The Dividend Cafe - Wednesday - May 20, 2026

Episode Date: May 20, 2026

From Miami Beach at a Hightower summit, Brian Szytel recaps a broad market rally (Dow +645, S&P 500 +1%, Nasdaq +1.5%) driven by falling interest rates (10-year down 8 bps to 4.58%) and oil (WTI down ~5%) amid hopes for progress in the U.S.-Iran conflict around the Strait of Hormuz. He focuses on how expectations moved from ~60 bps of Fed cuts this year to pricing closer to a potential hike, a global shift also seen in Europe, and notes the tight correlation between oil prices and rate expectations. With markets up ~7–8% and earnings up ~13–14%, multiples have compressed, and higher-rate expectations reduce the chance of re-expansion. He also addresses high profit margins, citing tech-heavy, asset-light index composition as a key driver while still expecting eventual mean reversion via economic slowing and sector rotation. 00:00 Miami Beach Intro 00:26 Market Rally Recap 00:50 Oil And Rates Link 01:16 Rate Cut Expectations Shift 02:17 Multiples And Valuation 02:52 Upcoming Economic Data 03:04 Margin Mean Reversion 03:26 Why Margins Stay High 03:56 How Reversion Happens 05:08 Wrap Up And Thanks Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Welcome back into Dividend Cafe. This is Brian Saitel with you as your host this evening here from Miami Beach, Florida, actually. There's a High Tower Summit that David and myself, along with Joe Klein and Trevor Cummings are attending here for a couple of days of important meetings. And so I'm recording here after the market has closed and after I've written the podcast and the Dividing Cafe for you today, we did have an update in markets, a pretty good one, really. The Dow ended up closing up 645 points. The S&P 500 was up 79 points, which is about a percent. And the NASDAQ was up a percent and a half. So broad-based rally. And the reason was actually interest rates had come down. Price of oil has come down a little bit on the day. WTI. closed down about 5%. This is around some hopefulness on a settlement or an agreement or some sort of positive resolution in the U.S. Iran conflict in the Middle East surrounding the Strait of Hormuz, as this keeps going back and forth and back and forth. So I'm not spending a lot of time talking about

one day of rate movements lower. The tenure was down eight basis points on the day. That's a good move. That puts us at 4.58% on the tenure. So that's good. But what I actually wrote today, was more about the expectations of rate cuts because we came into this year looking at 60 basis points of potential rate cuts before the end of the year. That matters a lot because you have market multiples that get based off of the risk-free rate and what the central bank fed funds rate will be. And then those expectations have basically been lockstep with the correlation in the price of oil almost exactly. And I included a chart that shows you that. It's an inverse relation between interest rates and Brent crude so that the two charts actually overlap perfectly.

And my point is just this isn't just a U.S. phenomenon where interest rates cuts have now moved into either holding a steady Fed funds rate or starting to raise rates. This is something that's happening in a global phenomenon. In Europe, there's two rate increases, price and now 50 basis points in the United States back and forth, but we've gone basically from 60 basis points of cuts to now closer more to a one-rake height before the end of the year. And I'm pointing that out because again, if you look at where markets are priced, I've talked about the market multiple being compressed a little bit. You've had markets up, call it 7 or 8% on the year, and you've had earnings growth, something closer to 13 and 14. So that's good thing. You've got markets that compress a little bit on the multiple. But then you have a backfilling where if rates are going to move actually a little higher, then multiples tend to have to come down a little bit. And in that environment, we have already had that multiple compression. Our hope was that maybe you get re-expansion that comes off of the table a little bit, which is the point today in there. And there really wasn't any economic data for me to report to you today.

We get a good amount of it in the next day, which is tomorrow and Friday. So I'll go through some of that a little bit more. The question in there today, the SDBG was about margins again. Obviously, it's a popular topic. Margins are more or less at all-time highs. I'm calling them multi-decade highs, but they're over 20% at this point. And the question was about reversion to the mean, and when is that going to happen? I think it's an astute question.

I think generally speaking, markets do tend to revert to the main, and no, I don't think this time is different. I talk about the reasons as to why those margins are expanded. It isn't just that there's been technological advancements to improve operating leverage, because that's true, and it isn't just about the very strong economy backdrop. Those things are true, too. But the third component is just the composition of the index, again, has shifted more into those asset-like businesses, software, technology, AI, those things. And those just tend to

operate in a higher margin arena. And 40% of the index is that. And so the overall margins are driven up by those things. But I do think there's reversion to the mean. So I'm not saying this time is different. What I am saying is just it won't be one of those things. I think it'll be a combination of things. You can have an economy that starts to slow down a little bit. Market participants favoring some of the other components, let's call them potentially industrials or energy names, which have a positive equity risk premium to them now, and having some of the multiple get compressed in some of the over-value tech space. So those things can happen, and that pendulum can swing.

But just understand that margins are driven by more than just one thing, and I wouldn't just expect for the sake of a mean reversion because history says X that we're going to get Y. Just remember, the world does evolve. And so sectors and how economies work, remember, we were a goods-based economy forever. and we shifted into a services-based economy. So when you use historical context on multiples and also on margins, you've got to keep that part in mind.

Those things are secular, they're generational, and part of that calculus as well. That's my answer on that question. If you have any more or want further feedback on it, please reach out. It's come up quite a bit with different clients and different readers. So I'm happy to walk through it. But that's what I have for you today. I appreciate you listening very much. We're going to get back into our meetings here this afternoon.

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