Northern Trust Asset Management’s Gary Paulin warns that one of the biggest risks to investors this quarter could be underexposure to risk assets or overbearishness as buy sides wrap up 2026. The chief investment strategist, International, discusses where he is seeing a disconnect in fearful institutional sentiment and strong market performance, coupled with improving liquidity and market conditions.
As buy-side desks prepare for the year ahead, Paulin examines rising global debt concerns, assesses whether an AI bubble is emerging, and identifies the key market signals investors should be watching.
Interview
Josephine Gallagher – Us, growth and exceptionalism has been a big theme for this year, but we did see discrepancies in retail sentiment and professional investment sentiment. So how have trading communities been approaching risk as they come into your end?
Gary Paulin – So you’re right, the idea of US exceptionalism took a real hammering back in April on ‘Liberation Day’. I think the retail investor was reasonably quick to buy the dip, whereas the institutional ones were way more reluctant. And I think that’s still largely the case. If you look at positioning and sentiment data, it suggests that the institutional still have fairly low risk exposure. And I’m kind of struggling to remember a time in my career when you’ve had so much fair and negative sentiment with markets just shy of all-time highs. You look at the CNN Fear and Greed index, for example, which is back to where it was in April, right. Signaling extreme fear. You’ve had the fund manager survey showing that whilst markets are still overweight risk. They’re well below levels to what you might have expected in the past. So that’s not the anatomy of a market top. And I think what’s driven a lot of this, certainly recently has been tightening in US money markets, and I think that’s principally been due to the shutdown but now that that’s over and quantitative tightening ends in the next couple of weeks, not least the fact we might get another rate cut. You may see this liquidity profile start to improve for markets, but also risk appetite as we head into year end, meaning the biggest risk for traders may actually, ironically, be in not having enough risk on
Josephine Gallagher – Another big risk on people’s radars is the growing debt levels, whether it’s corporate or government debt, and it’s a big concern that I’ve heard from buy sides, speaking to them this year, particularly as we come into 2026. So how would you advise trading and investment desks to be thinking about this?
Gary Paulin – Look, debt is an issue that comes up pretty much every year I’ve been doing this job. I think where debt really becomes an issue is when there’s inflation concerns. So I’d be encouraging trading desks to really get a good sense as to where they see inflation trends for next year and and one of the key things I think, to focus on to get right is to really understand how AI plays into that calculus and whether or not the Scott Besant worldview actually manifests, and that namely, he thinks 2026 will be the year we we see a handoff from capex to productivity growth. Now, if that occurs, and you see this disinflationary impulse impact markets, a bit like than what we saw in the 90s, but also when China joined the WTO (World Trade Organisation). That could allow the Fed (Federal Reserve) to run things a little bit hotter than what they would otherwise do. It also has a big role to play in that debt calculus, given that, as we’ve seen by the CBO (Congressional Budget Office), who has done the work here, if you saw productivity growth closer to 3% debt to GDP out a couple of decades can fall quite precipitously. And whilst we shouldn’t reason by analogy too often, I think the 90s does provide really interesting parallels. And productivity growth, the first part of that decade was 1% but at the later part it was closer to 3%. I think that is instructive for where we could be going and these debt issues over time may not be as big a thing as what they currently are.
Josephine Gallagher – I’m glad you mentioned AI because that feeds into my next question. You said you remember the time of dot.com bubble. First question is, are we in an AI bubble? And can you give me more details on the differences and parallels you’re seeing between that investment cycle and this one?
Gary Paulin – Is it a bubble? I’m not sure we’ve met the necessary conditions for it to be a bubble. Yes, there are parallels. You know, I lived through that period, and I still bear the scars, and so I look at any technology boom with a degree of skepticism. And yes, there are things to be skeptical of, not least the concentration we have in markets, the circular financing, some of the leverage that we’re seeing emerge, the valuations and the risks of overspending. But there’s also sufficient differences that makes me at least think that we’re perhaps early in this bubble. And those differences are things like the concentration risk and value is matched by concentration risk and earnings. The valuations of the technology stocks now, compared to dot.com bubble, are a lot lower, but they’re also much better and higher quality companies. Whenever you’re concerned about leverage, you really have to look at the underlying collateral and residual values of what they’re secured against, and they’re not falling. I think they. It’s key. And yes, while some companies are using debt to fund capex. Remember this capex, a lot of it’s in land. So debts not a it’s not a crazy thing. In aggregate, we still have large hyper scalers who can fund out of cash flow. And I think that’s a key differentiation. But whenever I think about bubbles, I’m always brought back to JK Galbraith’s quote about a mass escape from reality. And for me, we haven’t yet met that point. And the point, I think, which will signal that is when my mother starts calling with her stock picks, and I will make sure I’ll come back on the show when she does. And so I think we’re still early in this phase, and there’s more, more to come.
Josephine Gallagher – Okay, so that’s the real data signal that you’ll need is your mum ringing you and on the phone. Just finally now to wrap up things, tell us what is one piece of advice that you would offer trading desks as we come into the year-end and go into 2026.
Gary Paulin – I’m going to give you two pieces of advice. One is to focus on facts and not feelings, because I think, you know, there are, particularly in these markets, there are headlines that draw us into an emotive response. So I think, facts, not feelings are really important. The second thing is, really pay attention to what Scott Besant, the Treasury Secretary, says and does. And I say that because, like your listeners, he used to be a trader, but unlike your listeners, the book he runs is the biggest book in the world. So what he suggests and what he signals, I think pays {requires} paying really close attention to because it could have signal value for where we head going forward.
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