You've got bond yields over five, 5.25 today, oil at 100. If you see oil prices move lower, interest rates should come off quickly and the market should rip. So, I think that it's actually to the upside, risk to the upside, that the markets move substantially higher and that people are off sides because they're trying to kind of deconstruct and decompose. Is the AI trade real, and maybe miss the upside move? I mean, markets would be substantially higher if the conflict in Iran had been resolved. And that's dragged on longer than, you know, folks in Washington would have liked, and that's really keeping kind of a coiled spring underwater for the market.
Welcome to Prof G Markets. I'm Ed Elson. It is October 7th. Let's check in on yesterday's market vitals. The major indices climbed as stock investors grew bullish ahead of earnings season. The yield on 10-year Treasuries declined slightly but remains near multi-decade highs. Brent crude climbed back above $100 per barrel as industry executives warned that global stockpiles are running low. Meanwhile, Constellation Energy popped more than 12% after Google agreed to a 20-year nuclear power purchasing deal. Okay, what else is happening?
Big tech just pushed the S&P 500 to its first record close since August. The S&P rose nearly 1% yesterday, and it's now up more than 14% so far this year. While the stock market is ripping, though, bond yields are still near record highs. On Monday, the 10-year Treasury yield closed above 5.3%, its highest level since 2002. According to Cal Street, traders are now betting that the chances of a rate hike before the end of the year are above 70%. In other words, the bond market and the stock market are now telling somewhat opposite stories, which leaves us all wondering who is right.
Here to discuss the markets, we are speaking with John Mowrey, chief investment officer at NFJ Investment Group. John, good to see you. The S&P hit a record high, which I think was surprising to some considering the fact that we saw yields rising as much as they did. And usually when yields rise, that means stocks come down. That's not what happened, though. Stocks kept rising. We're now up 14% year to date. What do you make of what's happening here?
Yeah, Ed, it really is remarkable. If you had told me at the start of the year that the 5-year, or excuse me, the 10-year bond yield was going to go to 5.25 or 3%, oil would be at 100 or higher for multiple consecutive days, I think that's kind of textbook. You would have expected the market to be lower. I think the reason that we have seen such resiliency is that we've got, you know, forward earnings at nearly 38% for the S&P. And to contextualize that, the only time you've seen earnings growth at 30% or higher is coming out of recessions. So coming out of COVID, coming out of the 2009, the GFC in 2008, that was the only other times you saw that. So the earnings have been incredibly resilient. And what's fascinating, Ed, is actually the market has gotten cheaper even though it's hitting all-time highs as we sit here today.
Yeah, that's the part. I mean, it is hard in a lot of ways to call the market overvalued right now when you've got the S&P trading at about 19 times forward earnings, below its 5-year average. I guess the question, I mean, we should try to understand what the risks actually are here. Some are questioning the earnings themselves. The earnings are exploding, and that's why you've got, based on those forward earnings, a cheaper market. But some people are wondering, you know, to what extent can we trust these earnings? Do we think that these earnings are sustainable, durable? What do you make of that? Because you're right that the earnings growth is tremendous, and it seems to be the thing that's powering this market.
Yeah, I'd say a couple things. I mean, look, you're getting a lower multiple. So that's textbook for when you have higher interest rates. So the market is responding appropriately. Interest rates are up, and so that's pushing the multiple down. But you have substantial earnings growth, and that's why the market is at all-time highs. So if we think about, are those earnings durable? You know, there's a lot of people that look at the AI trade and they think, hey, is this a bubble? And I might take the other side of the equation. I might take the side that maybe we're mistaking a bubble for a boom, because when I look at the durability of earnings, it's across sectors. This is not one group. I think there's a misconception in the market that this is a narrow trade, and I keep hearing people say that only a handful of stocks are holding the market up. I would take the opposite side of that. You know, small caps are doing, you know, well this year. They're up double digits. Midcaps are up double digits, and you've seen tremendous performance out of refiners, industrial machinery, material stocks. There's a whole cohort. I think that the counter to that is, well, is that being driven by kind of the capex cycle, which is, you know, roughly, you know, 900 billion coming from the hyperscalers? And my answer is largely yes, you're seeing a lot of that come from that. But the counter is, would you rather there not be strong earnings coming out of kind of an investment capital cycle? I would rather have the setup we're in, which is where we have low valuations, strong earnings growth, and actually a backdrop that might get a lot more favorable, should we see some alleviation in oil prices or bond yields as we look into the next 6 to 12 months?
I guess the reason that this breadth question is coming up, this idea that the market is so narrow or that it's so concentrated right now, you're right when we look at the full year that generally speaking it's been pretty good. But over the past couple of months, just looking at individual stocks in the S&P, the equal weight is down since August. More than half of S&P companies right now are in a bear market. I mean, at least over the past few months, basically since the end of the summer, it has been all tech driving the gains, I guess. What would you say to that pushback?
Yeah, it's a great point. I mean, small caps have pulled back. There's no question. So why is that? That I would argue is directly tied to what's going on with bond yields and with oil prices. Because if you think about oil prices, that's a progressive tax that's going to impact the smaller, medium-sized companies more. And then the smaller, medium-sized companies have less leverage to pull when interest rates go up. So, you know, Apple, Nvidia, Microsoft, interest rates going up doesn't impact them as much. The smaller companies, for two key reasons. The first is that the cost of capital directly impacts their ability to go to the capital markets. And secondly, the smaller companies typically have more debt on their balance sheets. So you have more concern about what it's going to be to roll that debt if those interest expenses stay up. So that's the reason you've seen that. I think the small caps are kind of spring-loaded here, though, because you are still seeing earnings growth there at 27%. So really strong earnings growth after years of kind of flat to no earnings growth in the smaller companies over the last few years.
Are you concerned at all about the fact that we just, at least over the past couple of months, it has been a story of tech? Do you worry that, you know, it seemed as though we had kind of a broad market that was pretty diversified? You know, the equal weight was really strong. A lot of these small cap companies were doing really well, but now it seems like maybe we're reverting back to this sort of top-heavy dynamic where you have a handful of companies. Is that a concern for you, or do you think that it's not a real issue right now?
You know, we kind of had a little bit of, you know, a pretty harsh selloff after June in a lot of the semiconductor and AI names. It wasn't just technology, it was also kind of industrial machinery that was tied to data center buildout or connectivity stocks as part of that kind of, you know, data center wiring that's needed for the capital cycle. So it's been a group. I think that ironically, you know, we kind of had an alleviation in that semiconductor trade, and now you've got some of the lowest multiples we've seen. I mean, if you look at the multiple you're paying for Nvidia, Ed, I think it's, you know, very reasonable. The market obviously is doubting the earnings, but I think that the rerating in some of the tech stocks are warranted given that you had a lot of compression kind of coming out of the end of a lot of the reconstitution actually that happened at the end of June in some of the Russell indexes. You had a lot of kind of pressure as those were reconstituting with some of the semi names coming down. You know, for example, a lot of the memory stocks were very large weights in some of the large indexes like the 1000 value, and those completely got moved out. So I think you had some just kind of, I would say, technical selling pressure, and so now you're kind of seeing some of those rerate. And I mean, Micron just reported stellar earnings. So again, the results keep coming through, and there's a lot of doubters out there. And again, I kind of go back to the case that, you know, maybe as opposed to doubting the build, it would be a little bit wiser to kind of look at how it's impacting kind of a broad swath of companies and participate, because it's really good for the country if we're kind of at the lead and the forefront on the AI buildout, not just for national security, but for productivity gains.
Yeah, I guess the concern that I think is valid, at least in my view, is this circular financing concern that we have these earnings that are moving in a circle. That's largely why the earnings have been so dramatically large is because we have all of these big tech companies, these hyperscalers, kind of trading revenues and recycling the revenues through the system. That at least is my concern. One, are you also concerned about that? But two, the follow-up is, is that priced in? And I wonder if maybe at these multiples, when you look at the multiples on forward earnings especially, that maybe that is priced in, and maybe this is a healthy market that is, you know, acknowledging the risks.
Well, and I couldn't agree more. The circular financing is something we've got to pay very close attention to. And I'd actually extend that further to we really need to see how much of this is going to be financed with debt versus cash from operations. So I kind of put both of those as kind of the worry poles. On the first one, on the circular financing, I mean, let's take Amazon for example. They had a great previous quarter, but it was criticized because of the gains they had with Anthropic, which is a large investment they have, which also buys their chips. So that's kind of that circular argument. So I think that, you know, we need to see validation from third-party independent sources, but I think that the circular financing to some degree is part of the ecosystem. When the largest companies in the world are driving the capex cycle, it's inevitable that you're going to have some of those customers buying products from these companies. I mean, we have to remember these companies are like their own countries. So, I mean, these are massive enterprises. I mean, Nvidia now hitting 6 trillion. So I think that the circular financing to some degree is expected, but it is a concern. We do need to see independent demand, Ed. So I completely agree it's something to watch closely. Something that I am watching closely is how some of these operations, particularly with these investments, are being financed. To the extent that they're being financed from debt and not from cash flow from operations, that is a concern, and we need to see demand materialize to justify the amount of spend that's coming. And I think the return on the AI trade, that's the real question. You know, everyone's spending, what's the return going to be? The flip side is you have to invest to stay competitive. So it's why markets do create bubbles, because it's not that people are stupid. It's not that people don't understand that you can spend too much and overbuild data centers. Of course, they get that. But the risk of not doing it is that you fall behind in a competitive space that is moving at the speed of light across the globe.
Yeah. The return on the AI is so essential because, as you say, the system is dependent on that capex right now. That is what is driving the earnings growth, and the only reason they're willing to do that is because they think that they're going to get the return. We haven't seen it yet, at least among those extremely large spenders within their own businesses. So I guess if that doesn't show up, or if it underwhelms in any way, you might see a massive reduction in that spending, and therefore you'd see a reduction in the earnings growth, which I think goes to the sustainability question. I guess just sort of as we wrap here, do you believe that that is sort of reflected in these prices? Like, do you think that that concern is properly priced, and therefore, you know, this is something to be not so worried about?
You know, as my kids would say, you know, it's mid-priced. It's mid-priced. I don't think it's fully priced. The market tries to discount, but it doesn't fully know what that return is going to be still. So I don't think we know on that one. I think that if you look at kind of the price and the demand for compute, everything there points to that it's going higher, and that actually contracts may reprice higher for compute, Ed. So we actually are still in a pretty, you know, constrained market. To me, I think the real interesting dynamic, if I look at the S&P 500 just as kind of the broad market, it's trading at 19 times, it's growing at 38%. You've got bond yields over five, 5.25 today, oil at 100. If you see oil prices move lower, interest rates should come off quickly, and the market should rip. So I think that it's actually to the upside, risk to the upside, that the markets move substantially higher, and that people are off sides because they're trying to kind of deconstruct and decompose. Is the AI trade real, and maybe miss the upside move? I mean, markets would be substantially higher if the conflict in Iran had been resolved, and that's dragged on longer than, you know, folks in Washington would have liked, and that's really keeping kind of a coiled spring underwater for the market.
Is it your expectation that yields will come back down soon?
Well, I think that if I, okay, let's break this down. The CPI, you know, the two-year bond yield forces the Fed's hand. The CPI should roll over the next 12 months, if nothing else, just because of the calculation. So even if oil prices stay elevated, Ed, the way that calculation works, when this is kind of the cruel economics of how inflation works, it's not that things necessarily need to get cheaper. It's that the rate of change needs to slow, and that's unfortunately the way this is done. And so that right there, if I look at a year out, I would expect the CPI to be lower. And so the Fed should have an easier time with interest rates potentially out of year. So my expectation is yes, oil prices come down, CPI gets a little bit weaker, and if earnings growth stays, we'll see what the next couple quarters produce. That's going to be real bullish for markets.
Okay. John Mowrey is chief investment officer at NFJ Investment Group. John, we appreciate your time. Thank you.
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We're back with Prof G Markets. The average 30-year fixed mortgage rate just hit 7.28%, the highest reading since November 2023. The result: fewer people are buying homes, and more are renting. Pending home sales fell 8.12% from a year ago, according to Zillow. Americans' expectations of moving are near all-time lows, and the median age of first-time home buyers recently hit 40. Meanwhile, rents posted their biggest annual jump since April 2025. So today we're asking what happens to the economy when a generation stops buying homes. Joining us to discuss the housing market, we're speaking with Robert Armstrong, US financial commentator for the Financial Times and author of the Unhedged Newsletter. Rob, thank you for joining us. You just wrote about housing recently in the Financial Times. You wrote about the mortgage on your house. Tell us about that situation and what it tells us about the larger housing market in America.
Well, the entire motto of my life, Ed, is that it's better to be lucky than good. And I was lucky in that I was at the stage of life where I needed to buy a new, bigger house in 2020 when mortgages were like 2, 3% if you, you know, played your cards right. And I ended up, you know, with a good-sized 2 and 3/4 mortgage on this house. And now that looks brilliant. You know, now that we're at 7 and a half percent, I have like all this cheap financing way below market financing. So I'm in this slightly weird position that one of, or perhaps the biggest asset that I have is a liability, meaning some really cheap debt. And that actually has implications for the larger economy because there are millions and millions of Americans like me who got mortgages in the zero rates era, the kind of 2010s through 2020, and who now, essentially, barring something really great or really awful happening to them, are never going to leave their home. Right? Because if I get a great job offer in Cincinnati or London or Tokyo, I've got to give up this mortgage.
So, you know, and if I decide to downsize when my kids leave for college next year, same thing. I'm not going to, right? So I'm going to stay in the house no matter what. And the effect of these, and it is, by the way, a somewhat uniquely American phenomenon, these very long-term 30-year fixed-rate mortgages subsidized basically by the government, which we can discuss in a second. Very American phenomenon. The impact of this is that the market freezes when rates rise. So people like me, mortgage rates go up. People like me stay put, and essentially the supply of homes, or in any case the liquidity of available homes, goes down. Right? That's one phenomenon. Second phenomenon is nobody wants to sell their house for a loss. Right? So people will always wait a million years rather than sell at a loss. In a normal market, Ed, the price of financing this asset would have gone up and the price of the asset would have gone down. But because people have trouble accepting the fact that they're selling their house at a loss, again, the market freezes. And so that's fine for me. I'm in this great house in Brooklyn. Everyone's happy for you. Age 27, Ed, maybe you live in a fabulous home that you own, but if you should be a renter,
