The Compound and Friends - Why Every Trader on Earth is Watching the 10-Year Treasury Now with Nick Colas

Episode Date: August 24, 2026

On this episode of What Did We Learn, Josh Brown and Nick Colas discuss rising long-term Treasury yields, why real yields not inflation are driving the move, and what higher rates could mean for stocks. Plus, they break down S&P 500 valuations, the earnings revisions powering this year’s gains, three paths to new highs, and more insights from DataTrek’s latest research. This episode is sponsored by F/m Investments and SGVA, the F/m Accumulator Ultrashort Treasury ETF. To learn more about SGVA, visit Fminvest.com/SGVA Sign up for ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Compound Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and never miss out! Instagram: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://instagram.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://twitter.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠ Learn more about your ad choices. Visit megaphone.fm/adchoices

This podcast is sponsored by FM Investments and SGVA, the FM Accumulator, ultra-short Treasury ETF. A quick congratulations to Alex and the FM team on joining forces with Tiro Price. We're excited to see what this next chapter brings for FM and its innovative approach to fixed income investing. That innovation is particularly relevant when you look at how ultra-short treasury ETFs are typically structured. Most pay out monthly cash distributions that investors don't need and don't want. Those distributions come as taxable income that must be reinvested after taxes. Here's an ETF to solve that problem.

The FM accumulator ultra-short Treasury ETF, ticker SGVA. SGVA is structured to avoid unwanted taxable distributions and harness the power of compounding inside the ETF. Instead of monthly distributions, you stay in the same. invest in ultra short treasuries and you choose when to redeem based on your personal cash needs. SGVA, built to grow, not distribute. To learn more, visit fminvest.com slash sgVA. Well, well, well, here we are again. How are we doing, Nick? Very good. How are you? Good. Let me introduce the show real quick and we'll get down to business.

Ladies and gentlemen, welcome to an all-new edition of watching. What did we learn? On today's show, we're doing, I think, the most important topic of the past week for investors, allocators, portfolio managers, hedge funds. This is the thing that everyone's looking at now that we are most of the way through earnings season. And we're very fortunate. I have my friend Nicola is here, Nick, along with his co-founder, Jessica Raib, who is on the bench today for today's episode, not feeling great. But Nick is here. Nick is the co-founder of Datatrek research and the author of Datatrek's morning briefing newsletter, which goes out daily to 1,500 plus institutional and retail clients. Nick and Jessica also have their own awesome YouTube channel. You could find a link to it in the description below. Welcome back, Nick. It's so great to see you.

Great to see you. All right. Are you having a good summer? Very good. How about you? This is a really good one for me, too. So I say this every year. This is the part of the summer where it's almost over, but you almost say to yourself, thank God, I'm having too much fun.

I actually need to get back to work. So this is like that week for me usually. But we're here regardless. So I want to do this. I want to open this segment by just saying typically we talk about the stock market. Typically, what happens in the bond market doesn't really have much of an impact. act on the stock market or the sentiment in the stock market because people just understand it's two different markets.

Sometimes they fluctuate for the same reason. Sometimes they are doing their own thing independent of each other. However, right now, the treasury bond market has come back. It's the front burner of the market conversation because we're seeing some volatility there. We're seeing a lot of narratives being kicked around about what's causing it. And I think it's a great way for us to open up the conversation today. So, Nick, you're talking about long-term treasury yield specifically moving higher. So let us know what we need to know.

Sure. I'm focusing right now on the 30-year treasury because that's gotten a lot of the press. It has broken out to plus 15, maybe 20-year highs in terms of yield. And there's a lot of confusion of what's causing that. So I pulled together a chart that we can start talking about. And this shows you 30-year treasury yields decomposed into inflation expectations. and then the residual, which is called real interest rates. The nominal rates that you see on the screen, the 5.2, 5.3%, can be broken down into how much

inflation investors expect over the next 30 years per year. And then whatever's left over is called the real yield. The red line, which is inflation expectations, has been dead flat pretty much for the last 15, 16 years. This chart goes back to 2010. And it goes between, you call it, one and a half and two percent. it is a or two and a half percent. It is very stable.

The market always knows inflation is coming and it's very stable. Those expectations are very stable. What moves around a ton, meaning a ton, is real rates. What you have left over after inflation expectations. And there are the ones that have broken out. So instead of being, call it 2%, 2.5%, they're not pushing up on 3% in the current environment. and that's the reason for rates being higher.

And it's super important. If you just throw the chart back up for one more second, if you were an investor in TLT, which is a very popular, a long-dated treasury bond ETF out of eye shares, you compounded at almost 8% a year positive through the 2010s. It was a very good money-making investment.

In the 2020s, because real rates have exploded from being negative to being very positive, your Kager, your compounded annual growth rate, over this decade so far has been negative 4.4%. So this went from being a massive money-making trade, being the long end of the curve, to being just very destructive to portfolio returns. And the reason for that is entirely real rates.

Let me just make sure everyone understands and just double-click on that real quick. A kegger of 7.8% a year on a portfolio of long-term treasuries, which effectively, from a credit perspective, are risk-free. The risk that you're taking is duration risk because the interest rates fluctuate. But to be able to earn 8% a year from 2010 through 2019 led to a lot of allocators, including TLT or something like it as sort of a permanent part of their asset allocation. That piece of the puzzle, that piece of the allocation in the last six years,

has been compounding at negative 4.4%. And that's for the risk off asset. A lot of people thought TLT should always be included in allocations because when the market's getting killed or the economy's in big trouble, that should work really well to the upside as a hedge. Your hedge for an overall portfolio should lose money when times are good. And it's worked. But I think a lot of people are now looking at that and saying,

maybe that's not the exact hedge that I want going forward. Yes, precisely so. And by the way, those returns are with coupons reinvested. So that's your total return. That's just sitting there with the asset reinvesting. So it's been tough. And look, that trade even worked in 2020. When everything was falling apart in the pandemic, TLT was rallying.

It was the anchor for a lot of portfolios. It just has been destructive since. Yeah. Okay. Go on. Okay. So that takes care of the picture. And let's talk about what's going on with the next slide.

And here we kind of break down, what is the actual reason for real rates being high-end climbing? And there's, I think, four that are important. First of all, they were very artificially depressed by the Fed. Purposefully so in the early 2010s and 2020s because of quantitative easing, bond buying by the Fed to bring real rates down. The Fed did that, and it worked fantastically well. They got real rates super negative. That encouraged a lot of investments, so mission accomplished.

This is the unwind. This is the unwind. So now we do the unwind and now we have a very stable Fed balance sheet with no bond buying. The second, and I think a theme that we're going to touch on a couple of times in this conversation today is there's been no recessions since 2020 despite a whole range of shocks. 2022's aggressive rate hikes, 2025 is U.S. trade policy shock, two different oil shocks in 22 and 25. And the inevitable conclusion has to be that the neutral rate of interest, the rate at which the Fed keeps rates

over a cycle must be higher than historically has been the case because we've stood up to a bunch of shocks with no noticeable impact on the economy. The third is federal budget deficits remain high and credit qualities becoming into question. I think it's a pretty well-understood topic. And then finally, a new topic is there's a lot of air-related long-term corporate borrowing going on, and that's pulling demand away from treasuries because all of a sudden where companies we're kind of flat issuing long-term debt. Now you have a lot of new players in the market, issuing a lot of long-term debt that is competing directly with the treasury bonds. So the combination, the combination of those factors is why we're seeing real rates keep climbing.

And the conclusion that I've been talking about with my clients is you've got to keep bond portfolio durations pretty short, like under five years, until the U.S. economy weekends, because that'll begin to take away this topic of neutral rates have to be higher, and that should stabilize real rates at the long end of the curve. So, okay, so financial advisors building portfolios with fixed income, the answer to those people would be, you can ladder, but you don't want to be laddered out to 30 years. It's more a stepstool than a ladder.

It's a stepstool. The time to get longer on duration is when the economic data is weakening and the risk of one of these shocks turning into an event. that's where you might want that longer term duration as your portfolio hedge. But we don't have any signs of that right now. It's not that it can't start. There's no reason to think that it is starting. No, and we actually have a counter example of all these shocks since 2020 and no recession,

which in many ways is just astounding. It explains a lot of things in capital markets, not just what's going on in bonds, but it really shows up in bonds in a very pronounced fashion. Right. So to sum up, the resilience of the economy, means the neutral rate should be higher. So that's one reason for it climbing. And then you've got, then you've put the, put the slide right back up. And then you've got the federal budget deficits. I think already year to date out the deficit is already larger than it was for all of 2025.

So that's heading in the wrong direction. And that, that, that, that pulls people out of, feeling very safe in U.S. bonds. They still feel safe, but maybe a little less safe. The artificially depressed part is obvious. I want to double-click, though, on this fourth point. AI-related long-term corporate borrowing, pulling demand away. Chart off, guys. So I think the number is $1.75 trillion in corporate bond issuance this year.

And I think we did a show about this last one. week, I think that's running 20 or 30% ahead of where we were at this time in 2025. And we all have seen the headlines. We've seen Oracle and Meta and Amazon and Alphabet. They're all out in the market raising money. Sometimes they're doing secondary stock offerings, but oftentimes they're doing bond offerings as well. They should.

With the exception of Oracle, these are very high grade credits. They're able to borrow at very low dollar amounts. It's less dilutive than doing this through equity. And the bottom line is the investing public is hungry for these deals. The competition with Treasury's part, I think, is the leap that a lot of people don't make very easily. So could you explain why alphabet selling bonds would impact the price of a long-term Treasury? Sure. As a bond investor, you've got to think about risk, right?

Now, treasuries have been notionally the risk-free rate and still are from an academic standpoint. And certainly, there are money good as far as getting repaid. But I would put it this way. If I told you, I was going to sell you either a Google 10-year bond or a U.S. 10-year treasury, which do you think will trade better? Or which do you think is more notionally secure? Because on the one hand, you have, yes, the U.S. government ability to tax. Great. On the other hand, you have Google's cash flows, which are profound.

And in some ways, Google, I think I could argue, is at least as safe as the U.S. government because it's a global business and very well managed. So as a bond investor, you're thinking, okay, what is risk? We've just seen TLT compounded negative 4% over the last six years. That's real risk. So I think bond investors look at this more holistically than perhaps an equity investor thinks they probably should, but they're just looking for the right amount of yield with relatively little risk. Remember, bond investors are risk-averse. The best they can do is get what they're promised back again, coupons and principal.

They're just looking to get their coupons and get their principal back. That's all they want. And Google is just as likely to do that as the U.S. government. Right. They're not making a bet that Google is going to outperform the NASDAQ or that Google's stock will be higher. The bet is Google will give me back my principal and they're going to pay the interest rate. And there won't be insane volatility along the way toward that. happening, the yield is going to be higher than what a comparable maturity treasury might yield.

And that's because Google is not sovereign, doesn't have the Marines and the Coast Guard and a Navy. But it's got other attributes that maybe in times like these are as or even more attractive than the safety that you feel buying a 10-year treasury. Exactly. And we'll get to this in the last section. but I've been making the argument to clients that the reason the U.S. dollar is a reserve currency is because of the innovation in the U.S., the long-term innovation in the U.S. That is what makes a reserve currency, not just the Army and the Navy and the taxation, but what a society does with its capital.

And Google is an exemplar of doing something clever with your capital. Right. Okay. So competition from Alphabet and Amazon and these other giants selling bonds in the market. So every dollar that goes into a high-grade corporate bond is a dollar that does not go into a U.S. Treasury, which is less demand on the buy side, which means higher yields. Is that what we're saying? Yes, essentially, yes. Yeah, exactly. It's a trade-off every PM has to make. Do I buy treasuries? Now, if you're a pure treasury buyer, yes, of course, you're just buying treasuries. But most fixed income, most RIAs are looking at the whole spectrum of fixed income and saying, where's my best bet? Okay. So now the question, so where the equity market investor then goes to is, well, what does this mean for my stocks? Or what does this mean for the market or the potential for, you know, new investment coming into stocks versus bonds? Like at what point do treasuries, you know, at what point do high, higher yielding treasuries represent new competition for, for example, dollars coming out of a money market fund? Yeah, I mean, the way I think about it is more around the concept of at what level do rates begin to threaten the economy?

Because as an equity investor, you're worried about earnings. You're worried about the volatility of earnings, the strength of earnings. And so the question is, at what level do we get rates? And it was for most of this decade, it's been 5% on tens. If you get to 5% on tens, there's the threat the economy slows down because borrowing costs are higher, economic growth slows, and earnings become touchy. we're not there yet on tens. We're at 470, 472 today.

And so we're not quite there. But I think this is if you want sort of a trigger point, look at tens, look at 5%. If you get there on tens, then at least over the 2020s, the equity market's begun to really jitter. And that's the level I'm looking for. One of the things we're saying on TV, which everybody seems to like and clap at is as long as the pace of, like, As long as the, it's like, in other words, not about the absolute level of the rate. It's the volatility of how quickly the rates get to that level that's more potentially damaging. And so I think you would agree for the most part this summer, rates have been rising.

Now they're rising in the belly of the curve, not just the long end, but it's been orderly. And so people on TV keep saying, yes, but it's orderly. yes, the rates are higher, but the path to hire hasn't been shocking or the velocity of the rates rising has been in check. These are the things that you're hearing people say, and everybody likes hearing those things because it's reassuring. What do you think about that concept, that it's not just the absolute level of rates, but what does the path look like for us to get there?

It's a fair point. And it's fair because if you move slowly, then you have time as an equity investment. to judge how those changes and rates are affecting earnings at your companies. If it happens quickly, you don't have that opportunity. It's just a big shock and rates go to five and what do I do and what's going to happen to my companies. When things go slowly, the market has time to judge and assess and look at what's going to get hurt, look at what's not going to get hurt.

But, yeah, the rate of change does matter. And so far, yes, it has been orderly. That being said, it was not disorderly when the 10s got to 5 and 23. I think it was, and the market still kind of twitched at that point. So I think it is a matter of speed, but I also think that there is a level where equities say, I'm not so comfortable paying 20X for the SB 500. One of the get out of jail free cards from 2022, so in 21, they start the rate hiking campaign, and it's way more aggressive than anything our generation has experienced.

You had to have been around in the 70s and 80s to have seen anything. like it. So that's a really long time without as aggressive a rate hike cycle as what we experienced in 21 and 22. But one of the get out of jail free cards for the stock market was that it just so happened the largest companies in the indices that had the least amount of interest rate risk because they weren't big borrowers were the companies that we were relying on the earnings coming from. And so what they did was they looked at their share prices down 30, 40, 50%, and they committed to getting some religion on spending. Meta is like the poster child for this. They got over their skis in the bubble in 2020 and 2021, funding a lot of projects with no

ROI. They cut all that out. The stock prices recovered. But we were never really in danger from 5% interest rates or from the velocity of that rate rise because the largest companies weren't big bond issuers, didn't have that role risk. In fact, it was the opposite. They refinanced so much of their debt at 0% in 2020 and 2021 that we weren't even thinking about the indebtedness of the Fortune 500 companies. I think what's changed is we can't say that anymore. these companies have become, they've gone from being buyback companies to being companies that sell

stock on the secondary market and issue debt. And some of them do have roll risk. And I don't think it's an accident that Oracle is the worst performing mega cap stock and is also the loan mega cap stock with a debt rating that's almost been cut to junk. So talk a little bit about the difference between now and 2020. and maybe why we shouldn't be so sanguine about it. Well, okay, so in 22, tech was the hardest hit, and it only bottomed this December.

Stock prices. Stock prices. So granted, they had had a huge run in 20 and 21. There were a pullback coming, but, you know, I think 21 to 22 was, I want to say, the 9th or 10th worst year for the S&P since 1928. It was up there, down 19% on the year. It was bad.

So there were a lot of unwinds going on. Your fundamental point I think is absolutely right. The nature of these companies has changed profoundly for two reasons. The first is financial leverage, which you're right. It's much different now. And associated with that, you don't have money going back to shareholders. You have money going into AI. And that's the second reason they're different.

You now no longer have the idea that these are steady 30% R.O.I. REOE businesses that can reinvest, what they need to reinvest, and give a lot of cash back to shareholders. You now have a lot of reinvestment risk on top of role risk, as you call it, from the bond market. So you have these two simultaneous factors. The offset is the technology that they're investing in is, you know, both in practice and in theory, pretty compelling and pretty potentially world changing. So the market so far, I'm willing to give the benefit of the doubt. I worry a lot more about the AI side because ultimately it's going to have to fund those debt issues, you know, fund the debt.

fund the debt and fund the cash flows, fund the coupons, fund the principal repayment. But you're right, it kind of, you know, you put a bow on it, and it's a much different package from what we had just three years ago. Yeah. Is that why the 5% trigger could really come into play here? It sort of did in 22, and we did have a market-wide pullback, and you're right, like, the tech stock sell-off was much more acute than the S-Cube. And P. Then we had this hiccup in 23 with some of the banks in the spring. We had a couple of banks go under or be resolved is how the regulators put it. But like this time around, now we have heavily indebted projects all built around a single theme. We've got this interplay of private credit and private equity companies funding some of these projects with other people's money, a lot of ill

liquidity and then a lot of these liabilities or guarantees coming directly from the hypers. These are all things that didn't exist in 2022, or at least not to the extent that they do today. Is that why that 5% interest rate trigger on the 10 year bears even more importance potentially than it did then? I think there's a lot of the same, honestly. And the fundamental thing is that ultimately the current cash flows of the hypers are still economically sensitive. It's advertising. It's high-end electronics. It's all the things that get pulled back in a recession. And we haven't found it yet, but there must be a breaking point for the

U.S. economy on the yield curve somewhere. You know, we got to five and didn't have recession. We got four 75 basis point rate hikes in 22 didn't get a recession. We've had two oil spikes and didn't get a recession. So there's an amazing durability in the U.S. economy. But there has to be a point on the tens, maybe it's five, maybe it's six, where car sales go down a ton, home sales go down a ton, people stop spending, you start to get layoffs. We haven't seen where it is, but five has been a level where the market begins to get worried about it. And again, you know, the cash flows, underlying cash flows from big tech are still cyclical. They're still cyclical businesses. Right. Okay. So we're going to watch that level. The last thing I would say about it,

my colleague Ben Carlson has written a lot about how the average rate for the 10 year in the 1990s was 5%. And that was, A, a decade with no real recession. You had like early 90s, you had the SNL crisis. But like once that was over, we were pretty okay. The economy grew. Stock market was one of the best stock market decades ever. So the level itself provided, like we can get accustomed to it, I guess, is not the threatening thing per se. It's about what else is going on in the context of that level or maybe not, in your opinion.

What do you think? It is a fair point in terms of static. Yes, the average was five. However, it was coming down from 15 in the 80s, right? It was coming down from the Paul Volcker, squeeze the economy of good inflation down. So I think, I want to say, tends to peak at 17. And then by the 1990s, they were five. And there was a massive rejuvitation of economic growth because the cost of money had come down so quickly.

That's a big tailwind that we do not have. And now we have sort of the opposite. We had a world where you made 8% on 30-year treasuries for a decade per year. And now you're not. And now you used to have 1% rates. and now you've got five going to six. And so, you know, the where you're coming from is oftentimes just important as where you are when it comes to capital markets. We're coming from an era of declining rates for the better part of 40 years and now on the up again.

That's a great, right. That's a great addendum to that idea. Yes, we've had decades at 5% where the stock market did well, the consumer did well, the economy did well. However, that's a tailwind from the rates having come down from 15 to 5. This is not that. This is coming from 0 to 5 and where does it stop? We don't know yet. Right.

And that's the weird thing about bonds. You don't know where yields probably don't go negative like they did in Europe, but they have no natural cap. And that's the concern. There's no knowing. Look, I think if we could guarantee a listener, hey, the 10 is going to stop at 5 for the rest of the decade. the multiples will expand by two points tomorrow. Okay, let's do some stock market stuff.

Okay. So every couple of weeks, we put up a grid for our clients to look at current S&P evaluations, and I'll just pop that up on the screen now. It's kind of an eye chart, so I'm just going to hit the highlights, and then we've got a talking point chart behind it. What it does is look at this year and next year, fact-set earnings consensus, and then puts the standard multiples on. The range over the last 10 years has been 14 to call it 22.

And then we add a 24 multiple because that was the peak from the dot-com bubble. And we add a 26 just to dream the dream and say, okay, if multiples really expands. And the upshot is, for people listening, I'll just summarize it. Most of this grid shows losses. If you're trading at 14, 16, 18 times on consensus or even above consensus numbers, you're below where the S&P is trading today. You only get to real payoffs at 20 plus times earnings. So the underlying message here is the market's still fairly richly valued and has not a lot of room for error.

If earnings miss, if investor confidence begins to fade, that's the basic message. The other thing that's important to know is that the S&P is up like 12% year today. I think 12.1 is a Friday. Earnings revisions for this year and next year are up 15 and up 13%. So the entire move for the SEP this year has been earnings revisions. It has been no P.E expansion at all. As a matter of fact, you've had a little P.E contraction. A little bit of that is like the kooky one-off earnings growth at Amazon and Alphabet and Q2 because of the markups on SpaceX.

But even looking at 2027 earnings, you know, call it, I want to say 13%. You know, we're basically, that's why the S&P is up. It's just been very strong earnings provisions. Let me tell you, I was a cell site analyst in the 90s. I watched this data for 30 years. Analysts never raised numbers during a year. It just never happens. They start high and trim.

They start high and trim. That has not been this year. It's been an amazing year for earnings growth because of tech and because of energy. And that's why the S&P has rallied the way it has. It's been 100% earnings, which is super unusual. So now you have a couple of scenarios game planned out to show people. And this is really, I think this is really the most critical. Like if you want to have a happy ending to this year, which you and Jessica have taught me over the years, still the most likely outcome, but you're showing us now the different pathways that this could potentially take. Why don't we put that on screen while Nick explains? Okay, so three scenarios for the S&P, these are the upside scenarios. The downside kind of, you can, you know, there's a thousand

different ways to get there. We don't discuss it. I think it's well understood. The most likely scenario for the S&P up six to 16 percent, and that just comes from corporate earnings growth remaining strong, and estimates keep increasing. They've been doing that all year. Estimates should continue to rise. Multiple stay flat at around 20, and you get six to 16 percent upside, again, based on that great data that I showed you. I'm sorry, Nick, from here, from here, six to 16 percent or total? From here over the next 12 months. Next 12 months. Okay, yeah, great. So this will take us through all 27. So maybe a rally into year end, a little sluggishness in the first half the next year. So no expansion. Like,

we just maintain the multiple we're at, but the corporate earnings goal. that we've been experiencing, the spigot doesn't shut off. It continues. Exactly. I think everybody watching this would be thrilled with that. Yes. Considering all the worries out there and considering we have not seen up any of multiple expansion, that's fine. Okay. So scenario two, possible. This is like good, better best. This is better. 13 to 28% upside. We had earnings growth and a resolution to the U.S. Iran conflict and therefore lower oil prices. And multiples go to 22. The anchor idea,

here is one of the big overhangs on the market is the effective oil on the economy and the effective oil prices on inflation and Fed policy. If we can get oil prices to come back down, not to 55, 60, 60, 60, but let's call it 60, 65, something reasonable. Let's get diesel back down to 80, 70 from 100 plus where it is now. Then multiples can begin to increase. Multiple has been flat because we've had a huge oil shock and we have a new Fed share. So if we get multiples to 22 and the earnings growth exists, then 13 to 28's the upside level. That's your better case. That would be awesome. But that is not your, that is not, that is not your most likely. That's just the way that this could get even better than it's already been.

Yeah, honestly, this was my base case until about six weeks ago. And the longer the U.S. Iran conflict goes on, the higher oil prices go, the less I'm willing to believe that you got, you know, it's teen level kind of returns available. I think, we're in the 6 to 16 band. Now, let's dream to dream. Let's go all out bullish. Okay, we get our earnings growth, and we get our loyal prices, and AI CAPX begins to show its value in tech earnings.

This is the other big fundamental overhang. When are these returns going to show up? If we get them in the next year, you can get to a 24 multiple, and then you're talking 12 to 39% upside. Much better. But you need all three things to go right. The sun, the moon, the stars, they all have to align. Yeah. So, right, you need like, you need Anthropics IPO will be this year.

Yep. You need them to really come out and be talking about like the revenue generation that they're doing from AI. And then you need alphabet to confirm that with Gemini. And then you need to hear from the providers. And then you need the companies that are their customers, simultaneously to be showing the results of their own AI spending. Because that's who's spending with OpenAI and Anthropic and Google and the AWS environment and Microsoft.

So you need the customers to be putting up continued earnings surprises and specifically citing AI as the source of those surprises. And then I think people will say the multiple in this market is too cheap for the revolution. that we're in. Yeah. But a lot has to go right for that to, okay. A lot has to go right. Look, AI has exploded this year for one reason.

It's coding. That is why AI demand is where it is. And that's fine. But the non-coding side is the vast majority of the economy. And it's got to start working in that arena as well. Is there a push and pull between the idea of higher rates and a 5% 10 year and us getting to a 22 or a 24 multiple? it seems like both of those things probably would not occur simultaneously, although I guess they could.

They absolutely could. And here's a super important point. One of the first things they teach you in business school about discounting cash flows is it's the cash flow that you're getting divided by the risk-free rate, the R minus a growth rate. The minus the growth rate is the super important part because the higher the growth rate is, the valuation can be higher. It's C over R minus G for the nerds in the audience. People always forget that the G is super important. And if you're growing faster, if incremental growth is outpacing incremental increases in the risk-free rates or the discount rate, then your valuation will expand. And that's exactly dynamic here.

If you can show earnings growth is, let's just pick a number, 18% for the next five years. I don't care if the 10 is at 5% or 6%. I honestly don't. because the expansion from low teens to high teens more than offsets the increase in the discount rate from higher risk-free rates. Okay. We're going to do a quick grab bag to close things out. Why don't you take us through these client discussions that you're having? Sure. A couple of things. The first is let's remember that the AI investment that we're seeing is not about where AI stands today. It is about what AI can do in the future. And it just pulls some basic data from a great website called artificial analysis.

com. And it shows you the speed, the intelligence of various models over time. Since November 22, when it launched, ChatsyPT's intelligence is up 1,300%. In the last year, clause is improved by 76%. AI is dramatically exceeding Moore's Law, which is a double over two years or a 41% Kager. The race is about getting to artificial generally. intelligence, a much more all-inclusive kind of intelligence that can teach itself. This is what, I listen to a ton of Silicon Valley podcast, any founder, anybody an expert in

this space, I want to hear what they have to say. This is the conversation. It is not about, hey, AI can help your code. It's strictly about getting to AGI first or second. That's the race. That's why this money is getting spent. It's not to figure out AI agents or anything else. It is about getting to this end goal. And that's why the money is getting spent. So that's the underlying. That's the story. It is not about an agent that can help me pick airline tickets. Right.

So if one platform gets to AGI meaningfully faster than another, the advantages that accrue to that platform might make it so that it can compound those advantages and be impossible to compete with. Exactly. And that's why the Chinese open source models haven't super effective. investor sentiment where you think they would because they are very good and they are very fast. It's because that's not the ultimate goal.

And equity investors need to understand this very coldly. What you're investing in right now is 100% about getting to AGI as soon as possible. That's the game. Okay. And then once you're there, what happens? The hierarchy becomes a little bit more set in stone? The hierarchy comes up and you can actually, no one will doubt that that's worth money. People will pay for that.

Okay. So the monetization story becomes very different. So that's one thing. The second thing is much more prosaic. S&P sector and stock correlations are extremely low. Why crazy low? We measure them sector-wise. They're at 10 plus year lows. And that's very unusual.

And the reason for that is this notion of a recession proof U.S. economy. If there's no recession in the wings and nobody I think thinks there is, then correlations can be low because investors can pick and choose. I want to be long, I want to be long financials, I want to be a big tech. That's right, correlations fall apart in volatility at the aggregate level.

The VIX level is very low. And by the way, every hyperscaler implicitly believes the same thing. Because if you were worried about a recession, you would not be plowing all this money and leveraging up your balance sheets just to invest in something. So the implicit assumption of this market and the investment cycle that we're in is that there is no recession for the next five years, period, full stop. And if you want to be super long, you have. I have to believe that 100%.

Yeah, I do think it's interesting that the tech founders and the CEOs at the hyperscalers have looked at the last 15 years and everything we've shaken off. And they've concluded there are risks, but the risk to look for it is not a vanilla business cycle correction. Correct. That is not going to be the thing. The risk is existential tech innovation. Okay. Public equity investing is now a lot like VC investing. What do you mean? Yeah, this is something that we talk a lot about with clients. Where we used to own a bunch of companies at the top of the S&P stack that spun off like a third or a half of their cash flows back

to investors in buybacks and dividends, that money's gone. We're back to a VC kind of investment cycle where every single dollar these companies make is going to a science project. 38% of MSCI global, all country world is tech and big tech. So basically 40% of the global index is in this science project. And the only way you can really escape it. And as you know, Jessica and I have not been fans of Equalweight S&P for a long time. I see a point of it now. Equal weight S&P is 14% tech.

You still own these companies in some small size, but you're not as leveraged as you are as the market cap weighted indexes. So that's the story there. And then the AI race between U.S. and China. I know you think a lot about this and you read a lot about this. Is this the real existential wall of worry dominating threat that's out there beyond all the stuff that we talk about on a day-to-day basis? Is this really what it all boils down to? It does.

It does. For all the reasons we've discussed, this is the next big technological innovation. The reason the U.S. is a reserve currency is, again, we talk about it at the top, but it's because this country does smart things with its capital. So you can run a deficit if you're innovating quickly and your tax space will expand as a result. If you lose the AI race, that begins to go away. That's it. If you lose the AI race, China's equipment and services will then proliferate around the world and China's ability to trade with other countries and sell AI products to other countries can increase to the point where it literally affects like currency flows around the world.

Is that what we're saying? What is the externality of that? I put it a little differently. Sixteen to the top, most valuable global companies by market cap are U.S. companies. They're all the ones you know. The other four are in Asia and in the Netherlands and are basically offshoots of U.S. tech. So the way you accrue wealth as a society, the way you convince people that your currency is the smartest thing to own is by taking the globe's capital, the world's capital, and investing it sensibly and creating innovation.

Ultimately, innovation drives equity returns and reserve currency status. It's all human innovation. That's the core of capital markets. Okay. So we want our AI giants to be the ones that conquer the world and not China's. We want alphabet to win and not Baidu. Yes. And for another reason, the American system will allow those companies to earn a massive amount of money and their founders get even richer. And China has shown us they do not like that fundamental approach. So you won't even be able to make a lot of money if Baidu wins or Baba wins or Tencent wins or Deep Seek wins. wins. Those will be constrained. Only in the Western system where you allow companies to make the money they can. Okay. Got it. Well, Nick, I want to say thank you so much for stopping by. We always learn so much, the audience always learned so much from you guys. I personally learn so much for you

guys. Let's give people the URL where they can learn more from Datatrek and get more of your insights, which again are coming out every day of the week. Where do they go? Datatrackresearch.com. super simple, just a simple sign-up box, no credit card, no nonsense. All right, you're the man. Please tell Jessica to feel better. We miss her. And have an awesome rest of your summer. We'll check in with you guys soon.

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