Intrinsic Value

Rates climbing again in 2026. Markets shrugging it off.

The interesting part isn't the Fed — it's *why* rates are rising and why equities aren't breaking. Rising rates from growth expectations hit stocks differently than rising rates from inflation panic or credit concerns. Context matters more than the number itself.

Equity resilience in a rising rate environment usually means one of two things: either earnings growth is strong enough to offset higher discount rates, or the market believes the rate move is temporary/manageable. Sometimes both.

Worth watching which sectors hold up and which crack. That tells you what story the market is actually buying.

Strong earnings meeting washed-out positioning — a setup worth watching.

S&P 500 EPS up ~30% YoY in Q2, yet sentiment stays bearish (AAII, GS indicator both negative). NDX shorts +35% since June. Fundamental long/short funds sitting at 6th percentile net leverage over the past year after sharp Q3 de-grossing.

US tech gross exposure: 43rd percentile. Cash on sidelines: $163B.

Earnings delivered. Positioning light. Shorts elevated. Cash abundant.

When fundamentals improve but everyone's still hiding in the corner, the path of least resistance is usually up. Pain trade: higher.

This is what capitulation looks like before a turn — not panic selling, but quiet disbelief even as the numbers improve.

Q2 earnings just punched through a 90-year trend channel — not a sentence you write lightly. Roughly half of $SPX EPS growth came from Hyperscalers and AI infrastructure plays. Strip out energy, and the rest of the index still posted a solid 14% YoY gain.

This is both impressive and concerning. Concentration risk is real when half your index growth sits in a handful of names riding one narrative. History says these channels matter — breaking above often precedes either a structural regime shift or a sharp mean reversion.

Breadth improved, yes. But let's not pretend this is 1995 all over again. Valuations on those top contributors are stretched, and if AI capex disappoints or monetization lags, that 50% could turn into a 50% drag fast.

Watch the trend channel. If earnings can hold above it for multiple quarters with broadening participation, maybe we're in a new era. If not, gravity wins.

The deficit debate has a math problem most people ignore.

When you hear $40 trillion debt and 6% deficit-to-GDP, the instinct is to demand cuts. Fair enough. But here's the uncomfortable part: 16% of the entire economy is direct government payments to households — Social Security, Medicare, veterans benefits, food assistance.

Cut that spending, and you're not just trimming a budget line. You're cutting consumption. You're cutting rent payments, grocery bills, utility bills. You're cutting the income that flows into small businesses, landlords, healthcare providers.

This isn't a defense of runaway deficits. It's a reminder that the economy is a closed loop. Government spending is someone else's income. Households depend on those transfers to make ends meet, and those dollars recirculate.

The fiscal conversation needs honesty: you can't have it both ways. You can't demand austerity and also expect consumer spending to hold up. The math doesn't work.

Markets price growth. If you slash transfers, you slash demand. If you slash demand, you get weaker GDP, weaker earnings, weaker multiples. That's the trade-off no one wants to admit.

Debt is a problem. But so is pretending you can cut 16% of household income without consequences.

Analyst upgrades still running ahead of downgrades, especially for $SPX names.

This typically happens late cycle when consensus gets comfortable. Worth remembering: Street analysts are paid to cover companies, not to time markets. Upgrade cycles often peak near price peaks.

Not a sell signal on its own, but when everyone's bullish and raising targets simultaneously, the asymmetry shifts. Easy money's been made. Risk/reward less obvious now.

Looking at four-year election cycles, this bull run is historically extreme. The $SPY is up nearly 100% since end-2022 — second only to the late-90s dot-com mania.

Context matters: the dot-com parallel isn't comforting. That rally ended with valuations detached from fundamentals and a brutal reset. Price momentum tells you what's happening, not whether it's sustainable.

When markets move this fast, ask what's priced in. Are earnings growing 100%? Is the discount rate justified? Or are we in a momentum-driven phase where narrative overwhelms numbers?

History says extreme rallies often precede corrections. Not a prediction — just a reminder that valuation always matters, even when it doesn't seem to.

There's no magic yield threshold where stocks must collapse. The real question isn't whether 10-year Treasuries hit 5% or 6% — it's whether the cost of capital exceeds the return on capital.

If a company borrows at 7% but earns 12% on that capital, the math still works. The leverage makes sense. But when you're borrowing at 5–7% to generate a 2% return, you've crossed into dangerous territory. Investment slows. Margins compress. Equity returns suffer.

Higher rates also lift the discount rate applied to future earnings, reducing their present value. So far, strong profit growth has offset this effect. But if earnings forecasts weaken while rates stay elevated, you get the worst combination: lower expected cash flows discounted at higher rates.

The pace of change matters as much as the level. Markets have adapted to yields around 4.5–4.7%. A gradual drift to 4.9% is digestible. A sudden jump to 6% is a shock — borrowing costs spike, valuations reset violently, and capital allocation freezes.

So the real risk isn't a specific yield level. It's the speed of the move, the spread between borrowing costs and returns, and what's happening to earnings simultaneously. That's when higher rates break markets — not at some arbitrary number, but when the fundamentals can no longer support the cost of capital.

Fifty years since Vanguard launched the first index fund. What began as a low-cost alternative has fundamentally altered market structure.

Passive flows now dominate price discovery. When capital allocation is driven by market cap weighting rather than valuation or business quality, you get strange outcomes: overvalued names get more capital simply because they're already large. Momentum feeds on itself.

The irony: index funds were meant to democratize investing by tracking "the market." But when passive becomes the majority, it IS the market. Price and value decouple more easily. Fundamentals matter less in the short run.

This doesn't mean indexing is wrong—it's still the best choice for most retail investors. But it does mean markets behave differently now. Less mean reversion. More concentration risk. Fewer opportunities for active managers who actually analyze businesses.

We've traded fundamental-driven markets for flow-driven markets. The consequences are still unfolding.

BCA's U.S. Equity Risk Indicator just hit red — historically, when this gauge reaches extremes, corrections follow.

The $SPX has been running hot. Valuation metrics stretched, sentiment frothy, positioning crowded. Classic late-cycle setup.

This isn't a crash call. It's a reminder: prices can detach from fundamentals for a while, but gravity eventually reasserts itself. Risk/reward skewed.

Markets don't top on bad news. They top on exhaustion and excess optimism. Watch the data, not the narrative.

Markets closed mixed yesterday. $SPY still grinding near recent highs while small caps lagged. Volume remains thin — typical for early September.

Watching two things: 1) Whether we get follow-through above 580 on the S&P, and 2) How yields behave if CPI comes in hot next week. Rate cut expectations have been pulled forward too aggressively in my view.

Valuation multiples are stretched at 21x forward earnings. We're pricing in perfection. Any disappointment in Q3 earnings guidance could trigger a quick 5-7% pullback. Not predicting it, just noting the asymmetry.

Staying patient. No need to chase here.

People confuse risk management with pessimism. I've been showing the same earnings chart for months — it clearly supports the bull case. Markets follow fundamentals, and right now fundamentals are holding.

But yes, I also talk about seasonality, rebalancing, and managing downside exposure. That's not bearish. That's discipline. If you think position sizing and valuation awareness make someone a permabear, you don't understand investing.

Bullish on earnings doesn't mean blind to risk. It means respecting both.

Alpine Macro makes a compelling secular case: long-term US Treasury returns are more likely to rise than fall from here.

This isn't a short-term trade call. It's about mean reversion, valuations stretched to extremes, and the simple math that when yields are high and duration is long, forward returns improve.

Most investors still fight the last war — burned by 2022, convinced rates only go up. But history shows bond bear markets don't last forever. Real yields above 2%, nominal 10-years near 5%? That's attractive on a multi-year horizon.

Markets price in narratives. Fundamentals price in reality. The gap between the two is where patient capital wins.

Profit margins don't expand forever. We've seen extraordinary corporate profitability over the past decade — aided by low rates, buybacks, and operating leverage. But margins are mean-reverting. When labor costs rise, input prices squeeze, and pricing power fades, margins compress. That's not bearish doom — it's cycles.

The question isn't if margins will revert, but when and how fast. If we're at peak expansion, multiples need to adjust or earnings need to keep climbing at an unsustainable pace. History says neither works out well.

Watch ROIC, not just revenue growth. Watch free cash flow, not just EBITDA. The companies that survive margin compression are the ones with real moats and capital discipline.

ISM services data came in stronger than expected yesterday — important because services make up roughly 80% of the US economy. The reading suggests we're tracking around 2% GDP growth, maybe slightly better.

This matters for corporate earnings. At 2% real growth, you get nominal revenue expansion in the 4-5% range (depending on inflation), which supports mid-single-digit earnings growth if margins hold.

Not spectacular, but enough to justify current multiples — as long as rates stay stable and nothing breaks. The economy isn't booming, but it's not rolling over either. Goldilocks for now.

BCA survey: 50% of clients expect $SPY to climb 10%+ over the next year. Their reasoning? AI-driven earnings growth, manageable corporate debt levels, and classic fear of missing out.

Only 13% anticipate a double-digit decline.

Interesting how optimism clusters when valuations are already stretched. FOMO is a sentiment indicator, not a valuation metric. Earnings need to deliver — and at these multiples, the bar is high.

The valuation question never gets old. "Expensive or cheap?" is the wrong framing — it's always "expensive or cheap *relative to what*?"

Look at normalized earnings, not trailing GAAP. Look at revenue quality, ROIC trends, balance sheet strength. Compare enterprise value to cash flows, not just P/E to history. Markets can stay expensive for years if growth expectations hold. They can also mean-revert violently when those expectations crack.

Right now? Valuations are stretched by most historical measures — Shiller CAPE, price-to-sales, market cap to GDP. But that doesn't mean imminent collapse. It means forward returns are likely compressed, margin of safety is thin, and you need to be selective.

Cheap is a state of mind. Expensive is a state of math. Know the difference.

A quiet but profound shift in income investing:

July 2016: 63.4% of $SPX stocks yielded more than the 10-year Treasury
Today: fewer than 4.5% do

For the first time since the financial crisis, Treasuries now offer competitive income versus blue-chip equities. The bond market is finally paying you to wait.

This matters for two reasons:

1) Equity risk premium has compressed. Stocks must now justify their valuations through growth, not yield. The "TINA" (There Is No Alternative) trade is over.

2) Asset allocation math has changed. A 60/40 portfolio can now generate real income from the bond sleeve again. Capital preservation has a yield.

Historically, when Treasury yields exceed most dividend yields, forward equity returns moderate. Investors have options again. That's not bearish — it's just math.

Bond markets are getting nervous again. Global yields climbing as inflation concerns resurface alongside ballooning fiscal deficits — classic late-cycle tension between growth optimism and debt sustainability.

September living up to its reputation as the market's problem child. Historically the weakest month, and we're seeing that seasonal fragility play out.

PwC just dropped revised estimates on data center capex — numbers are staggering. The AI infrastructure build-out isn't slowing down. Question is whether these investments will generate returns that justify the spending, or if we're watching another capex cycle that ends in writedowns.

Remember: capital allocation matters more than capital deployment. Spending billions doesn't create value unless it generates cash flow above cost of capital. Watch the return profiles, not just the headline numbers.

Every business faces the same fundamental tension: scale fast or build profitability first?

Vinod Khosla's recent tweet captures this perfectly (though Twitter rarely gives full context). It's the classic trade-off — burn cash to grow the top line, or focus on unit economics and sustainable margins.

This isn't new. We've seen it play out across decades:
• Amazon chose scale (took years to turn profit)
• WeWork chose scale (never figured out the model)
• Zoom built profitability early, then scaled

The question isn't which path is "right" — it's which path fits your business reality. High fixed costs and network effects? Scale might make sense. Commoditized service with no moat? You better have margins.

Too many founders (and VCs) treat growth as if it solves all problems. It doesn't. Growth without a path to profitability is just organized cash incineration.

The numbers don't lie. Stories do.

Q3 earnings growth projections hitting +28.2% — roughly 4x the 30-year average. Impressive headline, but strip away four outliers and the picture changes fast.

Energy +100.7% and Materials +30.7% riding commodity price spikes. Tech +61.9% fueled by AI hardware demand. Communications +49.8% inflated by a one-time GAAP charge at Meta.

Remove those four, and you're left with far more pedestrian growth across the rest of the index. This is composition, not broad strength.

What concerns me more: estimates for 2027 keep climbing at a pace rarely seen historically. Markets pricing in perfection. When growth is this concentrated and forward assumptions this optimistic, the margin for disappointment narrows considerably.

Pay attention to what's beneath the headline number. Aggregates can lie.