Weekly Research Briefing: Scary Times

As of Friday, Saudi Arabia's East-West pipeline has officially been shut down after recent attacks, putting -4 million barrels of daily oil exports at risk.

Meanwhile, the Bab el-Mandeb Strait is now at risk of being shut down, threatening up to -9 million barrels of daily oil supply.

All while the Strait of Hormuz is operating at ~20% of its pre-Iran War capacity, removing -15 million barrels of daily oil flows.

Combined, this represents nearly ~30 MILLION barrels per day of oil flows that are either offline or at risk.

Even after accounting for some overlap between these routes, the scale of the potential disruption is enormous relative to the ~100 million barrel per day global oil market.

A typical 18-wheeler carries about 200 gallons. Filling it now costs $1,240, $120 more than 2 weeks ago.

They average about 7 miles per gallon (efficient for a vehicle that can weigh up to 80,000 pounds, including freight).

So a 2,000-mile trip from Chicago to LA now consumes about 300 gallons (including climbing the Rockies), costing ~$1,900 in fuel alone.

Diesel is the world’s most-consumed refined petroleum product, accounting for nearly 30% of total oil demand. The trucking industry swallows about half of the world’s output, with railway freight, construction, factories, mining and agriculture absorbing the rest.

“We are going to be in a higher-cost world for probably at least the next six to 12 months. Even if tomorrow they end the war, there is too much inflation in the pipeline. All the raw materials are going up everywhere, on everything. Everything is impacted by oil. That is why you are seeing crazy things. We are trying to manipulate currencies, buying back things. It is a crazy time.” - RH CEO Gary Friedman

“I think the pressure on pricing will increase with some of the cost pressures sustaining. And again, the longer oil stays at above $100, the harder it will get, I think, for everyone to manage, and I think the higher the combined pressure on pricing will be.” - The Procter & Gamble CFO Andre Schulten

Food prices for the rest of this year are largely headed in one direction: up.

Conagra Brands Inc. has told retailers to expect increases on products including Healthy Choice and Banquet frozen dinners. Campbell’s Co. said it plans to raise prices by 4% to 5% on roughly 60% of its products, mostly meals and snacks. Spice and condiment maker McCormick & Co. has said it expects higher prices, which were already implemented earlier this year, to bolster results in the second half of 2026.

Food and grocery companies’ efforts to keep prices down are sputtering following a sustained rise in energy and fertilizer costs along with tariffs on imports. On top of this, the El Niño weather pattern is on track to become the most powerful of the past 76 years — potentially putting even more pressure on prices if severe weather damages harvests and disrupts trade.

Now, some executives say they have no choice but to reflect these increases in their own prices.

The 10-year US Treasury yield surged to nearly 5% this week, reaching its highest level since October 2023. Following an above-consensus CPI print, our economists expect a 25 bp hike at the FOMC meeting next week. Our rates strategists believe that the combination of rising oil prices, a repricing of the Fed path, strong economic growth, and AI investment have lifted long-term interest rates.

"Warsh has loaded the scales toward a hike, needing to see clear improvement in inflation to avoid one. That hasn’t happened, and with the bond market now in a turbulent mood, not hiking could leave him looking silly. Credibility is easily lost, and he needs to go through with a hike to maintain it, particularly in current conditions."

Treasury Secretary Scott Bessent’s gambit to deploy increased bond buybacks to keep longer-term yields in check appeared last week to have failed. The 10-year yield leapt after the long-heralded details of the buyback were announced on Wednesday — and weren’t as great as some had expected — and again on Thursday when it emerged that the Treasury hadn’t bought all the bonds that it could have under its new mandate. Long yields matter, and the overriding purpose of the Fed must now be to avoid pushing them higher, for the sake of the housing market above all. The chart below shows the relationship between shares of homebuilders, a direct expression of housing market perceptions, and the 30-year mortgage benchmark bond yield.

Homebuilders slammed the brakes on housing starts in August. Normally, homebuilders we survey slow starts -2% MOM from July to August. This year, however, they slashed the pace of starts per community -20% MOM (worst August MOM drop in our survey history).

Equities typically struggle at the start of Fed hiking cycles, but the market has already priced substantial Fed tightening in coming months. The S&P 500 has generated an average 3-month return of -2% at the start of seven hiking cycles during the last few decades. However, the S&P 500 then generated an average 12-month return of +9%, with positive returns in every episode but 2022... Today, the rates market is already pricing more than three 25 bp hikes by the middle of 2027, lifting the bar for policy to surprise in a hawkish direction. The medium-term impact of Fed tightening on equities will depend on how tightening affects earnings growth, which is the most important driver of stocks.

"while higher bond yields tend to coincide with lower equity returns, even at a 7% yield, average annualized stock returns are still higher"

The forward 12-month P/E ratio for $SPX is 19.1, which is below the 5-year average (19.8) but above the 10-year average (19.0).

A few people asked over the weekend what the calls to slow the pace of frontier AI mean for the buildout. Some thoughts:

Even if models never improved from here, just rolling out what they can already do would take more compute than the world can build for years. The debate about how fast AI should be allowed to improve is a fair one to have. It's about future generations of models.

Existing demand is the part I think people are misreading. Anthropic CEO Dario Amodei said in May they'd planned for 10x growth and were running at an 80x pace in the first quarter, and that's why they've had trouble supplying compute. OpenAI president Greg Brockman said in July they'll be in a compute shortage no matter what, and are choosing which products to scale. Google says it's processing 7x the tokens it did a year ago. Hundreds of millions of people use these models today, and most of them use a small part of what the models can already do. And every time more compute comes online, usage steps up again: limits come off for people already using it, customers who were turned away get on, and new use cases show up that weren't in anyone's plan.

Now supply. The constraint is HBM, the memory that sits inside every major AI chip. Three companies make it and all three are sold out this year. A new memory plant takes years to build. TrendForce has HBM shipments growing 50-60% next year. NVIDIA, the biggest buyer of it, expects its revenue to grow about 70% next year and calls that outlook 'supply-constrained', noting its customers' forecasts point closer to 100%. On our own bottom-up work, the memory constraint lands in about the same place as NVIDIA's growth number.

Then the chips need a building with power connected, which takes longer again. Goldmans reckons only about half the US capacity scheduled over the next two years will actually be built on time.

The risk to demand continues to seem heavily weighted to the upside. The risk to supply continues to seem weighted toward less capacity getting built, not more.

“We still feel really short...if we had more compute, there are more things we could do.” - OpenAI CFO Sarah Friar

“And so I think given the need for everyone’s short compute and the need for more compute and the supply being deployed to meet the demand that’s out there” - KLA CFO Bren Higgins

“...the hardest thing to find right now is compute. Even if you get yourself an open-source model, you want to run it for $1 billion a year, you have to go buy $1 billion of compute. So it still costs you.” - Palo Alto Networks CEO Nikesh Arora

“And we even have discussions with customers all the way through 2030. My view is AI compute demand is going to remain very strong for many years going forward into the future.” - Applied Materials CEO Gary Dickerson

Microsoft Corp. plans to more than triple its data center capacity, an effort that could help the company overcome a computing shortage that has forced it to turn away some AI and cloud business.

The company’s globe-spanning network of data centers will have more than 38 gigawatts of capacity in 2032, up from about 12 gigawatts now, according to people familiar with the plans. That would eclipse the amount of electricity New York state uses during peak periods.

The road map includes company-owned and leased facilities and excludes computing power rented from so-called neoclouds like Coreweave Inc., said the people, who requested anonymity to discuss private information…

The numbers provide a rare glimpse of how much computing capacity Microsoft hopes to get in exchange for the massive sums it’s lavishing on data centers. The company’s capital expenditures hit $145 billion in its most recent fiscal year, and analysts expect that spending to keep growing in the years to come.

Companies know how to build data centers that won’t alienate communities.

But their desire to build these AI-processing plants faster than ever has resulted in sprawling, polluting, noisy, thirsty complexes more reminiscent of the industrial revolution than the era of artificial intelligence.

We could be living in a golden age of data centers, one in which communities welcome the contributions to their tax base and have little to fear in terms of noise, air pollution or rising utility rates. Decades-in-the-making technologies are now becoming viable alternatives to outdated systems for cooling and power. Data centers that blend into their communities and don’t overtax local resources actually exist, they just don’t make news.

Instead, pushback from communities over noise, electricity costs and secretive development processes across the U.S. is leaving many builders with a stark choice: Do better, or face indefinite delay—even cancellation…

After interviewing experts, many inside the companies facing this pushback, I compiled a list of ways to build data centers that people won’t hate:

• Be more transparent
• Mitigate utility rate hikes
• Seek cleaner energy
• Reconcile water use
• Revisit carbon-neutrality promises

The long-beleaguered mall business is finally having a moment.

After years of lagging behind the commercial-real estate recovery, malls are outperforming every other property type as more investors conclude that enclosed shopping centers have more staying power than previously understood.

Mall values are up 13% over the past year, according to real-estate analytics firm Green Street. That tops all 10 commercial property sectors and is more than double the increase in overall commercial real-estate prices…

The American mall revival has been so strong that Paris-based owner Unibail-Rodamco-Westfield is getting back in the game just four years after it said it planned to ditch the U.S. market. The company has committed to spend nearly $1 billion this year buying out its partners at two of its malls: Westfield UTC in San Diego and Westfield Southcenter in deals that gave it full control of both properties.

“We see the type of rent growth that we haven’t seen since the beginning of the 2010s,” said URW Chief Executive Vincent Rouget.

Rouget said the U.S. market is now a growth driver for the company, with tenant sales and net-operating income growth outpacing the broader portfolio average.

Large institutional investors, including pension funds and endowments, have shifted their allocations in U.S. equities from public to private markets over the past 40 years. This change has had reverberations for investors, executives, policymakers, and asset managers of public and private equity.

For public equity, we include all of the stocks of companies that trade on an exchange in the U.S. The S&P 500, an index that tracks the stocks of 500 large companies in the U.S. and represents about 80 percent of the total market, had a solid 11.5 percent compound annual growth rate (CAGR) for the 40 years ended 2025. Still, there are today about one-half as many public companies as there were in 1996.

For private equity, we include buyouts and venture capital (VC). We examine long-term trends in each of these markets, including their size, patterns of how they have bought and sold businesses, and return on investment.

This report is an update of one from August 2020, and a lot has changed in the ensuing half dozen years. Most notably, the period of “easy money,” which started in 2009 when the Federal Reserve and other central banks lowered policy rates to essentially zero in the wake of the Great Recession, ended in 2021. As a result, the real yield on the 10-year U.S. Treasury note went from about -1.0 percent in late 2021 to roughly 2.4 percent in August 2026.

There have also been regulatory and business initiatives aimed at making investing in private equity more accessible to individual investors. Institutional investors have been the primary source of capital for this asset class, but a majority of surveyed money managers now expect that at least one-half of flows into private markets will come through investments targeted at individuals within the next couple of years.

Plan Charlie needed to keep Spirit operating as normal, not tipping its hand even to the airline’s own employees, before instantaneously freezing everything in place. Because the team wanted to ensure that no Spirit planes were in the air when the announcement was made, and because they also wanted to minimize cancellations, the plan was built around a 3 a.m. shutdown, a time when normally only a few overnight flights would be en route.

The day after Spirit’s rescue fell apart was Friday, May 1. It wasn’t when anybody running the company would have wanted to put Plan Charlie in motion. Weekends and the days leading up to them are particularly busy for a low-cost airline catering to leisure travelers. Nevertheless, around 1 p.m. that day the airline started canceling its longer flights. This included international departures to Latin America and the Caribbean. There were additional reasons to make sure those planes didn’t take off: Having them sitting at airports outside the jurisdiction of the US government and US courts at the moment the airline went out of business could complicate the already tricky business of getting them back home.

Early Friday evening, Spirit stopped doing any maintenance on its planes that wasn’t immediately necessary, reducing the odds that its mechanics would be in the middle of a job the moment operations ceased. Around the same time, the company’s board was officially notified that the wind-down was in progress. The night’s red-eyes were canceled a few hours before they were set to depart. As the day wore on, news of the impending shutdown began to leak to the press.