2026 year-to-date highlights:

• Equity gains sustained by US technology
  
  • S&P 500 +12.7% year-to-date, semiconductors +79%
  • Negative impact of inflation and higher rates
    
    • all sectors negative in September except technology
• Resurgent bond yields driven by economic growth & fuel costs
  
  • 10-year Treasuries yield 5.3%, the highest level in 20 years
  • Economic growth continues to surpass expectations
  • Prices for fuel and freight continue to rise
    
    • US diesel retail prices +77% since the beginning of 2026

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The impact of AI investment on borrowing costs

The current market environment resembles in many respects the one we faced in late May-early June, though with important differences. Negative sentiment in the Spring gave way to optimism over easing tensions in the Middle East and strong earnings growth, allowing stocks across sectors to rebound. Despite persistent wars and steeply higher prices for many global commodities, confidence in US economic growth has strengthened in recent months. The Atlanta Fed’s GDP Now forecast for the current quarter points to over 7.0% annualized GDP growth in nominal terms and 3.5% in real (inflation-adjusted) terms. Recent growth trends bode well for corporate earnings. Whereas war in the Middle East was generally viewed as the primary cause of higher borrowing costs during the Spring, the expanding scale of data center investment spending strikes us as the major factor today.

The proximate cause of rising longer term interest rates, in our view, has to less to do with fiscal worries  - or even energy costs - than with corporate demand to borrow money in order to make investments. All else equal, this is a healthy sign for growth and productivity. Rising rates, moreover, are unlikely to meaningfully slow down AI capex given the still elevated returns on new data center capacity. Recent large debt issuance from Alphabet, Amazon and other tech firms suggests that significant capital spending is still ahead of us. Growing capital investment should, in turn, support US economic growth over the coming quarters.

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Successful IPOs of Anthropic and/or OpenAI could form fresh catalysts for further market gains due to additional liquidity and earnings visibility, particularly in the data-center space.  Due to the potentially massive  scale of such IPOs, including the recent listing by SpaceX at a valuation over $1 trillion, these fund-raising rounds also carry with them the risk of lengthening the AI capital spending cycle. The longer the cycle runs, the more likely becomes another leg up in long-term borrowing rates.

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The impact of higher borrowing costs has clearly negative repercussions for housing and other sectors. Tighter credit constrains US consumers, especially as 30-year fixed mortgage rates rise above 7%.

As yields on high-grade bonds and Treasuries reach attractive levels, some near-term easing of interest rates should be expected. The sheer velocity of recent increases will tend to dampen economic growth. Relief, however, could prove ephemeral. Recent industry projections for annual global data center spending suggest a potential $3 trillion annual investment in 2030.

In a sign of healthy skepticism, markets don’t appear to believe such seemingly wild projections. The economics of AI will likely evolve in the next few years. And as momentum builds in the AI and data-center space, so, too, does the search for diversification from a potential “bubble.” But if industry 2030 projections are within a reasonable range, the impact on economic growth and markets would be profound. We should keep in mind, too, that AI investment is a strategic priority for defense as well as commercial reasons. Global competition for resources and advantage tends to favor a “whatever-it-takes” approach to funding AI infrastructure.

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Among risks to AI infrastructure growth is potential regulation of AI development and data-center permitting, especially if the regulatory framework is legislated at the Federal level. In this regard, regulatory risks have supplanted rising token costs as the chief concern for investors in the AI buildout. In our view, the impact of regulation and restricted development could fall disproportionately on suppliers of equipment and materials to the AI boom – and less so on the largest companies at the center of it. Indeed, the providers of large language models, notably Anthropic and OpenAI, may favor regulation which restricts competition, particularly from lower-cost (and presumably less secure) AI models. Meanwhile, the main infrastructure providers may also benefit from reduced capital spending (and higher fress cash flow) amid rising demand for AI tools.

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Portfolio Decisions

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META

In Q3 we revisited Meta Platforms (META), a long-term holding. Early in the quarter the stock was down approximately -20% YTD and trading at what appeared to be a depressed valuation. This was despite strength in Meta’s core business and revenue growth consistently above 25% per annum. Questions over the future returns to Meta’s massive data center spending, combined with potential legal liabilities linked to social media addiction and child safety cases, weighed on the stock price. However, during the quarter META management began to actively address investor concerns. They noted that they had the ability to rent out datacenter capacity to third parties, to the extent that they could not monetize the capacity internally. On the legal front, the company settled for $18 billion – a dollar amount far less than what the market had priced as a worst-case scenario.

And, in early September, META announced a new AI personal assistant, “Muse”, which has seen rapid adoption since launch.

Perhaps the timing of Muse’s launch (coming right after the legal settlement) was not coincidental. In any event, the dislocation in Meta’s stock and resolution of legal liabilities allowed us to add to positions opportunistically in the quarter.

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We are grateful for your confidence in our abilities. We welcome your thoughts and questions, as always.

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Sincerely,

The Bridgehampton Group

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For questions or follow-up, please reach out to any member of our team. https://www.ingalls.net/bridgehamptongroup/about-us

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Ingalls & Snyder is a brand name used for the affiliated companies of I&S Group, LLC.

Bridgehampton Group is a team at Ingalls & Snyder that offers investment advisory and brokerage services. Investment advisory services are offered through Ingalls Investment Management, LLC ("IIM"), an SEC registered investment adviser, and brokerage services are offered through Ingalls & Snyder, LLC ("INGS"), a member of FINRA and SIPC.  When offering investment advisory services, individuals act as investment advisor representatives or, otherwise, employees of IIM.  When offering brokerage services, individuals act as a registered representatives or associated persons of INGS.  

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This material is being provided to you for informational purposes only and is not intended to be a general guide to investing, or as a source of any specific investment recommendation and makes no implied or express recommendation concerning the manner in which any account should be handled. Any investment program involves certain risks, including loss of    principal, and no assurance can be given that any specific investment objective will be achieved.