Unscripted: Are markets too optimistic about inflation?

Inflation remains above target and geopolitical tensions continue to shake supply chains. AI is transforming the investment landscape. Yet, markets seem remarkably comfortable with the global economic outlook. While Loomis Sayles’ fixed income experts focused on different risks, a strong consensus emerged that markets may be underestimating several factors.

Inflation may prove more persistent than markets expect

Matt Eagan: “I think the market is too optimistic about inflation from a structural perspective. Investors seem to be clinging to the view that inflation will gradually revert back to the 2% target in the not-too-distant future. That view misses the key structural themes that have emerged over the past five to six years, like an aging population, a more constrained labor market, a massive structural fiscal deficit, and a greater-than-expected boom in AI and energy infrastructure spending. The AI story holds hope for investors that believe productivity gains can keep growth high with no inflation. But I think, if anything, the AI spending boom is blowing inflation into the system, and I expect it to be more volatile on a cyclical basis. I see the potential for unanchored inflation expectations to kind of swamp US Treasuries in terms of higher yields.”

Resilient consumer health, but growing stress beneath the surface

While spending data appears strong, there are signs of growing strain within both lower-income households and parts of the higher-income workforce.

Scott Service: “Consumer health is one spot where the market might be a little optimistic. The stock market, while sometimes volatile, continues to move higher. Retail sales numbers are doing very well. I think these factors mask the stress that the lower-end consumer is feeling right now. To put it into perspective, 60-day-plus delinquency rates for subprime auto loans are higher than they were in 2008, during the Great Financial Crisis.*”

Jennifer Thomas: “I’m seeing cracks in a specific set of high-income individuals. A large swath of high-income earners, primarily in the tech space, have only been able to replace a job loss if they accept a lower salary. For example, someone laid off in the AI tech space previously earning $400,000/year can find a new job, but at $200,000/year. These borrowers typically live in high cost-of-living areas, are high spenders and are less familiar with how to manage financial struggles. We’re starting to see the pressure come through in performance numbers in certain areas of personal consumer loans from high-income, high-FICO-score borrowers.”

AI productivity expectations may be ahead of reality

AI could deliver meaningful productivity gains, but markets could be underestimating the time required for those benefits to emerge.

Scott Service:

“The AI productivity growth assumptions embedded in the market could be a little bit optimistic. We’re definitely believers in the long-term productivity benefits of AI, but we feel it will take time to get the return on investment that investors are looking for. It reminds me of the late 1990s and 2000s with the internet and fiber network buildout. Everyone was excited about how the internet was going to change everything. It did, but it took more than a decade to come to fruition. I think we’ll have a similar slower-than-expected rollout for AI productivity growth. I do think it will be life-changing, but it will take time to play out, and we are being very prudent in that space.”

*Source: Fitch Ratings, as of June 30, 2026.