Margin pressures raise the stakes on Q3 earnings: Strategist

• The AI capex cycle is maturing; monetization by 2027 is crucial, with a risk of market correction if earnings expectations are not met.
• The US economy shows bifurcation: high-end consumers are robust, but lower-income households face significant pressure from rising borrowing costs and inflation.
• One further Fed hike is expected in December and another in 2027, but the overall hiking cycle is historically shallow given current growth.
• Q3 earnings are expected to be strong, but margin pressures and the necessity for companies to meet high expectations create vulnerability for the market.

Principal Asset Management's Chief Global Strategist, Seema Shah, discusses the maturing AI capex cycle, highlighting the need for monetization by 2027 to avoid correction risks. She notes a bifurcated US economy with resilient high-end consumers but stressed lower-income households. Despite strong Q3 earnings expectations, margin pressures and higher yields constrain valuations, with further Fed hikes anticipated.