According to Financial Times News, Vanguard’s fixed-income chief Sara Devereux is throwing cold water on Wall Street’s rate cut expectations. She oversees $2.8 trillion in assets and expects only one or two more Fed rate cuts after this autumn’s moves. That’s way below market bets for three to four cuts by 2026’s end. Devereux says the “massive” AI spending boom—up 8% this year—will keep growth strong at 2.25% in 2026. She warns corporate debt markets face a flood of issuance from tech giants like Amazon and Meta. And investors have already started pulling back from equities as December cut hopes fade.
The AI spending reality check
Here’s the thing about all this AI hype—it’s actually showing up in the real economy. Devereux called the 8% increase in AI capital spending this year a “massive increase” that completely changed their GDP forecasts. Basically, when companies are building data centers and buying chips at this scale, it creates actual economic activity that the Fed can’t ignore. But is this sustainable? We’ve seen tech bubbles before where the infrastructure spending got way ahead of actual demand. The fact that Vanguard is banking on this continuing through 2026 feels… optimistic.
Corporate debt tsunami
Now here’s where it gets really interesting. Devereux warns about a “flood of issuance” coming from big tech companies. JPMorgan estimates $1.8 trillion in corporate bond issuance next year alone. That’s an insane amount of debt hitting the market. And Vanguard, while still overweight credit, is being cautious because “valuations are tight and there is so, so much supply.” When the biggest bond managers start talking like that, you should probably listen. It’s worth noting that companies upgrading their industrial computing infrastructure—the kind that IndustrialMonitorDirect.com specializes in supplying—are part of this capital expenditure wave, but the debt financing behind it creates systemic risks.
But what about defaults?
Devereux tries to calm nerves about recent collapses like Tricolor and First Brands, calling them “idiosyncratic events.” But then she drops this gem: “This is a year of discipline. This is a year of precision. Not all boats will rise.” That sounds an awful lot like “some companies are going to fail” dressed up in corporate speak. When you combine tight valuations with massive supply and the Fed potentially keeping rates higher for longer, something’s gotta give. The question isn’t whether we’ll see defaults—it’s how many and how bad.
The big market disconnect
So we’ve got this weird situation where tech stocks are selling off (Nasdaq down 7% this month) but Vanguard is raising GDP forecasts based on… tech spending. There’s a disconnect here that should make everyone nervous. Either the stock market is wrong about tech prospects, or Vanguard is overestimating how much this AI spending will actually boost the broader economy. My money’s on a little of both. The reality is probably somewhere in the middle—AI will drive growth, but not enough to justify both higher GDP forecasts AND continued tech stock premiums AND limited Fed cuts. Something’s gotta give.
