Giles thinks that Xander acting like a jerk and associating with imbeciles is just a phase of typical teenage boy behavior and pooh-poohs Buffy's theory that he's possessed. Later, we learn that Giles had a delinquent period of his own as "Ripper" where he fell in with a bad crowd under his own steam, so it makes sense that he thinks that's what's happening with Xander.
