Welcome to the week from PropG Media, where we break down what mattered and what it all means. I'm George Hahn, and it's Friday, October 9th. Today, why the stock market and the bond market are telling opposite stories. Then, who gets to decide how much privacy we trade for safety? And finally, what happens when Americans stop believing anyone is coming to help? Let's get into it.
The S&P 500 closed at a record on Tuesday, its first since August. It got there with the 10-year Treasury yield above 5.3%, the highest since 2002, and oil back over $100 a barrel. On Wednesday's Prof G, John Mauzy, chief investment officer at NFJ Investment Group, told Ed he wouldn't have predicted it.
It really is remarkable. If you had told me at the start of the year that the 10-year bond yield was going to go to 5.25 or 5.3%, 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 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 GFC in 2008, those were 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.
Much of that earnings growth traces back to AI spending. Ed asked whether it will last.
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 decide 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 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 the capex cycle, which is roughly $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 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.
Ed pushed back. Since August, most stocks in the index are down, and tech has carried the gains. He also raised circular financing. The largest AI companies are each other's investors and customers. Mauzy agreed that that needs watching.
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 is to some degree 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.
The spending is already happening. The question is whether demand and eventually profits will catch up. We'll be right back.
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