, which is very different attitudes to adoption. You don't need me to tell you, you can see it around you, there is a increasingly adversarial attitude towards AI in the West. Certainly in Europe where I live, you can see it in the papers. Pick your major city. In China, you don't really get that feeling. So it feels like more of a natural progression of, we were doing one thing, and then we got mobile phones, and then we got self-driving cars, and oh, yeah, of course we're going to have robots amongst us. It's less incongruous because of the trajectory of their growth.

Where that ultimately leads, it's hard to say, but I can just say that in terms of where you see it on the day-to-day... Again, a huge market. It seems something that you, again, you need to be there to see it because there's some opportunities that are worth paying attention to.

Brian Levitt:

So what are other ways that they embody AI? That's what you're talking about with robotics? And then what becomes, just succinctly, what are the most investible areas when you think about it?

Michael Oliveros:

We can answer this at the use case level. Think about anything that a person is doing that is ultimately repetitive enough that a robot can do it, because that's the first step before you have to get to true artificial intelligence where you have an intellectual layer that's trying to decide what to do. So what is driving? We have Waze. We have map apps. So we know how to get from point A to point B. You just need a set of instructions to get it there with a cat running across the street or a stoplight or whatever. And these are things that you can program, and so it's not surprising to see that deployment in autos.

But start from the end use case and then work backwards. How do you enable that? Well, you're going to need a set of sensors to take the information in, you're going to need some processing capability, then you're going to need the intelligence or the software layer. And I think that's kind of the way that we're approaching it, just what are the easiest tasks to deploy? Start two-dimensional, then move to three-dimensional, and then work through that supply chain to say, "Where are the most critical components?"

But then the next would be almost like edge AI applications, so a camera. You can see them now. You can buy... Apple's talking about a device that's just sitting, recording. And it's like, why is that going to be, and why are they going to put a camera in your AirPods? And it's because it can take visual context and then run it through an LLM. So it doesn't have to be a Terminator. There's a whole set of small steps in between where you say, "If you could splice in another bit of information, could we then apply intelligence in that way that can automate tasks?" And I think if you sort of open your mind that way, you can see opportunities perhaps that maybe weren't so obvious in the first instance.

Jodi Phillips:

And finally, we asked Michael about space. Obviously it's very interesting on a human level and an investor level. So is space actually an investible theme? And here's what he said.

Michael Oliveros:

TBD, to be determined. Every time I see a SpaceX rocket launch and then land itself on the launchpad, I'm amazed. I was just like, it's a marvel of engineering. So the hype component of that is certainly there, and it's very visual and visceral, which is important.

But underlying that, there's two things that I would say it's worth paying attention to. Launch costs when you can relaunch a rocket and land it every two days fall exponentially. They're planning at the launch cadence of one an hour. It's going to be the same as an EasyJet flight, except you're launching payloads into space. So think about that. What happens when the cost of delivering a kilogram to low earth orbit is the same as air freight? What could you do with that? What suddenly becomes economic that wasn't before?

And why I say that is there are certain advantages to space from a business model perspective. Energy is free when you're in solar synchronous orbit. You don't need a battery because you're in solar synchronous... You don't need a cooling fan or liquid cooling if you have a data center there because it's cold in space. The gating constraint then becomes the launch. But again, if you drop that piece, suddenly all kinds of things open up. And I think that's number one.

If you take that as a given, and it's not a given that Starship will work, but if it works and that is in fact true, another very important thing happens: Space moves from a project-based industry to industrialization. So I just met a rocket company today. Historically, it was a program from a national government for something. It would be a one-off project and it would be $20 billion or $100 billion, whatever it is. And then you would design that ship and then you would hope there would be another project. If you move to a cadence where all of a sudden you're producing at a constant rate, you can start to serialize things. When you start to serialize, you industrialize, the profit potential goes like that.

And again, my gig is small cap, and what I like about all of this is whenever you kind of disrupt the order, new winners will emerge, and they can become big companies or they can be small companies. And so the playing field for competition becomes a little bit flatter.

But I think if I take a step back, yes, there's hype, and we got to be careful about valuations, but underlying it, there is something very real that you have to consider. And when you start to think about these business models, I would put it through the lens of, what is the gating constraint for this business model to be successful? If the answer was launch, then... I'll tell you, if the Starship works, economics are going to shift. And the other is, where can you see significant changes in the profit pool because of industrialization? And you're probably going to ask me where; satellites is an obvious one, but all kinds of things, like communications in space. So when you have a data center in space, how do they talk to each other? A communication system that works in space. How do you deal with cybersecurity in space? There's like, how do you service those things in space? So all kinds of things that you take for granted in terrestrial space, you have to think about, what happens when I can't service that the way that I do? And again, your perception of where the opportunities lie might shift a little bit, and I think that's an interesting place to be.

Jodi Phillips:

Thank you, Michael, for joining us. And that brings us to...

Speaker 3:

I disagree.

Jodi Phillips:

All right Brian, who is it this time that you disagree with?

Brian Levitt:

I'm going with Jamie Dimon, CEO of JPMorgan, on interest rates: They could be much higher than they are today. I disagree.

Jodi Phillips:

Well, this certainly isn't the first time you've disagreed with Jamie Dimon.

Brian Levitt:

No, it's not. And rest assured, I have all the respect in the world for what he's accomplished as JPMorgan's CEO, so this is not a knock on Jamie Dimon. It's just I've disagreed with him a handful of times on some of the bolder outlook comments he's made. If you remember, he said in 2018, "The world isn't prepared for 7% interest rates." I disagreed then. The good news is we're probably still not prepared for 7% interest rates, but we don't have to worry about that. In 2022, he said, "Brace yourself for an economic hurricane." I didn't agree with that one. And in 2025, he said, "When you see one cockroach, there's probably more." I didn't agree... That was about private credit. That was around the first brand default. I didn't agree with that one either. So it's not the first time. You're right.

Jodi Phillips:

Well, I suppose as a bank CEO, one always needs to be thinking about the risks.

Brian Levitt:

Yeah. Right. That's the job. But here's why I disagree on why interest rates are not going to go much higher than they are right now. I would say the recent move in rates, so what caused it, in my opinion, it was more of a recalibration of Fed expectations than about things that would give you more cost for concern if you had significantly higher inflation expectations or even, forbid, a bad bond auction. Those are the types of things that you would worry about with the sustained moving rates. Like we said, inflation expectations are relatively contained. We have not had bad bond auctions by any stretch of the imagination. The reality is the 10-year Treasury rate, which the benchmark rate should reflect the nominal growth potential of the US economy. So if you're a person who thinks real GDP is going to be 2%, inflation's going to be 2%, 2.5%, then there's nothing wrong with a 4.5% 10-year rate. And you would expect it to move within a band, given where the Fed's going to anchor the short rates.

So it suggests today's rates are quite reasonable. If nominal growth were to improve, rates were to drift higher, that's not a bad thing, but that's... Again, I don't think that this is a world where we should expect significantly higher interest rates.

Jodi Phillips:

Okay. And with that, let's put Brian on...

Speaker 3:

The hot seat.

Jodi Phillips:

All right, Brian, are you ready?

Brian Levitt:

Yeah, let's do it.

Jodi Phillips:

First question, a prominent memory chip company recently became the fastest company to go from a $500 billion market capitalization to $1 trillion market capitalization. Is that an ominous sign?

Brian Levitt:

No. That same company is now trading at 10 times forward earnings, so that's roughly half of the broad market's forward earning multiples. So, look, that's not an investment recommendation, but just a reminder, to put things into context, yes, 500 billion to a trillion sounds large, but the company's trading at 10 times forward earnings.

Jodi Phillips:

Okay. Next, are you concerned that new Federal Reserve chair, Kevin Warsh, is going to be tested by the market early in his tenure, as we've seen so many times?

Brian Levitt:

Yeah, I would actually view the narrative that new Fed chairs get tested as nothing more than a coincidence. October '87 is an example that people use, the stock market crash two months after Alan Greenspan took office. And then you had Bernanke coming in in the early housing downturn. Janet Yellen walked in right after the taper tantrum. But I would say a lot of those examples speak to specific times rather than necessarily testing a new Fed chair. You know, as I like to do, we run the data on these types of things. The average six-month return on the S&P 500 following the start of the last six Fed chairs is +3.6%, so there's nothing to suggest that these people necessarily get tested. Janet Yellen was positive, Jerome Powell was positive, and those are our last couple of examples.

Jodi Phillips:

Okay. Next, you've consistently highlighted how tight credit spreads are. Do you think we're seeing any structural changes that are underneath this, particularly related to the growth of the private credit market?

Brian Levitt:

Yeah, actually, interestingly enough, public credit spreads, so if you're looking at the Bloomberg Corporate Bond or US High Yield Index, those spreads have actually tightened since the conflict with Iran began. I don't know how many people had that on their bingo cards. To me, I still view that as our best real-time signal of the underlying strength of US businesses in the broader economy. I take it as a very positive sign.

It is true, obviously, that if there were stress in the private markets, they would emerge more slowly, although people have been waiting for them for quite a while now and they have not seemed to be emerging. But I would argue, Jodi, if there were systemic issues developing in private credit, you would almost certainly see it reflected in public markets through the wider spreads, rising credit default swaps, and that's because you have a lot of overlap in borrowers across these ecosystems, and you just have not seen it.

Jodi Phillips:

All right. Well, you're off the hot seat. So now we're going to conclude with one of our newer segments, Think, Rethink. So, Brian, tell me something that many people think that you believe they should rethink.

Brian Levitt:

The think is the markets have been very concentrated again this year.

Jodi Phillips:

Okay.

Brian Levitt:

You've had some weeks of it, but let me just rethink it for you. It's had its moments, like I said, particularly in the early days after the Iran conflict began. But year to date, through May, MSCI ACWI, ex-US, and the Russell 2000 Small Cap Index are both outperforming the S&P 500 Index. When people say it's concentrated, I think a lot of people would immediately go to, "Oh, it's only the S&P that's working." No, small caps are outperforming; non-US stocks and US dollar terms are outperforming.

Jodi Phillips:

All right. Well, that's it. We did it, Brian. We got through it. No avatars required.

Brian Levitt:

How do you know this wasn't my avatar?

Jodi Phillips:

So before we go... Yeah, I won't dig into that one too hard. But before we go, Brian, where can our listeners follow you or your avatar for more?

Brian Levitt:

Which language do you want me to read it in?

Jodi Phillips:

Your choice. Your choice.

Brian Levitt:

Yeah, thanks, Jodi. I'll stick with English. I don't want to show off. All right, visit invesco.com/brianlevitt to read my latest commentaries. And of course, you can follow me on LinkedIn and on X @BrianLevitt.

Jodi Phillips:

Thanks for joining. We'll see you next time.

Brian Levitt:

Thanks, Jodi.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of June 2, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Artificial Intelligence (AI) technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there is no guarantee these protections will be sufficient. Significant research and development spending doesn’t ensure product or service success.

Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.

Stocks of small- and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

Oil price discussions based on the price per barrel of US West Texas Intermediate Crude Oil, which peaked on April 7, 2026. Interest rate discussions based on the 10-year US Treasury rate, which peaked on May 19, 2026. Inflation expectations based on the 5-year US Treasury inflation breakeven, which peaked on May 4, 2026. Data sourced from Bloomberg as of May 29, 2026.

The S&P 500 Index bottomed on March 30, 2026, then gained 18.5% from March 30, 2026, to May 26, 2026. Sourced from Bloomberg, L.P., as of May 29, 2026.

Discussions about past periods when the S&P 500 Index rose by at least 18.5% sourced from Bloomberg, L.P., and Invesco as of May 29, 2026. Based on daily data from December 31, 1956, to May 28, 2026. The study examines periods where both the 2-month return on the S&P 500 exceeded 18.5% and the subsequent 6-month return was positive. Adjacent trading days where these conditions are true are excluded from the analysis.

Discussions about US corporate earnings and stock prices sourced from Bloomberg, L.P., as of May 29, 2026. Based on the earnings per share and price of companies in the S&P 500 Index and on Bloomberg consensus forecasts.

Comments about inflation expectations moving lower sourced from Bloomberg, L.P., as of May 29, 2026, based on the 3- and 5-year US Treasury inflation breakeven.

Discussion of a memory chip company hitting a $1 trillion market capitalization based on Micron Technologies as of May 29, 2026. Forward earnings comparisons of Micron to the broad market based on the price-to-forward earnings of the company compared to the S&P 500 Index. Sourced from Bloomberg, L.P. The mention of specific companies is not intended as investment advice.

The average 6-month S&P 500 Index return following the start of tenure of the last six Fed Chairs sourced from Bloomberg L.P.

Comments about public credit spreads tightening sourced from Bloomberg, L.P., as of May 18, 2026. Based on the option-adjusted spread of the Bloomberg US Corporate High Yield Bond Index.

Year-to-date returns of the S&P 500 Index were 11.00%, compared to the MSCI All Country World Index ex-US at 13.46% and the Russell 2000 Index at 18.95%, sourced from Bloomberg, L.P., as of May 28, 2026.

AGI stands for artificial general intelligence, a theoretical type of artificial intelligence that can learn, reason, and adapt like humans across any intellectual task.

LLM stands for large language model, a type of artificial intelligence designed to understand, process, and generate human language.

A credit default swap (CDS) is a financial derivative that allows an investor to offset or swap their credit risk with that of another investor.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

The discount rate is the interest-rate backdrop investors use to figure out what future earnings are worth in today’s dollars.

Earnings per share (EPS) refers to a company’s total earnings divided by the number of outstanding shares.

Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.

Tightening monetary policy includes actions by a central bank to curb inflation.

Taper Tantrum refers to the market panic that occurred in 2013 when the Federal Reserve started to wind down its quantitative easing program.

West Texas Intermediate (WTI) is a type of light, sweet crude oil that comes from the US.

Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified time period.

Breakeven inflation is the difference in yield between a nominal Treasury security and a Treasury Inflation-Protected Security of the same maturity.

Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

The Russell 2000® Index measures the performance of small-capitalization stocks and is a trademark/service mark of the Frank Russell Co.®

The Bloomberg US Corporate High Yield Bond Index measures the US dollar-denominated, high yield, fixed-rate corporate bond market.

The MSCI All Country World ex USA Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the US.

Rethink Markets and the Greater Possibilities Podcast are brought to you by Invesco Distributors, Inc.

Is the stock market’s advance in April and May “too good to be true”? We explore why market pessimism may be missing the bigger picture. Then, Head of Global Small Cap Equities Michael Oliveros joins us to discuss what he learned about artificial intelligence during a recent trip to China, and the emerging economics of space.

Rethink Markets: Chinese AI, small caps, and the space economy
Rethink Portfolios: Commercial real estate with Charlie Rose

00:00

00:00

00:00

Transcript : Disclosures

Danielle Singer:

Hello, I'm Danielle Singer, head of wealth management platforms for Invesco, and I'm excited to bring you the second episode of Rethink Portfolios. A new series from the Greater Possibilities podcast. This show will go inside the decision-making process of portfolio managers, where we'll bring you in-depth conversations that explore how our experts manage risks, identify opportunities, and navigate changing markets.

Now speaking of markets, our market focused show with Brian Levitt and Jodi Phillips will continue as usual right alongside the series.       So please watch your podcast queue for the latest from them.

Now with that, let's get to our guest. Charlie Rose is the global head of commercial real estate credit for Invesco. I'm very excited to have this conversation with Charlie today, because of all the headlines about this space that are probably still raising concerns. Some even say it's broken. But while office demand remains lower than it was pre-pandemic, there are likely market specific nuances that are going to be critical to understand. So let's welcome Charlie to give us his insights on what he's concerned about, what he's not concerned about, and why it's time to rethink real estate. Welcome to the podcast, Charlie.

Charlie Rose:

Danielle, thank you so much for having me here. It's such an honor to talk to you again. I'm really looking forward to the conversation.

Danielle Singer:

Great. Now we're going to spend some time drilling down into the credit part of real estate, but we're going to start big picture. Because when most people hear commercial real estate lately, they picture half empty office buildings, scary headlines. So from your perspective, on a scale of dumpster fire to quietly fine, where are we really?

Charlie Rose:

Well, that's a great setup, Danielle. I would say if people are going to use terms like dumpster fire, they must be looking at a very small portion of the commercial real estate industry. And probably what they're looking at is the office sector where we've seen so many negative headlines over the last couple of years, but let's put that into context. Office is only 2.5% of the listed US commercial real estate market. Now it's a little bit larger in the unlisted institutional market, but it's still only 17% of that segment of the market. So said differently, 96% of listed investment real estate is something other than office, and 83% of unlisted institutional investment is not office. Even within office too, you see a broad divergence in performance. And I think many people are shocked to hear that in the office sector, fully 47% of all office buildings in the United States today are fully occupied, meaning they're 95% occupied or higher. So roughly half of the office market is fully occupied. So we have to take down some of the rhetoric and really look at the numbers to understand what's going well and what's not going well in the commercial real estate industry.

To be clear, commercial real estate did go through the second largest correction in modern history between 2022 and 2023. We saw real estate values in the institutional space down somewhere 20 to 25% during that period of time. This time around was different, however. It wasn't a demand or supply driven issue specifically. It was a rate shock that led to that adjustment in pricing. And we've now seen real estate values start to increase from the bottom, we've seen supply drop off fairly significantly. And overall in the commercial real estate industry, we're seeing an environment of stability from a demand perspective and from a valuations perspective.

Danielle Singer:

That's really helpful context and I think that data speaks to maybe, like you said, what's driving some of those headlines versus the reality. So let's keep on this theme of is the pain over. I think one time when we were speaking recently, you did talk about that real estate values have been recovering maybe even since late 2023. Now, if you and I were at a cocktail party that might get some mixed reception. What do you think has been driving that recovery?

Charlie Rose:

So again, commercial real estate saw a major correction starting at the end of 2022 as rates started to rise. We look at two metrics when we're thinking about real estate values. The first, and we have to make a clear distinction, is prices. What are market clearing prices as individual investors are buying and selling real estate? And the second are values. What values are being recognized in existing portfolios through an appraisal process?

So from the pricing perspective, prices have actually started to increase as early as late 2023. So we're now almost three years into a recovery cycle, and prices as measured by the Green Street Price Index are up 8.8% from the trough in late 2023.

Now from a valuations perspective, valuations typically take longer to adjust down and longer to start to correct. So valuations in the NCREIF index are up only marginally from the trough at about 0.3%, with that increase really just starting to come in over the last year.

But regardless, today we're in an environment where both transaction prices are increasing and valuations broadly writ are increasing across the market. That has resulted in less of a gap between buyers and sellers, more certainty for lenders in the market as to the values of the collateral they're lending against. And for us, that's translating into a significant increase in both our buying activity in the real estate market and even more so in our lending activity in the commercial real estate market.

Danielle Singer:

Wow, that certainly makes it sound like things have been exciting and continue to get more exciting. So maybe touching on a stat you brought up before, office being a relatively small part, 95 plus percent outside of office. So would you say this is not a narrow recovery but rather broad across property types and markets?

Charlie Rose:

Yes, and it is broad, but real estate remains a sticks and bricks asset class, block by block, asset by asset. And so there's a lot of nuance that we see across the industry. To start with, we are now seeing demand firm up in our asset classes where we spend most of our time from a credit perspective being apartments and industrial. Apartments and industrial are the largest transaction markets today and are characterized by a fairly stable demand profile and cashflow profile, driven by the fact that these buildings are occupied by many tenants and that results in less volatility in the underlying cash flows. Demand is increasing in those asset classes right as we're seeing supply start to drop off, but different markets are reacting differently.

And I'll give multifamily as a specific example, somewhat counter to popular opinion is where we're seeing the strongest apartment rent growth throughout the country. Many people would assume that you're seeing the strongest rent growth in the Sunbelt markets, those markets that are seeing the largest population and employment growth. But in fact, over the last two years, the three best performing apartment markets from a rent growth perspective have been New York City, Chicago, and San Francisco. And these are markets that are characterized by very low supply and relatively stable demand, which has resulted in better rent growth.

Danielle Singer:

So you have access to a lot of data. You're quoting a lot of things that you see as a subject matter expert, but a lot of our listeners don't. So when they say commercial real estate is broken, what do you think they're getting wrong? Is it just the headlines or is there something else you think that they might be observing that's feeding this? Just to put a bow on this topic.

Charlie Rose:

Yeah. So I think that is somewhat of a backward-looking statement over a relatively short period of time. From a forward-looking perspective, we are seeing an environment in which you have relatively stable demand, you have reduced supply, and you have a stabilization of values. I also think that you may be somewhat informed by the way that investors have accessed commercial real estate historically, that is leading us to be focused on the equity side of our business in investing in a very data-driven, differentiated fashion, and to emphasize to a much higher degree some of the specialty product types that we think will perform particularly well in this environment. These are generally asset classes that are characterized by modest CapEx and relatively high current in place income, and include amongst other things, senior housing, manufactured housing, medical office and student housing.

Now, the credit side of the business is another area where we are spending a lot of time focusing, and real estate credit stands out as particularly attractive because it's exhibited effectively a zero correlation over the last 10 years to real estate equity. As an aside, real estate credit similarly has effectively had zero correlation to private credit over the last 10 years. So that is a way of accessing real estate that has a very low correlation, a current income level that historically has been attractive relative to both private credit and equity, in our opinion, and is set up to perform well in a higher for longer rate environment.

Danielle Singer:

Charlie, you brought up a lot of great points there, one of which very helpful, is the distinction between investing in real estate from the equity perspective or the credit perspective where you are more focused on. So let's spend some time getting into the nuts and bolts maybe of the credit investing side of this space. One thing I think that a lot of people think about is banks as the traditional dominant lender, and now it has switched to alternative lenders, private credit, for example. What changed that really drove a lot of this?

Charlie Rose:

Sure. So if you go back prior to the global financial crisis, banks in the United States were over 60% of the commercial real estate debt market. Fast-forward to 2019, banks were a little bit over half of the commercial real estate debt market. Last year in 2025, banks only represented 34% of new commercial real estate loans being originated.

So you've seen this progression from 60% to 50% to around a third of the market being represented by bank lenders. And to put that into perspective, we're talking about what is today a $6 trillion asset class. So that is a very substantial reduction in overall origination volume from the banks.

And there have been multiple factors and multiple steps along the way that have resulted in the banks being less active. To be clear, the banks still remain very active in commercial real estate debt. They're still a third of a very large market, but from a relative perspective, they're less active, because banks have realized that there are other more efficient ways from a capital treatment perspective for them to deploy their capital.

And one area where we've seen the banks get particularly aggressive in the growth of their businesses is providing loan-on-loan leverage to alternative real estate lenders such as ourselves. So they're getting access to the asset class without making direct real estate loans secured by real estate.

Danielle Singer:

And maybe it's that the traditional lenders, at least today, aren't the ones dominating some of the news. Right? There's been a lot of headlines recently around private credit, and it was great that we were able to have Scott Baskind, who heads up our global private credit team on our Rethink Markets podcast recently, to talk about the sector and what's happening. You already started to touch on some of the diversification properties of private real estate credit, but do you want to dive into a little bit more about how it stands out potentially within a portfolio from other forms of private credit?

Charlie Rose:

Sure. So what exactly is real estate private credit? Maybe we'll start there. Real estate private credit as we think about it is a strategy in which we are direct originators of mortgages secured by commercial real estate properties. In most instances today, we are making a mortgage loan just as an individual would obtain a mortgage loan against a home. We're the lender making that mortgage loan against an apartment building, an industrial building, or similar property types. We're doing so at scale and we're generally lending to institutional sponsors. So rather than a family being the borrower on a mortgage loan on a single family loan, we are lending to a multi-billion dollar institutional fund run by a manager whose name would be familiar to you.

We're generally doing so on a relatively short-term basis, three to five-year total loan term, with a floating interest rate structure. This asset class is characterized by, again, as I mentioned, a very low correlation to private credit and to real estate equity, and it's characterized historically over the last 10 years, by lower volatility than, say, real estate equity.

So while you don't have the growth potential that you would get in real estate equity, in real estate credit, you do have a very stable current income profile and a diversifying benefit coming from these portfolios of mortgage loans. The reason you've seen less volatility in real estate credit is by virtue of the position in the capital stack that we're investing in. On average, historically, we've been a lender around 65% loaned value, which means if we are lending against a $100 million property, we're making a $65 million loan, and subordinate to us is $35 million of equity from a brand name institutional sponsor. So even in a GFC-like or 2022 like market correction, our loan balance is insulated.

Danielle Singer:

I appreciate that you were able to zoom out a bit and redefine the space for our listeners. So now let's zoom in a little bit more. Earlier you touched on a few areas that you were finding attractive, but let's talk about where you're really leaning in right now. When you look across your landscape, what's standing out as particularly appealing or interesting today?

Charlie Rose:

So first, when we're talking about real estate credit, our objective is to be a pretty boring part of your portfolio. Number one, my job is to not lose money, and I want to minimize default rates, minimize delinquencies, minimize volatility. So our focus is really on risk mitigation.

Today we have found ourselves continuing to be very active in making loans to industrial buildings, and specifically when we're talking about industrial buildings, we're really focused on multi-tenant infill industrial buildings that have a diversification of the cash flows that are used to pay the interest on our mortgages, and secondly, on various forms of housing, most notably apartments. From a geographic perspective, we always strive to have a geographically diversified portfolio, but year-to-date, Europe has stood out as a particularly attractive market for us. So we have been leaning in to institutionally backed real estate in Europe, while also remaining cognizant that the US market is about three times the size of the European market. That's always going to be our largest market.

Danielle Singer:

I love that you are talking about trying to be boring in that sleep well at night type of asset class. And maybe that's somewhat at odds with things like the enthusiasm around AI, and I think you've been pretty clear about maybe steering away from things like data centers. Is that why? Is there an element of risk and not boring that's keeping you on the sidelines in that space?

Charlie Rose:

I am at risk of scaring folks away during this very exciting period of innovation, but as we think about the real estate lending business,at a time in which investors have quite substantial exposure to AI in different parts of their portfolios, we have made the conscious decision to avoid data centers and focus on non-AI correlated property types.

Additionally, I would say as a sleep well at night conservative lender, that whenever I see a lot of enthusiasm in a specific segment of the market, it makes me nervous and I start to retrench back towards the most stable cash flows without binary risk. Most data centers have some sort of binary risk in terms of single asset exposure or potential exposure to redundancy over time. And accordingly, that's why we've been very vocal, we're not making loans on data centers today, we don't plan to, and we intend to keep it that way.

Danielle Singer:

Very interesting. And I like the ability to contextualize it for the AI story and then the specific commercial real estate credit story elements of AI enthusiasm. One area that I think our listeners might be enthusiastic about just because it's tangible. I love that parts of real estate, it's about you can see it, you can touch it, many of us are homeowners. And it sounds like retail and hotels, areas familiar to a lot of people, are starting to pick up steam. What's changing that's making those sectors interesting right now?

Charlie Rose:

Yeah, so let's break it down a little bit. Retail would probably surprise a lot of our listeners as being our strongest conviction amongst the four major traditional asset classes, at least from an equity perspective. So traditionally within institutional real estate, the four prominent sectors have been retail, apartments, industrial, and office building. Retail was out of favor for a long time with overbuilding and the onset of e-commerce, as well as changing consumer preferences. Today we are finding ourselves in an environment where we have much better understanding of e-commerce penetration and what types of retail are thriving in an e-commerce environment. And we also are finding ourselves in an environment where we simply haven't been building new retail for well over a decade, at the same time as our population in the US has been increasing. So from a supply-demand perspective, retail is leading us to be very convicted in that space. Now, interestingly, that is mostly an equity conviction for us right now. On the credit side, retail is a little bit harder to access for the types of retail that we like. And so we see less volume in retail on the credit side.

Hotels are a very different asset class and are an asset class where you've seen that K-shaped recovery really accentuate a certain profile of winner and a certain profile of loser. So you are seeing some notable strength, particularly at the high end of the market, but for us, we are playing it very conservatively because it is a very operational business, it is a CapEx intensive asset class, and you have to release the building every single night, which creates more volatility in the underlying cash flows than you would see in some of those other property types that we focus on.

Danielle Singer:

Thanks for clarifying that. And it's nice to hear that for some of us that are mall walkers, there's still maybe a tailwind at least on the retail equity side of the space.

Charlie Rose:

Don't air all your dirty secrets to our podcast listeners, Danielle.

Danielle Singer:

Maybe that's what's going to keep the listeners. Let's take it personal for a minute. What do you love most about your job investing in commercial real estate credit markets?

Charlie Rose:

You know, Danielle, I love talking to young people in our industry. It's one thing that gives me a lot of joy. And as I'm talking to young people getting into our industry, I often tell them, careers are a combination of luck and hard, hard work. And also, many careers are characterized by being willing to take advantage of opportunities, even if they weren't what you planned for when they arise. So when I got into this business, I thought I was going to be a real estate developer, building shiny skyscrapers that I could show my children I had built and feel very proud of.

Today I'm a real estate lender, it is about as different as you can get within our industry from being a developer of skyscrapers. Certainly a much lower risk proposition. But I love talking to our clients, understanding what [inaudible 00:26:56] objectives are, and working with our people to achieve our clients' objectives on a day in and day out basis. This ultimately is a people business, our capability is defined by our people, and we are working on behalf of our investors who are individual constituents with individual goals, and that gives me a lot of satisfaction.

Danielle Singer:

I love that. And hopefully you're inspiring the next gen of Charlie Roses for the commercial real estate credit space. Maybe to wrap up, in five years from now or so, what do you think people will say they misunderstood most about this period in real estate?

Charlie Rose:

I think that we often find it is very hard to call the bottom, it is very hard to move with conviction early during a recovery. And I am seeing a setup for a very strong secular cycle in commercial real estate, both credit and equity. We are in an environment of reduced supply, we're in an inflationary environment, it is becoming more and more expensive to build, and it is expensive to finance the ground-up construction of real estate today. Those factors are resulting in less building, at the same time as our economy still grows and our population still grows, and the need for real estate expands. That is setting us up very well from the equity side of the business. On the credit side of the business, we've seen a fundamental shift in the composition of lenders, resulting in greater opportunity for alternative lenders to step in, take market share. And what we find, is once a borrower borrows from an alternative lender, they typically come back time and time again, because it is a smooth, seamless, efficient process. So five years from now, I think folks will look back and say we should have acted with more conviction getting into the real estate space in 2026, at a time when equity was set up for a strong growth cycle and credit was set up for a strong deployment cycle, at a time when that elevated inflation environment was supporting higher for longer pace rates, supporting higher income on floating rate credit instruments.

Danielle Singer:

Amazing, and I'm sure I will have you back well within the next five years. Charlie, as always, it's been an absolute pleasure.

Charlie Rose:

Danielle, the pleasure was mine.

Danielle Singer:

Thank you, and catch you all next time.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of May 12, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

Diversification does not guarantee a profit or eliminate the risk of loss.

Investments in real estate-related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

Private credit strategies invest in debt instruments that are not publicly quoted on an exchange.

Private equity strategies invest in companies that are not publicly quoted on a stock exchange.

Alternative investment products may involve a higher degree of risk, may engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, may not be required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual portfolios, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. There is often no secondary market for private equity interests, and none is expected to develop. There may be restrictions on transferring interests in such investments.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

There is a risk that the value of the collateral required on investments in senior secured floating rate loans and debt securities may not be sufficient to cover the amount owed, may be found invalid, may be used to pay other outstanding obligations of the borrower or may be difficult to liquidate.

Data on the office sector’s share of the US commercial real estate market based on the FTSE NAREIT All REIT Index as of April 30, 2026.

Data on the office sector’s share of the unlisted institutional market based on the NCREIF Property Index as of March 31, 2026.

Data on office building occupancy rates from CoStar as of the fourth quarter 2025.

Discussion about the 2022-2023 correction in commercial real estate and the increase from the bottom based on the Green Street Commercial Property Price Index. The index fell about 22% from its March 2022 peak to the cyclical low in December 2023, then rose 8.76% from that trough to the most recent reporting period in April 2026.

Data about valuations in the NCREIF Property Index as of the first quarter of 2026, sourced from the National Council of Real Estate Investment Fiduciaries.

Correlation and income comparisons of real estate equity, real estate credit, and private credit over the past 10 years based on the Giliberto-Levy High-Yield Real Estate Debt Index, the Cliffwater Direct Lending Index and the NCREIF Property Index from 2016 through 2025. The 10-year average distribution yield was 11.2% for private real estate credit, 10.3% for direct lending, and 4.5% for private real estate equity. The correlation between the Giliberto-Levy High-Yield Real Estate Debt Index and the Cliffwater Direct Lending Index was 0.06. The correlation between the Giliberto-Levy High-Yield Real Estate Debt Index and the NCREIF Property Index was 0.05.

Statements on the volatility of real estate credit versus real estate equity based on the Giliberto-Levy High-Yield Real Estate Debt Index and the NCREIF Property Index from 2016 through 2025. Based on the annualized standard deviation of 1.37 for the Giliberto-Levy High-Yield Real Estate Debt Index and 3.85 for the NCREIF Property Index. Standard deviation measures an index’s range of total returns in comparison to the mean.

Statistics on the activity of banks in the commercial real estate debt market and the size of the commercial real estate market sourced from the Federal Reserve and MSCI as of April 21, 2026, latest data available.

Discussion of the best performing apartment markets from a rent growth perspective sourced from RealPage market data as of the first-quarter 2026.

Comparisons of the size of the US and European real estate markets sourced from the US Federal Reserve System and Bayes Business School through the fourth quarter of 2025.

The FTSE NAREIT All REIT Index is an unmanaged index considered representative of US REITs.

The NCREIF Property Index, or NCREIF Index, is a quarterly, unleveraged composite total return for private commercial real estate properties held for investment purposes only.

Green Street Commercial Property Price Index is a value-weighted index that measures what's happening in real estate prices in aggregate.

The Giliberto-Levy High-Yield Real Estate Debt Index measures the returns of high yield commercial real estate debt.

The Cliffwater Direct Lending Index is an index of private middle market loans.

Leverage measures a company’s total debt relative to the company’s book value.

Capital expenditures (or capex) is the use of company funds to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

Cash flow is the net amount of cash and cash equivalents generated by a business.

Correlation is the degree to which two investments have historically moved in relation to each other.

Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.

Capital stack is the financial hierarchy of all the money used to fund a real estate investment, including debt and equity.

A K-shaped recovery refers to one in which higher-end categories are thriving and other categories are struggling.

GFC stands for the Global Financial Crisis of 2008.

Rethink Portfolios and the Greater Possibilities Podcast are brought to you by Invesco Distributors, Inc.

Danielle Singer sits down with Charlie Rose, Invesco’s Global Head of Commercial Real Estate Credit, to look past the headlines and unpack what’s really happening in commercial real estate. From the office market narrative to the evolving opportunity in real estate credit, they explore where risks remain, where demand is holding up, and why select areas of the market may be more resilient than many investors think.

Rethink Portfolios: Commercial real estate with Charlie Rose
Rethink Markets: Strong corporate earnings beat the market’s expectations

00:00

00:00

00:00

Transcript : Disclosures

Brian Levitt:

Welcome to Rethink Markets, a series from the Greater Possibilities podcast. I'm Brian Levitt and with me as always is Jodi Phillips. Hey, Jodi.

Jodi Phillips:

Hey, Brian. So today we're going to be connecting with Hemant Baijal, who's the Head of Global Debt at Invesco. We're going to have a conversation on global macro, a look at how emerging markets have been faring during the Iran conflict and his views on the US dollar going forward.

Brian Levitt:

Don't you love having these kind of friends at the firm? The Phone a Friend.

Jodi Phillips:

Absolutely.

Brian Levitt:

I'm very much looking forward to that. And one of the things that I've really found remarkable since the start of the conflict with Iran is that the US dollar has just been essentially flat since then.

Jodi Phillips:

Yeah. No, it certainly hasn't been a risk off type of environment. Investors, they're not exactly crowding into the so-called safe haven US dollar assets.

Brian Levitt:

No, they're not.

Jodi Phillips:

But you told us before that you expect markets to be positive a year following the start of this conflict and so far so good. Is that view just because you're the self-proclaimed FOMO guy? Your fear of missing out on market advances, is that what's behind that view or do you really believe it?

Brian Levitt:

Brian Levitt, the FOMO guy. You think I'm going to get legs with that? You think this is going to stick?

Jodi Phillips:

I mean, one can dream, right?

Brian Levitt:

I am dreaming. I need a nickname.

Jodi Phillips:

Maybe it's this one. Yes.

Brian Levitt:

Yeah, maybe it is. Yeah, I still believe it. It actually has nothing to do with my FOMO. It really has a lot to do with just markets. They're just simply not behaving as if the business cycle is coming to an end anytime soon and the economy continues to be quite strong.

Jodi Phillips:

But a stronger dollar would be one of those things that might give you pause.

Brian Levitt:

Yeah, correct. That would be one of them. Credit spreads blowing out would be one of them. And of course that hasn't happened either.

Jodi Phillips:

Good. Well, that's a nice testament to the resilience of the economy and the fundamental strength of corporate America.

Brian Levitt:

It really is. And another solid earnings quarter too. Jodi, it's like forget FOMO. It's hard to be bearish when the companies of the S&P 500 Index are growing earnings by double digits quarter after quarter and expectations continue to climb for earnings.

Jodi Phillips:

Yeah. Well, anyone who's listened to this podcast knows that you can't help but tie in song lyrics to whatever is happening in the markets. And so I did see one of your recent commentaries you brought out War, what is it good for?

Brian Levitt:

Absolutely nothing. Say it again.

Jodi Phillips:

That of course is the right answer. But you rightly noted that's the purview of foreign policymakers and the voters, of course. But for markets, when it comes to events like the Iran war or Russia, Ukraine or tariffs or pandemics, these aren't necessarily as bad for markets as investors may have been fearing. And that's because markets are looking for whether or not businesses are growing earnings.

Brian Levitt:

Correct. And that's been the case. That's been the case this time. And historically it matters. Did you come into the conflict in a good place? And it's hard to argue that the global economy did not come into this in a good place. It did. The United States did as well.

Jodi Phillips:

And that brings us nicely to our first segment.

Narrator:

Trending conversations.

Jodi Phillips:

What's trending, Brian?

Brian Levitt:

I hope it's earnings. I mean, I'm sure there's other things trending like the war in Iran or maybe the UK bond yields or maybe Japan intervening with the yen. But no, I'm going to go with earnings.

Jodi Phillips:

Yeah. And this isn't just the things are better than we feared environment. We sometimes see that.

Brian Levitt:

No, no, no.

Jodi Phillips:

This was truly one of the strongest earnings quarters over the past several years. So give us the stats to back that up.

Brian Levitt:

Okay. Well, first, 84% of companies in the S&P 500 beat expectations. You usually see 75, 78, numbers like that. 84 is a big number. This is now the sixth straight quarter of double-digit earnings growth. Nine of 11 S&P 500 sectors grew earnings. Seven of the 11 S&P 500 sectors delivered double-digit earnings growth.

Jodi Phillips:

So clearly it's not just US tech companies that are behind all this.

Brian Levitt:

No, it's not. I mean, look, don't get me wrong, the big information tech companies delivered great results, but you also had significant beats from bellwether companies in the healthcare sector, the industrial sector, the financial sector. Not bad.

Jodi Phillips:

All right. So key takeaway, your view of all this is earning strengths looks to be real and that it's been broadening. And markets have followed despite the war, despite the elevated commodity prices.

Brian Levitt:

Right, correct. And so when people say it's a market that's ignoring war, I don't believe that's the case. I believe it's a market that continues to be surprised by the strength of corporate earnings and often by a meaningful amount. I was just reading on FactSet that earnings came in 20.7% above expectations. That's pretty meaningful.

Jodi Phillips:

Okay. That brings us to our next segment.

Narrator:

Phone a friend.

Jodi Phillips:

We caught up with Hemant Baijal for a conversation on global fixed income. First, we asked him how he would characterize the global macro backdrop and whether there are parts of the world where the war and the higher oil and gas prices have been meaningfully impacting activity. And here's what he had to say.

Hemant Baijal:

The curse is always of living in interesting times, and these are certainly interesting times from both the macro backdrop and the markets. So if we look at the US and then we look at the rest of the world, in the US, there are really three competing forces at work right now from a macro perspective. Prior to the Iran conflict, it was really AI that was driving. Interestingly, the equity market and the bond market were really trading two different versions of AI. The equity market was trading the first order derivative, which is growth, and the bond market was really trading the second order derivative, which was deflation.

And that's why what you saw in the early part of the year was the yield curve flattened significantly in the US even before the conflict. Once the conflict started, interestingly, obviously the conflict, the transmission mechanism is through oil. Higher oil prices is both a tax on consumers as well as somewhat inflationary, that's the dynamic that has been affecting the world. Now in the US, the bond market, interestingly, has been trading the first order derivative of that, which is inflation and not the second order derivative, which would be slower growth over a period of time. And the third factor affecting the US is obviously the labor market. We saw reasonably good non-farm payrolls today, but in the last 12 or 13 months, we've actually had five revised prints that have been negative in that same period of time too. So the labor market supply side shock, I think is still going to be a factor that is going to affect growth in the US and it's one of the risks to the market.

So if I look at the US market or the US economy, it's been doing particularly well. The dynamic that's making it do well, which is the CapEx from the hyperscalers and the impact on GDP, which directly is close to 1% of GDP and maybe even much larger if you include all the indirect benefits. But globally, that's not the case because that CapEx cycle is not translating globally. Maybe it should, but it isn't. So energy prices are the only thing that are transmitting or changing the macro environment globally. Clearly higher oil prices, it's not just higher prices, it is also shortages. So I am quite concerned about growth in Asia. India seems to have found some oil from Russia, et cetera, but nonetheless, shortages are very non-linear in their impact on growth. So I am quite concerned that Asian growth is going to be lower than what we are even expecting today.

And will that then channel over to Europe? We are already penciling in lower growth in Europe. Again, shortages, places you don't expect it, fertilizer prices up, jet fuel shortages. All of these have an impact on lowering growth estimates in Europe as well as Asia. Will that then come back to the US and go full circle? Possibly. So I think robust economic activity in the US weakening elsewhere with risk to the US on the downside.

Jodi Phillips:

Next we asked how, as global multi-asset investors, how is his team looking at navigating this type of environment? And here's what he told us.

Hemant Baijal:

You have really three levers you can pull in a multi-sector. You have rates, you have FX and you have credit. So when you look at rates and developed markets, we have adjusted to potentially a higher rate profile and we are pricing in an outcome which is purely based on that inflationary shock from oil and not the slower growth part of it. And so we think that that is quite overextended in the market at this place, particularly in Europe. So I think from a rates perspective, the opportunity set is quite rich.

That brings us next to foreign exchange. Now, foreign exchange is extremely interesting because the dynamic that was at play prior to the conflict still remains in play, which is a weaker dollar. That is not what we used to expect. A conflict of this nature with oil prices going up so much, one would've expected a much sharper increase in the dollar. That kind of indicates that that original dynamic of having too many dollar assets globally and too many portfolios is limiting the amount of inflows you can get in dollars. The cost of acquiring a US dollar investment, the marginal cost is effectively going up and that is showing up with a lower dollar over a period of time.

Credit is a very difficult... It's been rock solid because nominal growth has been pretty good, but it is a very tight spread. Given that we can do rates in a multi-sector portfolio, we would prefer to be in rates than in credit as a result. So we think credit remains an underweight in the portfolio. So overweight rates, overweight FX, underweight the dollar and underweight credit.

Jodi Phillips:

And finally, we asked Hemant why he believes active management is important and here's what he told us.

Hemant Baijal:

Think about it this way, that if we have 20 different countries we can invest in. So we can choose which countries to invest in, which part of the yield curve, just to create efficient portfolios. If the dollar isn't going up, then you just open up a vastly larger base and there active management becomes very key. Which market do you want to invest in? Which part of the yield curve do you invest in? Which instruments do you use? Which currencies do you go long? How do you extract FX carry in the best possible way? Which currencies do you want to be long? Which currencies do you be underweight? It's not just always against the dollar. And there are so many that the global cycle is so asynchronous with Asia probably facing shortages, US being energy independent, this asynchronous cycle just creates a lot of opportunity which active management can take advantage of.

Jodi Phillips:

Thank you, Hemant, for joining us. And that brings us to our next topic.

Narrator:

I disagree.

Jodi Phillips:

All right, Brian, what is it this time? Who are you disagreeing with?

Brian Levitt:

All right. I'm going to go with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. A series of rate increases could be warranted even at the risk of further weakness to the labor market. I disagree, Jodi. All right.

Jodi Phillips:

So you're not feeling rate hikes?

Brian Levitt:

No, I'm not. And neither is the market. Actually, if you look at the Fed funds implied probability rate, it has rates as flat between now into the middle of 2027. That's a pretty far cry from expecting three rate cuts this year, but it is certainly not expecting rate hikes.

Jodi Phillips:

So it sounds like you're not too concerned that higher commodity prices are going to feed through to broader inflation.

Brian Levitt:

No, and a few things on that. The first, it's a price shock. And so I agree with Hemant's comment about it being a tax. That doesn't typically lead to a sustained move higher in inflation. And the bond market seems to agree. You know I love my inflation breakevens, right, Jodi? So the five year is back at 2.6%, that doesn't seem like it warrants a rate hike. The other thing to notice that Fed policy is already restrictive. The spread between the two-year US Treasury, which the Fed tends to anchor and the 10-year US Treasury, which reflects nominal growth is already very tight. And so my view is that rate hikes would risk inverting the yield curve at a time when consumers are dealing with over $4 or $4.50 gasoline nationally. That should not be viewed as a good thing. So apologies to Neel Kashkari, but I wholeheartedly disagree.

Jodi Phillips:

All right. Guess we could try calling you the inflation breakeven guy.

Brian Levitt:

Do you think that's good? Inflation break your FOMO?

Jodi Phillips:

FOMO’s better. We’ll stick with that one.

Brian Levitt:

Thank you. Thank you.

Jodi Phillips:

And at this point we're going to put you on.

Narrator:

The hot seat.

Jodi Phillips:

So first, Brian, let's talk about the Fed. You gave us your rapid reaction to Jerome Powell's last meeting as the Fed chair in the Greater Possibilities Rethink Now series. But one of the things you didn't mention at that time was Powell's decision to remain on as a Fed governor. So that's really not typical for outgoing Fed chairs. Are you concerned about that decision being a distraction?

Brian Levitt:

No, I'm not. Look, I view Powell as remaining on the Fed likely because he wants to show his deep determination to keep the Fed independent. I would view that as a good thing for markets, even if Powell won't admit that. That's why he's staying. I view that as a good thing for markets. If you observed Jerome Powell over these years, it's pretty clear to me he has the temperament to be a lower profile Fed governor. I don't think he has any intention of being a shadow Fed chair.

Jodi Phillips:

All right. Next question. Markets have already posted strong gains this year, but as the old saying goes, sell in May and go away. Do you agree with that philosophy?

Brian Levitt:

No, absolutely not. And actually the last few years have been, May's represented sort of a turning point after some challenging springs. Russia, Ukraine, Silicon Valley Bank, tariffs, and others. So no, we did the math on this. If you look from 1928 through 2025, staying invested throughout those years would've dramatically outpaced the sell in May playbook portfolio by more than 300%. Let's think about what 300% means. So 3X your money over that nearly 100-year period simply by not selling in May and buying back in the fall.

Jodi Phillips:

Nice. So stay tuned for the disclosures to hear all the numbers behind that particular math problem.

Brian Levitt:

Be reading that one for a while.

Jodi Phillips:

Our next question, our next question. There are probably a lot of investors out there who are wondering if it's too late to invest in oil, that they've missed the big price jump. What is your view on investing in oil right now?

Brian Levitt:

Yeah, I mean, I'll use history as a guide. So we took a look, maybe you'll need more footnotes, but we took a look at each time oil spiked by more than 20% since 1988. And over the following 12 months, oil was down on average by 7.9%, and the S&P 500 index was up by 25.6%. So when oil spikes, people tend to want to barrel into it. You see what I did there? But it ends up you tend to be buying more at a peak. So I would view it as oil as a potential hedge right now against further geopolitical conflict, but I would not view it as a way to speculate right now to generate outsized returns.

Jodi Phillips:

All right. Last question. The 30-year US Treasury rate had climbed to over 5% in early May. Do you see that as a harbinger of bad things to come or a potential buying opportunity in bonds?

Brian Levitt:

I'm with Hemant on this one. I view it as a buying opportunity. Reality is I just don't believe inflation will be as bad as some fear. If the economy slows, I would expect rates to come in. So I don't think we're heading to a sustained place over 5%, no, buying opportunity.

Jodi Phillips:

Okay. You're off the hot seat. So now we're going to conclude with one of our newer segments, Think, Rethink. So Brian, tell me something that you believe people are thinking right now, but that you believe they should rethink.

Brian Levitt:

All right. Think. This is stagflation. You've heard that, right, Jodi?

Jodi Phillips:

I have once or twice.

Brian Levitt:

Rethink. Unemployment rates 4.3%. Five-year inflation breakeven, 2.6%. I'm the inflation breakeven guy. So this is neither stag nor flation.

Jodi Phillips:

Okay. So before we go, Brian, where can our listeners follow you for more?

Brian Levitt:

Yeah, thanks, Jodi. Visit invesco.com/brianlevitt to read my latest commentaries. And of course, you can always follow me on LinkedIn and on X @BrianLevitt.

Jodi Phillips:

Thanks for joining. See you next time.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of May 8, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

The profitability of businesses in the financial services sector depends on the availability and cost of money and may fluctuate significantly in response to changes in government regulation, interest rates and general economic conditions. These businesses often operate with substantial financial leverage.

The health care industry is subject to risks relating to government regulation, obsolescence caused by scientific advances, and technological innovations.

Investments focused in a particular sector, such as industrials, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

Currency risk is the risk of an investment’s value declining due to changes in currency exchange rates.

Statements about the dollar being flat since the start of the war sourced from Bloomberg as of May 6, 2026. Based on the return of the US Dollar Index from Feb. 27, 2026, to May 6, 2026.

The US Dollar Index measures the value of the US dollar versus a trade-weighted basket of currencies.

The S&P 500 Index has returned 6.80% since the start of the war on February 28, 2026, according to Bloomberg.

Statements about credit spreads sourced from Bloomberg as of May 6, 2026. Based on the option-adjusted spread of the Bloomberg US Corporate Bond Index.

Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market.

Commentary on earnings per share growth of S&P 500 Index companies sourced from Bloomberg and FactSet for the quarter ending March 31, 2026, as of May 8, 2026. The first quarter of 2026 was the sixth straight quarter of double-digit earnings growth.

Comments on the flat yield curve sourced from Bloomberg, based on the spread between the 10-year and 2-year US Treasury rates.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

A flat yield curve is one in which there is little difference in the yields for short-term and long-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield.

The front end of the yield curve refers to bonds with shorter maturity dates.

Non-farm payrolls sourced from the US Bureau of Labor Statistics as of April 30, 2026.

The economic impact of capital expenditures by hyperscalers sourced from the US Bureau of Economic Analysis as of May 8, 2026.

Capital expenditures (or capex) is the use of company funds to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

Hyperscalers are large cloud service providers, which can provide services such as computing and storage at enterprise scale.

Statements on the fed funds implied probability rate sourced from Bloomberg as of May 6, 2026.

The fed funds implied rate refers to the likelihood of future changes to the Federal Reserve's target fed funds rate.

Commentary on the 5-year US Treasury inflation breakeven rate sourced from Bloomberg as of May 6, 2026.

A breakeven inflation rate is a market-derived estimate of future inflation, calculated by comparing the yield on a standard government bond (nominal) to the yield on a Treasury inflation-protected security of the same maturity.

Commentary on the spread between the 10-year and 2-year US Treasury rates sourced from Bloomberg as of May 6, 2026.

Discussion about “Sell in May” investment results sourced from FactSet, as of Dec. 31, 2025. A $1000 investment in the Dow Jones Industrial Average from January 1928 to December 2025 would be worth $9.2 million. That same investment by an investor selling May 1 of each year to go into Treasury bills and getting back into the market on Nov. 1 would be worth $2.7 million.

Commentary on oil spikes and the following 12-month return of oil and stocks sourced from Bloomberg. Data from June 23, 1988, the earliest data available, through March 30, 2026. Oil prices based on Brent crude oil, which comes from the North Sea and is a global benchmark for oil prices.

Information on 30-year Treasury rates sourced from Bloomberg as of May 6, 2026.

The unemployment rate is sourced from the US Bureau of Labor Statistics as of April 30, 2026.

The 5-year inflation breakeven is sourced from Bloomberg as of May 6, 2026.

Correlation is the degree to which two investments have historically moved in relation to each other.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange.

Earnings per share (EPS) refers to a company’s total earnings divided by the number of outstanding shares.

Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified time period.

Stagflation is an economic condition marked by a combination of slow economic growth and rising prices.

FX refers to foreign exchange, or currencies and their exchange rates.

First-order derivative refers to the immediate, direct effect of a development, while second-order derivative refers to the subsequent, indirect effect.

Rethink Markets and the Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

In this episode, we unpack why strong corporate earnings — not geopolitical headlines — have continued to drive market performance. They also sit down with Invesco’s Hemant Baijal to discuss the global macro backdrop, the US dollar, and where he sees opportunities across rates, foreign currencies, and emerging markets. Finally, we discuss Jerome Powell’s decision to stay on as a Federal Reserve governor, oil prices, and why investors may want to rethink the stagflation narrative.

Rethink Markets: Strong corporate earnings beat the market’s expectations
Rethink Now: A new era for the Federal Reserve

00:00

00:00

00:00

Transcript : Disclosures

Jessica Wise

Hi, I'm Jessica Wise. Welcome to Rethink Now, a series from Invesco’s Greater Possibilities podcast designed to help you make sense of what's happening right now and what it could mean next. Today, Jerome Powell presided over his last Federal Open Market Committee (FOMC) meeting as the Chair of the Federal Reserve. After the meeting, we caught up with Brian Levitt, Invesco’s Chief Global Market Strategist, to get his thoughts.

First, Brian shared his opinion on the Fed's decision.

Brian Levitt

Basically a nonevent. The market has been primed now for a while really, since the war in Iran started, that the Fed was going to hold off on rate cuts. So the big difference coming into the beginning of the year was the market expected three rate cuts. By the time we got to the April meeting, there was no expectation of the Fed doing anything, which is precisely what we got.

I think that what's really important to note, though, is that this is a market that had priced out the three rate cuts without really much incident. The credit markets held up nicely. The equity markets have recovered. And so it's a market that's not beholden on rate cuts. And so the Fed has some time here. But ultimately, I would expect interest rates to go lower as inflation expectations come down and as the economy potentially slows, given some of the lagged effect of $4 a gallon gasoline which hopefully may be changing there.

Jessica Wise

Then we asked Brian what he expects to see from new Fed chair Kevin Warsh.

Brian Levitt

I would expect to see much of the same that we had under Jerome Powell. I know that there are some concerns that Kevin Warsh might be beholden to the president and might come in and want to bring interest rates down substantially, because that's what President Trump has wanted. Ironically, we probably would be at 3% interest rates by now on the Fed Funds had we not done the tariffs and not done the war in Iran. So, I still think that there's room for the Fed to bring rates down to what I think most of us would assume to be more of a neutral rate.

But Kevin Warsh, remember, he's anyone who's chaired a committee; he's chairing a committee. And it's not just him. There will be others on it. And this has been a Fed under Jerome Powell that's largely voted and operated in unison, not at every meeting, but for the most part. And so I don't think it's going to change meaningfully. I think Kevin Warsh is going to continue to look to have a unified Fed or as close to a unified Fed as possible.

And most of the members of the FOMC right now seem pretty committed to holding rates where they are, wait and see, and then slowly bring rates down should the conditions warrant it. And that would be regardless of whether it was Kevin Warsh or Jerome Powell.

Jessica Wise

Finally, we asked how he would sum up Powell’s time at the helm of the Fed.

Brian Levitt

A little bit of a mixed bag. I can't imagine he's all that upset leaving the Fed position with markets at or near an all-time high and with inflation expectations contained. So, he should declare that a victory, right? He left with his good name. He left with price stability. He left with a historically low unemployment rate.

So all of that is good. The reason it's a mixed bag, of course, is because of the response in 2022, when the Federal Reserve was slow to recognize that inflation was heading to 9.5% on a year over year basis, now it's a little bit hard to look back. Hindsight's always 2020. Remember that there were a lot of things operating against him.

First, huge stimulus from the prior two administrations or from Biden and the prior administration. The supply chain challenges. We also have to remember that it was unclear whether we were really getting out of Covid or whether the vaccines were going to work and all these things, so it was hard. He wanted to wait and see. He let the inflation genie out of the bag.

He tightened fairly quickly, got inflation back down and again is leaving office with price stability, pretty close to full employment and markets near an all time high. So mixed. But he can leave with his head held high.

Jessica Wise

Thank you for joining us at Rethink Now, brought to you by the Greater Possibilities podcast. In future episodes, we'll continue to explore the future of Fed policy under its new chair.

Important information

You've been listening to Rethink Now, from Invesco's Greater Possibilities podcast. The opinions expressed are those of the speakers, are based on current market conditions as of April 29, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward-looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Gasoline prices are sourced from the American Automobile Association, as of April 1, 2026. Based on the national average price of regular unleaded gasoline.

On April 15, 2026, The S&P 500 Index closed at a record high of 7,022.95, and the Nasdaq Composite closed at a record high of 24,016.02. Sourced from Bloomberg.

Inflation figures are sourced from the US Bureau of Labor Statistics.

The Greater Possibilities Podcast: Rethink Now is brought to you by Invesco Distributors, Inc.

Brian Levitt shares his quick take on the results of today’s Federal Reserve (Fed) meeting, his expectations for incoming Fed Chair Kevin Warsh, and his assessment of Jerome Powell’s time at the helm of the Fed. (Invesco Distributors, Inc.)

Rethink Now: A new era for the Federal Reserve
Rethink Portfolios: Municipal bonds with Mark Paris

00:00

00:00

00:00

Transcript : Disclosures

Danielle Singer:

Hello, I'm Danielle Singer, head of wealth management portfolios at Invesco, and I'm very excited to bring you the first episode of Rethink Portfolios, a new series from the Greater Possibilities Podcast. This show will go inside the decision-making process of portfolio managers, and we'll bring you in-depth conversations that explore how our experts manage risk, identify opportunities and navigate these ever-changing markets. Speaking of markets, our market-focused show with Brian Levitt and Jodi Phillips will continue as usual alongside this series. So please watch your podcast queue for the latest from them.

Now with that, let's get to our guest. Mark Paris is the chief investment officer and head of municipals for Invesco. I always get the pleasure to speak to Mark, but this is a really interesting time. We have surging energy prices that have put inflation back in the spotlight. The Federal Reserve is entering a new era under Kevin Warsh's leadership, and the midterm elections could bring back a divided government and impact federal spending priorities. So how is Mark and his team navigating all this? Let's find out.

Welcome to the podcast, Mark.

Mark Paris:

Great to be here. Thank you, Danielle.

Danielle Singer:

Now, before we jump in too deep, how would you usually explain municipal bonds to somebody that's not in finance?

Mark Paris:

So I always say, you wake up in the morning, you turn the lights on, we own the power company. You go brush your teeth, we own the water company. You get in your car, you drive to work, we probably own the toll road that you go to work on. So essential services are the backbone of the municipal bond world. Also, borrowing at the county level, at the state level. And then you've got hospitals, universities, school districts. These are all essential projects that get to borrow at a lower rate than corporate bonds because there's a federal law that says that municipalities can do that, and they save a lot of money in doing that. And then they provide a lot of great services in all these different areas that we touch every day.

Danielle Singer:

Wow. So for our listeners, these are things that they live and breathe, things that are very familiar to them. Now you're a seasoned professional in this space. I'd love to know, what are some of the things that have changed the most about this market since you started managing portfolios?

Mark Paris:

I get that question a lot. When you've been around a lot, you get some gray hairs and people start asking you stuff. Maybe the gray hairs are the things that change the most. But look, the reality is obviously technology has affected everybody. When I started on Wall Street in 1990, people didn't have computers on their desk necessarily. There certainly wasn't the internet. Now we're dealing with AI. And what I've learned over the years is you have to embrace change. You have to embrace technology. It is vital for how you provide value for shareholders, how you improve as an investment manager.

But I would also say that the more things have changed, the more they've actually stayed the same. Our market is an unquoted market. It's always been since I've been involved over 30 years now. An over-the-counter market where you have to negotiate prices, where you have to understand the supply and demand aspects of the market, where you have to have really strong relationships with traders, underwriters, salespeople, issuers. And so I always say, yes, you have to be there for technology and you have to adjust. But I also say that this is maybe not quite your father's muni market, but it still has a lot of the same things where advantages go to people who can understand how to take advantage of anomalies that exist in the marketplace.

Danielle Singer:

So this is one of those areas that almost really is, the more things change, the more they stay in the same.

Mark Paris:

Yes. Yes.

Danielle Singer:

And maybe why munis sometimes I think in a good way are called boring, right?

Mark Paris:

In a good way.

Danielle Singer:

In a good way, but we're going to dive into all the reasons-

Mark Paris:

Awesome.

Danielle Singer:

Why they're absolutely not. Let's continue on the current landscape, big picture for munis. What feels most important today for investors to understand about the marketplace?

Mark Paris:

So I think the most important thing is that we came out of a period of time post-COVID where rates were extremely low. And what I continue to hear from investors, from friends, from family members is, "My God, I can't make enough interest in this environment." Well, rates are significantly higher than they've been in quite some time. So I think investors are starting to feel that, starting to enjoy that. And the reality is that, for a long time, you really couldn't get a lot out of fixed income, but now you can clip that coupon, you can gross that up on a tax-exempt basis. And I think investors are excited about that.

Danielle Singer:

Very true. And you brought up a couple different dynamics there. What's more important today? Fundamentals or technicals?

Mark Paris:

I get that question all the time in the muni market. We are still a technically-driven market to a large extent because supply matters, how much new issuance is coming into the market. Parts of the curve where that supply is coming flows into the marketplace, what retail investors are putting into the product. So those are always vital things to look at. However, we are a credit shop, we believe. We have 24 dedicated credit analysts. These analysts do their own research. They look at the Moody's and the S&P reports, but what they really do is put their own proprietary rating on everything that we do.

So yes, it's still a very technical-driven market, but what is that credit doing? What is the competition of that credit? For instance, if we bought a hospital bond in the city of Chicago, what's the next hospital nearby that does similar things to it? How is that going to affect that bond's credit rating? What are the demographics of an area? Is it aging? Are more young people coming in? Those things matter for school districts, for tax basis. So I think always, to me, we start off at the fundamental level and then the analysts give us a strong fundamental opinion. And then the portfolio managers layer on that the technicals of supply and demand and what is going on in the actual over-the-counter, non-quoted market.

Danielle Singer:

That's really helpful. And I'm glad you brought up credit because we are going to dig into that topic in a minute. But you mentioned that investors might be really excited right now about munis. What area might you think they're underestimating though?

Mark Paris:

So I think people have had a little bit of shock here. Interest rates have moved up a lot the last few years. Your NAVs in bond funds, your prices of municipal bonds have gone down over the last few years. And I think people think that what happened in the past is going to happen in the future.

We actually disagree a little bit with that. We think that this is going to be a really positive carry year. We think that rates are going to be in a range this year. We talked about rates being higher, and so when you clip that coupon and gross it up, and so our hope this year is that investors understand that the last couple of years were a bit of anomaly in the muni market. There were a few different things going on. We had some talk about tax exemption going away for a while last year in the One Big Beautiful Tax Bill. Thank God that didn't happen. And that means that the tax exemption is going to last. Not only has it lasted for over 100 years, but I expect it to last going on in the future. So that's really positive.

So I would tell investors, don't be focused on the volatility of the last few years. Be focused on where the yields are. This could be more of a range year, more of a carry year. And they should feel a lot more positive about where the muni market is in 2026 than where it was the last several years.

Danielle Singer:

You read my mind, because thinking about what's on people's minds, headline risk, the macro. Again, before we dive into the technicals and the micro, is there a headline risk you think people are worried about that might be overblown?

Mark Paris:

Yeah. So look, I think you've heard a lot of people, you see people sometimes in the media, sometimes non-muni people, to be quite honest, that talk about general obligation bonds could be in trouble, that state budgets are not doing well, that the muni market is in danger. That is, to me, a little bit of the sky is falling. And I'll tell you why. Tax collections are really strong in this country. Tax collections come from three places in most states. That is property tax collections. Mortgage rates 6-7%. Housing prices continue to go up. We see that in this area, obviously. And so tax collections on property are going well.

Sales tax collections. Right before COVID, a law was passed, if you bought something online, you had to pay the state sales tax on that. So state sales tax collections have been very, very positive the last few years. States have surpluses. Most states have a good surplus. So I think the fears of whether they think that maybe the economy is going to slow down too much or states are going to spend money in the wrong ways, I think that can be a little bit blown out from times. When we do the microcredit research, we find that municipal credits are actually in a really good place because we're watching the tax collections, we're watching the local economies, and we're watching politically what the governments are doing.

Danielle Singer:

Really helpful. As a portfolio manager, I'm going to let you get carried away with the more technical stuff because I know that's where you're raring to go. Let's talk about rates and credit a bit. You mentioned this. Investors tend to not see periods of volatility as an opportunity, but they get nervous, right? They see this as a threat. How should investors think about muni bonds when interest rates are moving around as much as they have? And you talked about that a little bit, but maybe dive a bit deeper into the rate environment.

Mark Paris:

So look, we know that rates have been high. We will get a new Fed chair and we'll see what that means for rates. This economy is doing fine. It's not a runaway economy, but we also don't see it as necessarily a slowdown economy. So again, most of your return in the municipal bond market historically has been from the coupon. And so when you have strong managers that can find really good fundamental credits and really high coupons and hold those coupons for a long amount of time, that's a very valuable thing.

And I think that's a pretty powerful thing to get out of fixed income. It's not what you make, it's what you keep, and you don't have to pay taxes on the muni money. And I think that's where investors are starting to see, "Wow, a couple of years ago I couldn't get this, now I can, and when I gross it up, this is pretty good."

Danielle Singer:

See, not boring at all. You talked about the importance of credit research, the strength of it within your team, but I still think that, even though this is a very tangible part of the market for investors, they drive on the toll roads, they go to the hospitals, they're also very aware of some big household corporate names. So how should investors think about buying a bond from a city or a water department or a municipal instead of just buying that big famous company name?

Mark Paris:

So look, I think that municipal credits are rated. They're out there. They're strong revenue streams. We live here in New York City. The New York City Water and Sewer Authority is one of the strongest credits in the muni market, providing water, providing services to a vast majority of people. And they have a large amount of days cash on hand and they're doing just fine as a credit. The bridges and tunnels that we use in the city, my kids used to laugh at me. We'd go on a vacation and we'd land somewhere and they'd say, "Okay, Dad, tell us what you own. We know you own that tunnel authority, that bridge, that hospital, that university."

So again, as you said, those are the things that we can touch and we can feel and you can see them tangible. You're probably getting a bill at your house with one of the municipal bonds that we own in our portfolio. So it's not a known name, but it's something that you touch and see every day and know that we're doing solid credit research on those things to make sure that we're getting a good coupon and that the fundamentals are right.

Danielle Singer:

Your kids must have thought you were the king of New York owning all of these very important things. Speaking of which, as a born and raised New Yorker myself, I was really interested in Moody's revised outlook on New York. Any thoughts there?

Mark Paris:

Yeah, a lot of thoughts. So as you know, I was born and raised in Brooklyn. I went to college in Manhattan. I've worked my adult life in Manhattan, even though I've lived in New Jersey most of my adult life. I love New York. We were a little bit ahead of the rating agencies, which was great. So we had pared back a little bit, not because we were worried about the credit, but because when something goes on negative watch, you do see some price movements. So kudos to my analyst for being a little bit ahead of that. We are still very comfortable owning New York City. There are still a lot of things that this current administration by the mayor of New York, I mean, talk about that are going to be difficult for him to just do.

You've got a council in the city that has control over a lot of things like property tax. You have the state, which has control over a lot of other taxes. So I think it's going to be a little bit difficult to just enact certain types of change. In the meantime, you've got a very vibrant economy here. You try to get a reservation on a Monday night in New York City, it's not an easy thing to do. We look at the finances of New York City and New York State to be in very good shape. I think that the rating agencies wanted to just be cautious here because change always develops and this new administration is talking about a lot of change, but we're very comfortable owning New York.

We were a little bit ahead of the downgrade. Obviously it's something we're going to continue to monitor, but even when we look out one year, two years, three years, we think the economy in New York is going to be very good. We think that New York City bonds and New York State bonds are going to be solid investments. It just matters when you buy and sell them. And when they go cheap, you want to buy them.

Danielle Singer:

Very constructive comments and very helpful. Where else are you seeing resilience on the credit side?

Mark Paris:

So I think transportation has been one sector, specifically airports. I hear it a lot from folks who come visit us in the New York office. "Wow, I just got off the plane in LaGuardia. I can't believe this place. It looks so different than it did when I was younger." And that's what we're doing really across the country. The United States is putting money into infrastructure, putting money into airports, because origination and departure fees are strong at airports. Then concessions, what do you do when you're at an airport and you're stuck there for a while? You buy that $6 water, you go to the concession stand, you pay 20 bucks for a hamburger.

Danielle Singer:

The smell of Aunt Anne's pretzels.

Mark Paris:

All those things roll into fees for the airports. So airports have great cash on hand. I think back to the COVID crisis and everybody said, "Oh, what's going to happen? No one is traveling." Well, these airports had hundreds of days of cash on hand to weather that storm. These airports are very well run. Sometimes you go to a city and you find that the airport is more vibrant than the actual city that you're in. So there's so much activity. So transportation has been a great place for us.

I would say that some of the education charter schools have really become a much bigger thing in the country, specifically since the pandemic. And so where you do really good credit research, where you understand that there's a good management team in place, we've seen a lot of value there. And then the expansion of suburbs in places like Houston, Florida, California, we've been able to provide the infrastructure for the utilities in the pad that goes in for the house. We don't buy these things as shovel and dirt. We buy these things as houses are being bought and sold there. And then the house pays an assessment to the bond holder for the services that are provided. This is not 2008 where people own multiple houses and they don't live in them. These are primary residences that people are buying. And so we've seen a lot of value there.

The last thing I'd say is, we have a really keen eye right now on healthcare. The One Big Beautiful Bill does cut back on Medicare, Medicaid reimbursements. It'll be more towards the end of 2027 than now. We think there's going to be some selling in the hospital space where people get nervous. They hear that the One Big Beautiful Bill has cut this, and they say, "I don't want to own hospitals." Yet, hospitals that do elective surgery, hospitals that are in the birthing business, hospitals that have sometimes even an endowment or good fundraising possibilities, are in a good demographic area, have good, strong management, we should be able to pick through some of the selling that goes on and really find some good deals in that sector going forward.

Danielle Singer:

So in addition to those comments you just made on healthcare, when you look across maybe rates, yield, duration, credit, the whole spectrum, are there other risks you're monitoring that aren't necessarily keeping you up at night?

Mark Paris:

Yeah. Look, I think as a money manager, everything keeps you up at night. You manage billions of dollars, you realize that it's billions with a B and this is other people's money and you want to do the right thing for them. So I think that's really important to keep in mind, but certainly you have to follow when you manage a fixed income portfolio, what is your duration compared to what is out there in the marketplace? How is that duration going to move with interest rates? What can you do to mitigate that duration? Can you buy some shorter call bonds that can mitigate it? Can you buy some higher coupon bonds? So we're looking at the convexity of our portfolio, the duration of our portfolio, the structure.

Risk is a big part of what we do here at Invesco Fixed Income. I think there are two very strong things that we add to the table in Invesco Fixed Income. The risk parameters that we bring in from our risk team and the investment strategy team, which I'm a part of where we talk about where rates are going, where we talk about where the global economy is going, what the Fed is going to do. And so we bring in a lot of thoughts from the taxable side, from the mortgage side, from the rate side of things into how we're managing the dynamics of a fixed income portfolio. It is municipal bonds, but it's still fixed income.

Danielle Singer:

I love that you're starting to touch on the importance of education and really being 360. For our listeners, when we think about what's in it for them, what are some of the key takeaways? Let's start with, if I'm an investor and I invest in munis today, what should I think about success looking like in let's say five years time when I evaluate that portfolio?

Mark Paris:

So I think when you look at that, you want to know that you're getting a good rate of return, that your price of your bond or your NAV is not eroding that return. And some of that did happen in '22 and '23. Let's be fair. The Fed was very aggressive, rates moved very quickly, but you also had treasury returns that were significantly negative those years. So now that we're past that, I think where investors should see success is looking at their yearly grossed up returns in their potential, in whatever their specific tax bracket is. And if you're getting close to what traditionally you see getting in the equity market on a year-to-year basis in muni bonds with hopefully a little less volatility and price movement and not having to write that check to the tax man, I think that's a pretty successful story.

So, munis are going to be a little bit lower than treasuries on an absolute... With treasuries on an absolute basis, a little lower than credits on an absolute basis. But again, when you gross that up, that is where you should see and feel your success in clipping that higher coupon, which is again, significantly higher than we've seen in a while.

Danielle Singer:

So I think, based on those comments, we might already know the answer to this question, but how should investors think about the importance of muni bonds in their portfolio? Is it about the income? Is it about the taxes? Is it about the stability or it's always going to be about all three?

Mark Paris:

It's always going to be about all three, but I think what sometimes investors miss is the muni market is a pure play on the United States. We're not really worried about steel prices. Tariffs weren't that big of a hit to the muni market. Even oil shocks that we've seen in the past, I remember when Brexit hit and everybody said, "What does that mean for the muni market?" Not a whole lot. This is about local communities, this is about states, this is about the services that they provide. And there's a really good low correlation in munis to the equity market. When you buy a corporate bond, that corporate bond usually has an equity component to it. And if the equity starts to sell off, you're going to see some volatility in that corporate bond, even if rates don't move.

We don't have that in munis. So you have a little bit of a buffer there. I think munis are a great addition to your portfolio because you're investing in infrastructure in the United States and services in the United States. You don't have that global look so that you don't have the geopolitical necessary risk to it. And I think that the tax exemption, therefore, gives you that extra component of, "I don't have to write the check to the IRS." So a little bit of what you all said, but I also believe that the fact that munis are specifically for the United States gives it a bit of an advantage to have a part of your portfolio that is U.S.-centric.

Danielle Singer:

I think that's a great point. And also it gives an investor options. How do you want that exposure?

Mark Paris:

Exactly.

Danielle Singer:

How do you want to own it? What about the listeners that are thinking, "Yeah, this sounds great, but it's only for the rich. It's only for the high income investors." What do you say to that?

Mark Paris:

So I think that's a bit of a misnomer. Nobody wants to pay taxes. I think you can always find a rate that makes sense. And I say this a lot to young people, "You may want to start owning munis now while your income is here, because as your income gets to here, you're going to feel good about moving it." And what I said, low to high. I know we're doing a podcast.

Danielle Singer:

Can't see the hand movements.

Mark Paris:

Sorry about that.

Danielle Singer:

We get it. We get it. I want to turn a little bit to some personal reflections. Is there something that you've learned over your time managing muni portfolios that people might surprisingly not know?

Mark Paris:

Yeah. So I think that you feel an obligation. And I talked about this a little bit earlier. This is a lot of money. I'm a kid from Brooklyn and to see, again, billions with a B, I know that I feel a sense of obligation to our shareholders. I know my team feels a sense of... I love when I get on a team call and I hear, "my fund", "our fund", and I hear that from credit analysts. I hear that from quantitative people. I hear that from portfolio management. Everybody has a vested interest in doing what's right for the shareholder. And I think sometimes you see a headline on Wall Street, "This Wall Street person makes this much, this firm is doing that." We are here for our clients. We are here for our shareholders and we care deeply about them.

And I will tell you that when I talk to members of my team about a bond, about the performance in the portfolio, about what we're doing, it's always with that underlying current of, what is best for the shareholders and how are we doing things? And I've been here a long time. This is my 24th year here at Invesco, and I feel like that's been the driving force of what keeps our department focused and what keeps our department grounded. And we're always going to have that philosophy. Shareholder first, care, thoughtfulness. Not what's important for us, what's important for the shareholder.

Danielle Singer:

I think our listeners probably really appreciate hearing that and clears up some maybe misconceptions about portfolio management and Wall Street and the like. Speaking of misconceptions, what is maybe one other misconception about muni bonds that you'd love to clear up?

Mark Paris:

So I think people hear municipal bonds and we talk about the fact that it's a non-quoted market and the word illiquidity comes up. I've been in this business a long time, over 30 years. This is not an illiquid market. This is a market where professionals can find liquidity. We have a very large amount of municipal bonds that we manage in high-grade, high-yield, down the curve, up the curve, separately managed accounts. And so we know how to negotiate with the street. We know how to get liquidity when we need it. We know how to manage the portfolio so that there are pockets of liquidity and pockets of yield that's throwing off good yield that maybe we don't want to actively sell. So I hear a lot from other markets, "Well, the muni market isn't as liquid as the treasury market." No, nothing is as liquid as the treasury market, but we're not as illiquid as people think.

Good managers who create good portfolios. I always tell my portfolio managers, "Don't tell me you have no liquidity when you need liquidity. You better be building liquidity up constantly in the portfolio." And so, I get a little bit personal about it because I've been in the muni market a long time. I've worked with people on our staff who've been with me a long time, and we always feel like that's a little bit of a bad rap. We find liquidity when we need it because we have good relationships, we build portfolios the right way and we understand the dynamics of the muni market.

Danielle Singer:

Mark, I think we've given our listeners a lot to chew on around municipal investments. It has been an absolute pleasure.

Mark Paris:

Thank you, Danielle.

Danielle Singer:

Thank you. And catch you all next time.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Portfolios.

The opinions expressed are those of the speakers, are based on current market conditions as of April 10, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

Diversification does not guarantee a profit or eliminate the risk of loss.

Mortgage rates sourced from Freddie Mac.

Discussions about most of the return in the municipal bond market coming from the coupon based on Bloomberg Municipal Bond Index data sourced from Morningstar and Bloomberg from 2011 through 2025.

The Bloomberg Municipal Bond Index is an unmanaged index considered representative of the investment grade tax-exempt bond market.

Discussion about negative Treasury returns in 2022 and 2023 based on the Bloomberg US Treasury Total Return Index, which measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

Discussion about the correlation between municipal bonds and the equity market sourced from Bloomberg as of Dec. 31, 2025. The 10-year correlation between The Bloomberg Municipal Bond Index and the S&P 500 Index was 0.44.

The 30-year AAA muni-to-Treasury ratio was 92% as of March 31, 2026, sourced from Bloomberg.

Discussion about tax-equivalent coupons for muni bonds sourced from Bloomberg, based on the Bloomberg Municipal Bond Index as of March 31, 2026. The tax-equivalent yield for an investor in the top tax bracket is near its high over the past 15 years.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/or interest.

High yield bonds, or junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

The health care industry is subject to risks relating to government regulation, obsolescence caused by scientific advances, and technological innovations.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Correlation is the degree to which two investments have historically moved in relation to each other.

A coupon is the annual interest rate paid on a bond, expressed as a percentage of the face value.

“Grossing up” refers to the fact that municipal bond interest is generally exempt from federal income tax. You would require a higher yield on a taxable bond to end up with the same income on an after-tax basis.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

"Carry" refers to the income earned from holding a bond over a specific period, primarily derived from its coupon payments minus any financing costs.

A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments, or other debts.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates.

A general obligation bond is backed by the credit and taxing authority of the issuer rather than revenue from a project.

Net asset value (NAV) is the per-share value of open-end and closed-end funds and exchange-traded funds (ETFs).

The Greater Possibilities Podcast: Rethink Portfolios is brought to you by Invesco Distributors, Inc.

Host Danielle Singer sits down with Mark Paris, Chief Investment Officer and Head of Municipals, for a timely, in-depth conversation on the municipal bond market — why it matters, how it works, and what investors may be missing right now.

Rethink Portfolios: Municipal bonds with Mark Paris
Rethink Markets: The war with Iran, market indicators, and the realities of private credit

00:00

00:00

00:00

Transcript : Disclosures

Brian Levitt:

Welcome to Rethink Markets, a series from the Greater Possibilities Podcast. I am Brian Levitt, and with me, as always, is Jodi Phillips. Hey, Jodi.

Jodi Phillips:

Hey, Brian. We've certainly got no shortage of market news to talk about today, but first, let's explain the new intro to our listeners. The Greater Possibilities Podcast has been going strong for five years, and we're shaking things up a bit now.

Brian Levitt:

Yeah, we are, and we're welcoming some new series into the Greater Possibilities family. It is time. We are now a Greater Possibilities channel, which is very exciting. So our colleague, Danielle Singer, will be hosting a series called Rethink Portfolios. Those are going to be deeper dive interviews with portfolio managers about how they're managing risks and finding opportunities. Much more in depth, Jodi, than our quick phone a friend segments. I'm looking forward to it.

Jodi Phillips:

That's right, I am too. In addition, we'll produce some special episodes called Rethink Now, where we give a quick rapid response to breaking news that's impacting markets. But the most important thing for our listeners to know is that they don't have to do anything different to get these episodes, they're all part of the Greater Possibilities Podcast Channel. So if you're subscribed to us, you get it all.

Brian Levitt:

That's right, we're giving them three for the price of one.

Jodi Phillips:

Yeah, I mean, it's free, so let's not forget that. But yeah, three for the price of one. So back to today, coming up in a bit we're going to have a conversation with Scott Baskind, who's the global head of private credit for Invesco, for a conversation on the current realities of private credit. In response, of course, to the ongoing headlines emanating from that space. But before that, let's get to our first segment.

Narrator

Trending conversations.

Jodi Phillips:

All right, Brian, what's trending?

Brian Levitt:

I think it still has to be the war in Iran.

Jodi Phillips:

Yeah, of course. That is still ongoing. You said in our last episode that the impact on the global economy and the markets of that is going to depend on the duration of the conflict and the closure of the Strait of Hormuz. At this point in time, early April, are we in the danger zone now?

Brian Levitt:

Well, I guess let me first let you in on a little bit of a secret, Jodi.

Jodi Phillips:

Yeah.

Brian Levitt:

That secret is I'm not a military expert. I'm also going to maybe ruin things for you as well to let you know I wasn't a molecular biologist in 2020 at the time.

Jodi Phillips:

Understand, understand. You just played one on TV.

Brian Levitt:

Yeah. Look, I mean, when you do what I do for a living, people want you to have opinions on these things. I think of myself as a markets guy, and so basically what I want to discern is what the market is telling me, rather than give you the timeframe for the conflict that puts us into the danger zone.

Jodi Phillips:

Well, that makes sense. I mean, chief global market strategist, yeah, markets guy. So what is the market telling you at this point?

Brian Levitt:

Yeah, I'm not chief military strategy, molecular biologist strategist. So the crude oil forward curve is still in backwardation. I think that's a good sign in terms of whether the market is considering this danger zone.

Jodi Phillips:

Yeah. Of course, what backwardation means is that the prices are higher for delivery in the short term than for delivery in six months and 12 months. So if the market's expecting $75 a barrel for oil in 12 months, which would be significantly lower than where it is today, that means markets expect the conflict to have ended by then.

Brian Levitt:

Right, and so yeah, it takes away me having to think about this from a military perspective, what's the market telling us? If I think of other preferred indicators of distress, things you and I, Jodi, have talked about for years, whether it's inflation expectations, whether it's credit spreads, whether it's the US dollar, I mean, admittedly, they're moving in the wrong direction, I think that's clear, but they're not pointing to disaster, which is critical.

Jodi Phillips:

Good. Well, that's good to hear. You mentioned credit spreads, right? Spreads for investment grade and high yield are still below average.

Brian Levitt:

Yeah, remarkably. Look, if you zoom in on it, it's moved up. The credit spreads have widened out a little bit. But you zoom out over a three or five-year period, it's not substantial. That's indicative, I would say, of the fundamental strength of the US economy and US businesses going into this event. Now, don't get me wrong, it's clear the economy is slowing. How could it not? The nearly synchronized global expansion that we had forecasted has faded with the conflict. That's disappointing. I mean, it was a very nice setup for the global market. So it's a slowdown, but right now, in terms of the things that we like to watch, there's little to suggest that something more ominous is occurring.

Jodi Phillips:

Okay. Well, speaking of the fundamental strength of businesses, we're going to turn to our next segment.

Narrator

Phone a Friend.

Jodi Phillips:

This is where we caught up with Scott Baskind for a conversation on private credit. First we asked Scott, what's been driving the negative headlines that have been coming out of this space? And here's what he had to say.

Scott Baskind:

Yeah, it's a great question. I think if we take a step back to 2025 and the confluence of events that really led towards the first two high profile defaults, First Brands and Tricolor, and then the subsequent media covering the space and really painting private credit with a singular brush, and the expectations that on the heels of that there would be additional fraud, and I think there's many quotes out there from Jamie Dimon and many other high profile individuals that really started to paint the picture that private credit in totality was having challenges.

Fast-forward to where we are today and some of the evolution, if you will, or the AI expansion with Anthropic and others that have had some fairly significant impacts on the technology sector, and in particular the software space, which happens to be the largest component or single sector within private credit, there's been a level of panic, if you will, and I think some justified, and as always some overreaction. When I think about the broad market, credit concerns do become liquidity concerns in some instances. I think what we're finding is some of the reasons that have translated from credit to liquidity facing some of the largest public vehicles and public BDCs, if you will, leaves us where we are today from a market perspective. So I think there's some reality and some perception that we should look to tackle here.

Jodi Phillips:

Next, we asked Scott for his opinion on what the reality is of the situation and how concerned he is about it, and here are his thoughts.

Scott Baskind:

Yeah, as I mentioned, I think the credit concerns becoming liquidity concerns is something that, unfortunately, the market faces throughout different cycles and throughout history, if you will, I think maybe starting from the structural elements. These funds are doing exactly what they're supposed to do, protecting existing investors' medium liquidity that was deemed to be appropriate for these types of structures with these types of semi-liquid or less liquid assets in it. I think this reality of what's occurring in the market is not necessarily tied towards credit, but just broad market concerns.

So from a corporate credit perspective, what's I think really important to set the bedrock is broadly corporate credit remains on the sound footing. Revenues, EBITDA across the asset class remains positive, but there's certainly different pockets that are being more impacted by the continuation of inflationary pressures, by continuation of supply chain disruptions. Clearly, everyone's being impacted by the geopolitical environment that we find ourselves in, and software is clearly at the heart of concern due to the pace of change and the acceleration of change within the AI ecosystem, if you will.

I think what's most important for investors and interested parties to recognize is, while software is the largest component of tech and the largest component of the private credit allocations, if you will, they make up about 20% or approximately 20% of the broad market, quite consistent with US GDP, if you will. That's heavily concentrated in a number of funds, not in the breadth of funds in the broad market. I think the remainder of the market is very well diversified across sectors, across different industries, if you will, and the focus of lending to companies that should be characterized as old economy, more defensive and less growth-oriented, is really the bedrock of private credit in general.

Jodi Phillips:

Next, we asked Scott where he is seeing the best opportunities in the space, and here's what he had to say.

Scott Baskind:

Yeah, so opportunities is an interesting one in today's environment, and it's very much, I would say, bifurcated or barbelled, if you will, both between lending strategies and opportunistic opportunities and stressed opportunities. On the lending side, what's quite interesting is as markets tend to correct themselves, what we do traditionally look for and likely find is really good companies that are in need for capital for purposes of acquisition financing, capital markets activities, if you will. Those are really good companies to underwrite today. As we underwrite credit in more uncertain economic environments like we're in today, we're building stronger capital structures, we're building much greater protections as it relates to subordinated debt and/or equity cushions from a enterprise value perspective, which is really important, and we're incredibly conservative and the market has been conservative as it relates to putting capital to work in certain sectors. From a performing perspective, really interesting opportunities to put capital to work and deploy capital in this marketplace.

The other avenue that I think investors are very much excited about is on the opportunistic side. As we're seeing deterioration in certain sectors and weakness in certain companies and opportunities, there's certainly a need for capital and liquidity. Opportunistically, we're able to invest in companies that are in need of that type of growth capital, if you will, in order to continue to meet their objectives in terms of their underlying strategies. This capital markets evolution or cap solutions has been a tremendous component of how we've been putting capital to work for the broad market. That opportunity is barbelled, as I mentioned, performing credit and then companies that are in need of some capital, really allows investors to share in both income-oriented opportunities and also total return opportunities today.

Jodi Phillips:

Finally, we asked Scott if he believes that the democratization of private markets is going to continue, and here's what he said.

Scott Baskind:

Yeah, I think it's great, and it's obviously thematic given some of the challenges more publicly that the markets are facing. I think there's likely to be a bit of a pause or a slowdown in that, but we truly believe that over the medium to longer term that this opportunity for the wealth channels for retirement is very much embedded in what private markets ultimately can bring towards a broader diversified allocation. We do not anticipate a long-term hiccup here. Clearly, markets go through pauses and corrections. We view this as an opportunity. We're continuing to spend an enormous amount of time educating our partners, our clients on a global basis, and that's really important to making sure that democratization continues over a longer-term basis. This is a slow path, if you will, from low single-digit allocations to what's ultimately expected to be something at or near 10% over time. This is a long-term perspective, it's likely to morph over time as it relates to the pace, but we remain quite excited and quite confident in that.

Jodi Phillips:

Thank you, Scott, for joining Rethink Markets. Now, we're going to move on to our next topic.

Narrator

I disagree.

Jodi Phillips:

This is where Brian takes a statement that's been in the news recently and disagrees with it. What's it this time, Brian?

Brian Levitt:

Yeah, I've been political the last few times. I don't necessarily mean to be, but it's just so in focus. I'm going to go with President Trump, "We don't use the Strait," meaning, of course, the Strait of Hormuz, "The United States, we don't need it."

Jodi Phillips:

"We don't need it." Okay, so let's dig into that disagreement a little bit. I mean, before this conflict started, did the oil going through the Strait get exported here to the US?

Brian Levitt:

No, not a lot, and that's what President Trump is alluding to. More than 80% of the exports of oil going through the Strait of Hormuz went to Asia. I think it's estimated a couple of percent of the oil ended up in the United States. That's where I guess there's a bit of agreement with Trump's statement, but disagree entirely in terms of implications and what it means.

Jodi Phillips:

Right, it's the impact, because we still have $4 a gallon gasoline nationally.

Brian Levitt:

We do. I'm feeling it. You feeling it, Jodi?

Jodi Phillips:

Yes, I'm feeling it, for sure.

Brian Levitt:

Yeah. Considering an electric vehicle?

Jodi Phillips:

Well, I don't know. I don't know. I don't know. We'll see. But yeah, I have to fill up my car, my son's car. Yeah, it's a lot.

Brian Levitt:

It's a lot. Look, why do we need it? It's because, of course, oil is priced globally and any type of disruption raises prices everywhere. So yeah, the hit to the Asian economies is bigger, it's why you're seeing a strong dollar, they are more dependent on oil imports. The US benefits from the energy renaissance that we had over the past couple of decades. But don't get it wrong, this is why I disagree, the United States would benefit significantly from the Strait being reopened.

Jodi Phillips:

Because of oil and gasoline prices going down.

Brian Levitt:

Yes, exactly.

Jodi Phillips:

All right. So next segment, we're going to put Brian on.

Narrator

The Hot Seat.

Jodi Phillips:

All right, Brian, let's run through these questions pretty quickly. Do you think that the market was right to price out Fed rate cuts?

Brian Levitt:

Well, right or wrong, Jodi, it happened. The important thing is it happened without significant incident to the credit or equity markets. That's important. Ultimately, I still think the funds rate is going to 3%. The conflict has just stalled that for the time being.

Jodi Phillips:

Okay. So to that point, do you think the war is a bigger hit to inflation or to growth, or is it stagflation?

Brian Levitt:

Well, you and I both basically suggested that it's more of a hit to growth. I view it as a tax on the consumer, that $4 a gallon gasoline, or more in parts of the country. That's a bigger hit to growth. The stagflation points are a bit hyperbolic. In the mid 1970s, let's remember, that's where the term stagflation came from, the unemployment rate was above 8% and inflation was double digits. That's stagflation, and that's usually the result of policy mistakes by the US Federal Reserve. Today, obviously, the unemployment rate's substantially lower than 8%. The inflation rate is not even close to double digits. So stagflation, usually a policy mistake, not a short-term spike in commodity prices because of a war.

Jodi Phillips:

Okay. Switching gears a bit, how can the benefits of artificial intelligence potentially help non-US markets?

Brian Levitt:

Yeah, this is a good one. I like the question. So the first wave of performance within the AI trade really came from the hyperscalers, the chip companies. Of course, many of those businesses were domiciled in the United States, and they now make up a fairly heavy concentration of the S&P 500 index, as most people spent 2025 pointing out. Now, if you consider the MSCI All Country World Index, excluding the United States, that index has significantly greater exposure than the S&P 500 does to sectors and industries like healthcare and industrials and logistics and financials. If you think about parts of the market that potentially stand to benefit the most from artificial intelligence, I think those are some of the ones that many put near the top of the list, particularly things like healthcare, industrials, etc. So that's where a lot of the optimism was coming in early in the year around non-US markets stalled a little bit because of Iran, but ultimately I think we get back on that path. That's a structural story versus the conflict, which is a very near-term story.

Jodi Phillips:

Okay, and with that, you are off the hot seat. We're going to conclude this episode with one of our newer segments called Think, Rethink. Brian, tell me something that you believe people are thinking right now but you think they should rethink.

Brian Levitt:

People are thinking that the business models of software companies have been meaningfully disrupted by artificial intelligence. You've seen that in the valuations of the software businesses. You've seen that in some of the concerns in private market that we recently discussed with Scott Baskind. But if we rethink that, what you're seeing in the headlines, the earnings for software and broader infotech companies in the S&P 500 have generally been beating expectations and by a meaningful margin. Mega cap and large cap software oriented platforms beaten consensus by roughly 8% on average. Analyst estimates for 2026 earnings have been revised higher for many of these names. So think software's going away? Rethink when you take a look at the results that they've had.

Jodi Phillips:

Very good. So before we go, Brian, where can our listeners follow you for more?

Brian Levitt:

Yeah, thanks, Jodi. Visit invesco.com/brianlevitt to read my latest commentaries. Of course, please follow me on LinkedIn and on X, @BrianLevitt.

Jodi Phillips:

Thanks for joining. We'll see you next time.

Brian Levitt:

Thank you.

Important information

You've been listening to Invesco's Greater Possibilities podcast, Rethink Markets.

The opinions expressed are those of the speakers, are based on current market conditions as of April 7, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

The health care industry is subject to risks relating to government regulation, obsolescence caused by scientific advances, and technological innovations.

The profitability of businesses in the financial services sector depends on the availability and cost of money and may fluctuate significantly in response to changes in government regulation, interest rates and general economic conditions. These businesses often operate with substantial financial leverage.

Alternative investment products may involve a higher degree of risk, may engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, may not be required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual portfolios, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. There is often no secondary market for private equity interests, and none is expected to develop. There may be restrictions on transferring interests in such investments.

Comments on the forward curve for oil prices sourced from Bloomberg, L.P. as of April 1, 2026. The forward curve is a graphical representation of the current market prices for oil delivered at different future dates. Backwardation occurs when the current price of oil is higher than the prices in the futures market.

Discussion about indicators of stress sourced from Bloomberg, L.P. as of April 1, 2026. Inflation expectations are based on the 5-year US Treasury breakeven rate. Credit spreads are based on the option-adjusted spread of the Bloomberg US Corporate Bond Index. The US dollar is based on the US Dollar Index, which measures the value of the US dollar versus a trade-weighted basket of currencies.

Comparison of investment grade and high yield credit spreads sourced from Bloomberg, L.P. as of April 1, 2026. Credit spreads based on the option-adjusted spread of the Bloomberg US Corporate Bond Index and Bloomberg US Corporate High Yield Bond Index.

A breakeven inflation rate is a market-derived estimate of future inflation, calculated by comparing the yield on a standard government bond (nominal) to the yield on a Treasury inflation-protected security (TIPS) of the same maturity.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.

The Bloomberg US Corporate High Yield Bond Index measures the US dollar-denominated, high yield, fixed-rate corporate bond market.

Discussion about oil going through the Strait of Hormuz sourced from the International Energy Agency as of February 28, 2026.

Gasoline prices sourced from the American Automobile Association, as of April 1, 2026. Based on the national average price of regular unleaded gasoline.

Discussion of the unemployment rate and inflation rate in the 1970s sourced from the US Bureau of Labor Statistics.

Discussion of the sector concentration of the S&P 500 Index and the MSCI All-Country World ex-USA Index sourced from Bloomberg, L.P., as of April 1, 2026.

The MSCI All Country World ex USA Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the US.

Discussion of software company earnings sourced from Bloomberg, L.P., as of April 1, 2026. Based on Bloomberg consensus estimates.

Statistics about the size of the software market sourced from JP Morgan as of February 2026.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates. Duration is expressed as a number of years.

Hyperscalers are large cloud service providers, which can provide services such as computing and storage at enterprise scale.

Stagflation is an economic condition marked by a combination of slow economic growth and rising prices.

The federal funds rate is the rate at which banks lend balances to each other overnight.

EBITDA stands for earnings before interest, taxes, depreciation and amortization.

BDC stands for Business Development Corp., which are publicly regulated investment companies in the US that provide capital to small and mid-sized private companies, typically through loans.

Rethink Markets and the Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

What is the market telling us about the conflict in the Middle East? Brian Levitt discusses what he’s seeing from his preferred indicators of distress. Then, we talk with Global Head of Private Credit Scott Baskind about the current realities of private credit and the ongoing headlines emanating from that space. (Invesco Distributors, Inc.)

Rethink Markets: The war with Iran, market indicators, and the realities of private credit
A software-driven selloff, an incoming Fed chair, and economic resilience

00:00

00:00

00:00

Transcript : Disclosures

Brian Levitt:

Welcome to Invesco's Greater Possibilities podcast. I am Brian Levitt, and with me as always is my co-host, Jodi Phillips. Hey, Jodi.

Jodi Phillips:

Hey, Brian. So later in the show, we're going to speak with Senior Portfolio Manager Justin Livengood about the tech-led selloff that's happening as we're recording this today. But first, we have a full agenda to cover. It's already February, Brian, and this is the first time we've recorded together in 2026. Our January podcast was you talking with AI futurist Zack Kass, which was fascinating, by the way.

Brian Levitt:

I enjoyed that.

Jodi Phillips:

Yeah, it was a great conversation. But that means we've got a whole month's worth of headlines to cover right now. So there's plenty to talk about, don't you think?

Brian Levitt:

Yeah, I think there's always plenty of talk about it. I think I was saying the other day, Jodi, anytime I've been introduced in my entire career, somebody said, "Well, it's good we have Brian here, there's plenty to talk about right now." So yeah, there's probably always a lot to talk about.

Jodi Phillips:

That's a fair point. There is always a lot going on, but really, doesn't it feel like more than usual right now? It does to me.

Brian Levitt:

Yeah, yeah, I would consent that events have been happening at a feverish pitch.

Jodi Phillips:

And so that means we'll need to proceed at a feverish pitch to cover them also.

Brian Levitt:

Cover them at a feverish pitch, yeah.

Jodi Phillips:

Yes. Are you ready?

Brian Levitt:

Yeah, sure. Let's do it.

Jodi Phillips:

All right. All right. Let's do Venezuela first.

Brian Levitt:

Yeah, that was too small of an economy. The world had a lot of oil, not a huge issue.

Jodi Phillips:

Okay. Iran.

Brian Levitt:

Same. Also, too small of an economy and the world has ample supply of oil.

Jodi Phillips:

So when you say too small of an economy, just to make sure I'm clear, you're saying too small of an economy for that conflict to have much of an impact on markets?

Brian Levitt:

Correct.

Jodi Phillips:

Okay.

Brian Levitt:

Or much of an impact on the trajectory of the major economies of the world.

Jodi Phillips:

Yep, okay.

Brian Levitt:

Yeah.

Jodi Phillips:

Greenland.

Brian Levitt:

Also too small. The big issue with Greenland was tariffs on Europe, and that could have resulted in less optimal economic outcomes, particularly at a time when we're looking to contain inflation. But Jodi, as my kids say, that's so last month.

Jodi Phillips:

That's so last month.

Brian Levitt:

So last month.

Jodi Phillips:

All right. Well, we're in February. Let's move on.

Brian Levitt:

Yeah.

Jodi Phillips:

Federal Reserve independence.

Brian Levitt:

Yeah, although the markets, at least for now, seem to have been reassured by the selection of Kevin Warsh. I know we're going to talk about this a little bit later on, but not a significant issue right now for markets.

Jodi Phillips:

Okay, great. Now, how about the tech selloff?

Brian Levitt:

Yep, bingo. There you go. So all of these others, too small. What we're seeing in the tech sector right now, of course. And so we'll cover that on this pod.

Jodi Phillips:

Okay. So with that in mind, we'll move on to our next segment.

Speaker 3:

Trending conversations.

Jodi Phillips:

So Brian, I have a feeling I know what you're going to say, but what are you being asked about these days?

Brian Levitt:

Yeah, we gave it away. I would say the recent downturn in tech stocks, more specifically software companies, but also what we're seeing in precious metals, what we're seeing in Bitcoin. There's just been more volatility in different parts of the market that I think investors have been used to seeing for quite a while.

Jodi Phillips:

Yeah, for sure. I mean, it will be a few days before we can post this, but as we record this, the NASDAQ 100 is down between 2.5 and 3% from the start of the year, and it's about 6% off of its all time high reached in October. So in your opinion, Brian, does that sound like a bubble popping?

Brian Levitt:

No. And it's not all parts of tech. It's not all parts of the market. There's plenty of sectors of the S&P 500 that are positive this year. In fact, as we record this, the semiconductor industry or semiconductors index is positive this year. So no, it's not as if the whole AI trade is coming down together like a bubble. It's just behaving less like a monolith. The markets are becoming far more discerning, particularly within software, assessing the potential winners and losers.

Jodi Phillips:

Okay. Are you surprised by that?

Brian Levitt:

No. I mean, if you remember, we were very purposeful in naming our outlook resilience and rebalance. Now, you might remember I wanted to call it KPop Demon Hunters or something.

Jodi Phillips:

Of course, yes, yes.

Brian Levitt:

Yeah, but you wouldn't let me. And you were probably right about that as you often are. So the resilience thing was all about the global economy. Still feel good about that. In fact, our leading indicators are moving into expansion for a lot of the world. The rebalancing was really about diversifying away from mega cap growth and the so called AI trade.

Jodi Phillips:

Okay. So how are you feeling about that outlook now that we're a month into 2026?

Brian Levitt:

Yeah. Well, so far so good. We got to be clear. And given that these things are recorded, people can always go back and get them. But one month doesn't make a year, I know that. And I'm certainly not a baseball pitcher, but you never want to talk to a pitcher during a no-hitter. So you don't really want to brag about five weeks of performance. But yeah, it's been a better start for mid-caps as we had expected. It's been a better start for more value-oriented parts of the market, and it's been a better start for non-US equities. And that's all about diversifying away from what had become a mega cap growth story that was priced for a lot of really, really good things happening.

Jodi Phillips:

Well, so then in your opinion, what do we need to see for that good start to continue?

Brian Levitt:

Yeah, so you continue to need to see an improving economic backdrop both in the United States and around the world. And you'd like to see policy easing in the United States, Federal Reserve lowering interest rates down to what we would categorize as a more neutral or more reasonable level, probably Fed funds rate around 3%.

Jodi Phillips:

That seems reasonable.

Brian Levitt:

Yeah, improving backdrop. US easing does seem reasonable. I think so. It's funny, as we record this, all the negativity, it wasn't that long ago, only a handful of days before we recorded this where I was quite enthused by the ISM manufacturing PMI that had come out.

Jodi Phillips:

Yeah. The Purchasing Managers Index, which of course, surveys the people who make the big decisions in the manufacturing sector. So what did that tell you?

Brian Levitt:

Yeah, new orders were really strong. Okay. You saw a pretty significant increase in new orders. What does that mean? New orders come in. That's a pickup in economic activity. And the prices paid component has been fairly flat over the last, really since October. So new orders up, prices paid relatively benign. We like that.

Jodi Phillips:

Yeah. Sounds good to me.

Brian Levitt:

So that's the type of backdrop we're talking about where the economy can pick up and the Fed could ease. So despite all of the, I don't know, do we call this carnage, whatever we call this, the recent... I don't know, when did 2% down in the S&P become carnage? But underneath there's a lot more happening than that and we get that. And so we look through that, the fundamentals of the economy still looks sound.

Jodi Phillips:

Okay. And then that brings us to?

Speaker 3:

Phone a friend.

Jodi Phillips:

So we put in a quick call to Senior Portfolio Manager Justin Livengood to talk about this tech-driven selloff. First, we asked Justin, what is driving this selloff? And does he think it's the bursting of the bubble that so many feared? Here's what he had to say.

Justin Livengood:

Yeah. Well, it's almost a year exactly to the day when we had the selloff in the markets last year around DeepSeek and the potential implications that had on AI. So it's sort of appropriate that now we have the latest bit of volatility in the equity markets that again, is somewhat driven by AI. This time it is affecting software stocks. But the question in the market is more than just around tech and AI. There is definitely some change going on with momentum, which this week, for example, has had a couple of really sharp selloff days following some really sharp rallying days. In fact, it's interesting, the markets are sitting still very near their highs. And in fact, the equal weight market basically at its high. The breadth in the market has hung in there quite well.

I don't think that this is some bursting of a bubble. Look, momentum once or twice a year gets overbought to a point where you need to release some pressure. And that's going on right now. There are a handful of pockets in the market that have had incredible runs even year to date. Stuff like that needs to correct, of course. And that's part of what's triggered this selloff and part of what has, I think, moved some of the higher momentum names back down a bit. But it isn't the same broad selloff that we saw last year, for instance, with DeepSeek or in past momentum corrections.

I can think of some broader market pullbacks that were much more painful, much more systemic. This is much more selective, and that's somewhat a good thing. It's responding more to some of the macro stuff going on, again, around defense, around the geopolitical situation, a little bit around earnings. We're about halfway through the earnings season, and so people are reacting to some really strong earnings still in the industrial space and some strong earnings in semiconductors offset by weaker consumer and software-related earnings reports. So some of this is just natural volatility in earnings season that happens to coincide with some of this momentum part of the market being particularly extreme, and so it's somewhat healthy. I'm not particularly concerned about the market, though, comma, though I do think that it would make sense the market chops for a while in the first part of the year, given how strong last year and last couple years have been and as this rotation that I know we're going to talk about in a second continues to play itself out.

Frankly, I think it's good that some of the Mag Seven stocks are resetting as far as valuation and sentiment. A broader market is a healthier market, and I'm not just saying that as a small mid-cap guy, I genuinely believe that's true. I think last year was getting a little uncomfortable to have so much return coming from the top seven or 10 stocks. So it's not all bad. I think some of what's happening is healthy, and I don't think this is the beginning of some major bubble burst that leads to a double-digit type correction in the equity markets.

Jodi Phillips:

Finally, we asked him about his views on a rotation within growth and whether he thinks it may be time to rotate back towards tech, software, AI, and here's what he told us.

Justin Livengood:

The market has definitely been rotating from growth to value, although the definitions of those two really keep moving around a lot. I mean, there's a lot of growth in industrials. There's even a lot of growth right now in energy to very value traditional sectors. And so I don't totally think about it in the growth and value context, but you're right, there's been a lot of rotation by sector that started really last summer and has really picked up steam and pace in the last three, four months. I think that a lot of the industrials and energy rallying has legs. There might be some chopping and backfilling here in the short run, but earnings have been really, really good.

And this is just with the economy starting to turn. Monday, we had the best ISM number we've seen in probably a couple years, which has really started to reflect resurgence and activity in the broader economy, industrial economy. We're starting to see the benefits finally as some of the reshoring that's been talked about for a couple years. So I'm really bullish on industrials and to a degree, in energy and materials. We're seeing it in earnings, and I think the stock moves are largely justified. The flip side is, yeah, going back to the discussion around AI and software from a second ago, there's been a huge rotation out of software into semi and other parts of the market that are less affected. I definitely think that software companies are, and that part of the market that's affected negatively by the emergence of AI are getting to a valuation level that's intriguing, but valuation by itself is not enough to spark a recovery.

And I don't think those areas are yet fully washed out. And I don't think importantly, there are fundamental catalysts that are going to turn the stories and the fundamentals back in favor of some of those groups. So no, I would not say it's time to rotate towards software. Now, you asked tech generally, again, I think within tech, semiconductors are still probably a pretty interesting area, maybe a little stretched, but fundamentally unbelievable things are happening in semiconductor land and look no further than last night when Alphabet announced that they're going to spend 40% more on CapEx this year than anyone expected, which is 50, $60 billion of incremental spend. A lot of that's on data centers, servers, and semiconductor equipment or chips that will require semiconductor equipment. So the spend on the AI ecosystem continues at an incredible pace. That spend is largely from well-heeled, large customers that can write checks, they're not just borrowing money.

I don't think it's yet time to go contrarian and start buying the cheaper beat up software stocks yet. That moment may come, and it probably will come, and it might even be later this year, but I think February is still a bit too soon.

Jodi Phillips:

Thanks for joining us, Justin. Now we have-

Speaker 3:

I disagree.

Jodi Phillips:

All right, Brian, so what are you disagreeing with at the moment?

Brian Levitt:

I'm going to ask your permission. Can I go back 16 years on something I disagree with?

Jodi Phillips:

You've had something lingering for 16 years that you disagree with?

Brian Levitt:

Yeah, maybe. I would say not every day. It's not as if I'm perseverating over it, but yeah, I've got something 16 years later that I want to talk about.

Jodi Phillips:

I am super intrigued, so go for it.

Brian Levitt:

Yeah, don't worry, It's timely. So I want to go back to words from Kevin Warsh, who of course will be the next Fed chair if approved. So this is something he said in September 2009. If they, meaning the Federal Reserve, waited to raise rates until the economy returned to normal growth, they would almost certainly have waited too long creating an inflation problem.

Jodi Phillips:

Okay. That's an interesting quote because that does not sound like the dovish Fed chair that the administration wanted.

Brian Levitt:

No, it does not. And I could not have disagreed more with Kevin Warsh than I did in 2009. Honestly, it was baffling to me at the time, anyone who thought, including Mr. Warsh, that the US could raise rates in what was still a very over levered environment, both in the banking system and in the household sector. And there were significant deflationary forces on the economy at that time.

Jodi Phillips:

Well, considering that the Fed didn't raise rates until 2015 and there wasn't inflation, I'd suggest you were right. So what does that mean going forward now?

Brian Levitt:

Yeah, maybe it means I'll be the next Fed chair. No, that ship has sailed. I didn't get that rose.

Jodi Phillips:

I disagree, sorry.

Brian Levitt:

Yeah. So what does it mean? It's hard to say. I think you can project a bit on Warsh on what you want. He was clearly hawkish in '09, and now he seems to believe that significant productivity gains from artificial intelligence could produce growth without inflation, and that could enable the Fed to lower rates without bringing forward inflation.

Jodi Phillips:

Do you disagree with that?

Brian Levitt:

Seems reasonable. It'll be tested. It seems reasonable, but I do expect the Fed to be able to bring rates to 3%, whether that's over the next 12 months, the next 18 months, I do expect the direction to be lower, and that should be supportive of risk assets.

Jodi Phillips:

Okay. So what are your thoughts on Fed independence? I know that was one of the key risks to watch in your annual outlook.

Brian Levitt:

Yeah, it's all been fairly orderly. I mean, the dollars bounced round a little bit, had weakened a bit. US rates had been going a little bit higher, but that's unwinding a little bit in this little flight to quality. So I would categorize it as orderly inflation expectations, relatively contained. So the market does not seem overly concerned that Kevin Warsh represents the end of Fed independence. I think that that's critical.

Jodi Phillips:

Great. So now it's time to put Brian on-

Speaker 3:

The hot seat.

Jodi Phillips:

So Brian, I kind of feel like you were on the hot seat at the top of the show, but I do have more questions, so we're going to get through these as quickly as possible. First, you wrote an article about the market implications of US government shutdowns quite a while ago, but it's been live on our website ever since. Should we ever take it down or should we just keep it up forever?

Brian Levitt:

We're just keeping it up. Yeah, probably just keep it up. But the most important point of that is the markets have typically not been impacted and the last couple of times have been no different.

Jodi Phillips:

Okay. So what's going on with gold? Prices went down, they bounced back up again. What's the deal?

Brian Levitt:

I'd say a few things. I mean, the first thing was central banks were diversifying out of dollars and that was largely related to the US freezing Russian dollar reserves after they invaded Ukraine. So central bank diversification. Second, look, we talked about the Fed lowering rates. So as the Fed lowers rates towards the rate of inflation, you erode real yields. And so when your real yields go away in things like treasury bills, gold tends to look more attractive. Three, geopolitical risk. We talked about that. You started the show when I was on the hot seat, now I'm on the hotter seat, Venezuela, Iran, all of that, so the geopolitical risk and perhaps the final is the investors piling in the stuff you read on chat sites and that type of thing. I suspect that the rally in gold has gotten a bit overdone and obviously has pulled back in recent days ahead of us recording this.

Jodi Phillips:

Okay. So what's your assessment of the recent surge in Japanese government bond yields?

Brian Levitt:

Yeah, I've been getting that question a lot and whether that's the beginning of the end for countries, sovereigns being able to borrow money, no. To me, it just suggests the Bank of Japan is behind the curve with raising interest rates. I don't know if you can blame them. I mean, it's quite a sea change from the past 30, 40 years where they were desperately trying to get some inflation and nominal growth. So being a little behind the curve seems okay. Our expectation is they will raise rates. That should stabilize the yen and should stabilize bond yields there.

Jodi Phillips:

Okay. Well, now you're off the hotter seat. And before we go, I'm going to throw in a new segment, Brian. This one's called Think and Rethink. So Brian, in this segment, I want you to tell me something that many people are thinking right now, but you believe they should rethink.

Brian Levitt:

Oh, I like this. Well, when you said think, rethink, the first thing I thought of was me every August when I think the New York Giants are going to be good and I have to rethink that by the end of September. But think, rethink. I'm going to go with think. We started with this, geopolitical events have a meaningful impact on the equity market. Let's rethink that. We looked at the one-year average of the S&P 500 index following a peak in what we call the geopolitical risk index. That one-year return is 15.4% on average. So what does that mean? That means when the geopolitical risk index surges, when everybody's worried about the same thing, over the next year, the average return is 15.4% for equities.

Jodi Phillips:

All right. So before we go, Brian, where can our listeners follow you for more?

Brian Levitt:

Thanks, Jodi. Please visit investco.com/brianlevitt to read my latest commentaries. And of course, you could always follow me on LinkedIn and on X @BrianLevitt.

Jodi Phillips:

Thanks for joining. We'll see you next time.

Brian Levitt:

Thank you.

Important information

You've been listening to Invesco's Greater Possibilities podcast. The opinions expressed are those of the speakers, are based on current market conditions as of February 5, 2026, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

An investment cannot be made directly in an index.

Diversification does not guarantee a profit or eliminate the risk of loss.

The gold spot price per troy ounce peaked at $5417 on January 28, 2026, fell to $4779 on February 5, 2026, and was above $4900 during early trading on February 6, 2026, according to Bloomberg.

The silver spot price per troy ounce peaked at $116 on January 28, 2026, and fell to $70 on February 5, 2026, according to Bloomberg.

The spot exchange rate of 1 bitcoin per US dollar hit a 2026-high of $97,557 on January 14, 2026, and closed at $63,083 on February 5, 2026. The all-time high of bitcoin was $125,260 on October 6, 2025, according to Bloomberg

The return of the Nasdaq 100 Index declined 2.74% year to date as of February 5, 2026, and is off 6.02% from the October 29, 2025 peak, according to Bloomberg.

The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial securities listed on the Nasdaq Stock Market based on market capitalization. An investment cannot be made into an index.

The year-to-date return of the Philadelphia Stock Exchange Semiconductor Index was 7.54% as of February 5, 2026, according to Bloomberg.

The Philadelphia Semiconductor Index is a modified capitalization-weighted index comprised of companies that are involved in the design, distribution, manufacturing, and sale of semiconductors.

Leading economic indicators moving into expansion territory sourced from the Conference Board, as of January 31, 2026.

According to Bloomberg, as of February 5, 2026, year-to-date returns were 5.36% for the S&P 400 Midcap Index, 3.33% for the S&P 500 Value Index, and 5.21% for the MSCI All Cap World ex-US Index.

As of February 5, 2026, the S&P 500 Momentum Index had declined 6.51% since the peak on October 29, 2026, according to Bloomberg.

The S&P 500 Equal Weight Index closed at an all-time high of 8112 on February 4, 2026, according to Bloomberg.

The S&P 500® Equal Weight Index is the equally weighted version of the S&P 500® Index.

Year-to-date as of February 5, 2026, the S&P 500 Value Index and S&P 500 Growth Index have returned 3.33% and -4.03%, respectively.

The S&P 500® Value Index consists of stocks in the S&P 500® Index that exhibit strong value characteristics.

The S&P 500® Growth Index consists of stocks in the S&P 500® Index that exhibit strong growth characteristics.

The ISM Manufacturing PMI climbed to 52.6 in January from 47.9 in December, according to the Institute for Supply Management. The index is based on surveys of purchasing and supply executives across US manufacturing industries. 50 is viewed as the demarcation between expansion and contraction.

The S&P 500 Index averaged a 0.2% return over the past 22 government shutdowns since 1976, according to Bloomberg and Invesco analysis.

As of February 6, 2026, the 10-year Japanese government bond yield climbed from 1.26% to 2.21% over the past 12 months, according to Bloomberg.

Information on Alphabet is from the company’s financial results announcement on February 4, 2026.

Bitcoins are considered a highly speculative investment due to their lack of guaranteed value and limited track record. Because of their digital nature, they pose risks from hackers, malware, fraud, and operational glitches. Bitcoins aren't legal tender and are operated by a decentralized authority, unlike government-issued currencies. Bitcoin exchanges and bitcoin accounts aren't backed or insured by any type of federal or government program or bank.

Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

AI technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there is no guarantee these protections will be sufficient. Significant R&D spending does not ensure product or service success.

Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Businesses in the energy sector may be adversely affected by foreign, federal, or state regulations governing energy production, distribution, and sale as well as supply-and-demand for energy resources. Short-term volatility in energy prices may cause share price fluctuations.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

The federal funds rate is the rate at which banks lend balances to each other overnight.

The Geopolitical Risk Index measures adverse geopolitical events based on a tally of articles covering geopolitical tensions from 10 different newspapers. Data referencing that index sourced from Economic Policy Uncertainty as of October 2024.

Real yields are the returns that a bond investor earns from interest payments after accounting for inflation.

A risk asset is generally described as any financial security or instrument that carries risk and is likely to fluctuate in price.

The Magnificent 7 stocks refer to Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla.

AI stands for artificial intelligence.

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

We discuss the drivers and implications of the early-February market selloff with guest Justin Livengood, who believes “a broader market is a healthier market.” And Brian Levitt explains why he disagrees with a past statement from Fed Chair Nominee Kevin Warsh, and what he thinks of Warsh’s recent opinion that significant productivity gains from artificial intelligence could enable growth without inflation.

A software-driven selloff, an incoming Fed chair, and economic resilience
Discussing the future of AI with Zack Kass

00:00

00:00

00:00

Transcript : Disclosures

Brian Levitt

I'm Brian Levitt, Invesco's chief global market strategist. Today, I am bringing you a very special episode of the Greater Possibilities podcast. It's coming to you from Invesco's Breakthrough 2025 conference, where we just had the opportunity to hear from our keynote speaker, Zack Kass. Now, Zack joins us in our podcast studio so we can share his insights with our listeners.

Who is Zack? Zack is one of the world's foremost authorities on implied artificial intelligence. He played a key role in early efforts at commercializing artificial intelligence and large language models. Most recently, he served as OpenAI's head of Go to Market. And today, his mission is to help businesses, nonprofits, and governments navigate the rapidly evolving AI environment.

Our conversation today is brought to you by Invesco QQQ. QQQ tracks the Nasdaq 100 index, which is made up of the 100 largest non-financial companies listed on the Nasdaq. That includes many of the innovative companies that are driving this AI conversation, as well as companies that are using AI in less publicized but interesting ways.

The opinions you’re going to hear in this conversation are Zack’s. And we’ve got a lot of ground to cover. So with that, let's start the conversation. Zack, thank you very much for joining us.

Zack Kass

Thanks for having me.

Brian Levitt

We're so excited to have you. I would say the biggest question that I get now from the investment community is about the hype around artificial intelligence. So I figured just a great place to start would be do you view all of this as overhyped?

Zack Kass

I think we should separate sort of what the questions you get asked versus the questions that I think about.

Brian Levitt

That’s a good point.

Zack Kass

Because I do think it's ... hype has to be framed in the context of do you think that a given investment is — and by the way, let's just define hype, right? In this case, I assume what people are asking is, is this overpriced?

Brian Levitt

Is it overpriced? Will it ever return anything? Will we ever use it to the extent that the businesses expect it to be used?

Zack Kass

Okay. That's great. So let's separate those three definitions of hype. One is, is this overpriced, such that I won't get, you know, ROI? Is this overpriced such that it actually goes to zero? And is there business value in the adoption of this? And on the first two, you are a better expert than I am. And I say this to basically anyone who studies the markets.

It's very hard for me to look at any given company and say, yeah, that company is priced well, or that company isn’t. And public markets are pretty good at pricing things, but even they make plenty of mistakes because information is imperfect.

What I think is more important and what I try to talk about is whether or not AI broadly is overhyped. And I would argue the answer is no. So if you're staring at a company, I don't know if you're staring at even an industry, I don't know. But if you're staring at the potential for this technology to radically change the human experience, then I argue it's probably under hyped still.

And the reason I think it's under hyped is because I don't think most people have fully processed what it means to have unmetered intelligence. And in the same way that describing a future of electricity to someone in 1920 who was starting to see the effects of power plants around manufacturing, around their neighborhoods, where they knew that it was coming.

Right, the combustion engine or the steam engine was giving way to something more interesting, but hadn't yet fully seen what it would do. Right. There is still a lot of gas and kerosene, and a lot of people just didn't have power or electricity. It's pretty remarkable to consider that we're probably there with AI.

I think what's most interesting is not the argument about a given company or even a given market, but the fact that we are building very smart machines that are getting exceptionally cheap to run. And if all of the GPUs, by the way, went away tomorrow, you could run GPT 4 on your CPU. We actually have enough compute on Earth to power a ton of inference already.

So if we stopped making scientific progress on the model and if we stopped building the frontier, I think GPT 5 and 5.1 could do a lot . And if we stopped building data centers, the CPU could actually be a pretty impressive inference fallback. That, to me, signals that something way more profound is happening here than whether or not, you know, ChatGPT grows to 2 billion users or 3 billion.

Brian Levitt

And it's grown its base very significantly.

Zack Kass

And I don't think it's overhyped. And this is my answer.

Brian Levitt

You know it’s funny as you talk about it, it reminds me of my first week, freshman year at the university, 1994, where I did not hand in a homework assignment. And the reason I didn't hand in a homework assignment is because it was assigned over email. And I remember being told that I needed to have an email account, but I never did it. Which tells you a little bit about my personality, but it's the same thing you're talking about with regards to electricity. I didn't realize what was coming.

Zack Kass

Yeah. And again, to me it's studying these markets is about studying the proliferation and the cost and the utilization and the commoditization of AI is not even a subsidized game. It's real. We are massively in fast compressing these models. And the implications are going to be pretty incredible.

Brian Levitt

I've already noticed a pretty significant benefit. But it doesn't necessarily change how efficient I am at my — well, it changes how efficient I am at my job. I'm not sure what else it frees me up to do. Right. So I can use these models to do research quicker. So I'm already seeing benefits from it. But those feel like small potatoes compared to what's likely coming. What are some of the things that excite you that may be coming?

Zack Kass

So on an individual basis, I think what we're seeing right now in the younger generation, I think is, is a good bellwether. Now, this is what I'm going to say is going to be viewed probably. I mean, there's somewhat of a hot take here because people stare at Gen Z in particular. Great, people stare at Gen Z in particular, and they say, well, look what's happening with a younger generation.

Look at the, you know, my theory of Idiocracy, which says that someone will eventually discover they don't need to critically think in order to survive, and they will start doing it less. And a lot of the idiocracy that we're seeing in Gen Z, because there is a declining rate of literacy and motor dysfunction actually presenting Gen Z is less likely to, ride a bike and swim.

That's scary. And I agree, it's bad. And also Gen Z is overperforming in ways that we had never seen a generation over perform. And what I basically think is happening is we're observing this new k curve, cognitive k curve, where if you want to do nothing, you can. You can do absolutely nothing and live, you can subsist.

And I don't think that's an AI feature. I actually think that's an economic feature. I think abundance allows for optionality. And we have to acknowledge that optionality means some people will abuse it. But what's really cool about watching Gen Z right now and many parents can attest to this, is the younger generations are overachieving in ways that we have not seen them before. Multidisciplinary overachievement because of technology. They're exploring business, science, arts, sports in new, incredible ways because they have access to technology you and I couldn't have fathomed. And now we are ungating for many young people, what we used to gate in the form of education and technology and classes and coaches by just saying, what do you want to learn? What do you want to be great at?

That is an incredible marker to me of what will happen on a personal achievement and over performance basis. And that alone, I think, stands as sort of a very good lens into how we are going to see AI improve people's personal capacity for achievement.

On a business basis. It's going to look a little similarly, but different. Whereas I think AI is actually going to help us drive down the cost of doing business, which creates this massive diffusion event. And what I think is going to happen is we are fast tracking towards a world where exceptionally regulated environments, where we policy things that way will maintain very expensive prices, and worlds where technology can, will actually diffuse most things.

And the last thing I think AI does in the pretty near future, I think we're going to have major scientific breakthroughs. And I, you know, people have been talking about this a while, but I think we're getting much closer than people realize to things like fusion, custom gene therapies, custom antibiotics, a lot of material and particle sciences improvements. I mean, Willow chip, quantum. I mean, my backyard in Goleta, California, quantum just got very real. And this is in large part due to improvements in our ability to do incredible testing at scale through AI.

Brian Levitt

I want to draw on that point you were making about where the younger generation is getting better at things and learning quicker. A lot of people worry about this idea of mass unemployment. I get that question all the time. What are we all going to do for a living when there's a machine that can do many of the tasks that we currently do. How do you respond to that?

Zack Kass

First, I will start by saying that this is a particularly sensitive time to even talk about it. And so for those who are affected by layoffs or for those who are worried about it, I want to acknowledge that like what I'm going to say may sound callous, but I also am trying to point at what I think are facts.

Right now there are two trends that I think are particularly scary to people. One is like this sort of like weird undercurrent in the market that suggests that AI is massively propping up the actual market, and that GDP growth sans AI is actually flat or even negative. That discretionary income and consumer confidence is waning and has been for some time.

And that amidst that, companies, big corporations who employ lots of people are starting to say things like, we're going to hire less people because of AI. And there are a lot of reasons to stare at this and be pretty unnerved. I definitely acknowledge that. Amidst that backdrop, I actually think I want to tell a story that best explains how I view this issue.

In October last year, October 1st, 2024, the dockworkers went on strike. The longshoremen. Do you remember this?

Brian Levitt

I do remember.

Zack Kass

Harold Daggett, the head of the longshoremen, instructed his dock workers to walk off the ports on October 1st and shut down shipping in and out of the United States and basically brought the economy to a halt for a day.

Brian Levitt

Not only do I remember it, I wrote a paper about it. And the day the paper was about to go out, the strike ended. So I never used it.

Zack Kass

Ah just your luck.

Brian Levitt

Just my luck. Right.

Zack Kass

I would like to read the paper by the way. I also wrote a paper about it well after the strike ended, because I became fascinated when I watched him go on CNN on the morning of October 2nd, and he very calmly pointed at the camera and the American people, and he said, you have no idea how dangerous we are. I will cripple you.

And I remember I watched the whole thing start to finish and watched it over and over. And as you recall, I'm sure, you wrote a paper. His demands were neither more money or safer working conditions, which have been the two tenants of every labor union since we organized labor. His demand was new as far as labor unions are concerned, which is a guarantee from the ports that they would not automate their jobs.

And if you recall, the picket signs read robots don't pay taxes and automation harms families. I was pretty fascinated, so I sent him an email, a very long, thoughtful one. But I went and was able to meet with a bunch of, he did not want to meet with me, but I met with a bunch of the longshoremen and the results we’re going to publish in the book.

What I discovered in the process basically changed how I viewed this issue, and how I view the automation issue. For most of the men, it was clearly not an economic issue to them. It was an emotional one. They described the job as being core to their identity. They described it as a place they wanted their children to work.

One person we talked to said they were going to continue having children until they had a son, so that their son could join the union. And what I realized in the process is one of the questions I needed to ask was, and I asked each of them, who benefits economically if we automate the ports? And all of them without fail, reflexively, said the capitalist. They've been trained basically to say the capitalist.

Brian Levitt

The capitalists, management, the shareholders.

Zack Kass

And I said, okay, who are the capitalists? Well, it's the shipping companies, you see. It's the shipping companies and the port owners. They benefit economically. I said, well, who else might benefit economically? And my argument in exploring this question with them and anyone else is that it is in fact, everyone who benefits economically if we automate the ports, including eventually, the dockworkers and their kids.

And what I realized in exploring this and many other automation issues is that we all, all of us, wander the earth, every single day asking, when is this good or service going to be better, faster, cheaper? Without realizing that what we are asking is when is a human going to be extricated from the manufacturing of this good or service?

And we don't do it because we're jerks. We do it because we are conditioned to believe the world should get better, faster, cheaper. And if it doesn't, we are aggrieved. And what we forget every day, somehow in this automation debate, is that you and I and everyone else on Earth are descendants of people whose jobs were automated to our economic benefit.

Brian Levitt

Absolutely. And we've always known that good economies evolve, right? If you're going backwards or you're not evolving from agrarian to industrial to service to knowledge base, standards of living will decline.

The one thing that I question that seems a little bit different this time is that there was always some level of retraining or reeducation for people to move into new and better and higher paying and more service knowledge oriented jobs. What happens when the service and knowledge... do we get to a point where everything has then been automated, or AI has taken on most of the tasks? Where does the demand come from in society?

Zack Kass

The book that comes out in January pays homage to John Maynard Keynes, who wrote in 1930 a paper titled The Economic Possibilities for Our Grandchildren. You may have read this. I've read this now over 100 times. I can recite it word for word, in which he said, I must now disembarrass myself to describe a future in which I will certainly not live to see, one in which we have solved the economic problem, and be faced with something more profound.

The Godfather, or the father of modern macroeconomics, was describing a world where automation would actually force us to solve a spiritual issue. And I'm not trying to be flippant. I'm not trying to be esoteric or philosophical. I do think we should be honest about the fact that if we automate most work, we're going to be faced with a different problem, and it's not going to be how do we put more and better food on the table?

It's going to be, what do we do with our time? And my point right now is I actually think that's the new issue. Now the path getting there is wonky, and it's wonky for two reasons. All jobs do not automate at the same time.

Brian Levitt

Right.

Zack Kass

And policy is going to protect a ton of jobs. So when people are like, okay, what job is going to automate first I'm like, show me the weakest union because policy and policymakers are going to protect, as the longshoremen got protection, jobs that actually serve only those who are doing the work. There are huge cartels in the United States in terms of power, very small in terms of size.

Ophthalmologists. I mean, I take aim at them constantly. The reason that it is so complex to get eyecare, and the reason that glasses and prescription glasses are so expensive is because there's a policy that way. And the automation embedded in a lot of industries that allow us to do things more inexpensively may not come.

And so what I think we have to be honest about is two things. The distribution problem that we are facing, which I think could last 20 to 30 years. I am certain that there will need to be backstopping when industries actually automate at uneven paces, and that may be UBI, it may be something else. But on the horizon very clearly is something that I think is much more interesting, which is a space in which we do different work.

I also think, God, we have to have the humility to remember that most of the work we do today, we could not have described 50 years ago.

Brian Levitt

Oh, absolutely. I mean, I remember answering questions early in my career. What are we going to do when nobody works in the manufacturing sector? If we don't build anything, what are we all going to do? And it's been very clear. I mean, we're sitting here today with a near 4% unemployment rate. Right? We've created new jobs. We've created new industry.

Brian Levitt

Standards of living improve.

Zack Kass

The Indian economic miracle which happened very quietly. India achieved food safety, you know, 10 years ago. Happened because of the proliferation of electricity and the internet, and it pulled an enormous swath of the global population out of poverty at a time where people assumed it could never happen. And I remind people that it is not necessarily government intervention that they seek. It is technological intervention, and obviously it needs to be regulated. And I'm not a AI maximalist. But I do think we need to start reframing this conversation around the challenges that humans will face, not on an economic basis, but on an emotional one.

Brian Levitt

And just to put a finer point on that, I mean, I've always loved looking at the statistics. A lot of people kind of have this idyllic view of the 1950s in this country or in this world when something like 60, 70% of the world lived in abject poverty. Today, those numbers are less than 10%. So we've seen how this works across societies.

Zack Kass

Rosy retrospection to me, is something that I actually... There are, you know, there are a lot of biases in there, 100, over 100 biases in the human brain, all of which are a genetic predisposition that you cannot do much to, to eliminate your bias. You just have to acknowledge it and see it. One of the funny things about machine bias is that I have to remind everyone, eliminating bias in the machine makes the machine inoperable. You want a machine that operates with bias. You just want to be able to explain the bias, which humans can't do. We're not very good at unpacking all of our experiences, all of our genetic predispositions that tell us why we believe a certain thing.

So we wander the earth with this tacit agreement that you have biases and I have biases, and we just don't talk about them. One of the things that really amazes me is the degree to which very smart people are willing to romanticize the past.

Brian Levitt

Romanticize the past.

Zack Kass

The rosy retrospection issue.

Brian Levitt

The only thing better about the past was I was younger.

Zack Kass

Yeah, well, by the way, there were some... I think you can argue that on some basis. There were definitely times of, you know, certainly in the recent past there were times with more international stability.

Brian Levitt

Closer community maybe people think about.

Zack Kass

Totally. But also I'm like, look, we should probably acknowledge that we didn't do things particularly well at a point in history, and that it's okay to look forward at all the other solutions to the problems that we face today, including but not limited to, device addiction, which is, I think, our sugar or our cigarettes which we will solve because we have a history of solving these problems.

Brian Levitt

I couldn't agree with that more. And speaking of which, when you talked about earlier about vaccines or the ability to get a hold of the diseases that now currently plague us, can you walk through how that may work? What is the potential of artificial intelligence?

Zack Kass

Basically any novel sciences where we are clearly rate limited by human intelligence. And unmetered intelligence presents the opportunity not to print a million more oncological researchers, of which, by the way, today there are 10,000. But to answer the question, what if 10,000 oncological researchers were 10,000 times more productive?

And the sort of un shackling of novel science, I think is really just not being priced that well today. I think for many people it's so philosophical, it's unbelievable. What we're observing is the rate at which we can make novel scientific breakthroughs is accelerating. And critically, the rate at which we can link them together.

And so in the case of, for example, like vaccine exploration is one, but in this case, the genetic therapy that cured baby K.J. in May was developed by Crispr and AI, wherein they were able to test by multiple orders of magnitude and speed, the right target and the right solution for that target. And so now what's happening is...

We're creating worlds where very rare diseases can actually be solved because you no longer need a massive sample size. You used to need massive sample size and money in order to do things. And now you're seeing these incredible progresses in very, very rare disease. I mean, I won't name a name, but a dear friend of mine is doing some incredible work to cure a disease that, in his family, a very rare disease and only 20 families in the world seem to carry.

And they're making exceptional progress because they were able to do far more with 20 scientists than they could have ever done 10 years ago with 5000.

Brian Levitt

It's so promising. It's so exciting to hear you talk about that. Is there anything within this space that concerns you?

Zack Kass

Well, sure.

Brian Levitt

Is this the Terminator?

Zack Kass

First, let's extrapolate long enough. I actually think one of the things that we should start being honest about is that we are approaching, we will approach soon a moral quandary. Like when did we start playing God? When does genetic testing and genetic therapy actually start to, you know, it's like, oh, you want your child to be taller or smarter, right? Or both. Yeah, yeah. My case, I only got one.

Brian Levitt

You're pretty tall. I don't know. So which one? Which one were you suggesting?

Zack Kass

That’s nice of you. I was referring to myself as a Neanderthal. But we are going to start to wade into some interesting territory where we have to start asking, are we doing this to improve the human experience or are we doing this for vanity?

The other issue I have is, I'm exploring this idea of automation boundary. There is this very important theory of virtuous friction, which is some things are hard and that's good. Lots of things are hard and that's bad. Walking a mile to get clean, drinking water is bad. That is vicious friction. But working really hard in college to get grades so that you can prepare to be an adult is good. And when people talk about, oh, ChatGPT and cheating, I'm like, the point is not that it's cheating. The point is that right now we have homework that doesn't comport to the current world. And so students aren't actually stretched. We're losing the virtuous friction that used to exist to prepare people for adulthood. That is one of the most immediate things that I worry about.

The Terminator, which lives on sort of another end of it, I worry less about. I spend a lot less time concerning myself with malicious or maligned superintelligence. I think it's far more theoretical and science fiction than it is anything else. But if I had to rank order my deepest concerns. One is Idiocracy, which we talked about a percentage of the population deciding they don't have to critically think so they don't do it.

One is dehumanization. A percentage of the population finding more interest in a virtual or digital reality than a physical one. To be honest, those are recessive traits. Those people don't procreate. It may in fact happen, but I do think we've known for a while that our happiness function is time with friends and family and physical community, and we will continue to pursue it.

I think we solve it. The third is identity displacement. We talked about that and the fourth is bad acting. And what I don't think we appreciate just yet is that while cancer research is going to accelerate, so too will low resource bad acting. And for every individual trying to do something amazing with AI, an individual is going to try to do something bad.

And the good news is we know how to solve for this. I actually, what I remind everyone is the world was so scary when we started moving things across the West. The reason that we introduced capital punishment during the Wild West is because it was the only way that we could effectively scare robbers and barons from actually not raiding all the covered wagons.

And it turns out if you raise the cost of doing a bad thing to a high enough point, then you can actually limit the behavior. We're going to have to artificially do that, because the actual cost of doing bad things is coming down.

Brian Levitt

If history tells us anything, it reminds us that any problem you identify in the current moment, there's always a solution that is not identifiable to you at the current moment. Seems like that's exactly what you're suggesting.

Zack Kass

Yeah, except maybe the meaning of life.

Brian Levitt

Well, that's a whole deeper conversation.

Zack Kass

Death and taxes I suppose.

Brian Levitt

Death and taxes. Well, it sounds like we may be living longer, but that's also another conversation for another day. I want to conclude by asking you, what do you think that businesses right now are getting right or wrong with regards to artificial intelligence?

I see statistics that say that many businesses are deploying it, but they're not exactly sure how to be deploying it. And there's this 95% number that's hanging out there that 95% of businesses report that they're not necessarily sure they're getting any benefit from it. To me, that seems incredibly high and it seems almost impossible to believe, just given even the smaller tasks right now that I can ask artificial intelligence to accomplish. So how do you respond to that? And what do you tell business leaders?

Zack Kass

So the MIT report actually found that 95% of pilots fail. So it's not that 95% of businesses don't see success with AI. It's that 95% of pilots inside of businesses fail.

Brian Levitt

Okay.

Zack Kass

And on an adjusted basis, it basically came out to about half of businesses were seeing success with AI on some basis, but that a lot of their pilots were failing.

Brian Levitt

Pilots being their workers.

Zack Kass

Sorry. Pilots being their attempts to solve problems with AI.

Brian Levitt

Oh, okay. So I'm not a pilot. There's a group that has a pilot going on.

Zack Kass

That's right. A pilot in this case would be a test. Invesco tries to do a thing with AI and it doesn't work.

Brian Levitt

Okay.

Zack Kass

Now my response to this is pretty simple. My issue with this study, this MIT study, is that it failed to do two things. It failed to actually describe the cost of these pilots, and it failed to describe the value of the successes. And that makes it a pretty inconclusive and incomplete study that basically is meant to capture headlines, which it did very well.

My argument is for a long time, software was very expensive to deploy, it was expensive to buy, was expensive to deploy, and a 5% success rate in software would have been very bad. I'm not sure that's actually still true, and I don't know how pilots are defined in this case, but I actually think that a 95% failure rate might be perfectly tenable in a world where the 5% success rate is providing incredible lift to the business, and the 95% failure rate is actually not really costing much.

And that's sort of my response to this, which is unless you can define what the value of this is, it's pretty tough. At the same time, Wharton released a study that said, actually, 75% of companies are seeing high ROI from their AI efforts, which sort of speaks to this issue. And I do think it is a who knows right now.

But I will argue this. Most companies are getting right the sort of new sense of urgency, and most companies are getting wrong this frenetic attempt to buy every tool. There is this mad dash to buy lots of software right now. I think the software is going to end up being fairly either obsolete or, misplaced inside of an organization.

And I think what we're going to see is this sort of consolidation event in SAS and AI, in AI products, once companies realize that they can do a whole lot more with a lot less. The other thing I would say is leaders need to be way, way more clear about setting a vision. Too many companies right now are like, look, we're just going to cut cost.

And I'm like, yeah, to what end? What are you actually trying to accomplish here? One, your employees need it. Two, your vendors need it, but three, your actual company needs to know what it's trying to do with AI if you’re actually going to have any success. And what I argue if you're unsure what you should do, the easiest place to start is describe a world where your customers have more access to more of your goods and services. Describe simply a higher access environment through whatever means you want.

Expanding your TAM, lowering the cost of the service, improving the actual service itself. But start with saying we want more people to have access to our products and services. What plays out is actually pretty impressive.

Brian Levitt

And the negativity around it reminds me of some of these terrible calls in history where, you know, with the Beatles, nobody wants to hear guitar rock anymore. With the advent of the internet, it's a flash in the pan. The iPhone wasn't going to sell well. So yeah, I always try to remind people when they're overly negative about something that seems pretty revolutionary to be mindful to put their negativity in place.

I really appreciate the positivity you bring. I really appreciate the excitement that you bring around this. I want to thank you very much for joining us on the Greater Possibilities podcast. You know, look forward to future conversations.

Zack Kass

Likewise. Thanks so much for having me.

Brian Levitt

That brings us to the end of this episode. Thanks to Zack Kass for joining us for this very special episode of Greater Possibilities, brought to you by Invesco QQQ.

Important information

You've been listening to Invesco's Greater Possibilities podcast. The opinions expressed are those of the speakers, are based on current market conditions as of November 12, 2025, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. Should this content contain any forward looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.

Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, typically consisting of 50,000 Shares.

Before investing, investors should carefully read the prospectus/summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the Fund call 800-983-0903 or visit invesco.com for the prospectus/summary prospectus.

The Nasdaq-100® Index comprises the 100 largest non-financial companies traded on the Nasdaq. An investor cannot invest directly in an index.

Artificial intelligence, or AI, technology companies are sensitive to specific risks such as small markets, business cycle changes, economic growth, technological progress, obsolescence, and regulation. These companies may have limited products, markets, resources, or personnel, making their securities more volatile, especially for smaller start-ups. Rapid technological changes can adversely affect their results. AI companies often rely on patents, copyrights, trademarks, and trade secrets to protect their technology, but there is no guarantee these protections will be sufficient. Significant R&D spending does not ensure product or service success.

Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified time period.

A Pew Research study from 2020 showed that Gen Z is on track to be the best-educated generation yet, as they are less likely to drop out of high school and more likely to be enrolled in college than the generations before them.

More than 100 different identifiable biases have been reported in health care, according to a 2021 paper published by the National Library of Medicine.

The Alliance for Clinical Trials in Oncology comprises nearly 10,000 cancer specialists at hospitals, medical centers, and community clinics across the United States and Canada.

“Baby KJ” is a child who was diagnosed with a rare genetic disorder and was successfully treated with a customized CRISPR gene editing therapy in 2025. The case was detailed in a study published by The New England Journal of Medicine.

Discussion about the MIT AI study and the success rate of AI pilot projects refer to “The GenAI Divide: State of AI in Business 2025,” published in July 2025.

Discussions about the Wharton study refer to “Accountable Acceleration: Gen AI Fast-Tracks Into the Enterprise” published in October 2025.

Data on the percentage of the world in abject poverty sourced from the World Bank as of 2024.

The US unemployment rate in November was 4.6% according to the US Bureau of Labor Statistics.

Return on Investment, or ROI, measures the profitability of an investment relative to the money put in.

GPU stands for graphics processing unit.

GPT-4, 5, and 5.1 are versions of the artificial intelligence chatbot Chat-GPT

A K-curve describes an uneven trend in which different groups experience widely different outcomes.

The Willow chip is a quantum chip developed by Google. Quantum computing is an advanced computing method using quantum mechanics to solve complex problems.

UBI stands for Universal Basic Income, a government program that would provide regular payments to everyone, regardless of income or work status.

SAS is data and artificial intelligence software developed by SAS Institute.

TAM stands for total addressable market.

Invesco is not affiliated with Zack Kass or OpenAI.

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

In this special episode, we welcome Zack Kass, one of the world’s leading artificial intelligence (AI) futurists, to discuss hype, hope, and the human experience in the age of AI.

Discussing the future of AI with Zack Kass

Fund Performance

Other Capabilities

Alternatives

Trending Products

Equities

Trending Products

Fixed Income

Trending Products

By Strategy

By Investing Goal

Trending Products

Account & Forms

Tools

Insights

Podcast Series Greater Possibilities

Apple Podcasts

Spotify

Rethink Now: What could the midterm results mean for markets?

Rethink Now: What could the midterm results mean for markets?

Rethink Portfolios: Senior loans with Scott Baskind

Rethink Portfolios: Senior loans with Scott Baskind

Rethink Markets: AI. The surge, the spending spree … and a slowdown?

Rethink Markets: AI. The surge, the spending spree … and a slowdown?

Rethink Portfolios: Investment grade bonds with Matt Brill

Rethink Portfolios: Investment grade bonds with Matt Brill

Rethink Markets: Midterms, youth unemployment, and the next phase of the AI trade

Rethink Markets: Midterms, youth unemployment, and the next phase of the AI trade

Rethink Portfolios: US value stocks with Kevin Holt

Rethink Portfolios: US value stocks with Kevin Holt

Rethink Markets: Chinese AI, small caps, and the space economy

Rethink Markets: Chinese AI, small caps, and the space economy

Rethink Portfolios: Commercial real estate with Charlie Rose

Rethink Portfolios: Commercial real estate with Charlie Rose

Rethink Markets: Strong corporate earnings beat the market’s expectations

Rethink Markets: Strong corporate earnings beat the market’s expectations

Rethink Now: A new era for the Federal Reserve

Rethink Now: A new era for the Federal Reserve

Rethink Portfolios: Municipal bonds with Mark Paris

Rethink Portfolios: Municipal bonds with Mark Paris

Rethink Markets: The war with Iran, market indicators, and the realities of private credit

Rethink Markets: The war with Iran, market indicators, and the realities of private credit

A software-driven selloff, an incoming Fed chair, and economic resilience

A software-driven selloff, an incoming Fed chair, and economic resilience

Discussing the future of AI with Zack Kass

Discussing the future of AI with Zack Kass

All Products

Capabilities

Insights

Resources and Tools

Company Information

All Products

Capabilities

Insights

Resources and Tools