The Daily Spark

China's home prices have now been falling for four straight years, with both new and used home prices stuck in negative territory since 2022, see chart below.

Current ratings for software loans cluster heavily in the B2 and B3 buckets, but market-implied ratings spread loans toward both ends, a sign the market sees more credit dispersion in software leveraged loans than agency ratings currently reflect.

With more than 40% of Russell 2000 companies unprofitable, a higher-for-longer rate environment drives up debt servicing costs, threatening middle-market firms as interest costs take up a growing share of earnings, see chart below.

A wave of corporate bonds issued during the low-rate era of 2020 and 2021 is now coming due, forcing companies to refinance cheap debt at today's higher rates, with high-yield borrowers feeling the squeeze first given their shorter 5-to-8-year maturities, while investment-grade issuers sit in a stronger position today, having locked in low rates with 10-year-plus tenors that push their refinancing needs comfortably further out. With the Fed potentially hiking rates later this year, the bottom line is that rates higher for longer continue to have a bigger negative impact on lower-quality credits.

Corporate pensions are fully funded again for the first time in almost two decades, see chart below.

With rates still high, plans can lock in attractive yields now by replacing return-seeking assets with liability-matched fixed income and guard against the risk that falling rates during the next downturn reinflate their liabilities and erase the surplus.

The first chart below shows that so far there are no signs of profit margins rising outside the tech sector. This is ultimately what we are waiting for, because the value of AI companies today rests entirely on the promise that margins in the S&P 493 will eventually climb.

That promise is the link to current market prices, since implicit in the valuations of AI companies are assumptions about future earnings. That's why the current debate about token costs, model routing and token marketplaces is important. If token costs converge toward zero for most AI use cases, then there is not enough revenue for all hyperscalers even in a situation where compute demand surges higher. For more discussion, see also this great piece from my colleagues in Apollo Thematic Investing.

The key issue is the length of the ROI runway outside the tech sector. In a handful of sectors, software and tech above all, implementation is nearly immediate, since these firms can fold AI into their own products and processes overnight. But that is the exception. Across most of the economy, and especially in capital-intensive, heavily regulated sectors, deep process re-engineering and data governance requirements could delay structural productivity gains well beyond what the market currently projects. The list of slow-moving sectors is long, spanning health care, banking and insurance, energy and utilities, defense and aerospace, pharma and life sciences, manufacturing, transportation and logistics, construction and real estate, education, legal and the public sector.

This creates a dangerous divergence between aggressive, front-loaded valuations today and a much slower cash flow reality, since equity markets priced for instant earnings growth will face a painful repricing if the productivity hockey-stick takes five years rather than five months, see the second chart below. Put differently, companies will slow their AI spending if they don't see ROI quickly, and the current focus on token optimization is an early warning that AI implementation could be a bumpier, slower road than expected.

The bottom line is that a mismatch between current earnings expectations and the actual time firms need to generate ROI on AI investments could have significant implications for many AI company valuations today.

Trade policy uncertainty continues to decline, and the Strait of Hormuz is reopening, see charts below. This is all bullish for business planning and hiring.

The decade-long case for growth rested on the Mag 7 out-earning everything else, but with earnings growth converging toward the S&P 493 and their valuation premium compressing, the setup increasingly favors value over growth.

Our chart book (available here) covers the Mag 7's recent underperformance, their index share, converging earnings, the hyperscaler capex and data center buildout, and market valuations.

The tokenized real-world asset market has grown to nearly $32 billion, highlighting increasing institutional adoption of blockchain-based asset infrastructure.

US Treasuries (47%) and private credit (19%) account for approximately 66% of the market, emerging as the dominant use cases for asset tokenization.

For more discussion, hear my colleague Christine Moy talk about how tokenization is shaping the future of investing and private markets on this podcast here, and read her paper here.

Looking at a broad set of supply chain indicators shows some mild signs of distress, with rising freight rates by container, truck and air. See the charts below and in our chart book available here.