The Evolution of Anywhere Communications

We recently sat down with Dominic Nolan, CEO of Aristotle Pacific Capital, to get his insight into Elon Musk’s expansion into wireless communications, the Fed’s next moves, recent market trends, and opportunities in fixed income. We conclude with a speed round of questions and answers, and a personal reflection.

Market Performance

U.S. stocks reached new highs in September. What happened?

The Federal Reserve rate cut acted as a market catalyst. In September, the S&P 500 Index rose 3.7%, bringing its year-to-date gain to nearly 15%. Technology continues to stand out: The Russell 1000 Growth Index is up more than 17% this year and gained 5.3% in September. While recent economic data has softened – typically a negative for risk premia – this softening, combined with Fed cuts, should translate to lower financing costs and greater liquidity. Earnings forecasts generally remain positive, and I believe tax depreciation benefits are spurring industrial development, including the data center boom.

How about bonds?

Bonds have also performed well, buoyed by the rate cut and expectations of future cuts. The Bloomberg US Aggregate Bond Index (Agg) rose 1.1% in September and 6.1% for the year. Investment-grade corporates led with a 1.5% gain last month, followed by high-yield corporates at 0.8% and bank loans at about 0.4%. For the year, those sectors are up 6.9%, 7.2%, and 4.6% respectively. Such strong stock and bond performance contradicts the narrative of the death of a balanced portfolio. In fact, balanced portfolios and fixed income allocations generally are having a good year.

Mag7 + Broadcom

Your thoughts on the Magnificent 7?

Mag 7 performance was mixed in September. Tesla and Alphabet led, while Amazon and Meta had negative returns. Artificial intelligence (AI) continues to dominate the narrative. Broadcom could be added to this list with news last month of a $10 billion AI chip order and a market cap that lately has hovered around $1.6 trillion. Originally a semiconductor division of Hewlett-Packard, Broadcom’s earlier iteration spun off as Agilent Technologies, and eventually acquired chip designer Broadcom and assumed the name. Broadcom has delivered tremendous performance under CEO Hock Tan.

U.S. Treasury Yield Curve

How do you view the rise of the belly of the U.S. Treasury yield curve after the Fed cut rates in September?

Not all rates are created equal. The Fed controls short-term rates, which tie directly to much of the embedded leverage in our economy, including floating rate corporate loans. The Fed only indirectly influences the rest of the yield curve. After the September 17 rate cut, yields rose significantly on bonds with maturities of two to 10 years. This likely reflects investor expectations on inflation and economic growth prospects over that period and the implications for future Fed policy.

Fed Futures

Do you expect more Fed cuts in the fourth quarter?

Markets have been pricing between one and two more cuts this year. Counterbalancing factors include a softening jobs market, relatively strong GDP growth, and persistent inflation. I expect at least one more cut this year due to labor market trends, but it’s unclear if we will see a third cut in December.

Economic Dashboard

Let’s dive into U.S. economic data. What are you seeing?

The data is a mixed, with a tilt to weakening. While economists generally agree GDP growth is slowing, as we speak, the Atlanta Fed’s GDPNow growth estimate for the third quarter is 3.8%. Even if growth moderates to the 2% to 3% range, that’s still a healthy pace. Meanwhile, trailing 12-month CPI has been stubbornly flat since 2023, and ticked up to 2.9% in August. Labor market indicators suggest deceleration. Job openings have been mostly flat, while fewer people are quitting their jobs, which suggests they have less confidence in finding a new job. Consumer spending is flat to down from last year. These trends point to less consumer confidence. As discussed, the Fed is likely to cut a little more, but stubborn inflation likely will limit its scope.

How will the government shut down affect the economy?

It will likely act as a headwind to consumption, with government spending delayed. The severity depends on the shutdown’s duration. The previous shutdown lasted 35 days –the longest in U.S. history. Intangible factors, such as greater uncertainty and the additional psychological stress on government employees coming so soon after the DOGE cuts, add to the potential impact.

Echostar Rescued by Strategic Spectrum Sale

Now for our special topic this month: Elon Musk and the future of satellite and cellular communications. What’s the big picture?

Telecommunications is entering its next evolutionary stage. Elon’s SpaceX has been leading the satellite space race, launching thousands of small satellites and building its Starlink network. However, SpaceX has lacked direct to consumer spectrum licenses to offer cellular service and previously announced a partnership with T-Mobile to offer a limited amount of complementary service to T-Mobile’s customers. Meanwhile, Echostar, a telecom and satellite-TV provider known for the DISH Network, was reportedly facing bankruptcy and a Federal Communications Commission probe into whether the company was moving fast enough to use the wireless spectrum it had been granted. Under pressure, Echostar has reached three critical deals to sell wireless spectrum licenses: SpaceX has agreed to a $17 billion deal, AT&T has agreed to a $23 billion deal, and Verizon is the latest with a purchase that could be worth about $9.8 billion, according to Bloomberg.

The Spectrum Space Race

What’s the relevance of all this?

Most Americans use mobile phones, with the majority subscribing to Verizon, AT&T or T-Mobile. Now Starlink, in addition to offering portable Wi-Fi, is positioned to become the fourth largest telecommunications provider and the only one exclusively using satellites. This has major implications for areas with limited or no cellular service from cell towers. Global satellite coverage also eliminates reliance on roaming when traveling abroad. AT&T and Verizon have a few satellites and are adding more, but they lag behind Starlink’s fleet of over 8,000, and it also is adding more. Satellite expansion could significantly boost wireless transmission capacity and capabilities over time.

Direct to Cell

How does this fit with Elon's other endeavors?

Tesla and SpaceX have similar trajectories. Tesla created the first viable competitor to internal combustion vehicles and remains one of the top two elective vehicle (EV) makers globally, surpassed only by China’s BYD since late 2024. Tesla also built a network of charging stations, controlling both manufacturing and power delivery. Similarly, SpaceX first manufactured reusable rockets and then established a network of satellites. Now, through Starlink, SpaceX is expanding its offerings of wireless transmission services. Meanwhile, Tesla is leveraging its vehicle data and cameras to offer autonomous driving. Elonis tackling big problems, and time will tell how successful these endeavors will become.

Fixed Income Yields and Year-to-Date Returns

Shifting topics, where are you seeing opportunities in fixed income today?

I continue to favor investment grade (IG) corporate bonds. A softer economy typically leads to lower interest rates, and while spreads may widen, IC corporates are well positioned to weather such conditions. As I mentioned earlier, IG corporates have performed well so far this year: the Bloomberg US Corporate Index has returned about 6.9% as of the end of September, above the index yield of nearly 5%.

What’s your perspective on duration, and fixed versus floating investments?

Given the economic outlook and as long as the 10-year Treasury yield hovers around 4%, I see duration as more of a tailwind than headwind. However, due to volatility at the longer end of the yield curve and underperformance in bank loans this year, I see diversification benefit to an allocation of floating-rate bank loans.

Time for our random. I’ll give you a word or phrase, and you tell me the first thing that comes to your mind. First: Gold vs. Bitcoin.

Gold is having a stronger year.

Klarna IPO

After the IPO, Klarna was valued between $15 billion to $17 billion. However, when privately held, its value on paper reportedly reached $45.6 billion in 2021 . To me that indicates exit pricing – private equity players wanted out, and the market said it wasn’t worth $45 billion.

Electronic Arts going private

EA is a major player in digital gaming, including sports titles like Madden NFL. The $55 billion, all cash deal led by Saudi Arabia’s private wealth fund is the largest private equity funded buyout in history. It won’t break Saudia Arabia’s bank, but it’s a significant investment in digital entertainment. Other investors include a firm led by Jared Kushner, and I imagine he helped facilitate the transaction.

MLB playoffs.

I'm an Angels fan, but it’s been an awful decade. I’m rooting for the Dodgers. It's sacrilege, but I must admit the Dodgers are a better-run organization.

Let's close with a personal reflection.

I’d like to reflect on my two brothers. Juan Antonio Nolan  passed away earlier this year. On September 24^th , some loved ones went to the Camino trail in northwest Spain, and they spread his ashes at a spot he had chosen. Juan was a character. He was divorced six times and lived in Europe for the last decade of his life. My brother Joe Nolan couldn’t be more different. He tried the priesthood and later started a master’s program in London. Two very different paths, and God bless them both. My reflection: life is change, and change is life.

A 10-year Treasury note is a debt obligation issued by the United States government with a 10-year maturity period.

The Atlanta Fed GDPNow provides a running estimate of real GDP growth for the current quarter using available economic data.

Bank loans (or floating-rate loans) are financial instruments that pay a variable or floating interest rate. A floating rate fund invests in bonds and debt instruments whose interest payments fluctuate with an underlying interest-rate level.

A bond is a fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.

The Bloomberg US Aggregate Bond Index (Agg) is composed of investment-grade U.S. government bonds, invest-ment-grade corporate bonds, mortgage pass-through securities, and asset-backed securities, and is commonly used to track the performance of U.S. investment-grade bonds.

‍Capital Expenditure (CapEx) is the money a company spends to acquire, upgrade, or maintain long-term, physical assets.

Consumer Confidence measures consumers’ attitudes and optimism about the economy and their personal financial situation.

Coupon refers to the interest payment that a bond issuer promises to pay to a bondholder.

The Department of Government Efficiency (DOGE) is an initiative by the second Trump administration in the United States. Its stated objective is to modernize information technology, maximize productivity, and cut excess regulations and spending within the federal government.

Fixed income refers to assets and securities that pay a set level of income to investors, typically in the form of fixed interest or dividends.

Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's.

An investment-grade bond is a type of bond that is considered to have a relatively low risk of default.

The ISM Manufacturing Index is a monthly economic indicator published by the Institute for Supply Management (ISM) that gauges the health of the U.S. manufacturing sector.

Treasury rate (or yield) refers to the interest rate at which the U.S. government borrows money by issuing Treasury securities.

Yield is the income returned on an investment, such as the interest received from holding a security.

A yield curve plots the interest rates of bonds that have equal credit quality but different maturity dates.

Any performance data quoted represents past performance, which does not guarantee future results. Index performance is not indicative of any fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index. For current standardized performance of the funds, please visit www.AristotleFunds.com.

The views expressed are as of the publication date and are presented for informational purposes only. These views should not be considered as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment or market. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant.

Investors should consider a fund’s investment goal, risk, charges and expenses carefully before investing. The prospectus contains this and other information about the fund and can be obtained at www.AristotleFunds.com. It should be read carefully before investing.

Investing involves risk. Principal loss is possible.

A full list of holdings can be found at www.aristotlefunds.com and are subject to risk and to change at anytime. Any discussion of individual companies is not intended as a recommendation to buy, hold or sell securities issued by those companies.

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