Capital Markets Update #30

We don’t want to participate in the day-to-day, hand-to-hand combat taking place amongst Fed watchers over the topic of whether Fed Chair Warsh has credibility or doesn’t, needs to raise interest rates or let things play out, communicates effectively in public or offers an articulate thesis on what amounts to be nothing.  We don’t put much efficacy into extrapolating trends from kneejerk moves in individual equities.  Even short-term bull-bear twists across both debt and equity markets often function like a yoga stretch where markets go up and down and around and end up feeling better for it.   Identifying and analyzing trends is what’s important to us.  As such, we have noticed a wave of bearish sentiment has invaded our markets, casting a broad and pervasive cloud of negativity over what is otherwise a healthy economy. 

Here are some of the factors at play.  Global bond yields are rising for various reasons, while the Fed is under real market pressure to hike rates.  We’ve attempted to define reasons for the rise in global bond yields in previous thought pieces, but higher Treasury rates and bond yields are, ultimately, concerning for a myriad of reasons.  The Mid-East conflict has failed to resolve itself within the previously projected 3-month timeline, has now blown through what was once a theoretical outside-date 6-month timeline and shows no signs of abating (until it does – likely suddenly).  The long-overdue and constructive conversation around the unsustainable level of US debts and deficits is negatively impacting bond prices across the curve.  The major source of optimism within markets, that being prospect of future productivity increases due to AI development and implementation, is starting to receive hegemonic pushback as communities nationally curtail datacenter permitting and developing.  For that matter, quite often throughout Q2 2026 earnings season, stock prices fell after companies handily beat earnings guidance.  Finally, the airwaves are flooded with combative and negative political rhetoric.  Its election season and everyone is keyed up over topics which actually impact their lives – whether its taxes, democracy, capitalism, entitlement programs, immigration, etc.  We all have our own critical issues; politicians try and exacerbate the tangible connections we have to those issues in order to force us to the polls.  The result of this effort is a sustained, secular rise in the ambient temperature of American society.  

It’s almost miraculous that the S&P 500 has sustained its present price level under such duress.  While the put/call ratio currently sits at 0.83x (MicroMacro), which is in line with some of the most aggressive levels we’ve seen post Covid, it certainly doesn’t feel like it.  Consider this, the S&P 500 has gained a whopping 60 points since the end of Q1 2026 (up from 7,600 on May 31st to 7,660 today).  This meager performance follows one of the most positive and blockbuster earnings seasons of all time – apparently the requisite miracle the market needed to tread water in-place under the weight of the present negative sentiment.  97% of S&P 500 companies have reported Q2 2026 earnings, with 86% of companies beating guidance by an average 26.5%.  For reference, over the trailing 5-years, an average of 77% of companies have beat guidance by an average of 7%.  Even if you exclude huge unrealized gains on private company investments across Alphabet and Amazon, Q2 2026 earnings exceeded guidance by an average of 10.8% (all Factset data).  The blended earnings growth rate for companies in Q2 was 52%; excluding Amazon and Alphabet, the growth rate was still 33.8%.  For reference, full-year 2025 earnings growth was about 14% vs the revised full-year 2026 expectation of 31.2%.  That’s incredible when you think about it.  We’ve seen extraordinary growth in revenues, while margins are up to about 17% vs call it 12% in 2019 (Yardeni Research).  Even if you break out performance by sector, literally over 80% of companies within every S&P 500 industry beat earnings guidance (excluding utilities, and let’s be honest, that makes sense).  Just an extraordinarily strong report card on nearly all fronts.

So what can we expect from the market going forward?  We’ll avoid providing our useless opinion and perhaps summarize the forces at play.  In our view, extraordinary earnings are doing yeoman’s work holding up an entire market at risk of pulling back from any one of the myriad of bearish narratives running rampant.  The good news is earnings appear quite durable.  The semiconductor industry has earnings clarity out to 2028 / 2029, the consumer is stronger and healthier than ever before – literally in the history of America, banks are well capitalized and the majority of the marginal corporate leverage incurred throughout 2026 will be sitting on massive investment grade balance sheets.  We referenced consumer health above, we looked at it this way: Total US consumer net worth / total US GDP currently sits at about 5.4x, above 2019 levels of 5.0x, above 2007 levels of 4.6x and above 1999 levels of 4.0x.  Again, we’re reticent to add to the diaspora of opinions or divinations around go-forward market performance.  We just note how precariously positioned what otherwise should be a stable US equity market feels.

Perhaps that’s the market for you – find something to worry about in the absence of other worries.  But it’s impossible to define the negative stimuli mentioned earlier as red herrings.  Again, we get back to the point of this piece which is the underlying fundamentals of the US economy are strong by so many critical measures and yet the extent of the negative sentiment keeping a lid on optimism feels (and, according to the S&P index price throughout Q2, has been) exceptionally effective.  No conclusions, unfortunately just questions.  But, taking stock of these variables helps us position for major moves ahead.