Alexandra Wilson-Elizondo, co-chief investment officer of Multi-Asset Solutions at Goldman Sachs Asset Management, joined Phil Rosen on Full Signal to discuss the debt-funded stage of the AI trade, AI bubble fears, credit markets and where she sees opportunity in 2027.
Her core takeaway is that demand for AI still looks robust, but investors now need to know exactly what they own and what they're paying for it.
Why the AI trade has entered its debt-funded stage
Wilson-Elizondo said "we're in the debt-funded stage of the AI cycle," and that's putting pressure on the market as investors weigh how much new supply is coming to the investment grade and high yield markets.
With the Fed's front-end rate as the hurdle, lenders must ask if they're paid enough, since credit is "a capped return."
"So you have to be really careful about what you're underwriting," she said.
Still, she said the big Magnificent 7 names and "the big hyperscalers are very high quality credits."
The wave of new AI debt is more "indigestion" as credit markets absorb the supply, she said.
Why the AI bubble debate misses the point
"I think that the wrong question is being asked," Wilson-Elizondo said of the bubble debate. "The real question is, is there demand?"
Looking at 2027, she said "there's like a sold out sign on top of AI," with heavy demand for compute.
"It's a confidence game, too," she said, and with heavy leverage, wavering confidence could set off a spiral. "We don't think that that's going to happen now," she added, and "our longer term outlook is still quite positive on US equities."
For another take on bubble risk, see Sparkline Capital's Kai Wu on the AI bubble.
Credit warning signs and the best hedge against AI
Wilson-Elizondo pointed to credit default swaps on some names at "pretty distressed levels," though "some of those names have nothing to do with AI."
Rosen asked about her line that the best hedge against AI is more AI. If AI is a disrupting factor, she said, "you want to own the big disruptors," such as an OpenAI or Anthropic as those companies come to market.
Where Wilson-Elizondo sees opportunity in 2027
"In aggregate, the market is healthy. It's narrow underneath," she said.
She likes pharma and utilities, two sectors she said have flatlined or lagged. On utilities, "the number one constraint to AI is energy." On pharma, she cited a demographic tailwind and large companies embedding AI into their workflows.
Abroad, she said "Europe has actually been quite resilient," and her team has focused on European financials and banks. Japan brings diversification, with a market weighted toward autos and financials.
Why investors should get back to fundamentals
"The easy money has been made," Wilson-Elizondo said. Investors should "focus on the fundamentals, the fundamentals and what is the price that you're paying for something," she said.
With high-quality investment grade credit paying well, she said "it's time to kind of reset and be more demanding about your marginal dollar."
Tune in to the full conversation with Alexandra Wilson-Elizondo on YouTube, Spotify and Apple Podcasts.
For more on the AI trade, read J.P. Morgan's Stephanie Aliaga on Why the AI Cycle Is Still Early and the Sectors She Likes, and subscribe to the free Opening Bell Daily newsletter for a daily briefing on stocks, macro and Wall Street.
This article is for informational purposes only and is not investment advice. Views and stock opinions are those of Alexandra Wilson-Elizondo and market figures are as stated by the guest at the time of recording.
