🔎 At a Glance

• Jefferies Sets 9000 Target For Market: Everything Must Go Right
• Market Brief & Technical Review
• From Lance's Desk: Consumer Credit Stress: What The Data Really Shows - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Stocks Shrug Off A 5% Treasury

The S&P 500 gained 1.2% this week to close at 7,744.64. That leaves the index up 13.1% for the year and just 0.7% shy of its August 13 record close of 7,798.99. While that is a bullish headline, the real story was in the bond market. The 10-year Treasury yield climbed from 5.01% last Friday to 5.18% on Thursday, then touched 5.225% intraday on Friday, the highest level since 2007 and a move of more than 20 basis points in a single week. Meanwhile, the 30-year hit 5.50%, the highest level since 2004. Bond volatility jumped too, with the MOVE index rising from 80 on Tuesday to 104 on Thursday.

What pushed yields higher was an economy running hot. S&P Global’s flash composite PMI jumped to 58.4 in September from 56.0. Output grew at the fastest pace in more than five years. Initial jobless claims also fell to 197,000, near levels last seen in the late 1960s. Markets now price roughly a 70% chance the Fed hikes again in October, up from about 50% a week ago. In other words, the same strength that supports earnings is pushing the discount rate higher.

Consumers tell a different story. The University of Michigan’s final September sentiment reading fell to 48.1, a four-month low. Year-ahead inflation expectations rose to 4.6%, up from 3.4% before the Iran conflict, and gasoline near $4.50 a gallon is doing that damage. Crude offered some relief on Friday. WTI fell to $91.96 as U.S. and Iranian officials discussed reopening the Strait of Hormuz, but Brent still hovered near $100.

Under the surface, the week was narrow. Technology gained 3.6% and communication services added 1.9%, while utilities fell 4.3% and energy dropped 3.8%. Seven of 11 sectors finished lower, and the index still rose because technology carried it. Meanwhile, the equal-weight S&P 500 fell 1.1% against a 1.2% gain for the cap-weighted index. Small caps slipped 0.8%, and real estate lost 2.2%. Such is what a 5% “risk-free” rate does to the rate-sensitive corners of the market.

Earlier this month, in September Market Weakness: The Setup Has Teeth, we warned that late September is historically the weakest stretch of the year. The weakness showed up, just earlier than the calendar suggested. From its September 3 close, the index fell 2.5% to the September 16 low of 7,551.81. It has since rallied 2.6% off that low. So far, the back half of the month has been the stronger half, which isn’t what the seasonal data pointed to.

The thread to follow next week is simple. Stocks have ignored the bond market for two weeks. Wednesday’s PCE report and Friday’s payrolls will test whether they can keep doing so.

📈Technical Backdrop -  Momentum Turns Up, Breadth Doesn’t

The S&P 500 closed Friday at 7,744.64, up 1.2% for the week. It sits 1.4% above its 50-DMA at 7,636 and 7.5% above its 200-DMA at 7,205. The 20-DMA at 7,673 is rising just beneath the price. Since early August, the index has traded in a range between roughly 7,550 and 7,800 on a closing basis. Friday’s close put it back near the top of that range, less than 1% below the August 13 record. Holding near the highs while the 10-year pushed above 5.2% is constructive price action.

The week itself did most of its work on Monday. The index jumped 1.5% as AI names rallied and oil eased, gave back 0.75% on Wednesday as yields spiked, then added 0.5% on Friday. Buyers stepped in on each dip, and that matters. A market that refuses to break on bad news usually has more upside left.

Momentum improved meaningfully. The 14-day RSI climbed to 56.8 from 50.7 a week ago, neutral territory with plenty of room before overbought. The MACD crossed back above its signal line on Monday. It now reads +18.9 index points against a signal line of +10.8. That’s the first MACD buy signal since August 3, and it argues for a test of the record high. Resistance is well defined, though. The upper Bollinger Band sits near 7,791, almost exactly on top of the record close, so the 7,790 to 7,800 zone is where sellers are most likely to show up.

Here’s the problem. Price momentum improved while participation narrowed. The equal-weight index fell 1.1% this week as the cap-weighted index gained 1.2%. Small caps slipped 0.8%, and seven of 11 sectors finished lower. A rally led by one sector can run for a while. It’s fragile, though, because if technology stumbles there’s very little underneath to catch the index. The flip side is that the laggards are exactly where a broadening move would have to come from. Utilities and real estate were the most beaten-up groups on the week. They’re also the most sensitive to rates, so any pullback in yields would likely spark a sharp rotation into both.

The bond bears will say stocks can’t keep ignoring a 5.2% 10-year. They may be right eventually. The tape hasn’t agreed yet, and until it does, the trend deserves the benefit of the doubt.

For traders, the playbook is relatively straightforward. Don’t chase the index into the 7,790 to 7,800 zone. A closing break above 7,800 would open the 7,900 to 8,000 targets we laid out earlier this month. Pullbacks toward the 50-DMA near 7,640 are where we’d look to add exposure. On the other hand, a close below the September 16 low of 7,551.81 would break the range and put the 200-DMA near 7,205 in play. We continue to recommend rebalancing technology winners back to target weights into the current strength. Too much of this week’s gain came from a single sector.

The single level to watch next week is 7,800. A close above it confirms Monday’s MACD signal. A failure there, with breadth this narrow, keeps the index stuck in its range.

🔑 Key Catalysts Next Week

Next week’s data will go a long way toward deciding whether the Fed hikes again in October. Markets price roughly a 70% chance of a quarter-point move at the October 27 and 28 meeting. That puts two reports at the top of the list: Wednesday’s PCE inflation data and Friday’s September payrolls.

Wednesday brings August PCE, the Fed’s preferred inflation gauge, alongside personal spending and the final read on second-quarter GDP. Consensus expects core PCE to rise 0.2% for the month and GDP to hold at 2.1%. ADP’s private payroll estimate lands the same morning, with consensus at just 38,000.

Friday’s jobs report is the bigger event. Consensus looks for 162,000 new jobs, unemployment steady at 4.1% and hourly earnings up 0.3%. JOLTS on Tuesday and ISM Manufacturing on Thursday, expected at 54.6, round out the picture. A hot core PCE and a strong payroll print would all but lock in an October hike. With the 10-year already above 5%, that’s the combination stocks are least prepared for.

On the Fed side, Richmond’s Tom Barkin speaks Monday. Chicago’s Austan Goolsbee and St. Louis’s Alberto Musalem follow on Tuesday. Listen for whether any of them push back on the October pricing.

Beyond the data, watch the U.S. and Iranian talks over the Strait of Hormuz. A reopening would pull crude lower and ease the inflation expectations the Michigan survey flagged. A breakdown would do the opposite, pushing Brent further above $100 and dragging yields up with it.

Earnings stay light until third-quarter reporting season starts in mid-October, and FactSet already expects 28.9% growth for the quarter, so the bar is high. Accenture reports before the open Thursday, and Nike follows after the close. Accenture is a read on AI-driven consulting demand. Nike is a read on the same consumer the Michigan survey says is losing confidence. Wednesday also marks quarter-end. The S&P 500 is up 3.3% for the quarter while long bonds have sold off, so pension rebalancing could lean toward selling stocks and buying bonds.

The most market-moving event is Friday’s payroll report. A soft print is the bigger surprise. As we noted this week, CTAs hold the largest duration shorts since April. A weak jobs number could force them to cover, sparking a sharp bond rally that pulls yields lower and hands the rate-sensitive laggards the relief they need after a brutal week.

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💰 Jefferies Sets 9000 Target For Market: Everything Must Go Right

In this week’s Daily Market Commentary, we flagged the growing chorus calling for 9,000 on the S&P 500. The most detailed version comes from Jefferies, which now sees 9,000 by the end of 2027. With the index closing at 7,764.64 on Tuesday, that’s another 15.9% from here. Jefferies isn’t alone, either. FactSet’s bottom-up analyst target sits even higher at 9,261. In a matter of weeks, the S&P 500 9,000 target went from a bold call to the “consensus” view. That’s exactly why it deserves a closer look.

What Jefferies’ S&P 500 9,000 Target Actually Assumes

Jefferies’ price target of 9000 certainly is encouraging, until you strip away the headlines and focus on the math. Price equals earnings times whatever investors will pay for those earnings. Jefferies spells out its math plainly: $450 in 2027 earnings per share at 20x. That assumes 20.8% earnings growth next year, on top of a 2026 estimate of $373 that already sits above the Street. Its bear case is 6,900, and its bull case is 10,500.

However, this is where it gets interesting. Consensus 2027 earnings currently sit at $419.53, up 10% from roughly $381 in May. At Tuesday’s close, the market trades at about 18.5 times that number. Getting to 9,000 requires either a 16% expansion in the multiple or another 7% of upward revisions on top of the ones we’ve already had. Neither is impossible. Both require the current trend in estimates to keep running, and that’s the assumption worth testing.

The Drivers Are Real, And They’re Breaking A 90-Year Trend

Let me be clear about this: the bulls have the data on their side right now. According to FactSet, analysts expect S&P 500 earnings to grow 31.8% this year and 15.2% in 2027, on revenue growth of 9.1%. Net margins hit 17.0% in the second quarter, the highest since FactSet began tracking in 2009. Jefferies estimates that AI-exposed companies account for about 46% of index earnings, with growth of 60% this year slowing to 24% next year. Goldman puts AI infrastructure at roughly half of all S&P 500 earnings growth across 2026 and 2027.

The more unusual part is the direction of the revisions. Wall Street almost always starts a year too optimistically and spends the next 24 months cutting. Goldman’s chart of global earnings estimates clearly shows that. From 2016 through 2025, the final number landed below the first estimate in eight of ten years, and the other two were roughly flat. The 2026 and 2027 estimates are doing the opposite, running up roughly 17% and 27% from where they started. Such is the fuel behind every 9,000 targets on the Street. It’s also the thing that has historically reversed with the least warning.

That push higher matters because of where earnings already sit. Two weeks ago, in This Time Is Different? Earnings And Price Break 90-Year Trends, we showed that corporate earnings had broken above a trend that had contained them for more than 90 years.

The S&P 500 also pushed above the upper limit of its long-term price channel, a level last reached in early 2000.

Our work on earnings mean reversion put forward estimates close to 50% above their long-term growth trend. Jefferies’ $450 takes that gap to roughly 60%, and every upward revision widens a gap that has historically closed on the earnings side.

To wit, from that 90-year analysis:

“Whatever event causes the ‘E’ to revert towards its long-term mean, the ‘P’ will be repriced lower.”

Here’s What Could Undercut The Outlook

Someone will tell you the analysts have been right all year, so why fight them? That’s a reasonable point. The issue is NOT whether earnings grow in 2027. They almost certainly will. The issue is whether they grow 15.2% while the market is already priced for it.

Let’s start with the shape of next year's path. As of this writing, the consensus forecast has fourth-quarter earnings growing 26.5% and first-quarter 2027 earnings growing 18.2%. However, the second quarter drops to 1.5%. To hit the full-year 15.2%, the back half of 2027 has to average something close to 20% growth, at a point when the easy year-over-year comparisons are gone.

Secondly, margins are potentially problematic. FactSet already expects net margins to slip from 17.0% to 15.0% in the third quarter, against a five-year average of 12.4%. The 9,000 forecast needs margins to hold near a record, and records are where margins tend to mean-revert.

The third risk is how the AI buildout is being paid for. FactSet tracks hyperscaler capex near $800 billion this year, with free cash flow at or below zero for every major spender except Alphabet and Microsoft. Borrowing has risen from 9% of capex to 32%. As we discussed in AI Capex Depreciation Risk Is The Catch To Record Earnings, those servers are being depreciated over 5 to 6 years.

However, what if their real useful life is closer to 3 or 4? In that case, a much larger depreciation charge lands squarely in 2027 earnings. Then there’s the consumer. Brent crude traded near $98 on Tuesday, up from $72 before the war in Iran started, and year-over-year crude consumption has already turned negative. That series has closely tracked real personal consumption, suggesting higher energy costs are eating into broader demand.

The Fed Isn’t Coming To The Rescue This Time

Over the last fifteen years, investors learned that the Fed would cut if earnings stumbled. That reflex is gone. The FOMC raised rates by a quarter point to a target range of 3.75%-4.00% on September 16, and the vote was unanimous. Chair Kevin Warsh said the move “will deliver a timelier return to our target.”

As we noted in Another Hike By Year End And No Cuts On The Horizon, the median dot now sits at 4.1% for both 2026 and 2027. In other words, one more hike this year and no cuts until 2028. The Summary of Economic Projections has core PCE inflation at 3.4% this year.

Look at how the committee sees the risks. Not one of the 18 participants sees growth weighted to the downside. Seventeen see inflation risks weighted to the upside. Such is the setup Bob Farrell’s Rule #9 warns about: “When all the experts and forecasts agree, something else is going to happen.” As we showed in the DMC, a coin flip has matched the committee’s 12-month forecasting record since 2012. A committee this confident about growth and this worried about inflation isn’t positioned to deliver “rate cuts” quickly if earnings disappoint.

Rates are the other half of the valuation equation. The 10-year Treasury closed at 5.11% on Wednesday, the highest since 2007. The speed matters as much as the level. Goldman notes that stocks tend to struggle once the 10-year moves by about 30 basis points in two weeks or 50 basis points in a month. It’s up 28 since September 9 and 37 since August 21. The Russell 2000, where rates bite first, fell 1.8% on Wednesday.

FactSet’s forward P/E of 19.1 implies forward earnings near $400, an earnings yield of about 5.2%. Against a 5.11% 10-year, investors are being paid roughly 8 basis points to own stocks rather than Treasuries. At that premium, even 2027 consensus earnings need a 10-year near 4.6% to reach 9,000. The 6.2% cut in the table below is the average amount by which analysts have overshot final earnings, including recessions.

We can do some simple math and calculate implied S&P 500 returns based on various 2027 EPS levels and valuation multiples. As shown, math can become fairly brutal.

What Should Investors Do Now

None of this makes me bearish on the next few months. The trend is bullish, the index sits within a fraction of its record, and earnings momentum is positive. Fighting that tape has been a losing trade all year. What bothers me is how little room for error the S&P 500's 9,000 target leaves. It needs estimates to keep rising, margins to stay at records, AI spending to keep paying off, and rates to stop climbing, all at the same time. That’s a lot of things that have to go right for another 15.9%, against a downside of 6% to 14% if only one or two of them go wrong.

This is why we continue to recommend staying invested while increasing the risk controls and discipline around the portfolio. The goal is to capture potential market appreciation if Jefferies’ 9,000 target is achieved, without building a portfolio that depends on it. Practically, here’s how that looks.

Markets rarely punish investors for missing the last 15% of a bull market. They punish investors who needed that 15% to be there.

As we wrote two weeks ago, position for the trend and prepare for the bend. Right now, the forecasts have stopped leaving room for anything to go wrong.

They usually do right before something does.

🖊️ From Lance’s Desk

This week's #MacroView blog explores a viral stat claiming credit card delinquencies have just hit their worst level since 2008. However, the New York Fed’s own data shows the opposite, and the real consumer credit stress is hiding exactly where the headlines aren’t looking.

Also Posted This Week:

• Japan Breaks The ‘Debt Causes Inflation’ Narrative - by Michael Lebowitz
• Earnings Mean Reversion: When Estimates Snap Back - by Lance Roberts

📹 Watch & Listen

The S&P 500 remains trapped in a consolidation range, but the headline index may be hiding significant weakness beneath the surface. Small-cap, mid-cap, micro-cap, and equal-weighted stocks have come under pressure as higher interest rates, a stronger U.S. dollar, and signs of slower economic activity weigh on more rate-sensitive companies.

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

The market rose this past week as September continues to play out to form. Technology gained ground, offsetting weakness in the rest of the market. With Technology extremely overbought and everything else either approaching or at more oversold levels, a rotation is likely.

📐 Technical Composite: 75.84 - Increased Slightly, Still Overbought

The technical condition increased somewhat this past week as the market rallied. However, overall, the market remains technically overbought, and sentiment remains mostly bullish for now with no significant technical breaks. The indicator does suggest more struggles for the market next week.

🤑 Fear/Greed Index: 56.12 – Investor Bearishness Increases

Even though the market rose a bit last week, the underlying market allocation and sentiment remained mostly stable. There was a continued drop in the Commitment of Traders equity allocations, and investor sentiment turned slightly more bearish last week. If the market can continue to hold up amid increasing bearishness, it could present a good buying opportunity over the next month or so.

🔁 Relative Factor Performance

Factor performance has diverged over the last couple of weeks, with Growth, Speculative Technology, and Megacaps now extremely overbought, while Value, Low Beta and Dividend Yield (interest rate sensitive sectors) now the most oversold. A risk-off rotation from seems highly probable. As noted below, this is a "risk aware" market currently and increasing controls seems logical.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of September 25, 2026, with the S&P 500 at 7,743.41, the Money Flow Breadth Ratio (MFBR) stands at 65%, down from a peak of 80% set 6 weeks ago and flat versus 65% the prior week. The trailing four-week change is still -10 percentage points, but the near-term trend has rolled over. This places the indicator in BUY territory (60-70%). The raw zone signal reads BUY, but the model still flags a TOP REVERSAL, with 15 points now off the peak. Read that BUY as a zone label, not as fresh confirmation - the model reached this band by falling out of overbought, not by building up from below.

Bottom line: hold the target weight. The roll-over off the 80% peak is real and worth watching, but it has carried the gauge into the band that has historically been the best place to own equities. This is neither a chase nor a de-risk. A sustained break below 60% would move the grid to an underweight; a move back above 70% would re-engage the contrarian trim."

📊 Sector Model & Risk Ranges

Six weeks ago, we noted that several sectors of the market were hitting extremes, which typically denotes a good opportunity to reduce risk and rebalance holdings. That has remained good advice as the Fed hiked rates this past week and the market continues to consolidate within a small trading range. Energy, Technology, and Goldminers are the most deviated from their long-term means and should be rebalanced to target. Bonds are extremely oversold, and if there is a risk-off rotation, we could see money flow into bonds.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Jefferies Sets 9000 Market Target: Everything Must Go Right appeared first on RIA.

Media speculation about a possible agreement between Iran and the US often focuses on President Trump’s incentives to end the war. In particular, high gasoline and diesel prices are creating real political pressure heading into the midterms, as we share below. Thus, the reasoning goes that Trump may cave to political pressure to reduce energy prices and enter into a peace agreement. While that argument has merit, the framing is incomplete. Iran's incentive to come to terms is arguably stronger.

The IMF projects Iran's economy will contract by 6.1% in 2026, with inflation running over 70%. Iran's Statistics Organization has reported even higher annual inflation rates. Food inflation is also a problem, with Iran's reported fruit prices up 75% and bread and grains nearly doubling. The Iranian currency, the rial, trades at 2.3 million per dollar, against a state-administered rate of roughly 1.675 million. For context, a year earlier the rial traded near 600,000. That spread between the street rate and the state-administered rate shows that the central bank can't manage the currency.  

While Iran’s economic statistics are dire, it may be able to withstand the pressure for a while, as they are somewhat used to sanctions. Iran has absorbed economic sanctions and high inflation for most of the last five decades. While we complain about $4+ gasoline and some higher prices for related goods, our economy remains strong. The Iranian people are paying a much dearer price for the war, one that in time will likely get their leaders to capitulate or citizens to revolt.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the setup for a bond short squeeze, with CTAs holding the largest duration shorts since April. Today, I want to look at what that same rates move is doing to the equity risk premium, because stocks haven’t priced it yet.

Earlier this week, we reviewed Nomura’s 9,000 target for the S&P 500. The earnings assumptions are aggressive, but the bigger risk is NOT earnings. It’s the discount rate. On Wednesday, the 10-year Treasury closed at 5.11%, the highest since 2007. The S&P 500 slipped just 0.8% to 7,706. Notice in the chart below how wide the gap between stocks and inverted yields has become.

Here’s the math. FactSet puts the forward P/E at 19.1, which implies forward earnings near $400. That’s an earnings yield of about 5.2% against a risk-free 5.11% on the 10-year. Investors are getting paid roughly 8 basis points to own stocks rather than Treasuries. Such is the price of “certainty” about AI-driven earnings growth.

A bull would counter that earnings will simply grow into the valuation. They might. Consensus expects 15.2% growth in 2027, which lifts forward earnings toward $461. Yet even that only gets the index to about 8,877 at today’s yields. Hitting 9,000 requires the 10-year to fall back near 5.0%. If yields instead push to 5.5%, the next major level The Market Ear flags, fair value on current earnings drops to roughly 7,170. That’s about 7% below Wednesday’s close.

Equity risk premium sensitivity: implied S&P 500 level at each 10-year yield, holding today’s premium constant. As of Sept. 23, 2026. Source: RIA Advisors, FactSet, U.S. Treasury.

Speed matters as much as level. Goldman notes that equities tend to struggle once the 10-year yield completes a two-standard-deviation move, roughly 30 basis points in two weeks or 50 basis points in a month. We’re close. The 10-year is up 28 basis points since September 9 and 37 basis points since August 21. The damage is already showing up where rates bite first. The Russell 2000 fell 1.8% on Wednesday, more than twice the S&P 500’s decline.

We have often quoted Bob Farrell’s Rule #9, which says that when all the experts and forecasts agree, something else tends to happen. Right now, all the experts agree on earnings, but very few are stress-testing the discount rate.

Don’t build a portfolio that needs 9,000 to work. Rebalance equity exposure back to target weights, trim the long-duration growth names most sensitive to rates, and keep cash on hand. On the bond side, the math now favors adding duration in stages near 5%, as we noted yesterday. The bond market doesn’t need to crash for stocks to crash. It only needs to keep offering the same return without the risk.

Meta Jumps On Muse, Its AI Agent

Meta gained over 10% on Monday after launching Muse, its personal AI agent. Almost instantly, it reached number one on Apple's U.S. App Store. The stock is up 20% since the launch. Per The Wall Street Journal, Truist Bank projects Muse could generate $28.5 billion of incremental revenue by 2030, and analyst Youssef Squali observed that "the narrative around Meta has been changing."

Its impact on other companies is worth noting. For example, on the day of the announcement, Charles Schwab fell 6.1%. JPMorgan fell 3.4%, Bank of America 3%, and American Express 2.6%. The Journal reported the selloff across wealth managers, brokerages, and banks reflected fears that AI agents will disrupt financial services. That said, Muse's path is unsettled. Amazon blocked it from shopping on its site over unauthorized access. There is also a trust issue with AI agents. Per the WSJ, an Oppenheimer survey found that only 8% of consumers would trust Meta with their passwords, against 30% for Google.  Analysts expect OpenAI and Google to offer competing agents within weeks.

Muse's two and a half million downloads in two weeks are phenomenal. While we have yet to see its impact on the economy, it shows that AI revenue is starting to spread beyond data center buildout and AI model usage fees. It also shows how quickly the market will reprice an incumbent once a credible agent appears, which is why Schwab fell harder than other banks. Whether Meta’s Muse can hold an advantage is a separate question, but the disruption is being felt.

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The post Will Political Pressure Or Economic Hardship End The War? appeared first on RIA.

A viral stat claims credit card delinquencies just hit their worst level since 2008. However, the New York Fed's own data shows the opposite, and the real consumer credit stress is hiding exactly where the headlines aren't looking.

A number has been making the rounds all year, and it's misleading. The claim: roughly 13% of credit card balances are 90 days or more past due, the worst since 2008. Here's the twist. That number is real, and it comes straight from the New York Fed. It just doesn't mean what the scary charts say it means. Sorting the real signal from the viral one matters because one of them belongs in your portfolio decisions and the other belongs in the trash.

Where The Scary Number Comes From

Let's start with the Q2 2026 Household Debt and Credit Report, released August 11. Total household debt actually fell $13 billion on the quarter, a rounding error of 0.1%, to $18.8 trillion. Credit card balances rose $21 billion to $1.26 trillion, up 1.7%. So far, nothing that looks like a crisis.

However, this is the point where you are hit with the delinquency rate that everyone screenshots. The share of card balances 90 days or more past due has climbed from 7.6% in late 2022 to 12.8%. That is a real figure from the Fed's data, and it's the source the viral posts were reaching for without knowing it. Here's the problem with reading it as a crisis. The Fed published a companion piece the same day, and its own economists took the number apart.

Crucially, they draw a very clear distinction between a "stock" measure and a "flow" measure. The stock measure simply counts every delinquent dollar remaining on a credit report, including old charged-off debts that lenders keep reporting for years. The flow measure counts how much debt newly goes bad each quarter. The flow indicates how households are actually doing, and it has been roughly flat since 2024. It rose from 6.93% to 6.97% year over year. That's not an acceleration. That's noise.

The obvious question is: “Then why is the stock number climbing?”

The answer is that lenders now report charged-off debt to the bureaus far longer than they used to. From 2004 through 2012, only about 40% of charged-off balances were still reported a year later. By 2024, that figure had doubled to 80%. Strip those stale balances out, and the stock delinquency rate falls right back in line with the flow. As usual, when everyone agrees on something, something else is usually going on. In this case, the crowd agreed on a chart that the people who built it were quietly warning you not to trust. I've made the same point before about the gap between what the data says and what the tape feels like, in the consumer sentiment disconnect.

(The "stock" delinquency measure that went viral reads 12.8%, but it counts years of stale charged-off debt. The "flow" of new delinquencies, the honest read on current stress, sits at 6.97% and has been flat since 2024. Source: New York Fed, Q2 2026)

"When the question is 'how are households doing right now?' the flow delinquency rates provide a more accurate view of current consumer repayment behavior. By those measures, the pace of credit card delinquency is elevated but has been largely stable since 2024." - Lee, Mangrum, Scally, Sinha and van der Klaauw, New York Fed Liberty Street Economics

The Consumer Credit Stress That's Actually Real

Dismissing the meme doesn't mean the consumer is fine. Parts of the consumer are cracking. The stress is REAL. It just isn't spread evenly across the system, and the aggregate delinquency chart hides that. Dig below the surface, and you find a household sector splitting in two, with the top half spending comfortably and the bottom half running on fumes.

The savings data gives us the clearest read into what is actually happening. In July, the personal saving rate fell to 3.0% of disposable income, with total personal saving of $712.0 billion, according to the Bureau of Economic Analysis. Put that in context. For most of the decade before the pandemic, households saved 7% to 8% of income. The rate spiked above 16% in 2020 when stimulus landed, and there was nowhere to spend it. It has bled lower ever since. A 3.0% print is near the lowest reading in 20 years.

Notably, a thin savings rate isn't a crisis on its own. There are plenty of households that carry very little cash and never miss a payment. However, it does change the math on resilience. When the family car breaks down or a parent’s work hours get reduced, a family saving 8% of its income can absorb the hit. Conversely, a family that only saves 3% of its income reaches for a credit card more quickly. That's the mechanism, and it's why the delinquency increases we have seen are showing up first among subprime and lower-income borrowers, while prime credit performance has barely moved.

The Two-Speed Consumer, In One Table

The cleanest way to see the gap is to line up the viral claim against what the primary sources report. Almost every week, someone sends me a chart or a screenshot from somewhere, showing the consumer on the edge of collapse. The data, however, continues to tell a more specific story.

That split is the whole story, and it shows up in spending, too. The top 10% of earners now drive 49.2% of all consumer spending, the highest share since Moody's began collecting data in 1989, up from about 36% three decades ago. Meanwhile, spending by households earning under $175,000 has barely grown in real terms since the pandemic. One consumer is fine. The other is the one filling up the subprime delinquency buckets.

The top decile drives 49.2% of all consumer spending, the highest share since 1989 and up from about 36% three decades ago. The bottom 80% has barely grown their spending in real terms. That's the two-speed consumer in one picture.- Source: Moody's Analytics, 2025

"Consumer credit stress is real. It's just wearing a name tag that says subprime, and the headline chart keeps reading it as systemic."

Where The Bears Are Right

I readily admit that the bearish case has a valid point. They state that aggregate data lags current realities. Therefore, by the time the Fed's quarterly report confirms a broad deterioration, the damage is already done. Furthermore, a 3.0% savings rate means the marginal household has no shock absorber left.

If you then layer on a labor market that ran soft through the summer, with June and July payrolls revised down to 31,000 and 21,000 before August rebounded to 162,000, you have the setup for spending to roll over faster than the smoothed data will admit.

Those are all valid points. However, here's the problem with treating it as today's reality. It's a forecast about tomorrow, not a reading of the current tape. The same case was made in 2023 and again in 2024. Each time, behavior beat feelings and spending held firm. I'm reasonably confident the low-end consumer market will continue to deteriorate from here. I'm far less confident it will drag down the aggregate over the next two quarters, because the prime borrower, who does most of the spending, is still in good shape.

What Consumer Credit Stress Means For Investors

So what do you actually do with this information?

1. Stop trading off the scary screenshot. A K-shaped consumer calls for a scalpel, not a sledgehammer. The businesses exposed to the bottom third of the income distribution, dollar stores, subprime lenders, buy-now-pay-later names, and lower-end restaurants, are where the stress shows up first and hits margins hardest. That's a real and specific risk you can underwrite.
2. Respect the split rather than betting the whole book on one side. Higher-end consumer names and companies serving households with intact balance sheets are a different animal. Positioning for a total consumer collapse has been a losing trade for three years running. So has assuming everything is fine. The trade is the divergence itself.
3. Lastly, keep the real watchlist in front of you. Not the meme number. Watch the savings rate, the subprime delinquency trend, the quarterly New York Fed report, and retailer margin guidance through earnings season. We covered the deeper split between what households say and what they do in our look at the consumer sentiment disconnect, and in the piece on record retail inflows. The through line is consistent. Behavior beats feelings, and primary data beats viral charts.

The bottom line is this. The consumer credit stress story deserves your attention, but only the true version. A 3% savings rate indicates the cushion is thin, and the low end is exposed. The New York Fed data tells you this is a distribution problem, not a solvency crisis, at least for now. The moment the prime borrower starts slipping in the quarterly print, the calculus changes, and that's the number that will tell you when to lean out.

If this raises questions about how your own portfolio is positioned for a two-speed consumer and a softening labor market, that's the conversation we have with investors every day. Our process starts with your complete financial picture, not just your investment account. Schedule a complimentary portfolio review, and let's pressure-test your exposure together.

Questions This Article Answers

Are credit card delinquencies really the worst since 2008? Only by one measure. The New York Fed's "stock" delinquency rate, which counts all reported balances 90+ days past due, hit 12.8% in Q2 2026. That measure is inflated by old charged-off debt that lenders now report for far longer. The "flow" of new delinquencies, a better read on current stress, has been roughly flat since 2024 at just under 7%.

What's the difference between stock and flow delinquency? The stock measure is the share of all outstanding balances currently marked delinquent, including stale charged-off debt. The flow measure is the amount of debt that goes bad each quarter. The flow tells you how households are doing right now, and the Fed's own economists say it's the more accurate gauge of current repayment behavior.

Is the U.S. consumer actually in trouble? Part of it. The stress is concentrated in subprime and lower-income households, where the 3.0% saving rate leaves no cushion. Prime borrowers, who account for most spending, are still in good shape. It's a K-shaped consumer, not a system-wide credit event.

What should investors watch instead of the viral chart? The flow delinquency rate, the subprime delinquency trend, the quarterly New York Fed report, the personal saving rate, and retailer margin guidance. Those tell you when the stress is spreading from the low end into the prime borrower, which is the turn that actually matters for portfolios.

Sources

1. New York Fed. Household Debt and Credit Report, Q2 2026, released August 11, 2026.
2. New York Fed Liberty Street Economics. "How Distressed Are Consumers? Reconciling Diverging Credit Card Delinquency Measures," Lee, Mangrum, Scally, Sinha, and van der Klaauw, August 11, 2026.
3. U.S. Bureau of Economic Analysis. Personal Income and Outlays, July 2026, released August 26, 2026.
4. U.S. Bureau of Labor Statistics. Employment Situation, August 2026, released September 4, 2026.
5. Moody's Analytics (Mark Zandi). Consumer spending by income cohort, Q2 2025, as reported by Bloomberg, September 16, 2025. Note: Some economists have since questioned whether the 49.2% figure overstates the concentration.
6. Bank of America Institute. Consumer Checkpoint, 2026 monthly releases.

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Crude peaked at $106 on September 15 and has since fallen nearly 15% to $90. Despite the recent downturn, gasoline futures are up 1.9% over the same period. The margin between the two widened from roughly $40 to $58 per barrel. That is over three times the twenty-year median, $17, and sits in the 99.8th percentile of every trading day since 2006.

That gap is what a refiner earns for turning a barrel of crude into fuel, which helps explain why there is no relief at the pump. Refining capacity and freight costs are offsetting declines in crude oil.

U.S. refinery utilization hit 97.4% in late August, the highest since 2018. Shipbroker Gibson noted almost no fall maintenance has been scheduled because margins are too high to idle units. They conclude there "is no margin for error." Furthermore, Ukrainian drone strikes have hit 21 of Russia's 38 large refineries.

Freight costs are the other half of the problem. Refined products move on smaller, specialized vessels, while crude travels on a large, largely interchangeable tanker fleet. When Hormuz traffic was disrupted, crude found other routes. Gasoline and other products had less spare capacity to absorb it.

Equity markets recognize the bottlenecks and superior refining margins. The S&P 500 Oil Refiner Index is up 132% year to date against 35% for drillers and explorers.

What To Watch Today

Earnings

Economy

Fed speakers: NY Fed President Williams (4:10 a.m.), Richmond Fed President Barkin (8:00 a.m.), Cleveland Fed President Hammack (8:50 a.m.), Philadelphia Fed President Paulson (10:10 a.m.). The Fed Board releases the Senior Credit Officer Opinion Survey (SCOOS) at 2:00 p.m.

Market Trading Update

Yesterday, we discussed why 2027 earnings estimates need record profit margins to keep expanding. Today, I want to turn to the bond market, where a potential bond short squeeze is building. Goldman Sachs estimates that systematic trend followers are short roughly $171 million of global bond DV01. That's the largest aggregate short since April. Before that, you have to go back to February 2022 to find a comparable reading.

DV01 is simply the dollar change in a position for a one basis point move in yield. In plain English, it measures how much a move hurts. The shorts aren't concentrated in one spot either. The largest relative bets sit in Japanese and European rates, but the positioning runs across the U.S. curve, including the 5-year. Notice in the chart below that the current readings (the green stars) sit near the bottom of their one-year ranges in nearly every market.

That positioning makes sense given the tape. The 10-year Treasury closed Tuesday at 4.96%, up from 4.64% on August 25. It closed at 5.01% on both September 16 and 18, the highest level since 2007. The 5-year note rate ranged from 4.35% to 4.83% over the same period. Trend followers do exactly what the name implies.

"But Lance, if the trend is higher yields, why fight it?"

Because the setup is asymmetric. CTAs need yields to KEEP rising. They don't need a rate cut to get squeezed. They only need yields to stop going up. Goldman's one-month projections for U.S. 10-year positioning show little change in the flat or small-move scenarios. In the "up big" scenario for bond prices, the covering accelerates sharply into mid-October.

What lights the fuse? Oil is the obvious candidate. WTI slipped below $90 on Wednesday, its sixth straight decline, as talks with Iran eased supply fears, and Brent is back under $100. Slightly softer inflation data would also work. So would central banks simply deliver the tightening already priced, including roughly a 54% chance of another Fed hike in October, without a fresh "hawkish" surprise. The data don't have to turn benign. They only have to be less threatening than the market assumes.

Bob Farrell's Rule #2 fits: excesses in one direction lead to an opposite excess in the other. The confirmation to watch is intermediate Treasury yields falling while the Fed stays publicly hawkish. That divergence would tell you positioning, not policy, is driving the tape. Wednesday's 5-year auction result and today's 7-year sale are the near-term tests.

For portfolios, we're using yields near 5% to add duration in stages, focused on the 5- to 10-year part of the curve, rather than all at once. If the squeeze arrives, it rewards those already positioned, not those chasing it. If it doesn't, a 5% yield pays us to wait. Keep position sizes honest and don't bet the farm on timing.

Such is the nature of crowded trades. They rarely end quietly.

Bank Stocks Struggle

Bank stocks sold off on Tuesday, with JPMorgan down 3.4%, Bank of America 3%, and American Express 2.6%, while the Nasdaq 100 closed at a record high. That divergence in performance is recent, but underperformance by the largest banks has been a theme this year. The first graphic below shows the excess returns for the last five days. Financial stocks are down 3.27% versus the S&P 500, while the technology sector is up nearly 7%.

The financial sector ETF, XLF, covering the largest banks and brokers, is down 0.20% year to date despite the S&P 500 rising 13.2%. The 13.4% gap over the last nine months is worth noting, as it may tell investors something about what the market is trying to say. Interestingly, smaller regional banks kept pace with the market until peaking on August 9th. Since then, they have given up half of their annual gains as yields have steadily risen.

The catalyst for the performance differential between the large financial stocks and the broader market is Treasury yields, with the 10-year trading near 5.00%. Higher rates normally help bank margins. However, a flatter yield curve, as is occurring, compresses the spread banks earn. Furthermore, concerns are growing about credit issues involving some companies heavily investing in AI, like Oracle. Credit problems tend to show up in stock prices before they show up in bank financial statements. As such, watch the larger banks' loan-loss reserves in upcoming earnings releases. A sharp uptick may continue the financial sector's underperformance, but it could also warn the broader market of tightening financial conditions.

Japan Breaks The 'Debt Causes Inflation Narrative'

A dollar today buys nearly twice as many Japanese yen as it did fifteen years ago. Crude oil, in yen terms, is up roughly 70% year to date. Food prices are similarly elevated. Japan imports most of the energy and much of the food it consumes, paying for it in dollars that keep getting more expensive. Those facts alone should lead us to conclude Japan has an inflation problem.  

As if those factors weren’t enough, add their debt overhang, with the narrative that mounting government debt is inflationary. If that logic holds in the US, it should apply with even more force in Japan, where government debt is nearly double ours as a share of the economy, and where the yen carries none of the dollar’s reserve-currency privilege to cushion its borrowing needs.

A collapsing currency, heavy import dependence, and the developed world’s heaviest debt load. Surely that’s a recipe for an inflation crisis. Instead, Japan’s latest data shows headline CPI at 1.9% and core at 1.7%, both below where the US sits today.

Let’s go to Japan and find out why an economy with seemingly every ingredient for runaway inflation has relatively tame inflation. The facts may change how you think about the relationship between government debt and inflation in the US.

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A dollar today buys nearly twice as many Japanese yen as it did fifteen years ago. Crude oil, in yen terms, is up roughly 70% year to date. Food prices are similarly elevated. Japan imports most of the energy and much of the food it consumes, paying for it in dollars that keep getting more expensive. Those facts alone should lead us to conclude Japan has an inflation problem.  

As if those factors weren’t enough, add their debt overhang, with the narrative that mounting government debt is inflationary. If that logic holds in the US, it should apply with even more force in Japan, where government debt is nearly double ours as a share of the economy, and where the yen carries none of the dollar's reserve-currency privilege to cushion its borrowing needs.

A collapsing currency, heavy import dependence, and the developed world's heaviest debt load. Surely that's a recipe for an inflation crisis. Instead, Japan's latest data shows headline CPI at 1.9% and core at 1.7%, both below where the US sits today.

Let's go to Japan and find out why an economy with seemingly every ingredient for runaway inflation has relatively tame inflation. The facts may change how you think about the relationship between government debt and inflation in the US.

The Data

From 1995 to the present, Japan’s CPI averaged a mere 0.50%, with deflation marking 13 of the 31 years shown below. Since the pandemic, inflation has been above its 2% target. As a result, the Bank of Japan (BOJ) has been slowly raising its policy rate. Today, the policy rate is 1.25%, a departure from zero and negative rates that presided over much of the period shown below.

Japan’s recent inflation is certainly higher than the 1995-2020 experience, but it’s still running below America’s, where July CPI and Core CPI were 3.4% and 2.5%, respectively.

A Setup Built for More Inflation, Not Less

Japan self-supplies only 16% of its energy and 37% of its food, meaning most of what heats Japanese homes, runs its factories, and feeds its people is bought abroad, in dollars. Run that through a currency that’s lost nearly half its value against the dollar since 2021 and oil that’s up over 50% year over year, and Japanese wholesale inflation has been affected. To wit, Japan’s corporate goods price index ran at 7.2% year-over-year in April, with import prices in yen up 29% versus 17.7% in the exporter’s own currency. That 11.3% gap is almost entirely related to the yen’s depreciation.

A 7.2% wholesale inflation rate on top of its currency and import exposure is the kind of setup that has produced double-digit consumer inflation in many other countries. Yet, Japan’s consumer inflation is less than 2%.

Some of the lack of inflation pass-through to consumers stems from subsidized energy prices and businesses still absorbing costs rather than passing them through. Aging demographics and a declining population also weigh on consumer demand and inflation. Furthermore, and maybe most importantly, government debt is presenting a strong headwind, as we will discuss next.

The Debt Question

If the “debt and deficits are inflationary” story were true, Japan should be the cautionary tale, not the United States. Its government owes 1.6 times as much, relative to the size of its economy, and finances almost all of it with domestic capital. Very few foreign investors own Japan’s debt, while foreign buyers absorb nearly a third of U.S. Treasuries.

The level of debt does matter, and in Japan’s case it is very problematic, but not in the way most people think.  Government debt isn't free money injected into the economy. Instead, it’s a claim on capital today and when the debt gets serviced and rolled over in the future. Every yen or dollar used to fund the servicing and rollover of existing and new government debt is a yen or dollar a bank, insurer, or pension fund didn't lend to a business building a factory, hiring workers, investing in R&D, or expanding capacity.

Economists use the term negative growth multiplier to describe the economic impact of most government debt. Because government spending tends to be unproductive, debt servicing typically offsets the initial benefits over time. In aggregate, government debt reduces economic activity and impedes an economy's ability to become more productive.

This idea was made popular by Reinhart and Rogoff's 2010 research on debt overhang. They concluded that when government debt exceeds roughly 90% of GDP, each additional dollar of debt-financed spending buys progressively less growth, not more.

Japan Crowds Out Economic Progress

Japan is a real-world test case for Reinhart and Rogoff’s theory. With banks, insurers, pension funds, individuals, and the Bank of Japan (BOJ) absorbing most Japanese debt, that capital isn't chasing more productive private investment. Furthermore, with little economic growth for the past twenty years and a generally deflationary environment, the desire to invest in private Japanese ventures has been greatly curtailed

To wit, Japanese corporations sit on some of the largest cash hoards in the developed world rather than deploying it domestically. What Japan is witnessing is the crowding-out effect. The result of the government demanding large amounts of capital is not inflation or higher interest rates, but rather capital parked unproductively in Japanese debt instead of investments that can generate organic, demand-pull inflation and economic growth.

Debt, in other words, hasn't been a demand-side accelerant in Japan. The US, with a lower debt ratio and a captive foreign bid for its debt, is not in the same boat as Japan. However, debt is crowding out investment into more productive uses, and rising interest rates will make the crowding-out effect a bigger drag. This should give pause to anyone claiming more debt equals more inflation.

TFP Tells The Story

Total factor productivity (TFP) measures the output an economy gets beyond what capital and labor add. Think of TFP as the gains from technology, innovations, and smarter capital allocation. Over long-term horizons, TFP is the main driver of per-capita growth as labor and capital have limits. In Japan's case, its aging population, strict immigration laws, and declining population mean that labor is negatively impacting economic output. Furthermore, as we have been discussing, capital is being misallocated toward the deficit. Thus, its limited TFP is the primary source of growth.

The chart below shows that Japan's Total Factor Productivity (TFP) has been flatlining around 1%, as has its real GDP growth.

Summary

The simple deficits = inflation story being used to justify buying gold and bitcoin while shedding bonds at all costs is lacking. Instead, we must consider the longer-term implications of government debt and how too much debt inhibits economic demand and limits inflation by reducing investment in more productive uses.  

Japan can thank its high debt loads and aging demographics for the inflation restraint. But bear in mind that the cost paid in stagnant growth and diminished prosperity for its citizens has been dear.  We do not fear an inflationary spike in the US; instead, we are concerned that the economic doldrum that has infected Japan for over 25 years will slowly work its way here. 

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The graph below, courtesy of Apollo, shows that not one FOMC member sees downside risks to the economy. This must be a very bullish signal, given that most FOMC members are seasoned business veterans or economists. Further, they are supported by over 400 PhD’s in economics. Unfortunately, despite the experience and educational background of the FOMC members and their staff, their outlooks have little predictive value.

Across the four major peaks of pessimism and troughs of optimism since 2012, economic growth was weaker six months later in 7 of the 8 cases. If we look at their forecasts 12 months after the peaks and troughs of pessimism and optimism, we find that economic growth after two peaks of pessimism and two troughs of optimism was higher than where it started, and the economy was weaker after two of each. In other words, a coin flip is worth the same as FOMC members' forecasts.

With confidence in economic growth higher than it has been in 14 years using this measure, we must be wary. But at the same time, realize that the risk assessment carries zero forecasting content. To add further doubt to their forecasting ability, it’s worth noting that in January 2021 only one member saw upside risks to inflation despite numerous signs of a gross supply-demand mismatch forming in many parts of the economy.

We remind you of Bob Farrell's Investment Rule #9:

When all the experts and forecasts agree, something else will happen.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we looked at the split between the Dow and the Nasdaq and asked whether it was an omen or ordinary rotation. Today, the 2027 earnings growth outlook, according to a Nomura note that landed this week, puts an S&P 500 target of 9,000 on the next twelve months and a 78% probability that real earnings growth stays above trend.

Give the bulls their due first. Forward estimates normally decay through the year. This one has climbed. Consensus for 2027 has run from roughly $381 in May to $419.53, up about 13% year to date. That's the strongest leg of the bull case, and it isn't small.

Now look at the shape instead of the level. Consensus has the fourth quarter growing 26.5% and the first quarter of 2027 growing 18.2%. Then the second quarter drops to 1.5%. For the full year to land at 15.2%, the back half has to average roughly 20%. Tell me that's one soft quarter and I'd usually agree. Not when the quarters behind it carry the year.

Here's what bothers me more. Consensus has 2027 earnings growing 15.2% on revenue growing 9.1%. That six-point gap is the margin, not demand. Net margin hit 17.0% in the second quarter, the highest since FactSet began tracking in 2009. So the forecast needs a record to expand from.

And about half of that growth is in the four capital budgets. Goldman puts AI infrastructure at roughly half of S&P 500 earnings growth across 2026 and 2027, which makes Nomura's "strong AI investment" and "broader private demand" one driver counted twice. That spending has also stopped funding itself. FactSet tracks hyperscaler capex near $800 billion this year, free cash flow at or below zero for all but Alphabet and Microsoft, and borrowing up from 9% of capex to 32%. Compute is now 60% of the spend, and FactSet notes that useful lives of three to four years, rather than the assumed five to six, would mean materially higher depreciation. I've made that argument here before. The charge lands in 2027.

Which brings me to the probability. The 78% covers real earnings growth, beating TREND. Consensus isn't asking for a trend. It's asking for 15.2% stacked on 31.8%, funded by margin expansion off a record, with half the engine running on borrowed money. High confidence in the easy claim is being used to underwrite the hard one.

My read: 2027 earnings should be strong. I doubt they're 15.2%. Such is the problem with a price that already assumes the good outcome. Strong and disappointing, stop being opposites.

We aren't fighting this tape. For now, we remain fully allocated, trim the most extended technology back to target, and let that cash sit. Own 9,000 if it comes. Don't build the portfolio that needs it to.

Crude Oil Shortages And Consumption

A friend recently shared his analysis comparing oil market dynamics and personal consumption. Given the recent tightening of monetary policy, the economic importance of oil and oil prices, and the fact that personal consumption accounts for about two-thirds of economic activity, his analysis is timely.  His first graph below is very bullish for oil prices, showing that the stock of oil, excluding the Strategic Petroleum Reserve (SPR), is near 8-year lows. While the supply situation argues for higher prices, the second graph shows that higher prices are eroding demand. Year-over-year crude oil consumption is negative and trending slightly lower.

The third graph is where the rubber meets the road. Per the graph, our friend writes:

Furthermore, I looked at the Real PCE dollars annual percent change and graphed it versus the Crude consumption annual percent change from above and there's a 90% correlation, which makes sense.   

Higher oil prices are impacting demand for oil and likely many other goods and services. While the Fed hikes rates largely to quell concerns about higher oil prices and their impact on inflation, higher oil prices are negatively affecting demand across many other parts of the economy. Could the Fed be making a policy error, especially since its policies have very little impact on the price of oil?

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The Dow has lost ground for three weeks running, down nearly 3.5% from its August 28 close, while the Nasdaq 100 is slightly higher over the same period. That performance gap has worried some market pundits, as they say it may be signaling a downturn. While that might be true, we think the performance differential is more likely a rotation as investors adjust their holdings in response to the Fed taking a more hawkish policy by raising rates.

The graph below shows that the Dow and Nasdaq were trading similarly until the Fed meeting on September 16th. The divergence we note above largely occurred after the Fed meeting. Given the Fed is more restrictive, it's not surprising that economically sensitive sectors and financials underperformed, while less sensitive sectors outperformed. Over the last three weeks, the economically sensitive industrials sector fell 4.2%, and financial stocks, sensitive to rising interest rates and a flattening yield curve, fell 3.9%. Over the same time frame, technology rose 2.1%.

As we show below, the Dow's price-weighted construction is over 25% weighted toward financial stocks, while the Nasdaq 100 holds none. Industrials account for 16% of the Dow, but only 3% of the Nasdaq. Conversely, technology stocks are nearly 60% of the Nasdaq but only a fifth of the Dow.

The 10-year Treasury yield touched its highest level since 2007, and the parts of the market carrying the most cyclicality and refinancing exposure absorbed the damage. Technology shares rallied on the rate hike, in part because AI infrastructure commitments are contracted years forward and largely indifferent to a quarter-point move in the policy rate.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we covered the technical market levels heading into this week. Today, read the calendar instead, because September market seasonality is playing out almost perfectly true to form.

Start with the tape. The S&P 500 closed Friday at 7,650.50, roughly 1.9% below the August 13 record close of 7,798.99. That’s it. The index reclaimed its 50-day moving average near 7,615 on Thursday. It sits about 6.5% above a rising 200-day near 7,180. The 14-day RSI is back near 50 after tagging the low 40s on Fed day. The real story is under the surface. Only about 31% of members trade above their own 50-day line, and nine of eleven sectors are lower on the month. This has been a narrow, rotational pullback, NOT a disorderly one.

Notice how ordinary that is in the chart below. Since 1950, September is the only month with a reliably negative average return, near-0.7%. The back half is the weakest two-week stretch on the whole calendar. Scott Rubner’s desk at Citadel frames the same window from the flow side. Buybacks are marching into blackout, from 10% of index weight now to 61% by September 30. Roughly $7 trillion of options rolled off at Friday’s triple-witching and quarter-end rebalancing, tilting pensions toward selling stocks. As I warned back in the spring, the seasonal headwinds are real, and in a midterm year like 2026, the overlay only sharpens them.

Here’s what matters. That same weakness is what builds the turn. Look at Citadel’s midterm-year path below. Since 1928, the average midterm-year slide into quarter-end bottoms near September 30. From that low, it climbs about 5.6% into year-end, accelerating past Election Day. The index has been higher for twelve months after every midterm since 1950. We’re sitting right at the “you are here” mark, days past September opex, and just ahead of the seasonal low.

Then layer on earnings. The chart below tells the rest. Forward estimates are still climbing into the fourth quarter, and Q2 delivered its steepest positive revision path since 2000. Price follows earnings, and earnings keep rising.

For now, we continue to suggest holding quality and value over high beta. The cash buffer keeps earning its 4%, right where we were Friday, and you want to start building a shopping list to add into the month-end weakness rather than chase a bounce. Capital preservation comes first. The calendar is handing us an entry, not an exit, and the ones who wait to feel safe are the ones who miss it.

Expanding On The Fed-Led Rotation

As we led this commentary and show below, courtesy of SimpleVisor, technology and energy shares are outperforming the market, while most other sectors lag. Utilities are very oversold, likely a response to higher interest rates. With low earnings growth and relatively high dividend yields, utility stocks tend to correlate with bond yields. Some investors even treat them as a surrogate for bonds.

While the divergence between technology and sectors like utilities, discretionary, and real estate is getting extreme, a rotation toward those more conservative sectors may not be on the table immediately. The market will likely want to feel more comfortable with Fed rate-hike expectations. Furthermore, they may likely take their cue from bond yields. If the ten-year yield can resist 5% and begin to trend lower, we suspect the lowest-scoring sectors may start to outperform. Furthermore, rates are closely correlated with oil prices, so some sort of agreement with Iran could also go a long way toward helping the underperforming sectors, but equally important, weigh on those sectors if conditions remain combative.

Earnings Mean Reversion: When Estimates Snap Back

This has been an incredible year in that Wall Street has spent all of it raising its earnings estimates, and the second-quarter season only accelerated the trend. Analysts began the year expecting S&P 500 earnings to grow about 15%. By the close of Q2, that number had been ratcheted up to roughly 24%, with 2027 and 2028 estimates drifting higher right behind it.¹ Rising profits are good news. The question I keep coming back to is whether the slope of these revisions can hold, or whether we’re setting up for an earnings mean reversion that catches a lot of people leaning the wrong way.

Here’s why it matters. Based on the current consensus, forward earnings are close to 50% above their long-term growth trend. Make no mistake, a gap that wide does not appear at random points in a cycle. It shows up near the top of one.

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Consensus earnings estimates now sit close to 50% above trend, and that gap is exactly where an earnings mean reversion tends to begin.

This has been an incredible year in that Wall Street has spent all of it raising its earnings estimates, and the second-quarter season only accelerated the trend. Analysts began the year expecting S&P 500 earnings to grow about 15%. By the close of Q2, that number had been ratcheted up to roughly 24%, with 2027 and 2028 estimates drifting higher right behind it.¹ Rising profits are good news. The question I keep coming back to is whether the slope of these revisions can hold, or whether we're setting up for an earnings mean reversion that catches a lot of people leaning the wrong way.

Here's why it matters. Based on the current consensus, forward earnings are close to 50% above their long-term growth trend. Make no mistake, a gap that wide does not appear at random points in a cycle. It shows up near the top of one.

The Earnings Mean Reversion Setup Is Building

Notice in the chart above how tightly actual earnings tracked their long-term trend right up until 2020. Since then, the line has separated and refused to come back. That separation is the deviation Wall Street is now extrapolating into 2027 and 2028, and the Q2 print poured fuel on it.

Q2 delivered blended earnings growth near 38%, the second straight quarter above 20%. That headline flatters reality, though. Strip out a single one-time gain at Alphabet, and growth falls to about 26%.² The same distortion runs through margins, which hit a record on non-recurring "gains" at a few mega-caps rather than the underlying business.³

The estimates aren't merely high. They are being raised while companies keep clearing them, helped along by one-time boosts. Such is the tension at every late-cycle earnings peak. It feels wonderful on the way up, and it is the exact setup that precedes the sharpest disappointments.

Is "This Time Different"? Partly Yes

While the earnings mean-reversion story is crucial to understand, the more bearish argument ignores something very real. The S&P 500 index isn't what it used to be, which means some of the views on cycles are partially stale. Technology and communication services now generate close to half of S&P 500 profits, which is up sharply from a sliver two decades ago. Those businesses also carry structurally fatter margins than the industrials and retailers they replaced. When you add a lower corporate tax rate since 2018 and years of cheap financing, the margin base is higher than in history.⁴

However, the question that keeps landing in my inbox goes like this:

“What if the index has really changed enough that the old trend no longer applies?”

That is the right question, and part of the answer is yes. The margin level has re-based, and that piece is probably permanent. But where the bulls overreach is in assuming the rate of change rebases, too.

Why the Slope Still Reverts

With that said, there are three things that keep pulling me back to the earnings mean-reversion case.

First, as we wrote in “Capitalism Is Broken.”

“Profit margins are probably the most mean-reverting series in finance. And if profit margins do not mean-revert, then something has gone badly wrong with capitalism.” – Jeremy Grantham

The reason is that if capitalism is functioning properly, the basic supply/demand equation will eventually correct itself. When the economy eventually slows or enters recession, profit margins will decline as prices fall due to decelerating demand.

Over the next few years, the environment will look markedly different from the past.

1. The economy is returning to a slower-growth environment, with a risk of recession.
2. Inflation is slowly returning toward 2%, meaning less pricing power for corporations.
3. No artificial stimulus to support demand.
4. Over the last four years, the pull-forward of consumption has now begun to drag on future demand.
5. Interest rates are substantially higher, impacting consumption, and elevated corporate borrowing costs will impact margins.
6. Consumers have sharply reduced savings and increased debt.

Secondly, economic growth has become increasingly narrow. By Goldman's math, roughly half of this year's earnings growth ties to AI infrastructure spending, and a small group of mega-caps drives most of the upward revisions.⁵ A lot of that is a "closed loop." Hyperscaler capital spending, running near $754 billion this year, an 83% jump from 2025, lands as revenue on the income statements of the chip and infrastructure companies selling into it.⁶ The buyers' budgets are the sellers' earnings, and Wall Street sees that budget climbing past $900 billion in 2027.

Third, analysts are reliably too optimistic about the years they can't yet see. Over the past 25 years, the bottom-up estimate at the start of a year has overshot the final number by an average of 6.2%. Strip out the recessions, and that shrinks to under 1%.⁷

The estimates are usually fine, right up until the moment they're catastrophically not. Notice that the consensus already forecasts its own deceleration. Goldman's 2027 growth estimate drops to 13% from 24% this year, and FactSet's analysts pencil in a second quarter of 2027 that barely grows at all.⁸ The out-years are the softest part of the stack, and the sell side knows it.

Earnings Mean Reversion Won't Start Where You Expect

That brings us to the most interesting part of the question. What actually forces the reversion? The consensus answer is a recession or a hawkish Fed. But that's the door everyone is watching, and reversions rarely come through the door everyone is watching.

The issue is NOT whether AI is real. It's what the narrow leadership carrying these estimates has "priced in." Because the growth is this concentrated, you don't need a broad recession to break the aggregate number. You need the leaders to crack, and the early cracks are visible. Since June, correlation across the large AI hyperscalers has fallen from about 80% to 20%, as investors began rewarding names that tie spending to revenue and punishing those funding the buildout with debt.⁹

Goldman doesn't expect AI supply and demand to balance until at least the second half of 2027. The moment one or two hyperscalers signal that the return on a trillion dollars of spending isn't arriving fast enough, the revision engine throws into reverse, first in the names whose out-year estimates are stretched the furthest. A concentration unwind, not a "soft landing" or a classic recession, is the mechanism that fits this cycle.

The bottom line is this. The level of corporate margins is structural and probably durable. The slope of these earnings revisions is cyclical and probably not. I'm reasonably confident that the out-year estimates are marked down before they're marked up again. I'm less sure about the timing because momentum like this tends to run longer than it should.

When the adjustment comes, watch AI capex, not the unemployment rate. That's where the earnings mean reversion begins.

Sources & Notes

1. FactSet Earnings Insight, S&P 500 Q2 2026 season updates, July 2026; Goldman Sachs, U.S. equity outlook, May 2026.
2. FactSet Earnings Insight, Q2 2026 earnings growth excluding Alphabet, July 24, 2026.
3. FactSet Earnings Insight, Q2 2026 record net profit margin and one-time GAAP items, July 2026.
4. FactSet, S&P 500 sector earnings composition and margins, 2026.
5. Goldman Sachs Research, AI beneficiaries' share of S&P 500 earnings growth, May 2026.
6. Goldman Sachs Research, hyperscaler capex estimates for 2026 and 2027, May to June 2026.
7. FactSet, "Are Industry Analysts Overestimating S&P 500 EPS?" 25-year study.
8. Goldman Sachs Research and FactSet Earnings Insight, 2027 growth estimates, July 2026.
9. Goldman Sachs Research: AI hyperscaler price correlation has declined since June 2026.

The post Earnings Mean Reversion: When Estimates Snap Back appeared first on RIA.

To justify hiking rates, Kevin Warsh and the Fed painted a rosy picture of the labor market. Interestingly, Warsh did so by citing record low jobless claims. To wit:

Unemployment claims, on a four-week moving average, are running at levels consistent with full employment. So, the labor side of the Fed's congressional remit is in good shape.

Jobless claims are near historic lows, as shown below, and the news is even better as a percentage of the consistently growing labor force. However, treating them as proof the labor market is healthy is misleading. Jobless claims only measure layoffs. They say nothing about hiring. While jobless claims may signal that few people are being fired, they don’t tell you whether people are being hired. Consider that the JOLTS Hires level is at a 12-year low, and sits at the same level today as it was in 2014, when GDP was nearly half of what it is.

Economists deem this condition the "low-hire, low-fire" labor market, and the Cleveland Fed's research bluntly calls it "half a misnomer." The low-fire half is accurate, but the low-hire half is the part Warsh skipped.

Indeed's Hiring Lab put the risk of this frozen labor market as “it’s only stable as long as nothing pushes on it." The lack of hiring leaves no cushion if layoffs increase. In addition to fewer layoffs depressing the jobless claims data, we must also consider the lack of incentive to file for jobless claims. Per our Commentary in 2024:

Bloomberg estimates that the average wage coverage gap is bigger than ever at $1,400. Simply, unemployment claims payouts have not kept up with inflation. On the contrary, gig/part-time jobs have. Therefore, laid-off workers are better off working for Uber and other flexible gig economy jobs than filing claims.

What To Watch Today

Earnings

Economy

Market Trading Update

The bulls maintained control this past week, despite significant volatility and bearish headlines. The S&P 500 ended the week at 7,637.76 in index terms, which is not far off from where it started. The Fed’s rate hike knocked the index down toward 7,585 midweek before Thursday’s and Friday's rebound reclaimed the ground. The index still sits above both its rising 50-day and 200-day moving averages, so the primary uptrend that carried the tape to record highs all year remains intact, for now. What changed this week is not the trend. It is the conviction beneath it.

Despite that, our overriding concern remains both breadth and momentum. While the market rolled over hard into Wednesday's FOMC decision, the late-week snapback kept the weekly candle from closing ugly. Many will overlook last week's price action, but it’s the fingerprint of a market losing its footing at the highs rather than one breaking out from them.

As noted, we also remain concerned about breadth, which thinned as well this past week. With the banks and the rate-sensitive groups taking the brunt of the hit this past week, it was technology, AI-adjacent sectors, and the megacap complex that kept the market afloat. As we have noted many times before, when leadership narrows to a handful of names while the average stock struggles, the tape is more fragile than the index level would suggest. The weekly range was the widest in more than a month, the kind of expansion that tends to arrive at inflection points rather than in the middle of trends.

So, what does this mean for investors heading into this week as we begin to wrap up the third quarter? First, the levels that matter to investors are very close by. Resistance sits at 7,650, and then the round 7,700, the zone the rally must reclaim to prove Friday was more than a reflex. Support runs first to 7,585, Wednesday's reaction low, and a failure there opens 7,500 and then 7,400, where the rising intermediate averages come into play.

For shorter-term investors and traders, the market setup argues for patience over conviction. I say that because the current backdrop does not provide the proper entry to chase risk. However, if the market can rally toward overhead resistance levels (7,650 and 7,700), trimming exposure and raising stops seems the most logical course of action, rather than adding exposure. For now, with the 10-year pinned at 5%, a rejection at that level seems the higher-probability outcome.

With that understanding, we would only suggest adding exposure if the market makes a decisive break and holds above 7,585, with improving breadth. Lastly, consider sizing positions for two-way volatility, which has been the case as of late, and keep stops tight beneath any reaction low. A defined-risk hedge here costs little, and it earns its keep the moment 7,585 gives way.

The most important level to watch is 7,585. If the bulls can defend that level, then the record-high structure survives to fight another week. If they lose it, the burden of proof shifts to the bulls, with 5% yields and a hawkish Fed offering them little help.

The Week Ahead

This week will largely lack relevant economic data and corporate earnings. Likely taking center stage will be a host of Fed speakers. We will be keyed on one of the more hawkish members, Beth Hammack, President of the Cleveland Fed.

Hammack has been one of the Fed's most consistently hawkish voices in recent months. To wit, she dissented in favor of a hike at the July meeting specifically, arguing "inflation has remained stubbornly above 2 percent for more than five years" and that she's "not confident it will return to our objective on its own." She's flagged supply-side pressure from energy prices and broadening demand-side pressures based on what she's hearing from businesses in the Cleveland Fed district. Given that view, expect her speeches next week to reinforce her hawkish tone and possibly address whether Wednesday's hike and another would be enough to satisfy her call to action. Her remarks are also worth watching for any direct comment on the Iran-driven oil spike, since she's already on record treating energy costs as a real, not transitory, inflation risk.

K-Shaped Economy: Reality Or Media Driven Perception

The bottom half of American households owns about 2.5% of the nation’s wealth. That number is real, and it ought to bother you. However, that number is also higher than it was in 2019 and 2015, and roughly six times higher than the 0.4% low it hit in 2011. You will not read that in many places because it doesn’t “fit the narrative.”

Unfortunately, the K-shaped economy headlines have settled into a single unvarying note, and after a while, people stop hearing anything else. I’ve spent the past several weeks working through the underlying data. While there is some truth to the coverage, most of the claims are exaggerated for “clicks and views.” But the psychological damage is clear.

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🔎 At a Glance

• The Fed Rate Hike Won't Fix The Inflation It Targets
• Market Brief & Technical Review
• From Lance's Desk: K-Shaped Economy: Reality Or Media-Driven Perception - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Fed Hikes Rates

Unsurprisingly, this past week's market action belonged to the Federal Reserve. On Wednesday, the FOMC delivered its first rate hike since 2023, lifting the funds rate to 3.75%-4.00%. While the hike was widely expected, the 12-0 vote and the lack of rate cuts scheduled in 2027 shocked the markets. Furthermore, Kevin Warsh made clear that more hikes could follow.

Stocks fell following the decision, but rallied sharply on Thursday. Friday was a sloppy trading day, as option expiration applied selling pressure to stocks early in the day, but stocks rallied back into the green by the close, with the S&P 500 closing Friday at 7,637.76. For all the volatility, the market ended roughly where it began. The Dow finished at 51,778, the Nasdaq at 26,418, and the Russell 2000 at 2,874.

The real story sat under the surface, in the sectors. Financials took the beating. The banks led the tape lower as the curve and the hike did their work, with Goldman Sachs and Bank of America each shedding roughly 8% on the week, the group's largest weekly loss since March. Energy weakened a bit as crude prices fell back below $100/barrel.

Cross-asset told the same tale. The 10-year Treasury yield finished the week hovering at the 5% mark, a level not seen in 19 years, and the 30-year held near 5.34%. WTI settled around $95.46 a barrel. Gold held near $4,420. The dollar firmed at the margin, and bitcoin rose to $81,190, a sign the broader liquidity trade has not yet cracked. Under the hood, though, breadth stayed poor, the advance carried by a handful of megacaps, while the average stock, and especially anything that borrows, lagged badly.

While the underlying internals remain weak, the market continues to hold above key support levels. However, underlying investor sentiment took some damage. The latest AAII survey showed 53% of individual investors were bearish on the six-month outlook, a jump of roughly 14 points from the week before and the most pessimism since last spring. That is a reading that marks fear, not complacency, and fear is often a better friend to buyers than to sellers. The thread to carry into next week is simple. This tape now trades on two prices it cannot forecast: the price of oil and the price of money. Until one of them breaks lower, every rally is a rental rather than a purchase.

📈Technical Backdrop - Momentum Rolls Over, What Next?

The bulls maintained control this past week, despite significant volatility and bearish headlines. The S&P 500 ended the week at 7,637.76 in index terms, which is not far off from where it started. The Fed’s rate hike knocked the index down toward 7,585 midweek before Thursday’s and Friday's rebound reclaimed the ground. The index still sits above both its rising 50-day and 200-day moving averages, so the primary uptrend that carried the tape to record highs all year remains intact, for now. What changed this week is not the trend. It is the conviction beneath it.

Despite that, our overriding concern remains both breadth and momentum. While the market rolled over hard into Wednesday's FOMC decision, the late-week snapback kept the weekly candle from closing ugly. Many will overlook this week's price action, but it’s the fingerprint of a market losing its footing at the highs rather than one breaking out from them.

As noted, we also remain concerned about breadth, which thinned as well this past week. With the banks and the rate-sensitive groups taking the brunt of the hit this past week, it was technology, AI-adjacent sectors, and the megacap complex that kept the market afloat. As we have noted many times before, when leadership narrows to a handful of names while the average stock struggles, the tape is more fragile than the index level would suggest. The weekly range was the widest in more than a month, the kind of expansion that tends to arrive at inflection points rather than in the middle of trends.

So, what does this mean for investors heading into next week as we begin to wrap up the third quarter? First, the levels that matter to investors are very close by. Resistance sits at 7,650, and then the round 7,700, the zone the rally must reclaim to prove Friday was more than a reflex. Support runs first to 7,585, Wednesday's reaction low, and a failure there opens 7,500 and then 7,400, where the rising intermediate averages come into play.

For shorter-term investors and traders, the market setup argues for patience over conviction. I say that because the current backdrop does not provide the proper entry to chase risk. However, if the market can rally toward overhead resistance levels (7,650 and 7,700), trimming exposure and raising stops seems the most logical course of action, rather than adding exposure. For now, with the 10-year pinned at 5%, a rejection at that level seems the higher-probability outcome.

With that understanding, we would only suggest adding exposure if the market makes a decisive break and holds above 7,585, with improving breadth. Lastly, consider sizing positions for two-way volatility, which has been the case as of late, and keep stops tight beneath any reaction low. A defined-risk hedge here costs little, and it earns its keep the moment 7,585 gives way.

The most important level to watch is 7,585. If the bulls can defend that level, then the record-high structure survives to fight another week. If they lose it, the burden of proof shifts to the bulls, with 5% yields and a hawkish Fed offering them little help.

🔑 Key Catalysts Next Week

Thankfully, the economic calendar goes quiet next week. But that is also what makes it dangerous. With earnings season over and companies going into full blackout over the next two weeks, the market will be focused on the Federal Reserve. The coming days bring the first wave of Fed officials to speak since the hike, and every word will be parsed for how far and how fast the committee intends to go. After a decision that tilted the dots toward more tightening, the tone of that chorus is the week's real catalyst.

There is some hard economic data this next week, but most of it is second-tier and largely overlooked by market participants. However, Wednesday brings the S&P Global flash PMIs, which are the first clean read on whether the energy shock is bleeding into activity. Then on Friday, we will see the latest update on Durable Goods and the final Michigan sentiment survey. The sentiment survey will be watched closely for the inflation-expectations component, which is higher than usual in a supply-shock tape.

Oil, as ever, sits outside the calendar and above it all, the one price that can rewrite the week in a single headline from the Strait.

As noted, earnings largely thin out in the pre-quarter lull, but the names that report matter. Micron headlines as the memory-and-AI bellwether, its guidance a direct read on whether the AI capital-spending engine is still running hot. Costco arrives as the cleanest tell of consumer health, with $6 diesel in the tank. Accenture and Nike fill in the picture on enterprise demand and the global consumer. A Micron miss, or a cautious capital-spending signal, would land hardest because the AI trade is the one pillar still holding this market up, and it is priced for perfection. A Costco warning on the consumer would only confirm what $6 diesel already implies.

The single most important event is the collective Fed message, because it sets the path for the only variable that rivals oil, the cost of money. The asymmetric outcome cuts both ways. A hawkish chorus paired with a hot PMI would pull a second hike forward and press the long end past 5%, and the tape would not enjoy it. A dovish walk-back, or a further decline in oil, would hand the bulls the relief that Friday only hinted at. Watch the speakers, and watch the price of oil.

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💰 The Fed Rate Hike Won't Fix The Inflation It Targets

The Fed did what the bond market dared it to do. This past week, in a unanimous vote, the FOMC raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, the first Fed rate hike since 2023. The stated reason was "price stability." Yet this is a Fed whose own chairman has spent the past year insisting that real growth does not cause inflation, and that the drivers of this one sit largely outside the central bank's reach. As we argued in prior Bull Bear Reports on the debt-and-inflation problem, that tension is not a footnote; it is the entire story of the Fed rate hike, and something worth exploring more deeply.

Make no mistake, it was the bond market that forced the issue. Such is interesting when you consider that Kevin Warsh wants the market to create the signal. Well, he got what he wished for. The 10-year Treasury yield pushed to roughly 5.01% around Wednesday's decision, a level not seen in 19 years, while the 30-year cleared 5.35%. In other words, the market's message was clear: “Raise rates, or we will.”

What The Fed Rate Hike Actually Does

However, what gets lost in transmission is what the Fed is actually trying to achieve through interest rate policy. The mechanism behind rate hikes or cuts is a demand story, nothing more. Raising the policy rate raises the cost of money across the system. Credit-financed demand cools first, mortgages, auto loans, capex, anything that lives or dies on the cost of borrowing. As that demand softens, the economy loses some of its power to bid prices higher, and the pace of increase eases. "Price stability," in the Fed's own framing, is really "expectations" stability.

Now, notice what the Fed’s tool never touches, and this was mentioned by Warsh on Wednesday. A higher Fed funds rate does not drill a well, end a war, or reopen the Strait of Hormuz. The Fed rate hike works on one side of the ledger, and one side only: the demand side. Such is the design, and such is also the limit. When the inflation in front of you is a supply problem, a demand lever pulls on the wrong rope.

What Warsh Means By "The Fed Can't Fix Prices"

However, this is where most of the mainstream commentary gets sloppy. The Warsh school separates two things that the word "inflation" quietly blends together.

1. There are relative prices, set in the real economy by supply and demand for actual goods, and then
2. There is the monetary unit, the purchasing power of the dollar itself.

An iPhone gets cheaper because of globalized production. Oil prices rise because of a war that threatens supply lines. No policy rate produces either outcome.

When Warsh implies the Fed cannot fix prices, the defensible version of that claim is narrow and correct. Monetary policy cannot repair a supply-driven, relative-price shock. It can only compress demand until something breaks. Milton Friedman's line, that inflation is "always and everywhere a monetary phenomenon," is usually quoted, incorrectly, to argue the opposite. However, read that carefully, because it makes Warsh's point. Friedman described the slow erosion of the currency over the years (driven by a general rise in inflation amid economic growth), not the price of gasoline during a Gulf conflict. The Fed owns the monetary unit, but does not own the oil market.

Look at the composition of the number the Fed is fighting.

Headline ran 3.4% in August, but energy alone ran 16.9%. Strip the war out, and the overheating story gets much harder to tell. That is not a demand economy running too hot. That is a supply line on fire.

Then Why Hike Into A Supply Shock?

Fair objection. If the Fed cannot produce a barrel of oil, the Fed rate hike looks like "theater." It is not, and the reason is CREDIBILITY. A central bank tightens into a supply shock for three defensible reasons, none of which involve lowering the price of crude.

1. To keep inflation "expectations" anchored, so a one-off energy spike does not get built into wages and contracts and turn into the self-sustaining spiral of the 1970s.
2. To protect the institution's word after the "transitory" humiliation of 2021, when the Fed looked through a shock and watched it metastasize.
3. Because the cost of being wrong twice dwarfs the cost of over-tightening once.

The dot plot shows the committee has made that trade. Sixteen of eighteen officials now see the possibility of at least one more hike this year, and four pencil in two.

"Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal." - FOMC statement, September 16, 2026

Read that quote once again. The committee expressly said that it can steer prices with rates. However, history tells us more precisely that the Fed can reliably steer demand only. Those are not the same claim. Fighting a supply shock with a demand tool is the textbook recipe for stagflation, slower growth, and higher unemployment without curing the thing that lit the fire. Such is the box Warsh is in, the same Volcker-versus-Burns dilemma, now his to own.

Here is a clearer way to see the potential danger that Warsh is walking into. The same dot plot that pins the neutral rate at 3.1% now has the funds rate at 3.875% and climbing toward a 4.1% median by year-end. Once you strip away the language, the Fed is already about 90 basis points into restrictive territory, with more to come, even as Warsh insists conditions are not "broadly restrictive."

That setup leaves the Fed with absolutely no margin for error. In the current environment, the Fed is hiking rates to offset an oil price spike. If energy costs continue to weigh on growth and the Fed continues to tighten, it will accelerate the deterioration. If oil reverses, the inflation impulse fades quickly, and the Fed's hikes accelerate the economic bite. Both roads end at the same address, a Fed caught in a policy mistake, scrambling to fix the overshoot.

What Usually Happens To Stocks After A Hike, And Why This Time Is Different

The bulls have a comforting statistic ready for this week, and it is a real one. Going back to the late 1980s, the S&P 500 has slipped only modestly immediately after a first Fed rate hike, roughly 2% over the first three months, then recovered to average gains of nearly 9% over the following year, according to Goldman Sachs. LPL Financial puts the average 12-month gain at 6.7%, with a median of 10.7%. The tidy conclusion is that rate hikes are buying opportunities.

However, as is always the case, beware of “averages,” which in this case may well be lying to you. The reason I say that is due to the composition. The Fed almost always hikes into a strong, demand-driven expansion. It rarely hikes into a supply shock. When it has, the record is far uglier, and the damage tends to arrive late, once the energy spike feeds inflation and the tightening starts to bite.

After the 1973 oil embargo, the S&P fell 11% in a month and 41% over the next year. Another, more recent example, was when the Fed tightened amid the energy-and-inflation shock of 2022. During that period, the index lost roughly 19% for the year and remained underwater well past 12 months. Every "hikes are bullish" study carves 2022 out as the exception. Today, it is most likely not the exception, but the template.

One thing that matters is the pace of the Fed rate hikes. Charles Schwab's strategists found that the S&P returned 10.5% over the year following slow tightening cycles and lost 3.6% after rapid ones. So what should you actually expect over the next year, hiking into a war-driven supply shock with the 10-year near 5%? Our read sits below. It is a judgment anchored in that history, not a backtest.

In the current market, the leadership is not subtle. When the Fed hikes amid an energy shock, money tends to flow to where inflation is a benefit rather than a hindrance. For example, in 2022, as shown below, energy led the market up by about 48%. This suggests that investors, today, like then, should favor energy, materials, and defensives with real pricing power, as well as staples and health care. On the other side, underweight long-duration assets such as technology and communication services, as well as rate-sensitive discretionary and real estate names. However, there is always a caveat. If oil breaks and the shock fades, that map inverts, and today's laggards lead the way back.

Such is the danger of leaning on a historical average built almost entirely on the wrong kind of hike.

What This Means For Markets Over The Next Few Months, And How To Navigate It

So how do you navigate it? Rates are "higher for longer," and the committee has told you plainly it is willing to go again. The 30-year above 5.35% and the 10-year near 5.01% raise the bar that every equity, especially long-duration growth, has to clear to justify its multiple.

The forecasters are already marking that reality. Ed Yardeni cut his year-end S&P 500 target to 7,900 from 8,400 on the decision, flagging the risk of a downturn over the next three to six months as yields climb on energy. We would take the warning seriously without treating it as gospel.

Let’s focus on the bond market, which is the harder call right now, and the argument cuts both ways.

The bull case is a good one.

“The term premium has expanded to levels that historically pay investors to own duration, and a hike that slows the economy is the classic tailwind for long Treasuries. If Warsh restores "credibility" and growth cools, the long end rallies, and this past week's high yields will look like a gift.”

The bear case, however, also has teeth.

“The 30-year sits at a 19-year high for a reason: relentless issuance against a $40 trillion debt, layered on top of supply-driven inflation. Rate hikes can not fix that. That tail does not disappear either just because the Fed moved a quarter point. So, this argues that investors should take exposure at the point where the term premium is best paid for the risk. That is in the belly of the curve, with 5-7 year durations.”

Crucially, none of this argues for abandoning equities. It argues for respecting a market regime in which the risk-free rate finally competes with everything else. It is an environment where the biggest driver of "price stability," the Fed cited, is a war it can't control. The deeper problem lies one level down. The deficits and debt that we repeatedly flagged are the real long-run engine of price stability. Monetary policy sits downstream of all of it.

The Fed can raise the price of money. It cannot lower the price of a war. Size the portfolio for the difference.

🖊️ From Lance’s Desk

This week's #MacroView blog explores what the K-shaped economy gets right, what it exaggerates, and what believing the worst version is costing a generation.

Also Posted This Week:

• Has The Bond Market Already Done The Fed's Job? - RIA - by Michael Lebowitz
• Portfolio Risk Management: Winning The Long Game (Chapter 5) - RIA - by Lance Roberts

📹 Watch & Listen

Markets reversed sharply after Fed Chair Kevin Warsh signaled another potential rate hike by year-end and no rate cuts next year. Now the S&P 500 is testing support near the 100-day moving average as investors reassess what tighter monetary policy could mean for stocks.

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

The market struggled again this past week as September continues to play out to form. Technology gained ground and offset the weakness in the rest of the market. With Technology extremely overbought and everything else either approaching or at more oversold levels, a rotation is likely.

📐 Technical Composite: 66.87 - Overbought Reversing

The technical condition eased mildly again this past week as the market stalled. However, overall, the market remains technically overbought, and sentiment remains mostly bullish for now with no significant technical breaks. Indicator does suggest more struggles for the market next week.

🤑 Fear/Greed Index: 55.08 – Investor Bearishness Increases

Even though the market remained mostly flat last week, the underlying allocation and sentiment to the market reversed further. There was a continued drop in the Commitment of Traders equity allocations, and investor sentiment turned more bearish last week. If the market can continue to hold up as the bearishness increases, it could provide a good buying opportunity in the next month or so.

🔁 Relative Factor Performance

Factor performance has diverged over the last couple of weeks, with Growth, Speculative Technology, and Megacaps now extremely overbought, while Value, Low Beta and Dividend Yield (interest rate sensitive sectors) now the most oversold. A risk-off rotation from seems highly probable. As noted below, this is a "risk aware" market currently and increasing controls seems logical.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of September 18, 2026, with the S&P 500 at 7,650.50, the Money Flow Breadth Ratio (MFBR) stands at 65%, down from a peak of 80% set 5 weeks ago and falling versus 70% the prior week. The trailing four-week change is still -10 percentage points, but the near-term trend has rolled over. This places the indicator in BUY territory (60-70%). The raw zone signal reads BUY, but the model still flags a TOP REVERSAL, with 15 points now off the peak. Read that BUY as a zone label, not as fresh confirmation - the model reached this band by falling out of overbought, not by building up from below.

Bottom line: hold the target weight. The roll-over off the 80% peak is real and worth watching, but it has carried the gauge into the band that has historically been the best place to own equities. This is neither a chase nor a de-risk. A sustained break below 60% would move the grid to an underweight; a move back above 70% would re-engage the contrarian trim."

📊 Sector Model & Risk Ranges

Five weeks ago we noted that several sectors of the market were hitting extremes which typically denotes a good opportunity to reduce risk and rebalance holdings. That has remained good advice as the Fed hiked rates this past week and the market continues to consolidate within a small trading range. Energy, Technology and Goldminers are the most deviated from their long term means and should be rebalanced to target. Bonds are extremely oversold and if there is a risk off rotation, we could see money flows into bonds.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post The Fed Rate Hike Won’t Fix The Inflation It Targets appeared first on RIA.

We hate to drone on about a Fed rate hike, but we want to stress the risks in the Fed's 25bps hike, as it is unlike any other hike we have seen in over thirty years. Let's contrast it with every Fed hiking cycle since 1994.

• 1994: Inflation was trending higher, and already 0.8% above the Fed's 2% target, and economic growth was running 1.50% above trend.

• 1997: Like 1994, inflation and economic growth were running hot.

• 1999: Inflation was tame, but GDP growth was nearly 3% above trend. Surging stock prices and an overheating economy rightly raised inflationary concerns.

• 2004: Inflation was again in check, but like 1999, growth was strong. Furthermore, monetary policy was very accommodating, with the Fed Funds rate at 1%, which was almost 3% below GDP.
• 2015: GDP was near trend, and inflation was at target; however, monetary policy was extremely easy, with Fed Funds at 0% and the Fed conducting multiple rounds of QE in the years prior.
• 2022: GDP and inflation were both running hot because of extremely easy monetary policy coupled with stimulus-fueled demand and supply-chain shortages.

Today’s starting point is unlike those instances; economic growth is at trend and core CPI inflation is slightly elevated. Furthermore, the recent bump in inflation stems from a geopolitical supply shock, not a demand-driven problem. Monetary policy is already restrictive, with Fed Funds nearly 2% higher than GDP and 10-year real rates at 15-year highs.  

More simply, the Fed is fighting the bond market, not inflation, strong growth, or the normalization of easy monetary policy, as in the past. Given this unique backdrop, where economic fundamentals or the level of monetary policy do not argue for a rate hike, the Fed's action risks becoming a policy error.

What To Watch Today

Earnings

• No earnings reports today

Economy

Market Trading Update

Yesterday, we walked through the Fed’s quarter-point move and a dot plot that pushes cuts all the way out to 2028. Today, the question that matters more for your money. What does the market actually do after a first Fed rate hike, and who wins while it happens?

Goldman studied seven tightening cycles back to 1988. The shape repeats. Stocks slide roughly 2% over the first three months, chop through the middle of the year, and finish twelve months out up about 9% on average. LPL’s work across six cycles since 1994 lands in the same neighborhood, with a 6.7% average gain and a 10.7% median. The exhibit below is that whole argument in one picture.

The “a hike just ended the bull market” argument has a problem, and so does the all-clear crowd. Schwab’s data show that the average maximum drawdown in that first year is 14%, and 12% in the first six months. Both camps are right, which is the uncomfortable part. The twelve-month number usually ends up fine, but living through the middle of it rarely does. Back in June, the Fed’s own projections put 2027 at 3.6%. That number is now 4.1%.

Sector leadership is where this becomes actionable, and the history is unusually specific. Barclays studied five cycles since February 1994. Three months after the first hike, the S&P 500 fell 3.9% at the median, the Russell 2000 fell 7.2%, and financials were worst at a median 8.4% loss. Energy was the ONLY sector with a positive median return. Value beat growth, and the gap was widest in small caps.

Now look at what our market has already done since the August 13 record close. Energy is up 4.86% and is the only sector higher. Industrials are down 9.19%. Small caps have lost 6.45% against the index’s 3.06%. Value is off 2.91%, growth is down 4.07%, and high beta has lost more than twice as much as low volatility. That is the historical template running in real time, before the second hike even arrives.

The tape agrees. The index closed Wednesday at 7,552, roughly 3.1% below the August 13 record near 7,796, just under its 50-day moving average around 7,607, and still 5.4% above a rising 200-day near 7,170. A 14-day RSI near 40 is soft, not washed out.

We continue to hold quality and value over high beta, and are letting the cash buffer earn 4% while we wait. Such is the discipline a hiking cycle demands. Don’t sell the hike. Sell the crowding, and the 200-day average is where all this gets decided.

AI Productivity Gains Enter The Economy

Per The Wall Street Journal, Novo Nordisk announced that it will use Anthropic's science-specific platform, Claude Science, to speed up drug discovery, strengthen software development, and better automate its production processes. This partnership is the latest in a series of pharmaceutical/AI partnerships that include Eli Lilly, Merck, and Roche. We write about this because it shows AI's economic benefits aren't just about the massive expansion of data centers and chip demand that frequently garner headlines.

Novo CEO Mike Doustdar framed the benefits of the partnership as follows plainly:

AI can help us increase productivity in R&D and compress the path from research to marketed product. But beyond this, AI tools can also offer completely new scientific opportunities and aid reasoning and understanding of human biology and drug mechanics.

The question bugging investors is when AI benefits will hit the bottom line of the non-technology sectors. While only one small example, the Novo and Anthropic partnership shows how AI is starting to spread throughout the economy.

To be fair, AI has not produced an FDA-approved drug, and most of its benefits so far come from automation rather than drug or cure discovery itself. Ipsen's CEO David Lowe captured the dual benefit directly:

You can leverage AI on both sides, on creating more sales, being faster, finding more patients, and on the other side, becoming more efficient and being able, therefore, to do more with less.

The combination of faster revenue generation and lower cost structure simultaneously is the productivity unlock that will show up in corporate earnings and in GDP.

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The post A Hike Like No Other appeared first on RIA.

"What the K-shaped economy gets right, what it exaggerates, and what believing the worst version is costing a generation."

The bottom half of American households owns about 2.5% of the nation’s wealth. That number is real, and it ought to bother you. However, that number is also higher than it was in 2019 and 2015, and roughly six times higher than the 0.4% low it hit in 2011. You will not read that in many places because it doesn’t “fit the narrative.”

Unfortunately, the K-shaped economy headlines have settled into a single unvarying note, and after a while, people stop hearing anything else. I’ve spent the past several weeks working through the underlying data. While there is some truth to the coverage, most of the claims are exaggerated for “clicks and views.” But the psychological damage is clear.

So, before we get into our discussion, here are some numbers for you.

Where The K-Shaped Economy Headlines Are Right

Let me start where the “Persistent Purveyors of Doom” crowd bases its argument, as there is indeed a K-Shaped economy. However, what is critical to understand is that the K-shaped economy is not new. In every economy throughout history, there has always been a K-shaped divide between those at the bottom and those at the top.

Nonetheless, as the headlines suggest, the wage compression of 2020 through 2023 was extraordinary. Autor, Dube, and McGrew documented it in their paper “The Unexpected Compression.” The 90/10 wage ratio fell far enough to reverse roughly a third of forty years of divergence.¹ Then it stopped, and worse, it began running the other way.

The Economic Policy Institute data for 2025 show that real wages at the 10th percentile fell by 0.3%, while the median rose by 0.8%.² The lowest-paid workers in America went from the fastest-growing group in the distribution to the only one moving backward.

However, the Cleveland Fed adds a detail that should end many K-shaped economy arguments. Between 2020 and late 2025, real wages at the 10th percentile rose 9.7% against 4.5% at the 90th. In dollars, that’s $1.34 an hour against $3.09.³ Percentage compression off a small base is not catching up. And the 2015 to 2020 dollar gains were LARGER at every percentile in the bottom half than the celebrated pandemic-era gains were.

The price level is also crucial to discuss, and is where I think most commentary goes soft. Inflation falling from 9% to 3.4% is a change in the rate, not the level. Since December 2019, consumer prices have risen by roughly 29% and have stayed there. That is a permanent shift in the cost of living, and it is the part of the K-shaped economy argument that sticks, and it hits households with no assets the hardest.

As I’ve written before, “wage growth as a leading inflation indicator” matters for policy. The level is where people actually live. McKinsey asked 30,119 Americans this April, and 60% named the cost of living as one of their top three barriers. That held even with those over $150,000 in income.

Furthermore, the hiring rate hit 3.1% in February 2026, the lowest reading outside the pandemic, while the share of unemployed workers for 27 weeks or more reached 27.5% in May. Separately, expiration of the enhanced ACA credits pushed average net marketplace premiums up 58% and average deductibles up 37% in a single year.⁴ That is a real, dated, 2026 hit to exactly the households everyone is arguing about.

The honest summary is that the ladder from the bottom of the K to the top got harder to climb, even as the rungs themselves stopped moving apart.

Where The K-Shaped Economy Headlines Are Exaggerated

The single most repeated statistic in this entire debate, the one anchoring roughly every set of K-shaped economy headlines you have scrolled past this year, is that the top 10% of earners account for about half of all consumer spending.

It comes from Moody’s Analytics. The number is shakier than it looks. Moody’s revised its own estimate down from 49.2% to 45.8% after a methodology change, and Mark Zandi told reporters plainly that he “wouldn’t die on the hill of the top 10% accounting for 45% of the spending.”⁵ Berkeley’s Antoine Levy points out the arithmetic problem: the top decile takes home 35% to 40% of disposable income and saves a fifth of it, so its spending share cannot be half. The BLS Consumer Expenditure Survey puts the figure at 22.9%.

While you may think that is just economists arguing amongst themselves, it isn’t. What is crucial to note is that when the number that anchors the entire narrative varies by a factor of two depending on who computes it, that is a problem. In other words, the narrative is doing work the data cannot support. Such is the nature of a story that has outrun its evidence.

Furthermore, the perception gap runs deeper than just one statistic. In that same McKinsey survey, 56% of consumers named food as the category with the largest price increase in 2024.⁶ Here is why that is important. During that same period, insurance, housing, and childcare all rose faster, meaning that people are not tracking the data.

In other words, people are tracking what they hear on television and read on social media, and the two have become detached.

Where The K-Shaped Economy Headlines Are Simply Wrong

Here is where it gets interesting.

Everyone “knows” wealth concentration is worse than ever. As I laid out in my earlier piece on the K-shaped economy and why the middle class moved up, the income story runs in the opposite direction from the coverage.

The wealth story is stranger still. Pull the Federal Reserve’s Distributional Financial Accounts and compute it yourself, and the top 10% share of household net worth peaked at 70.3% in the first quarter of 2019. It sits at 67.9% today. The bottom 50% share bottomed at 0.4% in late 2011, was 1.7% at the end of 2019, and is 2.5% now.

When looking at wealth concentrations, it is very easy to blame those at the top of the wealth pyramid. Yes,  the top 10% of the population held a 31.8% share of economic wealth in the fourth quarter of 2025. Yet the bottom half gains since 2019 came almost entirely from the 90th to 99th percentiles, which fell from 39.7% to 36.3%. In plain English, the professional class lost relative ground, not the working class. Such is a detail that changes who you think is complaining.

Furthermore, the recovery that no one called K-shaped was far worse. Between 2007 and 2016, median wealth for the bottom 30% of families fell 31% while the top 10% fully recovered.⁷ Saez found the top 1% captured 91% of real income growth from 2009 to 2012. Nobody ran a K headline in 2013. The data was uglier then.

The last false claim is the one that worries me most, because young people believe it about themselves. That is the real damage the K-shaped economy headlines have done. Vanguard’s administrative records show 401(k) participation among young workers at 54%, against 28% for the same age group in 2004. Savings rates are higher, and average balances have roughly doubled.⁸ Vanguard’s own model puts 47% of Gen Z on track to sustain their standard of living in retirement, seven points ahead of the boomers. The problem is NOT that young people stopped saving

McKinsey found the same thing from the other direction. Adults aged 18 to 24 face the worst entry-level labor market in decades, and 34% name mental health as their top barrier, against 14% of older adults. Yet they were more likely than any other older group to say their finances will improve and that their lives have momentum.

"The generation everyone is writing eulogies for has not read them."

Do The K-Shaped Economy Headlines Become Self-Fulfilling?

This is the question I actually wanted answered, so I went looking for the research. Does talking constantly about a K-shaped economy help create one? The answer splits cleanly in two, and almost nobody reports both halves.

At the level of the whole economy, no. The Chicago Fed published the number in June. The correlation between the Michigan sentiment index and annual real consumer spending growth ran 0.69 before 2020. Since 2020, it has been roughly zero.⁹ Their composite estimate says Michigan currently understates sentiment by 25 to 30 index points. About 10 of those points trace to the 2024 switch from telephone to online collection. Then there is the receipt test. A Fed study matched roughly 10,000 survey responses to verified purchase records. Some 43% said they were doing worse than in 2019. Most had actually bought more.

Secondly, Barsky and Sims settled the mechanism years ago: confidence is a leading indicator, not a cause.

In the economy, confidence carries information that people already have; in a survey, they respond to what they have read or seen, rather than to what they expect. This is also the structural reason why the doom loop can’t close at the macro level. Bank runs feed on themselves because if you withdraw your money, it makes my withdrawal smarter. However, in the economy, consumption lacks this property. Your neighbor skipping a vacation does nothing to make skipping yours a better idea. Such is why sentiment can collapse, and spending can increase.

At the level of one household, yes, and this is where it bites. The K-shaped economy doom loop is real. It just doesn’t run through GDP. It runs through the handful of large, irreversible decisions a person makes over a lifetime.

The clearest evidence comes from Bailey and co-authors. They matched 1.4 million Facebook users to 525,000 housing transactions, then used the house price experiences of geographically distant friends to isolate the belief channel. When distant friends saw 5 percentage points more price appreciation, a renter’s probability of buying rose 3.1 points off an 18% base.¹⁰ Beliefs picked up socially, from people nowhere near your housing market, changed whether you bought a house.

Now apply that to a young person marinating in K-shaped economy headlines. I’ve pushed back before on the lazy version of this story, the one painting a whole generation as financial nihilists. That framing is still wrong. The behavior at the margin has gotten worse anyway. Baker and colleagues at Northwestern, using transaction data on 230,000 households, found that every dollar wagered on sports betting reduces net household investment by about 99 cents.¹¹ Not lottery spending. Not other gambling. Savings.

The damage compounds from there. New York Fed researchers found credit card delinquency rates rising 1.02 percentage points among households under 40 in states that legalized. Furthermore, separate work by UCLA and USC estimates that roughly 30,000 additional bankruptcies a year are attributable to online betting.¹² The same restlessness shows up in the options tape. Zero-day contracts reached 65% of total SPX volume in May 2026. Citadel Securities reports that nearly half of all retail options volume on its platform now expires on the same day, up from 13% in 2021.

None of that is saving or investing, and it is the real culprit behind the “K-shaped economy” narrative. In other words, the narrative is driving behavior that is creating the outcome. As we documented in our work on why retail traders consistently underperform, the average retail equity investor earned 16.54% in 2024, compared with 25.02% for the index. The performance gap is due to behavior, not access.

While everyone agrees that the economy is hopeless for the young, the agreement itself is the tell.

What To Do About It

Are there problems in the economy? Yes. Let's recap what we know.

But here is the real question to ask yourself, particularly if you "feel" like your future is hopeless.

"Do you have the ability to change your outcome?"

That answer is unequivocally - "yes." You just have to be willing to do the work.

First, fix your benchmark. You are not competing with a stranger’s vacation photos or the top 1% of a country of 340 million people. The relevant comparison is your own plan, and whether this year moved you closer to it. Everything in thinking like an investor rather than a speculator starts there. McKinsey found Americans with strong community ties were nearly four times as likely to feel their lives have momentum. Only a third felt they were connected. Trade some screen time for the other thing.

Second, stop gambling and call it what it is. Nobody ever bet their way out of the K-shaped economy. Will a sports parlay occasionally pay off? Sure. Will it build wealth over 30 years? The data is very clear that it doesn’t. More notably, the ones betting are also the ones who can least afford it.

Third, set goals you can actually hit. The $1.46 million “magic number” that circulates every January is a survey artifact from a company that sells retirement products. It is not your number. The number you need to focus on comes from your spending, your timeline, and your obligations, which is a smaller and far more solvable problem than headlines imply.

Fourth, automate the boring parts. The reason that Gen Z is projected to retire better than the boomers is not superior discipline. It is auto-enrollment. Company 401 (k) plans that enroll workers by default have a 94% participation rate, compared with 64% for voluntary plans. Design beats willpower, every time.

On housing, I recently argued that home affordability is better than the headlines suggest, and that holds for the monthly payment burden. Harvard’s housing center set home prices near five times the median income, up from roughly three times in the 1990s. That is indeed a barrier to entry.

However, the down payment for homes today is 3% versus 20% in the 1990’s. So, yes, the payment is manageable once you’re in, but the hard part is saving up for the down payment. I get that, and here is the hard truth. If you can’t save up a 3% down payment, you have other financial problems (e.g., overspending) that you need to resolve first. The mortgage payment is one thing; the taxes, fees, maintenance, and everything else that goes with the joy of homeownership is quite another.

The K-shaped economy is real, and it is old. What changed isn’t the shape of the economy; it's just that the media found a narrative that gets lots of clicks and views, and we let headlines do our thinking for us.

Believe the headlines, and you will make exactly the decisions that guarantee they come true for you.

Notes and sources

1. Autor, Dube & McGrew, “The Unexpected Compression,” NBER Working Paper 31010.
2. Economic Policy Institute, “Low-wage workers faced worsening affordability in 2025,” February 2026.
3. Federal Reserve Bank of Cleveland, “Real Hourly Wage Growth across the Lower Half of the Wage Distribution,” February 18, 2026.
4. Kaiser Family Foundation, 2026 ACA Marketplace premiums and deductibles.
5. Advisor Perspectives, “The K-Shaped Economy’s Statistic Problems,” April 7, 2026; TheStreet, economists’ debate on the Moody’s figure.
6. McKinsey Institute for Economic Mobility, “In Pursuit of Progress: Americans’ Aspirations for Economic Mobility,” 30,119 US adults surveyed April 1 to 13, 2026.
7. Federal Reserve FEDS Note, “Asset Ownership and the Uneven Recovery from the Great Recession,” September 2018.
8. Vanguard, “Busting three myths about young investors,” 2025; How America Saves 2026. Readiness figures from Vanguard’s US Retirement Outlook 2025, built on Survey of Consumer Finances, Health and Retirement Study and Social Security Administration data in 2022 dollars. Note that several secondary reports put the Gen Z figure at 48%. Vanguard’s own published table says 47%, and that is the number used here.
9. Brave, Henken & Jolley, “Reassessing the Relationship Between Consumer Sentiment and Spending,” Chicago Fed Letter No. 521, June 2026. Verified-receipt comparison: Federal Reserve FEDS Note, April 24, 2025. Confidence as leading indicator: Barsky & Sims, American Economic Review, 2012, confirmed by Choi, Jeong, Park & Yoo, Journal of Applied Econometrics, 2024.
10. Bailey, Cao, Kuchler & Stroebel, “The Economic Effects of Social Networks: Evidence from the Housing Market,” Journal of Political Economy, 2018.
11. Baker, Balthrop, Johnson, Kotter & Pisciotta, “Gambling Away Stability,” NBER WP 33108, published in the Journal of Financial Economics, 2026.
12. Federal Reserve Bank of New York, Liberty Street Economics, March 25, 2026; Hollenbeck, Larsen & Proserpio, April 2025.
13. Replication note. The top 10% wealth share is not published as a single series. I computed it from Federal Reserve Distributional Financial Accounts series WFRBST01134 (top 1%) plus WFRBSN09161 (90th to 99th percentiles), cross-checked against WFRBSB50215 for the bottom 50%. The 70.3% Q1 2019 peak and the 67.9% Q1 2026 reading are my calculations from those primary series, not figures lifted from a secondary chart.

The post K-Shaped Economy: Reality Or Media-Driven Perception appeared first on RIA.

The Fed hiked by 25 basis points and alluded to another hike, as the market expected and as we surmised in our prior Commentary. The more important takeaway from yesterday's FOMC meeting is what comes next. In the prior Commentary, we pointed out three things to watch: the Summary of Economic Projections (SEP), the balance of risk language, and Warsh's framing of risks and policy. Let's review those three factors and begin to appreciate that today's action is likely to be followed by at least another rate hike this year and not a "one and done" policy.

SEP: The median 2026 Fed Funds ending rate was 4.1%, implying another quarter-point hike before year-end. The 2026 year-end range came in relatively tight, 3.9% to 4.4%, suggesting a reasonable, though not unanimous, conviction among voters. The most important consideration was the 2027 projection, where the median remains at 4.1%, up half a point from June's 3.6%. The Committee effectively erased the rate-cut path it had penciled in three months ago. Cuts are not forecasted to begin until 2028, a much more hawkish stance than markets had priced. The dot plots showing another hike for 2026 and stable rates in 2027 are highlighted below.

Balance of risks: The vote was unanimous, a notable change considering only three members dissented in favor of a hike six weeks ago. Despite good core inflation data, the statement's tone was firm in its resolve to get inflation to 2%. To wit, the statement ended with:

The Committee will deliver price stability

There was no hedging language suggesting this is a one-off hike. Its labor language was neutral rather than cautious, which gives the Committee more room to focus on inflation. Based on the statement and the SEP, the Fed's message reads as the "series of hikes" scenario we flagged yesterday, not the "single defensive move."

Warsh: In Warsh's opening statement, he stressed that "today's action will deliver a timelier return to our target." Earlier statements from Warsh used the word "timely", thus using "timlier" shows his resolve to fight inflation. He stressed his resolve on inflation throughout the question-and-answer session. Warsh reiterated the FOMC statement and SEP confidence in the labor market and economic growth, giving him and the Fed cover to focus on inflation. Based on his words, another rate hike is highly likely.

What To Watch Today

Earnings

• No earnings reports for today.

Economy

Market Trading Update

Yesterday, we worked through what happens after the Fed hikes and why growth, rather than yield levels, drives equity returns. Today, let's explore whether the momentum trade unwind has gone far enough to set up a rally.

The damage is real. The iShares MSCI USA Momentum Factor ETF (MTUM) closed Tuesday at $299.51, down 13.2% from its June 22 record close of $345.22. Over that same stretch, the S&P 500 sits just 2.6% below its own August 13 high. That gap is the story. Momentum isn't dealing with a bear market. It's dealing with a rotation.

However, notice the chart below. Measured against the index, momentum has given back 16.5% from its rolling one-year high. That's the deepest relative drawdown since 2023, and only the fourth episode that severe in a decade. Crowded positioning has been cleaned out, which is usually the precondition for a bounce.

But here's the problem with calling the low, and the momentum panel in the first chart shows it. The 14-day RSI sits at 44.3, and even the July 29 flush only pushed it to 33.1. Momentum never got washed out; the trade just became boring. The 50-day average at $306.87 has rolled over, capping every rally attempt since mid-July. For seven weeks, the market has just consolidated its previous gains.

History doesn't rescue the bull case either. Of the four prior episodes where momentum surrendered 10% relative to the index, only two were higher three months later. The other two shed another 10% and 3% before finding a floor. That's a coin flip, not a signal. Momentum is also still up 19.7% this year, compared with 11.1% for the index, so "beaten up" describes June through September, NOT 2026.

So, what does this mean? Most likely, this is a potential setup, not a long-term trade. We're leaving momentum exposure at target weights in portfolios and routing new money into quality and cash flow rather than chasing the bounce. The trigger we're watching is mechanical. A close back above $306.87 that holds for more than two sessions turns the 50-day from resistance into support. That's where we add the position back toward an overweight. The rising 200-day at $280.83 is the line that says we're wrong. Break it, and the rotation is a regime change rather than a reset.

Two risks sit inside this setup. Momentum is the most rate-sensitive factor we own. Its earnings sit furthest out on the curve. Quarter-end rebalancing is the second, and it runs against last quarter's winners. For now, there's been enough damage to stop selling. However, there isn't enough proof to chase momentum yet, so let the 50-day make the decision for you.

Musk Hints At A Merger

Elon Musk hinted that Tesla and SpaceX could merge, creating one of the largest companies by market cap. To wit, he told the All-In Summit in Los Angeles:

With all this collaboration, on so many levels, who can imagine what action one might take when there's so much close collaboration in so many areas.

Beyond Musk's leadership, the two companies already overlap. For instance, Tesla holds an equity stake in SpaceX and the two companies signed a framework agreement earlier this year governing future collaboration. SpaceX buys Tesla batteries, energy products, and Cybertrucks, while Grok, SpaceX's xAI model, is being embedded in Tesla vehicles and reportedly powers the digital version of the Optimus robot. The two companies are also jointly building Terafab, a chipmaking plant.

Wall Street is taking the merger possibility seriously. JPMorgan argues SpaceX's IPO gave Musk fresh capital to make acquisitions. Prediction markets, like Kalshi, are pricing in 55% odds of a merger before May 2027. As shown below, the odds have been relatively steady around 50% for the last few months.

One complication in a potential merger is Musk's pay package. His November 2025 Tesla compensation structure ties his payout to Tesla's market capitalization in the event of a merger or acquisition, which could be a nearly $1 trillion windfall. However, that structure creates a conflict of interest that investors should weigh against the legitimate operational logic of a merger.

Has The Bond Market Already Done The Fed's Job?

If long-maturity yields are weighing on economic activity, has the bond market already done the Fed’s job?

The answer is complicated. The short and long ends of the yield curve impact the economy and inflation differently; accordingly, they are not necessarily substitutes for each other. Both impact GDP and inflation, but through separate channels and timelines.

READ MORE...

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We publish this article hours before the Fed updates monetary policy at its September 16, 2026, FOMC meeting. Prior to its decision, the Fed has kept the Fed Funds rate steady even as inflation runs stubbornly above target. At the same time, longer-term bond yields have risen appreciably and, in the process, are tightening financial conditions. The 10-year Treasury just surpassed 5%, and mortgage rates, corporate borrowing costs, and equity discount rates have all risen similarly. The combination of no Fed tightening but relatively significant market tightening raises a question. If long-maturity yields are weighing on economic activity, has the bond market already done the Fed’s job?

The answer is complicated. The short and long ends of the yield curve impact the economy and inflation differently; accordingly, they are not necessarily substitutes for each other. Both impact GDP and inflation, but through separate channels and timelines.

What The Long End Impacts

The 5-year, 10-year, and 30-year bond yields influence personal consumption, corporate capex plans, and the pricing of assets valued off a moderate or long stream of future cash flows.

Consider the following important sources of economic activity:

Housing

The 30-year mortgage rate closely tracks the 10-year Treasury plus a spread. With the 10-year yield at 5.00% and mortgage rates near 7.00%, new and existing home sales, buyer demand, and housing turnover are depressed. As a result, residential fixed investment as a percentage of GDP has fallen from nearly 5% in late 2021 to 3.6% today as mortgage rates more than doubled. 

Corporate financing

Corporate bond issuance is priced as a spread to Treasury yields. Thus, higher Treasury yields raise borrowing rates and increase corporate interest expense. The impact lags, as shown in the graph below. Higher yields also raise project hurdle rates for capital expenditures.

Higher interest costs reduce profits, often leading executives to cut expenses, including payroll. At the same time, higher project hurdle rates often cause firms to delay or reduce capex. In both cases, higher rates dampen economic activity over time.

It’s worth adding that higher rates today may have a greater impact than in the past because corporations borrowed extensively when rates were historically low in 2020 and 2021. A good portion of cheap debt is maturing over the next two years. Refinancing it at much higher rates will have a greater impact on interest expenses than in the past, even if Treasury yields stay at current levels or decline.

Auto Loans

New and used auto loan rates price mainly off the three- to seven-year part of the Treasury curve, which matches the loan's duration. These short- to intermediate-term yields are up nearly 100 basis points since their late-February low, pushing auto financing costs higher even though the Fed hasn’t raised rates. Auto sales account for approximately 5% of GDP.

Equity valuations

Equities are long-duration assets, with cash flow duration estimated at roughly 20 or more years on average. A higher long-term discount rate compresses fair-value calculations. In turn, lower valuations, if they weigh on stock prices, can hurt consumer sentiment through the psychological wealth effect. It’s debatable whether higher yields have impacted equity markets yet, but regardless, the odds of them negatively affecting stocks rise as bond yields rise.  

Federal Interest Expense

Higher yields raise the government's borrowing costs, but that increase in expense takes time, as most debt is set at lower rates and only resets when it matures. The first graph shows the sharp increase in the government’s interest payments since 2020. The following graph shows the lag between changes in rates and changes in the government’s average interest rate. Note that longer-term bonds have a much longer lag than bills.

The important takeaway is that as the government demands more money to finance its debts, it crowds out financing for consumers and corporations, ultimately raising their borrowing costs.

Higher Long Rates Are A Headwind

While those economic sectors and assets, and many others we don’t mention, are negatively impacted by higher long-term rates, none are a direct inflation channel. Rising long-term yields cool the economy by discouraging borrowing and spending, and lower demand or weak sentiment eventually feeds through to prices, but the diffusion is slow.

What The Short End Impacts

The Fed Funds rate and short-term Treasury bills govern different financial channels that tend to influence inflation more directly and quickly than longer-term yields.

Consumer Revolving Credit

Credit card rates, home equity loans, and floating-rate auto and small business loans are typically priced off the Prime Rate, which is the Fed Funds rate plus a fixed spread. A change in the Fed Funds Rate, and thus the Prime Rate, hits household and business cash flows within a billing cycle and directly alters consumption decisions with immediate effects on both prices and economic activity.

Bank Net Interest Margin And Credit Supply

Banks tend to fund their long-term assets, like loans and mortgages, with short-term liabilities. Short-term rates, along with the shape of the yield curve, determine lending profitability, i.e., a bank's net interest margin. Banks are more willing to extend credit when lending margins are high.  Thus, an increase in the Fed Funds rate, which often flattens the yield curve and, by default, banking profitability, can materially reduce lending activity.

As we show below, the yield curve is flattening (tightening net interest margins) as the market anticipates rate hikes.

Savings And Cash Yields

Money market and short Treasury Bill yields determine what households and businesses earn on cash. Those rates shape the propensity to spend versus hold cash. This can be a fast-moving channel that works opposite the slow equity wealth effect.  Higher yields incentivize consumers to save rather than spend, thus slowing economic activity.

Inflation Expectations And Fed Credibility

This may be the most important factor in answering the question of “has the market done the Fed's job" question. The Fed Funds rate is the primary tool the FOMC uses to manage monetary policy. Consumers, businesses, and investors are watching it closely today as a credibility signal of whether the central bank is committed to its 2% inflation target.

A tightening bond market, as we have, can restrain growth but says little about the Fed's resolve. Only the Fed's policy actions on the Fed Funds rate can do that.

Federal Reserve Governor Christopher Waller made a similar point in comments this month. He said policy is:

"currently only slightly restricting aggregate demand," and that "it may not take much acceleration in inflation to nudge me into supporting tighter policy."

That describes someone who views the front end, not the back end, of the yield curve as the inflation-credibility lever.

Summary

Long-term yields impact the economy and inflation but often with a decent lag. Thus, the impact of higher yields hasn't largely been felt yet. Short-term rates tend to affect growth and inflation more immediately. All that said, while stubbornly high inflation is a big problem and argues for Fed action, the recent inflation uptick and deviation from the downward inflation trend is largely due to the Iranian conflict and higher energy prices.

The Fed Funds rate can't solve the Iranian oil problem. So, we must ask: Is the price of “restoring inflation credibility” worth it, if higher Fed Funds rates have a very limited impact on inflation but risk meaningful damage to economic activity?

Hiking into a supply shock driven by geopolitical matters could be a big policy error. Accordingly, if they do hike rates, they could likely be followed shortly by rate cuts, an admission of sorts of a policy error. 

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Our title, "Fed Hikes," is a bit presumptuous, but with Fed Funds futures assigning a 90% chance of a hike this afternoon, it's likely a done deal. Instead of debating whether the Fed hikes, the more useful question for investors is: what comes next? Three things from Wednesday's FOMC meeting will likely put us in a better place to answer that.

Assuming the Fed releases its Summary of Economic Projections (SEP), aka dot plots, it will likely be the most important tell. Watch the median dots and outlying dots regarding 2026 projections on where Fed Funds will end the year. A tight cluster of dots signals conviction among the members, whereas a wide spread signals division. With only 2 meetings left, we suspect the median will be near one more hike, assuming they raise rates today.

Second, watch the FOMC statement's balance of risk language. If the inflation tone softens, today's expected hike could be a single defensive move rather than the start of a series of Fed hikes. Further, increased concerns about labor conditions could warrant caution from the Fed.

Third, listen for how Warsh frames the decision in his press conference. Instead of saying "one and done" or "the first of several," we suspect he will say future policy decisions will be predicated on incoming economic data.

Since 1994, the Fed has conducted six hiking cycles, as we share below. Five of them ran for years and included six hikes or more. The exception is March 1997, when Greenspan hiked once, and then cut in 1998. Every other modern cycle kept going well beyond the first move. Despite history, given that real rates are starting from an historically high point, we suspect the number of hikes in this cycle will be limited.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we worked through whether the AI capex backlog actually bends when the frontier labs start talking about slowing down. Today the tape handed us a cleaner question about rising yields and equity returns. The 10-year Treasury pushed through 5% on Monday and traded at 5.01% Tuesday morning, the highest level since July 2007.

That number matters because Wall Street told us it would. Bloomberg's Markets Pulse survey of 122 participants, conducted September 8th through the 10th, asked how high yields would need to go before year-end to trigger a 10% correction. Nearly 78% put the answer between 5.00% and 5.75%. Just 1.6% thought anything below 5% would do it.

Here's what the consensus misses. Rising yields did punish stocks, but mostly in the first half of the sample. The relationship broke down right around the time the 10-year fell under 5% and stayed there. So the line everyone is watching marks where the modern data set begins, not where equities break. Such is the trouble with threshold thinking. It mistakes a historical coincidence for a law of markets.

The real variable isn't the rate. Its growth. Split the rising-yield months by whether growth was strengthening or weakening, and the outcomes separate violently. Stronger growth with rising yields delivered a large positive excess return over cash. Weaker growth with rising yields delivered a deeply negative one. Same rates. Opposite results.

The multiple has already paid its toll. Forward earnings are up roughly 30% this year while the forward P/E compressed about 13.5%, from north of 23 down near 19. The index is up 11.6% year to date on EARNINGS, not on multiple expansion. The bond bears will tell me the deficit makes this cycle different. Maybe. But the de-rating they keep forecasting has largely already happened.

The sector tape mostly confirms the map. Since the 10-year bottomed at 3.97% on February 27th, energy has run 15.4% against the index's 10.9%, while utilities lost 12.4% and staples 6.2%. Financials only matched the market, so the rate trade isn't as clean as the textbook says.

The S&P closed below its 50-day moving average near 7,606 yesterday. That line is the trade into Wednesday's Fed decision. If it holds, this stays a repricing. If markets fall further, the next add point is the 200-day near 7,163, not before.

Watch the growth data, not the yield print. Rates don't end bull markets. Recessions do.

This Is Not 2022

With Fed hikes on the table, we hear some pundits harkening back to the last tightening cycle, which started in 2022. The setup then and now is nothing alike.

In 2022, the Fed was grossly offside. Inflation ran near 9%, and the real 10-year yield was negative when hikes began. The Fed was running extremely accommodative policy despite surging prices. They ultimately hiked 11 times in sixteen months, the most aggressive tightening since the 1980s. The bond market repriced violently because the Fed started so far behind the curve.

Today's starting point is the opposite. The real 10-year real yield sits near 2.50%, the highest level in almost twenty years, and the yield curve has flattened meaningfully, both signals that financial conditions are already restrictive. This isn't the Fed playing catch-up; it's the Fed worried about its inflation-fighting credibility, much of which dates back to 2020-2022, when it botched monetary policy.

The inflation level and its drivers today versus 2022 are also vastly different. Today's price pressures trace largely to the Iran conflict, oil, energy, and related goods. We are in a geopolitical supply shock, not the 2022 broad demand-supply mismatch born of pandemic stimulus and broken global supply chains. Geopolitical shocks reverse quickly once the underlying conflict de-escalates. Supply-demand mismatches take much longer.

Investors bracing for a prolonged 2022-like hiking cycle are fighting the last war.

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Anthropic CEO Dario Amodei published an essay, "We Must Pace the Frontier," on his personal website last weekend that is weighing on AI stocks. Amodei argues AI labs need to slow development to manage the risks that come with capabilities improving faster than our ability to understand and control them. Sam Altman and Elon Musk both publicly agreed with Amodei, an unusual alignment among bitter rivals. While Amodei's argument is very sensible, reality and the race for AI dominance are a strong counter argument.

Amodei acknowledges the pros and cons of slowing development:

Not building the technology deprives humanity of benefits or simply places AI in the hands of authoritarian powers, while building it too fast is reckless.

President Trump's answer was immediate. He rejected any slowdown outright, to wit:

We're leading China in AI, and, frankly, I want to keep it that way, because whoever wins AI wins.

House Speaker Mike Johnson echoed his sentiment:

If Congress just races in and does some sort of emergency session to try and regulate AI, we will lose the race to China.

Beijing dismissed the safety concerns as "fear-mongering." Based on comments from leaders, China views the technology through a security lens, not humanity's shared risk.

Amodei's proposal works only if China and the US pace themselves in tandem, yet Washington and Beijing have made clear they view AI primarily as a race to win, not a risk to manage.

The graphic below, courtesy of Finviz, shows that AI-related stocks were hit hardest Monday morning, but most other sectors were spared.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we worked through the weak Treasury buyback and the strong auctions behind it. The bid for bonds is better than the headlines suggested. Today, the question filling my inbox is the data center capex backlog, and whether three CEOs just broke it.

Dario Amodei called on the industry to slow the pace of improving frontier model capabilities. Sam Altman agreed and committed OpenAI to the same evaluator access. Elon Musk's reply was three words: "Dario is right." Asia sold first, with SoftBank down as much as 13% and SK Hynix off 6.4%. The infrastructure complex followed on Monday morning. Vertiv fell about 7%, GE Vernova about 9%, Applied Digital about 5%. The S&P 500 gave up less than half a percent, and the equal-weight index traded higher. That’s rotation, NOT liquidation.

Here's what Monday's selling skips about the data center capex backlog. Slowing the frontier is a decision about model capability. The buildout is a decision that has already been signed, financed, and scheduled. Those are two different problems running on two different clocks. Vertiv told us in February that large orders now carry 12- to 18-month lead times, which stretches its conversion window toward 15 months, compared with a historical 9. A turbine ordered this year for a 2029 slot doesn't get canceled because model releases span six to nine months.

A good example is Vertiv (VRT) as noted above. The company closed 2025 with a record $15.0 billion backlog, up 109% on a 2.9x book-to-bill. The filings also confirm growth on the books. Customer prepayments doubled in the June quarter to $3.6 billion from $1.8 billion at year-end, which is cash in the door for deliveries not yet made. As shown above, the stock has been under pressure amid the prevailing narrative, but fundamentals continue to improve.

For now, the sell-off is a sentiment event, not a capex event. It only becomes a capex event the day hyperscaler budgets get cut, and none have been. Jensen Huang repeated his $3 to $4 trillion infrastructure estimate at the Goldman conference last week. Such is the gap between a narrative and a contract.

For now, we're holding power and infrastructure exposure at target weight instead of chasing this dip. Our add point is the 200-day line, not a headline. A backlog is also a receivable. It's only as good as the credit behind the customer, the same warning we made about CoreWeave on September 4. Own the contract, not the story. Notably, keep a watch on backlogs. If the counterparties start to pull back, then the sentiment event becomes an actual concern.

Industrials vs. Energy: The Next Big Rotation?

The graphic below from SimpleVisor (beta version, due for release in mid-October) shows that energy stocks are very overbought on a relative basis, while industrials are very oversold. The large divergence suggests a rotation into industrials and out of energy is likely. However, and this is important, the Iranian conflict and its impact on oil prices are driving the two sectors in opposite directions. They may continue to do so until oil prices fall appreciably. That said, industrials and other sectors more directly impacted by higher oil prices are worth following for when the "peace trade" starts.

It's also worth noting our divergence indicator in the second graphic is starting to perk up. While this indicates weakening breadth, we may see it worsen until oil prices decline. As with industrials versus energy, the market is increasingly affected by higher oil and bond yields. Trade with caution, and start making a list of which stocks and sectors may outperform on a lasting peace agreement.

Portfolio Management: Winning The Long Game (Chapter 5)

First, stop everything you are currently doing. Before you buy a single share, you need to answer a singular question that almost nobody asks.

“What is the money actually for?”

Investing without a defined goal is just gambling with extra steps. “Retirement” isn’t a goal that is a concept. Be very specific about your dollar goals.  For example:

• I need $35,000 for a new car.
• A 5% downpayment on a $300,000 house is $15,000.
• To generate $5,000 a month in retirement, I need a lump sum of $1.3 million in bonds yielding 4.5% annually.

Being specific about your goals is crucial because your plan starts with three numbers that have nothing to do with the market.

• The amount you are starting with,
• The amount you need it to grow to, and
• How much time do you have to get there?

From those, you can go back to the only benchmark that matters, which we covered in the last article. The rate of return your plan actually requires, earned at the lowest risk that gets you there.

This reframing is critical to successful outcomes because it takes a nebulous concept that may seem out of reach and turns it into a concrete objective that can be broken down into smaller, more achievable ones.

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Last Thursday's Treasury buyback operation was deemed "weak" in the financial media as it bought back just $5.19 billion, less than the $6 billion investors had anticipated. A buyback succeeds only if current bondholders are willing to sell their existing holdings back to the Treasury at the offered price. Thus, a "weak" or undersized buyback operation means they weren't. Dealers and real-money investors chose to keep their bonds rather than part with them. The weak demand for the buyback was a hidden signal of demand, confirmed by the Treasury auctions.

Last Wednesday's 10-year auction posted a bid-to-cover ratio of 2.71, the highest since April 2016. This measure of demand was off the charts. Moreover, primary Wall Street dealers, the buyers of last resort when demand is weak, absorbed just 4.3% of the offering. When dealers get stuck with a small allocation, it signals strong investor demand.

The next day's 30-year auction was even more extreme by some measures. Indirect bidders, largely foreign central banks and large institutions, took 79.5% of the offering, the second-highest share on record. The auction stopped through the when-issued yield by 2.7 basis points, also the second-highest stop-through on record. The bid-to-cover at 2.61 is in the upper 75th percentile of results over the last ten years.

The weak buyback and strong auction show that real-money investors are buying Treasuries at these higher yields, even as fast-money traders still sell them.

What To Watch Today

Earnings

• No notable earnings reports

Economy

Market Trading Update

I will tell you one thing: you have to give the bulls their credit. This past week was the perfect setup for a sharp sell-off in the market. Corporate buybacks are sidelined, interest rates spiked, and oil surged, pushing inflation higher. If there was ever a case for a pullback, it was this past week. Nonetheless, the correction that we have discussed over the last two weeks stopped right where the first line of support sits. The S&P 500 closed the week at 7,666, down 0.68%. The part that matters happened on Thursday, with the index trading down to 7,595 and closing dead on its 50-day moving average near 7,600. That was our initial downside target, and the market met it up to that point before Friday's bounce lifted the price back above the line.

While the 50-DMA held on the first test, overall momentum remains another matter. RSI sits at 50.9, dead neutral, down from the high-50s a week ago. The MACD signal has crossed below its signal line, keeping downward pressure in place into the end of the quarter. Furthermore, the histogram has turned negative, adding to our caution. While the market held support, it did so with weakening momentum, which is the definition of an undecided tape.

From our vantage point, the breadth story is the bigger worry. The equal-weight S&P fell almost three times as hard as the cap-weighted index this past week. Most notably, it was small caps that led the whole thing lower, with volume telling the same story. Of course, the spike in crude oil didn’t help and forced the heaviest selling in the rate-sensitive names, rather than the index leaders. As noted, breadth is the key to a sustainable bull market rally. The current breadth is a warning, but not yet a sell signal.

This coming week keeps our focus on risk management. From that standpoint, we continue to recommend trimming the most extended winners back toward model weight into any push toward the old highs, rather than chasing them. The 50-DMA near 7,600 is the support line that decides our next moves. If we hold it, and the uptrend off the spring lows stays intact, we can keep exposures near normal levels. However, if we lose that support on a closing basis, the next real floor sits much lower at the 200-DMA near 7,158. We suggest keeping some dry powder heading into the Fed rate decision and next Friday's option expiration.

Heading into the end of the month and the quarter, there is one level that dictates portfolio strategy into October. A weekly close back above 7,796, the August record, says the buyers have reclaimed control. A close below 7,600 signals that the 50-DMA has failed and that the market wants deeper support. Everything in between is noise. And next week brings two catalysts big enough to force the break. Trade the level, not the narrative.

CPI & The Week Ahead

Headline CPI rose 0.4% in August, matching expectations, with the annual rate at 3.4%. Core CPI, however, ran slightly hotter than forecast at 0.3% versus the 0.2% consensus, though the annual core rate held steady at 2.4%. Energy prices drove the headline number: gasoline jumped 3.9%, and the broader energy index rose 2.1%, up 16.3% year over year. Following the data release, September hike odds rose to 85%, as shown below, courtesy of CME's FedWatch. The market believes the inflation data did not help the case for the doves on the FOMC who would like to hold rates steady.

With CPI and PPI out of the way, the market's attention will focus on Wednesday's FOMC meeting. In addition to the Fed's rate decision, the following factors will help form the market reaction.

• The number of dissenters.
• How did Warsh vote?
• The updated Summary of Economic Projections (SEP - dot plots).
• Warsh's tone at the press conference.
• Any comments on the recent spike in yields and its economic impact.

Also on Wednesday will be the retail sales report. Following last month's 0.6% decline, the current expectation is for a 0.3% increase.

US Debt Trap: A Crisis Without A Calendar

Every few months, a new essay declares that the US debt trap has finally sprung. The latest one making the rounds from The Economist is well written and genuinely unsettling. It argues that Washington has borrowed so recklessly that the Federal Reserve no longer dares to raise interest rates. Doing so, the piece warns, would detonate the whole structure and send financing costs spiraling out of control. It’s a compelling story, great for clicks and views, and I’ve been reading versions of it since the 2011 credit downgrade.

Here’s the problem with the “US Debt Trap” argument, or any of the myriad variations on the theme: it never comes with a date. Why is that important? Any piece of analysis must include three critical aspects to provide value.

1. A specific date when the “crisis” will occur. Without a specific date, the analysis can not be judged for accuracy or validity.
2. What will the crisis be specifically? A debt default, financial contagion, market crash, economic recession, etc.
3. Most crucially, what will be the end result of the crisis and, specifically, when will it be over?

Without those aspects, and most importantly, without a date the event will occur, the analysis isn’t a “forecast,” it’s a “mood.”

A good example is Ray Dalio, who almost annually predicts that a financial crisis is approaching.

• March 2015 – Hedge Funder Dalio Thinks the Fed Can Repeat 1937 All Over Again
• January 2016 – The 75-Year Debt Supercycle Is Coming To An End
• September 2018 – Ray Dalio Says The Economy Looks Like 1937, And A Downturn Is Coming In About Two Years
• January 2019 – Ray Dalio Sees Significant Risk Of A US Recession
• October 2022 – Dalio Warns Of Perfect Storm For The Economy (That was also the stock market low.)
• September 2023 – Dalio Says The US Is Going To Have A Debt Crisis

But you can even go further back than these when he wrote about some of his biggest mistakes about a decade ago:

“The biggest of these mistakes occurred in 1981-’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress.“

Even though Dalio understands his mistakes from 1981 to 1982, he has been repeating them over the last decade. I am certainly not picking on Ray Dalio; he is a brilliant person with a wildly successful track record of managing money.

“However, investors who listened to Dalio’s predictions of a coming “depression” a decade ago missed out on one of the most significant bull markets in U.S. history.”

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"How To Win The Long Game" is the final chapter of our series and we dig into the rules and guidelines for better investing and portfolio risk management.

Chapter 1: Think Like An Investor

Chapter 2: Investor Psychology

Chapter 3: Why Crashes, Timing & Valuations Matter

Chapter 4: Investing Myths Dismantled

Chapter 5: Risk Management

Over the first four articles, we have spent most of our time on what NOT to do.

• Do not speculate when you think you are investing.
• Do not let your psychology or your conditioning run your money.
• Ignoring the math of losses, valuations, and timing can be devastating
• And, most importantly, do not swallow the comfortable myths that tell you to stop thinking.

If you have made it this far, you are probably ready for the obvious question.

"Okay, so now that you have told me everything NOT to do, what SHOULD I be doing?"

The answer comes down to a discipline almost nobody teaches beginners, and it is the foundation of everything that follows. Portfolio risk management.

In our final chapter for this series, we will dig into that exact question. Unfortunately, there is good and bad news, and it can be summed up in a single sentence.

The plan is simple, but it is not easy.

What is most important is that you don't need a genius IQ, a Bloomberg terminal, or a secret indicator to invest for the long term. It just requires a goal, a disciplined process, and the conviction to follow your own rules when every instinct is screaming at you to abandon them.

So, let's get started.

Start With A Goal, Not A Guess

First, stop everything you are currently doing. Before you buy a single share, you need to answer a singular question that almost nobody asks.

“What is the money actually for?”

Investing without a defined goal is just gambling with extra steps. “Retirement” isn’t a goal that is a concept. Be very specific about your dollar goals.  For example:

• I need $35,000 for a new car.
• A 5% downpayment on a $300,000 house is $15,000.
• To generate $5,000 a month in retirement, I need a lump sum of $1.3 million in bonds yielding 4.5% annually.

Being specific about your goals is crucial because your plan starts with three numbers that have nothing to do with the market.

• The amount you are starting with,
• The amount you need it to grow to, and
• How much time do you have to get there?

From those, you can go back to the only benchmark that matters, which we covered in the last article. The rate of return your plan actually requires, earned at the lowest risk that gets you there.

This reframing is critical to successful outcomes because it takes a nebulous concept that may seem out of reach and turns it into a concrete objective that can be broken down into smaller, more achievable ones.

Furthermore, being specific about your goals reduces overall portfolio risk. For example, if your plan needs a 6% return to fund the life you want, then chasing a 15% return requires excess risk you do not need and, most likely, cannot afford. Trying to win a game of “beat the market” that you were never required to play often leads to disappointing outcomes.

Lastly, the foundation you build early includes the boring, unglamorous work that comes before investing at all. As we laid out in the “10 Laws Of Money,” spending less than you earn, clearing high-interest debt, and holding a cash reserve are the foundation to build successful outcomes. You cannot manage a portfolio if a single emergency forces you to sell it at the bottom. Get the base solid first, then build the rest.

Accept The Hard Truth

Here is the single most liberating fact in investing, and almost nobody tells beginners about it. You are going to be wrong. A lot. Not because you are bad at this, but because everyone is eventually wrong and more often than you think.

Steve Cohen, one of the most successful traders alive, has said his best trader is right only about 63% of the time, and most traders are right barely more than 50% of the time.

Look at baseball, where the greatest hitters in history reached base on roughly a third of their swings. The best in the world at these games fail most of the time and still win.

Stop and think about that for a moment, because it undercuts many of the things that we were taught, or at least believe to be true. If even the professionals are wrong nearly half the time, then obsessing over being right is a losing strategy. The edge is not accuracy. The edge is what happens when you are wrong.

In Portfolio Risk Management, Accepting The Hard Truth, we discussed how accuracy is overrated while survival is underrated. Here is the sentence I want you to focus on.

“The investors who survive the longest are not the ones who are right most often; they are the ones who make sure that being wrong never takes them out of the game.“

That’s it. That is the entire job of managing your own portfolio. Every time you invest, the only goal is to keep your losses small enough to survive, and let your winners run long enough to matter.

Manage Risk Like A Professional

So if survival is the goal, how do you actually build it into a portfolio? Professional risk managers, from hedge funds to trading desks, lean on the same three tools.

• Position sizing,
• A "sell" discipline, and
• The self-control to follow both.

None of those tools is complicated; it is just that most investors ignore them, which is exactly why most investors underperform.

Start with the most powerful and least appreciated of the three. Position sizing. How much of your money you put into any one bet matters far more than the bet itself. Research suggests that sizing drives the vast majority of a strategy's risk-adjusted results, meaning how much you risk matters more than what you buy.

The logic behind position sizing and risk management, while brutal, is also elegantly simple. If you risk 1% of your account on a position and you are wrong, you lose 1%. That loss, while painful, is survivable and quickly recoverable. However, if you risk 5%, 10%, or more on a singular position or sector concentration, a losing streak will dig a hole for you very quickly.

This concept is important because it turns the same math of loss from the third article into a tool. A small loss can be recovered in days or even weeks, but a large one can end your entire plan. This is why professional investors generally risk only a controllable amount of their investment capital on any single position. This is precisely so that no single mistake or unlucky streak can ever take them out.

No, this is not exciting. It also will not “make you rich” quickly; however, it is the secret to survival, engineered on purpose. And notice the quiet second benefit. When losses are small, they reduce the panic and bad decisions that the second article tries to cure. Good sizing protects both your capital and your judgment.

That is the easy part. The second tool, the most critical and difficult to use, is the “sell discipline.” Here is a simple process to follow:

“Before you ever buy a single share of anything, decide the price at which you will admit you were wrong and get out.”

Write it down and make it sacred.

Legendary investor Bill O'Neil had a rule to cut his losers at 7% or 8%. Warren Buffett's first rule is simply do not lose money; the second rule is to remember the first.

The specific number matters less than the commitment you make, and the one unbreakable law is this.

"Never, ever move your stop farther away to avoid taking the loss".

That is not patience or discipline. That is how a small, planned loss becomes a catastrophic one. If you want a simple version, a moving average, such as the 50- or 200-day line, gives you a rule that adjusts as prices rise.

The third tool is the one no chart can give you. Discipline.

"A rule you abandon in the heat of the moment is worse than no rule at all, because it gave you false confidence going in.

This is where the probabilistic mindset helps. The same mindset a poker player trains, as discussed in "What Poker Can Teach You About Investing."

Professional poker players do not set out to win every hand. They are quick to fold the bad hands cheaply, and they bet big on the good ones. Above all, unless there is an odds-based certainty of a win, they never commit so much capital that a single loss ends the night. As in poker, the same goes for investing:

“If you run out of chips, you are out of the game, no matter how good your reads were.”

How The Greats Actually Do It

Here is something worth noticing about every name we have mentioned. Value investors and macro traders, quiet compounders and aggressive speculators, they could not be more different in style. Yet on one point, they are absolutely identical.

• Every single one of them obsesses over not losing money.
• They never focus on how much money they will make, and
• Not one of them, in a century of collected wisdom, ever recommended that you simply buy, hold, and hope for the best.

That advice does not come from the people who got rich investing. It comes from the people selling you the product.

Start with the man most often held up as the patron saint of buy-and-hold. It is a misreading of Warren Buffett. He buys only with a margin of safety, concentrates his bets only when the odds are overwhelming, and sits on enormous piles of cash, recently a record, whenever prices get expensive by his own favorite yardstick. His first rule of investing is not "hold forever." It is to "never lose money." Then, as noted above, his second rule is never to forget the first. That is a risk manager talking, not a buy-and-hoper.

Now, cross to the other end of the spectrum, the aggressive macro traders, and the message does not soften. It intensifies. George Soros and Stanley Druckenmiller built one of the greatest track records in history on a single insight.

"It does not matter how often you are right. What matters is how much you make when you are right and how little you lose when you are wrong."

Paul Tudor Jones says the most important rule is to play great defense, not great offense, and that he spends his days thinking about losing money rather than making it. These are among the boldest risk-takers who ever lived, and they are the most obsessed with risk of anyone in the room.

The great investors that we all admire and try to emulate in some way, say it more calmly. However, they all mean exactly the same thing. For example, Howard Marks defines risk not as volatility but as the probability of permanently losing money. Marks leans defensively precisely when everyone else feels safe.

Ray Dalio built the world's largest hedge fund on diversification and balance. He has often warned that the moment you stop worrying is the moment you should start. Seth Klarman holds cash, and sometimes a great deal of it. Why? Because he refuses to buy until the price offers real protection. He believes the first job is to avoid losses, not to chase gains.

Even the pure traders, the ones with no interest in a company's story at all, live by the identical law. Jesse Livermore made his fortune by cutting losers instantly and sitting patiently on his winners, and he lost everything the times he broke his own rules. Bill O'Neil never let a loss run past 7 or 8 percent. Steve Cohen's firm and Izzy Englander's Millennium hand their traders hard loss limits, and if you breach the limit, you lose your capital allocation, no argument.

Here is the one point I want you to take away from this section:

"The entire industry that manages money for a living is built on one foundation, and it is not hope. It is controlling the loss."

"Wait a second, Lance, Jack Bogle, the father of the index fund, told everyone to just buy and hold?"

Not quite. Bogle told you to buy low-cost index funds, automate your contributions, and stay the course through a disciplined plan. That is a world away from buying on a tip and hoping for the best. His advice was rigorous, rules-based, and relentlessly focused on costs and behavior. Even the closest thing investing has to a buy-and-hold prophet was really preaching discipline. Never hope.

"In a century of collected wisdom, not one great investor ever said: buy, hold, and hope. Every one of them managed risk first."

That is something to think about the next time someone hands you a comforting chart and tells you the whole secret to success is to buy and hold and never look. Instead, ask yourself why not a single person who actually got rich investing agrees with them.

The “investing legends” of our time do not “hope,” they “prepare.”

• They all follow a discipline,
• Size their bets so no loss can end them,
• Decide their exits before they enter.
• Hold cash when nothing is cheap, and, most critically,
• They treat the avoidance of ruin as the first job rather than the last.

That is the thread running through all of their collective wisdom, and it is the thread running through this entire series.

Stand On The Shoulders Of Giants

Here is what is most important. Those patterns that run through all the investing greats are not a coincidence. The greatest investors and market observers of the last century left behind a body of hard-won rules, forged over market cycles. The striking thing is how completely they agree.

Bob Farrell distilled decades at Merrill Lynch into ten market rules. The legendary investors from Marks to Grantham to Livermore preached their own versions. I have collected these in several places, from Farrell's ten rules to fifteen rules to win the long game and the ten rules from the legends themselves. However, when you strip them all down to their core, the same handful of truths keep appearing.

Print that table. Tape it somewhere you will see it when the market is testing you, because that is exactly when you will be tempted to break every rule on it. These are not my invention, but rather they are the collected scar tissue of the people who survived the cycles you have not lived through yet. When bullishness runs to excess, the same rules apply, only harder, which is why I keep a version of them for navigating excess bullishness and another for the volatile markets that inevitably follow.

Three Ways To Run A Portfolio

"Great, tell me exactly what to do."

I wish there were just one method that everyone could follow, and I know you were probably expecting a specific style to adopt. However, there is no single right answer. There are really three legitimate ways to run a portfolio, and the best one is the one you will actually stick with. What matters is not which lane you pick; it is that you add risk management to whichever you choose. So, what are the three paths you can take:

1. The disciplined indexer. You own a low-cost, broad-market fund as your core, automate your contributions, and rebalance on a regular schedule. Crucially, you have a plan to reduce risk when the evidence clearly turns. This is buy-and-hold with a seatbelt, and for most people, it is probably sufficient.
2. A rules-based tactical investor. In this process, you still keep it simple, but you shift your risk exposure up or down based on objective signals, trends, valuation, and momentum. This is more work and requires strong discipline, but you lean with the odds rather than riding every cycle all the way down.
3. The active investor. This approach involves purchasing individual securities with a margin of safety, as discussed in the first article. It offers the most control but demands the most work, discipline, and temperament.

Any of these three approaches can win if you are willing to follow the rules strictly.

The only approach that consistently fails is the fourth one. This is the one that nobody admits to, but is probably by and large the most followed. Does it sound familiar?

Buy on a tip, hold on hope, and manage nothing.

The Long-Game Playbook

Let's put the whole plan in one place. This is the entire series, distilled into a sequence you can actually follow.

At the beginning of this series, we showed you a seductive chart of a dollar growing into a fortune, and the promise that you just had to buy and hold to get there. Now, five articles later, you know the truth is certainly richer and more demanding than that.

• Yes, own stocks for the long run.
• But do it as an investor, not a speculator.
• Be aware of your own psychology.
• Have respect for the math of losses, valuations, and timing.
• Avoid swallowing the comfortable myths.
• Lastly, above all, have a strict plan that manages risk.

Inevitably, the market will test you. The only question that matters,, either today or when the test comes, is whether you are still standing afterward.

The greatest investors who ever lived never once told you to buy and hope. Neither will I.

To “win the long game of investing” was never about being the smartest person in the room or calling the exact top or buying the precise bottom. It is, and always has been, about staying in the game long enough for compounding and discipline to do their slow, unglamorous work.

All of that is entirely within your control, not the market’s returns or the next headline. Just your own, personal goals, risk tolerance, and behavior. When you learn to control your emotions and master the basic rules, the “long run” finally becomes something you get to keep.

And remember, the promise on that chart was never really yours to begin with.

If you have read all five parts and want help turning this plan into a portfolio built around your goals and your risk, that is exactly what we do at RIA Advisors. Every day, for real families, with real money on the line. Schedule a complimentary consultation at RIA Advisors, and let's build the thing that keeps you in the game.

Sources & Notes

1. Lance Roberts, "Portfolio Risk Management: Accepting The Hard Truth," RIA Advisors. realinvestmentadvice.com
2. Lance Roberts, "15 Investing Rules To Win The Long-Game," RIA Advisors. realinvestmentadvice.com
3. Lance Roberts, "The Rules Of Bob Farrell: An Updated, Illustrated Guide," RIA Advisors. realinvestmentadvice.com
4. Lance Roberts, "Speculator Or Investor: 10 Rules From Legendary Investors," RIA Advisors. realinvestmentadvice.com
5. Lance Roberts, "Excess Bullishness: 10 Rules To Navigate It," RIA Advisors. realinvestmentadvice.com
6. Lance Roberts, "Investing Rules To Navigate Volatile Markets," RIA Advisors. realinvestmentadvice.com
7. Lance Roberts, "Poker & Gambling Can Teach You To Be A Better Investor," RIA Advisors. realinvestmentadvice.com
8. Position-sizing survival illustration assumes five consecutive losses at a fixed percentage of capital risked per trade. Trader and hitter success-rate figures are drawn from the risk-management article above and public baseball records.

The post Portfolio Risk Management: Winning The Long Game (Chapter 5) appeared first on RIA.

🔎 At a Glance

• September Market Weakness: The Setup Has Teeth
• Market Brief & Technical Review
• From Lance's Desk: US Debt Trap: A Crisis Without A Calendar - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - A Bond Scare

September, so far, is living up to its reputation. The market slipped to the 50-day moving average, with the tape taking orders from crude oil. For the week, crude rose about 9% over four sessions, which pulled the 10-year Treasury yield higher right along with it, closing just under 5%. The corners of the market that hate higher rates slid while the S&P 500 dipped 0.68% to close the week at 7,666. However, that rather lackluster headline conveniently hides the real story beneath it.

Take a look at the spread between markets. Small caps fell 2.38% while the Dow dropped 1.51%. The equal-weight S&P index gave up 1.87% while the cap-weighted index, by contrast, lost less than a point. The Nasdaq-100 barely budged, declining just 0.52%. When the average stock falls three times as hard as the index, leadership is narrowing, not broadening. As we have flagged in recent notes on the AI complex, a market carried by a handful of names runs with a thin margin for error.

Of course, the big news this week was the inflation data, which gave the bond market the excuse it needed. Headline CPI ran at 3.4% over the past year, and remains sticky, while core CPI remained at 2.4%, just above the Fed’s target.

On the producer price side, inflation told a louder story, with PPI jumping 0.4% on the month and the annual rate accelerating to 5.4% from 4.8%. However, that number, while higher than expected, will be revised lower with the benchmark revisions at the end of the month.

Overall, it was goods pricing that did the damage, which rose 1.1%, with diesel alone leaping 24%. Even core producer prices printed at 4.6%. However, while the bond market was jolted, the reality is that this was an oil shock rather than a sign of an overheating economy. The former doesn’t justify a Fed rate hike; the latter would. Neither report was a disaster, but neither one gives the Fed a clean reason to hike rates.

On a cross-asset review, the moves fit a “rate scare.” Gold fell, the dollar remained flat, and volatility lifted off its lows without anything close to panic. However, the real story remained below the surface in the cyclical and rate-sensitive groups, which dragged lower all week.

The Fed meets Tuesday and Wednesday next week, with the market still leaning toward a quarter-point hike. Firm headline inflation and a crude oil spike are not the backdrop a central bank is likely to hike into, particularly with a softening labor market.

Watch the long end into the decision. If oil keeps running and the 10-year pushes above 5%, the multiple on this market gets much harder to defend. The narrow leadership that propped everything up all summer would be the first thing to give way, which wouldn’t be a surprising outcome for the month of September heading into the midterm election cycle.

📈Technical Backdrop - Momentum Rolls Over, What Next?

I will tell you one thing: you have to give the bulls their credit. This past week was the perfect setup for a sharp sell-off in the market.  Corporate buybacks are sidelined, interest rates spiked, and oil surged, pushing inflation higher. If there was ever a case for a pullback, it was this past week. Nonetheless, the correction that we have discussed over the last two weeks stopped right where the first line of support sits. The S&P 500 closed the week at 7,666, down 0.68%. The part that matters happened on Thursday, with the index trading down to 7,595 and closing dead on its 50-day moving average near 7,600. That was our initial downside target, and the market met it up to that point before Friday's bounce lifted the price back above the line.

While the 50-DMA held on the first test, overall momentum remains another matter. RSI sits at 50.9, dead neutral, down from the high-50s a week ago. The MACD signal has crossed below its signal line, keeping downward pressure in place into the end of the quarter. Furthermore, the histogram has turned negative, adding to our caution. While the market held support, it did so with weakening momentum, which is the definition of an undecided tape.

From our vantage point, the breadth story is the bigger worry. The equal-weight S&P fell almost three times as hard as the cap-weighted index this past week. Most notably, it was small caps that led the whole thing lower, with volume telling the same story. Of course, the spike in crude oil didn’t help and forced the heaviest selling in the rate-sensitive names, rather than the index leaders. As noted, breadth is the key to a sustainable bull market rally. The current breadth is a warning, but not yet a sell signal.

This coming week keeps our focus on risk management. From that standpoint, we continue to recommend trimming the most extended winners back toward model weight into any push toward the old highs, rather than chasing them. The 50-DMA near 7,600 is the support line that decides our next moves. If we hold it, and the uptrend off the spring lows stays intact, we can keep exposures near normal levels. However, if we lose that support on a closing basis, the next real floor sits much lower at the 200-DMA near 7,158. We suggest keeping some dry powder heading into the Fed rate decision and next Friday's option expiration.

Heading into the end of the month and the quarter, there is one level that dictates portfolio strategy into October. A weekly close back above 7,796, the August record, says the buyers have reclaimed control. A close below 7,600 signals that the 50-DMA has failed and that the market wants deeper support. Everything in between is noise. And next week brings two catalysts big enough to force the break. Trade the level, not the narrative.

🔑 Key Catalysts Next Week

As mentioned throughout the commentary so far, there are two key events next week, and both are large enough to set the tone for the quarter. More importantly, they land 48 hours apart.

The first is the Fed. The FOMC meets Tuesday and Wednesday. The decision, a fresh set of projections, and Warsh's press conference all hit on Wednesday afternoon. The market still leans toward a rate hike. However, as noted above, I think this week's data made the call harder, not easier. A central bank does not like hiking into a 3.4% headline inflation print that was primarily a function of a temporary crude spike, so the real story on Wednesday may be who dissented, rather than the lack of a rate hike.

The second catalyst is purely mechanical. Next Friday brings the options and futures expiration, known as "quad-witching," which occurs four times a year.  Notably, this one is set up to be a record in size, which is unsurprising given the surge in options trading in the markets over the last couple of years. However, historically, expirations this large can pin price to the big strikes. Then they release it hard once they clear. Layer that on a Fed decision 48 hours earlier, and the week has a real setup for an outsized move.

The economic calendar around the Fed is full. Retail sales, industrial production, housing starts, the regional Fed surveys, and weekly jobless claims all print across the week. Retail sales carry the most weight. Consumer resilience is the last leg holding the soft-landing story together. A soft print would land badly, coming the morning after the Fed. There are no Fed speakers on the slate. The pre-meeting blackout window sees to that.

Earnings are thin in the gap between quarters, which gives macroeconomic data much greater weight. FedEx is the marquee large-cap report, worth a look as a read on shipping demand and the industrial economy on Friday.

The asymmetric risk is a hawkish surprise from the Fed. Whether the market is priced for a hike remains to be seen. However, if Warsh delivers a hike, the rate-sensitive trade may have already priced it in, along with the bond market. In other words, a rate hike might turn out to be a relief for bond traders after all.

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💰 This Time Is Different?

For every secular bull market, there is an eventual secular bear market. The next leg of the full-market cycle inevitably begins where everyone believes “this time is different.” There were two important charts this past week that should at least lend a momentary pause. The first was from Ned Davis Research, showing the market (on a log scale) is now trading above the upper limit of its long-term trend. The previous extreme was in early 2000, for reference.

Secondly, corporate earnings just broke above a trend that had contained them for more than 90 years.

Currently, it is not surprising that, given the advancement of AI, surging earnings growth, and bullish markets, investors inevitably come to believe that “this time is different.” The question we want to explore today is “Is it really different this time,” or just a normal secular cycle playing out in real time?  

Earlier this month, I argued the AI bears are right about the excess but may be wrong on the trade. So let's put the bull case on trial and see what holds.

What's Actually Driving The Breakout

Let's start with the good news, because there is plenty of it. Second-quarter S&P 500 earnings grew roughly 31% year over year on an adjusted basis, well ahead of the 23% the Street had penciled in before the season. Bloomberg calls it the strongest non-recession-recovery profit growth in its data going back to 1992. AI infrastructure did most of the heavy lifting. By BlackRock's math, AI-related names drove close to 60% of the index's earnings growth, and three hyperscalers account for roughly 70% of what analysts expect for the full year.ar.

Yes, there are reasons to be skeptical of the earnings growth, such as one-time investment gains that are boosting the numbers. However, there is a part that the bears keep glossing over. The rest of the index is finally pulling its weight as well. When you strip out energy, and the AI build, and the other roughly 490 companies still grew earnings 14% in the second quarter, a number that would headline most years on its own. The “broadening” everyone keeps asking for is finally showing up in the profit data itself, not the hope column.

This rally is earnings-led, not multiple-led, and that single fact is what separates it from 2000. Look at the revisions. Forward earnings estimates have climbed for most of the year, while the forward multiple has drifted lower. Price has been chasing profits, not the other way around. Hyperscaler capital spending is running north of $700 billion this year, up more than 80%, funded out of cash flow rather than junk debt. Furthermore, the hyperscaler capex is REAL. The question was never whether the spending exists. The question is what you pay to own the earnings it produces.

The Pain Trade Still Points Higher

However, the real risk to the bear case lies in the sentiment. You have a market compounding 30% earnings growth, and investors are positioned as if a recession just started. Sentiment across both the AAII survey and Goldman's own indicator sits firmly bearish. Nasdaq-100 short interest is up 35% since June. A sharp third-quarter de-grossing has pushed fundamental long/short net leverage into the 6th percentile of the past year, gross tech exposure sits in the 43rd percentile, and roughly $163 billion in cash is parked on the sidelines waiting for a pullback that refuses to arrive.

Of course, the obvious is: “If everyone is already bearish, isn't that itself the bullish tell?” The answer to that is “mostly, yes.” Strong earnings, light positioning, elevated shorts, and a mountain of idle cash are the exact ingredients of a “pain trade” that grinds higher and forces the underinvested to chase. Such is the setup that keeps me long into the highs even while I distrust them.

A good example is that single-stock short interest just hit its highest level in more than fifteen years. Every one of those shorts is a future buyer the moment the tape refuses to break. That's fuel, not a warning, at least for now. The warning is in the next section.

The Asterisk On “This Time Is Different”

Here's the problem with the clean bull story. The multiple only looks reasonable because it's sitting on peak earnings. The S&P trades near 25.6 times trailing profits. That runs above the long-run average, and it runs above the typical reading at prior bull-market peaks. The Shiller CAPE just hit 41, its 96th percentile since 1980, a zone AQR ties to something like 3.9% annual returns over the next decade.

While there is a lot of focus on the market price, the risk was never really the “P.” It's the “E.” When earnings break above a trend that held for ninety years, they are, by definition, above trend. And above-trend things are the things that mean-revert. A “reasonable” forward multiple computed on earnings that later prove to be a cycle peak is one of the oldest traps in the book. Such is the quiet danger in every “this time is different” market: the story is usually true right up until the math stops cooperating.

How These Breakouts Usually End

As we have discussed previously, Bob Farrell's Rule #4 has aged well for a reason. "Exponential moves," he wrote, "usually go further than you think, but they do not correct by going sideways." That's the uncomfortable geometry of a breakout above a nine-decade trend. It can extend beyond the skeptics' ability to stay solvent, and it can still end with a snap rather than a slow drift back. Both things are true at once.

So, in my view, there are only two ways this will eventually resolve, and the market is currently pricing the first option with near 100% certainty.

1. Either AI capital spending converts into durable returns and record margins hold, in which case earnings grow into the price, and the bull runs on. Or,
2. Capex depreciation starts hitting the income statement, AI demand hits an air pocket, margins normalize, and profits fall back toward the trend they just escaped.

Here is the most important point. Whatever event causes the “E” to revert towards its long-term mean, the “P” will be repriced lower. I laid out the arithmetic of that second path in Why Crashes, Timing and Valuations Still Matter, and the math is unforgiving.

Nothing about a valid breakout tells you which path you're on until you're well down it. That's precisely why you don't have to pick. You participate in the move while it runs, and you pre-commit to the exit before it ends.

What Should Investors Do Now

So, what does all this mean for your portfolio heading into next week? Mostly, nothing. However, over the longer-term time frame (next few quarters to a couple of years), this is where the two halves of the argument stop fighting and start cooperating. Is "this time different?" Most likely not.

First, the near-term evidence remains bullish. Both momentum and washed-out positioning suggest that investors remain invested for now. However, the longer-term evidence, including price action, stretched valuations, and above-trend earnings, clearly suggests that stronger risk management protocols should be implemented.

The reality is that you can hold both views without contradiction, and from our view, you should.

It isn’t a difficult plan to implement; it just requires a willingness to potentially give up some gains if that market moves higher near term, which is likely. Ride the trend, harvest the winners back to weight, spread into the parts of the market that are cheaper and finally growing, keep real ballast in bonds and cash, and write down your sell discipline today while your head is clear, rather than in the middle of the reset.

Will that keep you from giving back some of the last leg of the move? Yes. Will it keep you from riding a ninety-year breakout all the way back into the channel it came from? Also yes. I'll take that trade.

The trend is your friend, right up until the bend at the very end. Position for the friend. Prepare for the bend.

🖊️ From Lance’s Desk

This week's #MacroView blog explores Wall Street’s latest doom thesis: the Fed is trapped, a US debt trap is nearly here, but it never names a date, and the data says the trap door isn’t opening.

Also Posted This Week:

• Hike Or Hold? Debating The Coming Fed Decision - RIA - by Michael Lebowitz
• Investing Myths Dismantled (Chapter 4 of 5) - RIA - by Lance Roberts

📹 Watch & Listen

Markets have fallen for three straight sessions and are now testing the S&P 500’s 50-day moving average, the first key target for this pullback. While momentum remains on a sell signal, markets are becoming oversold enough to support a potential bounce.

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

The market struggled again this past week as September continues to play out to form. Energy and Technology gained ground, as interest rate sensitive sectors eased. Overall, the market remains well deviated above longer-term moving averages but has reversed some of its previous overbought conditions. A majority of sectors are entering more oversold conditions, so a rotation from Energy and Technology to other areas of the market seems most likely.

📐 Technical Composite: 68.63 - Overbought Reversing

The technical condition eased mildly again this past week as the market stalled. However, overall, the market remains technically overbought, and sentiment remains bullish for now with no significant technical breaks. Indicator does suggest more struggles for the market next week.

🤑 Fear/Greed Index: 63.20 – Investors Reduce Bullishness

Even though the market posted a positive return last week, the underlying allocation and sentiment to the market reversed somewhat. There was a continued drop in the Commitment of Traders equity allocations, and sentiment declined over the last two weeks. While not a significant warning yet, the reversal in positioning is worth watching.

🔁 Relative Sector Performance

Sector performance has diverged over the last couple of weeks, with Energy and Technology now extremely overbought, and Industrials, Discretionary and Real Estate the most oversold. A risk-off rotation from the Megacaps and Energy stocks (due to a drop in oil prices) seems highly probable. As noted below, this is a "risk aware" market currently and increasing controls seems logical.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of September 11, 2026, with the S&P 500 at 7,656.98, the Money Flow Breadth Ratio (MFBR) stands at 70%, down from a peak of 80% set 4 weeks ago and falling versus 75% the prior week. The trailing four-week change is still -10 percentage points, but the near-term trend has rolled over. This places the indicator in overbought territory (70-75%). The raw breadth signal still reads BUY, but that is the momentum read, and at these levels the MFBR works as a contrarian indicator. The setup that matters is the one now in place: a stretched reading that has stopped rising and turned down from its peak. Historically that combination has led to below-average - and in the 75%-plus zone outright negative - short-term forward returns, so the model reads this as a risk-off signal rather than a green light to add risk.

The 25-year backtest is why the grid trims here rather than adds: the 75%-plus zone has averaged -0.8% over the following 4 weeks and -0.8% over 13 weeks. Direction reinforces it - in the 70%-plus band the 26-week win rate is 72.2% once the gauge is falling versus 76.5% while it is still rising. The same logic runs in reverse at the lows, where sub-30% washouts have carried the strongest forward returns in the study.

Breadth that is this stretched and has already turned lower is a profit-taking signal, not a chase signal. The model's message is to sell into strength, move down to the target weight, and reassess next week. A move back above the 80% peak would reset the momentum read; further deterioration would confirm the risk-off turn."

📊 Sector Model & Risk Ranges

Four weeks ago we noted that several sectors of the market were hitting extremes which typically denotes a good opportunity to reduce risk and rebalance holdings. That remains good advice as the market continues to consolidate within a small trading range. Energy, Technology and Goldminers are the most deviated from their long term means and should be rebalanced to target. Bonds are extremely oversold and if there is a risk off rotation, we could see money flows into bonds as soon as next week.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post This Time Is Different? Earnings and Price Break 90-Year Trends appeared first on RIA.

Wall Street's latest doom thesis says the Fed is trapped and a US debt trap is nearly here, but it never names a date, and the data says the trap door isn't opening.

Every few months, a new essay declares that the US debt trap has finally sprung. The latest one making the rounds from The Economist is well written and genuinely unsettling. It argues that Washington has borrowed so recklessly that the Federal Reserve no longer dares to raise interest rates. Doing so, the piece warns, would detonate the whole structure and send financing costs spiraling out of control. It's a compelling story, great for clicks and views, and I've been reading versions of it since the 2011 credit downgrade.

Here's the problem with the "US Debt Trap" argument, or any of the myriad variations on the theme: it never comes with a date. Why is that important? Any piece of analysis must include three critical aspects to provide value.

1. A specific date when the "crisis" will occur. Without a specific date, the analysis can not be judged for accuracy or validity.
2. What will the crisis be specifically? A debt default, financial contagion, market crash, economic recession, etc.
3. Most crucially, what will be the end result of the crisis and, specifically, when will it be over?

Without those aspects, and most importantly, without a date the event will occur, the analysis isn't a "forecast," it's a "mood."

A good example is Ray Dalio, who almost annually predicts that a financial crisis is approaching.

• March 2015 – Hedge Funder Dalio Thinks the Fed Can Repeat 1937 All Over Again
• January 2016 – The 75-Year Debt Supercycle Is Coming To An End
• September 2018 – Ray Dalio Says The Economy Looks Like 1937, And A Downturn Is Coming In About Two Years
• January 2019 – Ray Dalio Sees Significant Risk Of A US Recession
• October 2022 – Dalio Warns Of Perfect Storm For The Economy (That was also the stock market low.)
• September 2023 – Dalio Says The US Is Going To Have A Debt Crisis

But you can even go further back than these when he wrote about some of his biggest mistakes about a decade ago:

“The biggest of these mistakes occurred in 1981-’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress.“

Even though Dalio understands his mistakes from 1981 to 1982, he has been repeating them over the last decade. I am certainly not picking on Ray Dalio; he is a brilliant person with a wildly successful track record of managing money.

"However, investors who listened to Dalio’s predictions of a coming “depression” a decade ago missed out on one of the most significant bull markets in U.S. history."

The Genre of the Dateless Crisis

The doomsday fiscal essay has become its own literary form.

• It opens with a scary aggregate,
• Moves to a chain of plumbing that "screams desperation," and
• Closes by waiting for a "trigger" that is always just over the horizon.

The author of this latest piece in The Economist even hands us the tell by quoting Rudi Dornbusch's famous line that:

"A crisis takes far longer to arrive than you think possible, and then arrives faster than you ever imagined."

That is not only a true statement, it is also the perfect alibi.

That is because any warning built on that adage can never be wrong, only early. When the reckoning fails to show, the answer is that the "trigger" simply hasn't been pulled yet. This particular essay ends exactly there, nominating a contested midterm election as the possible detonator. Such is the structure of every dateless prophecy: unfalsifiable by design. You cannot disprove a forecast that refuses to name a year.

Make no mistake, I have sympathy for the fiscal hawks. I've written many times that the long-run trajectory of federal debt is a real problem that Washington keeps refusing to face. But there's a wide gap between a slow-moving structural risk and an imminent "event," and collapsing the two is precisely how you frighten investors out of the market for a decade and cost them the compounding that actually funds a retirement. Such is the quiet damage these essays do.

The Trap Needs a Hiking Cycle That Isn't Coming

The entire "US debt trap" rests on a single load-bearing assumption, which is that the Fed will be forced to jack rates sharply higher to fight inflation, and that the higher rates will then bankrupt the Treasury on its next rollover. Pull that assumption out, and the trap door doesn't open. Let's take a look at the data.

The Fed has held its policy rate at 3.50% to 3.75% for five straight meetings. At the July meeting, three regional bank presidents dissented because they wanted rates HIGHER, and the voting majority overruled them.¹ The IMF is no cheerleader for US fiscal policy. It described the current rate as "close to neutral" in its April Article IV review.² Neutral is not "trapped." Neutral is roughly where a central bank wants to sit when it is neither stepping on the gas nor standing on the brakes. Such is not the picture of a monetary authority that has lost control of its own instrument.

"But Lance, inflation is running near 3% and drifting the wrong way." 

Correct, and this is where it gets interesting. That inflation push isn't a wage-price spiral from an overheating economy with runaway payrolls. It's an energy shock that led to a jump in oil prices after the conflict with Iran, layered on top of tariff passthrough into core goods.³ 

The IMF expects both effects to fade and core inflation to drift back toward the 2% target during the first half of 2027.² Meanwhile, the July employment report showed an outright loss of jobs.⁴ An economy shedding workers while the central bank sits at neutral is not the setup for a forced tightening cycle, and the Fed is not going to make a long-term monetary policy decision based on temporary factors.

There's a deeper irony that The Economist also misses: very high debt loads are disinflationary over time, not inflationary.

“Excess “debt” has a zero-to-negative multiplier effect, as Economists Jones and De Rugy showed in a study by the Mercatus Center at George Mason University.

The multiplier looks at the return in economic output when the government spends a dollar. If the multiplier is above one, it means that government spending draws in the private sector and generates more private consumer spending, private investment, and exports to foreign countries. (Inflationary) If the multiplier is below one, the government spending crowds out the private sector, hence reducing it all. (Deflationary)

‘The evidence suggests that government purchases probably reduce the size of the private sector as they increase the size of the government sector. On net, incomes grow, but privately produced incomes shrink.

In other words, every dollar borrowed to service old debt is a dollar that doesn't fund new production. That drags the natural rate of interest down, not up. The debt burden itself is one of the forces keeping a lid on the runaway rates required by the "US debt trap" doom scenario. I walked through why yields track nominal growth rather than the size of the debt stack in a recent piece on the rate narrative.

Interest Costs: High, Not Uncharted

Now to the scariest number in the whole genre: the claim that interest costs are steaming toward "uncharted waters." The claim I hear most often repeated is that "interest just crossed a trillion dollars and now tops the defense budget." That is a true statement, and when you consider the size of the defense budget, it certainly seems like a scary number. In 2025, the Federal net interest payments ran roughly $970 billion and will clear $1 trillion in 2026.⁵

The chart above is the doom crowd's favorite exhibit, and the line is real. However, looking at that number in isolation is somewhat meaningless unless you scale it to the economy, which is the only fair way to read it. In that view, interest costs were 3.15% of GDP in 2025.⁶ Moreover, notice where that lands in the chart below, which is right around the previous peak set back in 1991, when the republic did not, in fact, collapse into default.

As a share of federal revenue, interest runs near 18.5%. That is again close to the early-1990s high but not "off the charts"⁵. The 4.6% figure that gets waved around as today's reality is a Congressional Budget Office projection for 2036. That is a full decade out, and assumes current law never changes with rates elevated the entire way⁶. That projection is nowhere in the tape.

Where The Economist Is Right

It would be unfair to claim that the entire article was incorrect. There are indeed parts that are correct and deserve respect rather than reflexive dismissal.

First, the deficits are structurally ugly. The federal deficit came in at 5.9% of GDP in fiscal 2025, down from 6.3%. On the IMF's broader general-government measure, it runs in the 7%-7.5% range. Furthermore, debt is set to clear 140% of GDP by 2031^2,5. That trajectory is not sustainable forever, and pretending otherwise is its own form of denial.

Second, the Treasury's tilt toward short-term bills is a legitimate critique. Funding a growing pile at the front end holds down today's interest bill. It also raises rollover risk. The IMF explicitly flagged the rising share of short-maturity debt as a "growing tail risk."² 

However, from a portfolio management perspective, it makes sense for the government to issue mostly short-term bills today. If the Treasury expects rates to fall in the future, it would switch to longer-duration bonds.

However, none of that makes the debt stock itself the trigger for the "US Debt Trap." Such is a point I've laid out separately in what government debt actually does and doesn't do.

Third, the plumbing point is fair. Hedge funds running the Treasury basis trade with heavy leverage did amplify the March 2020 dysfunction, and both the IMF and the Bank for International Settlements have warned the structure could seize up again under stress. That's a real financial-stability concern, and it's the part of the essay I would underline rather than dismiss.

However, here is where The Economist and I part company - all three are risks to manage in portfolios, not proof of an imminent detonation.

Furthermore, there is evidence that the doom genre always steps around. The whole debt-to-GDP scare rests on an unstated premise: that, above some round number, a crisis becomes automatic. If that were true, Japan would have collapsed a generation ago. Tokyo carries gross government debt north of 230% of GDP, close to double the roughly 120% the US runs. It has worn the developed world's heaviest debt load for decades.¹¹ By the logic of this essay, Japan should be a smoking crater. Clearly, Japan remains functional economically, its bonds still trade and haven't defaulted, and its government still pays every coupon.

So, the question is why Japan has escaped the reckoning and what this potentially means for the United States.

• First, the mechanics matter far more than the headline ratio. More than 90% of Japanese government bonds are held at home, the Bank of Japan alone owns roughly half of them, and every yen of that debt is denominated in a currency Japan prints itself.¹¹ 
• Secondly, the country runs a current account surplus and is the world's largest net creditor. It funds its own government out of its own savings, not the kindness of foreign strangers.
• And lastly, here is the part that should stop the doomsayers cold. Japan does all of this WITHOUT owning the world's reserve currency.

For the "US Debt Trap" doomers, that one line means more than anything else. The reserve currency status is a permanent structural bid for Treasuries and dollars that Tokyo can only envy. On the one variable this essay treats as decisive, America holds the deeper cushion, not the shallower one. 

Now hold that same lens to the US itself, where every absorber Japan leans on exists in a deeper form. America borrows in a currency it prints and runs the deepest, most liquid government bond market on earth. Furthermore, the US holds the dollar as the world's reserve asset, backed by a home base of pensions, banks, and money funds that already park trillions in Treasuries.

Think about it this way: if Japan can shoulder double the load for three decades on weaker ground, the country with the stronger footing can defer its "reckoning" far longer than the doom case dares to admit, and still without a date.

None of this means debt is free, and I won't pretend it does. Japan is a live demonstration of what the real bill looks like, and it is nothing like a sudden detonation. As the Bank of Japan finally exits decades of easy money, JGB yields have climbed to levels unseen since the 1990s. The yen has sagged toward 160 per dollar, and rolling over that debt is slowly becoming more expensive.¹¹ 

The IMF has politely told Tokyo to draw up a credible consolidation plan while it still can. That is the true shape of a sovereign debt problem. It is a vice that tightens over the years through the currency and the interest bill, not a trapdoor that drops open next quarter. Even the world's most indebted government shows you the crisis arrives slowly enough to see coming. It still never comes with a date.

What This Means for Investors

So what do you actually do with all this? The answer is fairly simple: not much. However, that is the point of this analysis.

• A record $7.9 trillion sits in money market funds today, the largest cash buffer in history.⁷ That's the opposite of a system starved for liquidity.
• The 10-year Treasury yields about 4.70%, near a multi-year high but still below the roughly 5% it touched in late 2023, and the curve has un-inverted with the 2-year down at 4.22%.⁸ 

None of that reads like a market in the grip of a confidence crisis or a "US Debt Trap" unfolding.

The honest posture is to respect the long-term math without trading on a catastrophe that carries no date.

The consensus that "this time" the debt will finally break us has held for the better part of fifteen years. Think of the perma-bear fiscal warning as a smoke detector wired to shriek every time somebody makes toast. The alarm is real, the wiring works, and yet the house has not burned down. Eventually, a fire may come, but in the meantime, you can't run your portfolio out of the kitchen with your hands over your ears.

The US does have a debt problem. It's real, it's structural, and it will force hard political choices before this decade is out. But that is a problem we can see coming from ten years away, and it is a problem you can plan around, not a landmine about to go off under your feet tomorrow. The trap this essay describes requires a forced hiking cycle that the data simply does not support, at least not while inflation is an energy story and the labor market is cooling.

When someone finally puts a date on the crisis and is willing to defend it, I'll pay very close attention. Until then, I'll keep managing risk to the market in front of me, not the one in the headline.

Sources

Article under review: Ambrose Evans-Pritchard, “The ingredients are coming together for a US financial crisis,” The Telegraph, Aug. 11, 2026 (citing Steven Blitz, chief US economist at TS Lombard). telegraph.co.uk

1. NPR / PBS / CNBC, coverage of the July 29, 2026 FOMC decision (rate held at 3.50%–3.75%, 9–3 vote, three dissents favoring higher rates).
2. IMF, 2026 Article IV Consultation with the United States and April 2026 Fiscal Monitor (policy rate "close to neutral"; core PCE projected back to 2% in H1 2027; general-government deficit 7%–7.5% of GDP; debt above 140% by 2031; short-maturity debt a "growing tail risk"). imf.org.
3. Trading Economics, US 10-Year Treasury note commentary, Aug. 11–12, 2026 (energy-driven inflation pressure following the US–Iran conflict; September rate decision seen as roughly even odds).
4. CNBC, "Treasury yields drop after surprise jobs loss in July," Aug. 7, 2026.
5. Congressional Budget Office, Monthly Budget Review FY2025, and Peter G. Peterson Foundation interest tracker (net interest ~$970B in FY2025, crossing $1T in FY2026, exceeding defense; ~18.5% of federal revenue; FY2025 deficit 5.9% of GDP). cbo.gov; pgpf.org.
6. Federal Reserve Bank of St. Louis (FRED series FYOIGDA188S: federal interest outlays 3.15% of GDP, 2025) and CBO Budget and Economic Outlook (2026 est. ~3.3%; 2036 projection 4.6%). fred.stlouisfed.org; cbo.gov.
7. Investment Company Institute, weekly money market fund assets, Aug. 6, 2026 ($7.91 trillion, record high). ici.org.
8. Forbes Advisor / Trading Economics Treasury yield data, Aug. 10–12, 2026 (10-year ~4.70%, 2-year ~4.22%; 10-year peaked at 4.75% on July 31, 2026).
9. Federal funds rate history compiled from Bankrate / Yahoo Finance and Forbes Advisor "Federal Funds Rate History" (1981 Volcker peak ~19%; 1989 ~9.75%; 2000 peak 6.5%; 2006 peak 5.25%; 2018–19 peak 2.25%–2.50%; 2021 pandemic floor 0%–0.25%; 2023 peak 5.25%–5.50%; current target 3.50%–3.75%). bankrate.com; forbes.com.
10. Federal deficit as a share of GDP from U.S. Treasury / OMB via Trading Economics and USAFacts, with CBO's February 2026 baseline for the 2026 estimate (2020 ~14.9%, 2021 ~12.4%, 2022 ~5.5%, 2023 ~6.2%, 2024 ~6.3%, 2025 5.9%, 2026 est. ~5.8%; postwar average roughly 2.7% of GDP, 1948–2025). tradingeconomics.com; usafacts.org; cbo.gov.
11. Japan debt and financing structure: J.P. Morgan, "Fiscal Fireworks" (Japan debt-to-GDP ~237%, US ~121%, Jan. 2026); Statistics of the World, "Japan Economy 2026" (over 90% of JGBs held domestically, BOJ owns roughly half, yen-denominated, current-account surplus, 10-year JGB ~2.5% and highest since 1997); W1M and Allianz research (net international creditor position, debt service ~1.7% of GDP, yen near 160); IMF April 2026 Article IV Consultation with Japan (call for a credible medium-term consolidation plan). jpmorgan.com; imf.org.

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