Sonali Basak, chief investment strategist at iCapital, says the Fed's rate hike signals a higher-rate era, and she likes financials, industrials and a protected approach to tech.
I sat down with Basak at the Future Proof conference in Huntington Beach, California, just after the Fed raised rates under Chair Kevin Warsh for a live recording of Full Signal.
The Fed decision was unanimous, and Basak said that tells her "something went right" inside the central bank.
The Fed's hike points to a higher resting rate
Basak said iCapital expects one more hike in October and perhaps another in December, with oil as the wild card. She also pointed out that the Fed raised its view of the neutral rate, the level it sees as neither stimulating nor restraining growth.
"We are in an era of a higher resting heart rate," Basak said, citing resilient growth as part of the reason. She noted the Atlanta Fed's GDP tracker was running near 5%, while cautioning that it is early in the quarter.
On Warsh, she said it is "very, very early" to judge his inflation-fighting credibility, but "he's clearly gained some credibility among his peers." She also sees tension between the Fed and the Treasury, saying the two are "at odds with each other in a lot of ways" as Treasury Secretary Scott Bessent steps into the bond market. I covered that push in Scott Bessent wants to put a floor beneath the bond market.
Basak, who started her career covering debt, said "the 10 year yield is the most important price of anything in the world." She said it is the first thing she checks each morning, and I dug into the recent surge in bond yields at 19-year highs as well.
AI financing risk sits outside the hyperscalers
Basak said she is less worried about the largest hyperscalers than about parts of the AI ecosystem that are "far more levered with more immediate financing needs." In her view, neocloud companies such as CoreWeave have to tap debt markets sooner and at higher rates than Apple or Amazon, which can term out their debt for much longer.
She added that the frontier AI labs have raised debt in private markets as well as equity, something she said was unheard of five years ago. Her bear case for AI is not a collapse but a slowdown in growth, which she said could look different once the biggest labs face public market scrutiny.
Where she sees opportunity
"I do love financials," Basak said, arguing that some parts of the sector have been left behind unnecessarily. She called banks that are "clipping fees from all the IPOs and debt underwritings" an easier way to play AI than buying the hyperscalers directly.
She also likes industrials, pointing to a manufacturing boom and strong secular demand for power and natural gas from data centers. On tech, she said, "I like a protected play on tech," and she noted that iCapital kept its S&P 500 forecast "exactly where it was" because it expected more volatility.
Choppy markets are when active management matters most, she said. "When things get really choppy is my favorite moment," Basak told me.
Why she doubts the AI jobs doomsday
Basak said she does not expect AI to be as damaging to the job market as the worst forecasts suggest. "It's just not good enough to live without it yet," she said of the technology's need for human workers.
She also pointed to demographics, saying the Dallas Fed has warned that trend job growth could turn negative. Younger workers are being hit hardest right out of school, she said, and "the jobs of tomorrow won't be the same as the jobs of today," which makes retraining the key investment.
Tune in to the full conversation with Sonali Basak on YouTube, Spotify and Apple Podcasts.
For more on the Fed's pivot, read Kevin Warsh raised interest rates as President Trump demanded the opposite, 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 expressed are those of the guest.