Market Snapshot: What’s Next for Rates and Markets? Featuring Mona Mahajan, Edward Jones  

Mona Mahajan: Yeah, thanks, Ken and great to be with you all. You know, look, I think the Fed is looking at three key factors here. First and foremost, of course, is their dual mandate labor market and inflationary pressures. On the labor market side, we’ve seen a pretty nice pickup in hiring in the August jobs report came in well above expectations. The unemployment rate stayed steady at 4.1%. It feels like wage gains have been steady as well. So no wage price inflationary pressure coming through from the labor market. Labor market’s probably okay. What we’re looking at next is the inflation side of the equation, the dual mandate. And that’s where the Fed is looking at some challenges. Inflation, as we know, has been elevated above the Fed’s 2% target for over five years. But of course, more recently, we’ve seen headline inflation creep higher because of volatile oil prices, which remain ongoing. Perhaps a silver lining in inflation is that core inflation actually has come in at a steady, steadier level. Um, so I think the Fed will be very much focused. We’ll get a final inflation reading on Friday, September 11th, ahead of the next Fed meeting. That will be the final data point that may help sway the Fed one way or the other in terms of on hold or rate hike. And the third thing we’re watching, I’d say, is inflation expectations. I think the Fed monitors this closely. If we know if inflation expectations become unanchored or start moving higher, that means consumers and households and corporations may act accordingly. But the good news again there is inflation expectations, especially when we look at market-based indicators, remain relatively contained. So, net net, we’d say um this Friday’s inflation rating will be the key deciding factor. More recently, oil prices have moved higher. That’s not helping the cause. But all that being said, the Fed also does not want to dampen demand or the labor market to a large extent. So I think our our call overall is um we’ll probably see them have a bias to remain on hold unless we get an outsized inflation rating on Friday.

Kenneth E. Bentsen Jr.: What one thing on that I I wanted to ask, um you you mentioned, I mean, the the the labor market print that came in last week was quite strong, so or certainly stronger than than what analysts had estimated and wage growth was pretty solid, I think as you pointed out. But but inflation, wage growth was still below inflation. Is that a factor you think that the FOMC is also thinking about?

Mona Mahajan: Yeah, you know, I think for much of the last couple of years, actually wage growth had exceeded inflation, at least headline headline CPI inflation. So real wages were positive. We’ve gotten into this territory where now consumers are not seeing real wage growth. Um, and that does dampen demand to some extent. Um, but on the flip side, what the Fed does not want to see is a wage price spiral happening, that the demand for labor gets so high that corporations have to start paying higher wages. That flows through to cost of goods, cost of end product, and we start seeing inflationary pressures, and that leads to higher wages. And so there’s this spiral that happens. Um, that is not happening definitively. We see wage gains and wage year over year wage increases actually come in. So they were at 3.5%, back at 3.1%. Yes, they’re below inflation, but the good news is they’re not spiraling out of control.

Kenneth E. Bentsen Jr.: And Heidi, what are you seeing in the data? And how does that line up with what the market is pricing in?

Heidi Learner: Yeah, so expectations are more likely than not that we’ll see a 25 basis point rate hike next week, and that’s based on Fed fund futures. So as of today, we’re at roughly a 62% probability of a 25 basis point move that would take us from 3.5 to 375, up to 375, 4%. And that probability is where we were at the end of July, but that’s up substantially from just a 35% probability that the market was assigning to a rate hike just a few weeks ago in mid-August. So again, if you are to bet, um, I would bet on a rate hike, at least according to what the market consensus points to.

Kenneth E. Bentsen Jr.: And you know, turning to rates, I mean, we’ve seen long-term rates accelerate certainly in the last two to three weeks, even today that we’re talking about this. And just curious, Mona, what do you think in terms of how much of that is reflective of stronger growth versus higher fiscal or inflation risk?

Mona Mahajan: Yeah, you know, certainly the term premium or the extra amount of yield you’re paying to compensate for some of the risks we’re seeing in the market, that has risen. It’s off its lows, but we’re not back at, you know, even 12-month highs in a term premium. So we’re rising, but you know, thus far, we do think it’s a combination. We know economic growth and especially earnings growth have been quite strong this year. Um, that is reflective in the 10-year treasury yield. And of course, alongside that, we have worries about a rising debt and deficit level in the fiscal situation in the US. We have a global yield story that is showing signs of life and continuing to pick up as well. And then, of course, we have this AI narrative where AI, large cap players are tapping the debt market more. So a little bit more competition coming from AI as well in terms of investment grade, corporate bond issuance. And so all of that together builds a narrative and puts upward pressure on yields. We’re about 480 today on the 10-year treasury yield. Again, back in 2023, we hit that 5% threshold, very quickly bounced off of it. But in our mind, a 4.5 to 5% range is very much the new normal. Certainly not what we saw over the last 10 to 15 years, where you know the Fed funds rate was closer to zero and treasury yields were closer to one and a half to two percent. Now, for investors, what does that mean? Well, higher treasury yields certainly mean higher cost of borrowing, higher cost for consumers and corporations looking to tap debt markets. But on the other hand, if you are a saver or if you are in retirement, close to retirement, or looking for income, um, 4.8% tenure treasure yield or any you know, place shorter duration along that curve is becomes a little bit more interesting, we think, from a yield perspective.

Kenneth E. Bentsen Jr.: Yeah, and you know, Tadi, I mean, from the data you’re looking at, what are you thinking about around that split?

Heidi Learner: Yeah, I think Mona’s right to point to the um risk premium, which has been accelerating. I think this is still largely an inflation story. Um, as Mona suggested, the labor market has proven to be a little bit more resilient than many expected. Um, but there is evidence that the rise that we’ve seen, particularly in tenure rates, isn’t solely due just to inflation risks or robust economic growth or strong employment, but really to a widening of that risk premium. Um, and I think there we do have to look at the fiscal picture. So I’m gonna vote for a blend of all of the above.

Kenneth E. Bentsen Jr.: So I’m gonna maybe to both of you, I’ll start with Mona, but I mean, and Mona, you kind of touched on this a second ago. I mean, it does seem so we’ve got the term premium, we have, obviously inflation concerns, increasing fiscal policy concerns. And then you mentioned obviously the growth in corporate issuance, particularly around the AI trade. Are we getting to a period that we haven’t been in for some while, maybe arguably not perhaps since the mid or early to mid-1990s, where there was a sense that, you know government and corporate borrowers were bumping into each other and going after the same pool of capital that was driving up rates? Are we entering in a period right now where we know there’s strong demand’s not the right word, but we know the expect expected issuance of government debt is only going to be going up for the foreseeable future? And there’s strong corporate demand, which is a positive thing, given how the corporate economy is doing. Are we in a period where we’re where we’re maybe have have a strained pool of capital?

Mona Mahajan: Yeah, you know, I think it’s a fair point. I think the expectations or the forecasts point to, you know, upwards of $500 billion of AI corporate issuance. And, you know, you think about the treasury market itself, I think on average annually maybe two, two and a half trillion. So it is a big chunk of percentage-wise of overall treasury issuance. Um keep in mind the players that are tapping the debt market in the AI space have strong free cash flow metrics. They are um pretty good, you know, strong credits when it comes to debt markets. And so in some sense, yes, there is a competitive nature that comes into play. And at the very least, we know supply-demand dynamics, the supply is certainly increasing. And so, in order to attract that incremental demand, that may mean you might have to offer some higher yields here. And so um I think generally that supply-demand picture paints or points to um yields moving higher. There is maybe an alternative to U.S. Treasury, although for the, you know, for many pension funds and and foreign investors, they tend to tap sovereigns versus corporate. So from that perspective, there’s a different, I guess, buyer base as well.

Kenneth E. Bentsen Jr.: Yeah, and I and Heidi, I don’t know if if if you may want in in responding to this, what data you’re seeing in terms of are we starting to see material movement and credit spreads?

Heidi Learner: We really haven’t. I mean, if you look at basically option adjusted spreads, you really haven’t seen a meaningful rise over the last few months. I think one thing we want to separate out is what aspect of total borrowing costs is from the move higher in treasuries versus credit spreads themselves. So that’s definitely something that bears watching. Um, another thing I think I’d watch rather than credit spreads more broadly is looking at CDS. So looking at where that default protection trades, particularly for some of these names where there has been a rising debt load. But at least for now, that crowding out effect that you’re referencing, you know, the competition between government issuants and corporate borrowers competing for the same pool of capital hasn’t really led to rising credit spreads.

Kenneth E. Bentsen Jr.: Yeah, to Mona’s earlier point, I mean, I think fixed income capital or fixed income investors are not necessarily are certainly not monolithic, and and there are certain conditions why you know we have rates investors versus credit investors. So I don’t know that’s fair to look at think that the pool of capital is completely monolithic. But I do wonder, and I don’t know, Heidi, that we’ve seen any data or or it’s shown up yet, but if we do enter into a period, a sustained period of higher rates, maybe we’re in one now, um I would think we would see some offsetting in the mortgage back market as we’d see some contraction in issuance there with higher mortgage rates. But I don’t know if that’s something you’ve seen or not.

Heidi Learner: It’s definitely something we’re watching for. I mean, unlike I think year to date, the number is uh about 26%. We’re 26% higher in terms of corporate uh debt issuance um calendar year to date versus the same period in 25. So we’re not seeing anything um similar in the mortgage market. And you’re right to point out that these uh level of interest rates have led to higher mortgage rates, which is certainly uh resulting in uh scaling back um not only of purchases, but certainly refines as well.

Kenneth E. Bentsen Jr.: And and Mona, you know, if if if so if long rates stay elevated while the Fed you know remains on hold, maybe uh uh maybe one tike, uh is the is the is the bond market doing what uh you know what uh Chairman Warsh has suggested, more than suggested, that in effect is is doing what is tightening on behalf of the Fed.

Mona Mahajan: Yeah, you know, I think that’s a great point, one that the market has been debating uh vigorously as well. You know, to some extent, uh higher yields, as we talked about, do translate to a higher cost of borrowing for both consumers and corporations. And that is a de facto form of tightening of uh financial conditions. And so we are seeing a bit of that play out. And more recently, we’ve seen not only the long end move higher, but the short end is starting to catch up as well, as perhaps you know, oil markets have been volatile, inflationary pressures have re-emerged to the forefront. Um, you know, all that being said, does the Fed need to raise rates to maintain credibility? Is there a credibility issue at play? That is another aspect and an angle that we do think about. Um, Kevin Warsh has said multiple times, we still have work to do, inflation is our number one focus, 2% is still the goal. And so, um, yes, he’s trying to in some ways do his job by talking the market into moving to that higher rate regime. On the other hand, um, does he need to raise rates to just uh have some credibility behind those words? But as I take a look at the broader picture here, as you noted, whether the Fed raises rates once or even twice the cycle, uh, we don’t think that necessarily derails the broader economic earnings story. And this, in fact, the consumer has been quite resilient through most of this rate rise. So we can talk through more of that. But um, something that we think about as well, what would derail the story?

Kenneth E. Bentsen Jr.: I I think that’s a great point. And and I was you know, I was gonna, Heidi, I was gonna ask you about how how you’re seeing the market react to the Fed, but maybe to combine that with a question for both Mona and you is you know, I mean, we I think we can pretty well translate what the impact of rising bond yields are, you know, for consumers and corporations. Um uh, but you know, what do we think the impact would be of rising yields on on equity valuations? And so far, I think you could argue it’s it’s hard to say. I mean, today’s not a great day, but you know, or yesterday wasn’t a great day, but not so much. I mean, and um it, you know, I I I’ve often thought and and maybe I’m showing my age here, but the you know, we have run the economy pretty effectively at a at a 6% long bond in the past. It’s been a long time since we’ve been there, a long time. But you know, are we notwithstanding potential impact you know of higher rates to consumers and and and and and other you know, corps and other borrowers? Do we think this has a long-term negative value on on the on the stock market uh uh uh versus other uh economic factors?

Mona Mahajan: Yeah, and you know, why don’t you take that one first? Yeah, I can jump in briefly here. You know, one of the things that we’ve looked at in the past is um it’s not only the level of treasuries that the stock market looks at, it’s also the um pace at which we get to that higher level. So if you’re moving rapidly higher, that is worse for equity markets to absorb than if it’s a more gradual pace. And this year, I think we are up about 60, 65 basis points on a 10-year treasury. If you look back at 2022, we rose over 200 basis points in a pretty short period of time. Now, granted, the Fed was tightening during that period, uh, but the market had a severe reaction. And so we were down, you know, 20% or so um close to that bear market territory. Uh, this year we’ve continued to see an SP 500 up 11, 12% still, despite the 60 basis point move in the treasury yield. Historically, also um, you know, kind of the bogey or the number that many look at is that 5% on a 10-year beyond that point. You do tend to see actually some quantitative buyers come in, um, thinking, you know, it’s an attractive yield. It also does tend to be the point at which valuations start to maybe shift or re-rate lower if if the uh over 5% yield continues for prolonged periods. So we’re not there yet, I think, in either of those cases. We’ve moved gradually, we’re still below 5%, um, and and stock markets have held in there. Now, all that being said, uh, could could this shift quickly, especially if we start to see whether it’s um continuous rise in inflation or more uh acceleration in inflation or a Fed that starts to move, perhaps. Uh, but we, you know, what gives us some comfort from a market perspective is we know the market’s driven by two factors, earnings growth and valuation expansion. Now, valuation expansion, as we noted, has not been a big part of the story this year, but earnings growth is anticipated to be uh above 30% for the S P 500. And that’s we haven’t seen numbers like that since 2021 when we were coming out of kind of the COVID crisis. So uh some good strong fundamentals. We’re watching the yield story closely.

Kenneth E. Bentsen Jr.: Yeah, and Heidi, what what are your thoughts? I know you’ve been looking at a lot of that data. What what’s your thought?

Heidi Learner: Yeah, I think we’re continuing to watch what’s happening at the front. And as Mona indicated, there’s definitely been some job owning. Obviously, the Fed only controls the Fed funds rate, um, but it’s the tenure that matters for the majority of corporate borrowers for mortgage rates, um, you know, uh benchmarks uh for other forms of borrowing. Um so I think one thing to be mindful of is not only the level of rates, which a higher level, all things being equal, uh, when applied to discount the future cash flows that a company generates should result in a lower valuation. It’s not just the pace of the rise, but it’s also, I would say, some of the uncertainty and the whipsaw uh reactions that we have to probabilities of uh rate hikes. Um I would say if we look out even a year from now, the market’s pricing in a fairly steep uh probability of consecutive rate hikes or uh subsequent rate hikes. So, you know, to the extent that we do see a rate hike um in 2026, it’s not one and done. Um so I think it’s something that we’re going to have to watch, but um the market may have to play some catch-up.

Kenneth E. Bentsen Jr.: Let me ask one other question that you all may or may not want to answer, but but um going back to the Fed, uh the chairman was the new regime under Chairman Walsh uh moving away from the dot plot. I mean, is it and and it it seems that you’re hearing uh uh you know bank presidents and and governors uh maybe a little more vocal, and obviously the the feds uh set up a task forces to look at a lot of things, including how they communicate. Um do we think the dot plot is is is done and gone and and um do we think that we’re gonna see more um I don’t want to say freelancing because I don’t want to sound critical because I’m not being critical, but more commentary by individual uh bank presidents and governors who uh uh in terms of what they’re thinking uh or for you know their own forecasting their own views uh or giving their own forecast.

Mona Mahajan: Yeah, you know, it’s certainly something that, of course, has uh been put on the table here. I think Kevin Warsh himself has um been critical to some extent on the DOP law and has, you know, probably mandated his committee to take a look at it to see if that’s something they want to continue going forward. You know, keep in mind it was, I think, Chairman Powell that instituted the one press conference per Fed meeting. I think that could be a first step in reducing um, you know, some of the transparency communication element of the Fed. Um but you know, in addition to the dot plot, every quarter we also do get a forward look at uh economic projections, so GDP, inflation, unemployment.

To us, that’s a pretty meaningful way to assess how you know markets, investors are looking at the world versus how the Fed is seeing it. And it’s a useful tool. So my hope is that they keep elements of this forward communication and guidance in place and maybe tweak or remove other elements of it. But I do think the quarterly update in particular has been a good tool for most of us in the field here.

Kenneth E. Bentsen Jr.: So let’s turn to the let’s turn to AI. And Mona, you talked a little bit about this earlier in terms of what we’re seeing in debt issuance and the like. Again, I’m going to go back and quote something you you written before. You describe the AI trade as uh quote unquote maturing, not breaking. What is mature, what does a mature AI trade look like? And does leadership migrate away from the semiconductor and infrastructure providers? And if so, what sectors do you think will benefit? And do you have a favorite right now?

Mona Mahajan: All million dollar questions. I, you know, I think um certainly what we’re seeing is we’re we’re in the fourth year now of an SP that’s up double digits and in many cases, last three years at least, driven by a concentrated set of uh sectors and a concentrated set of names. And in particular, a lot of those AI, we call it Magnificent Seven names across the spectrum have uh been the drivers of the gains. Now, what we are saying is AI stories clearly maturing. We’re looking at CapEx figures, though, over the last quarter, we just heard from many of these companies. They’re not going down, they’re not staying steady, they’re actually increasing. So about 800 billion of CapEx spent um on data center build-out and infrastructure of AI this year will rise to over 1.1 trillion next year. And so um the direction of travel continues to be higher. The backlogs of many of these companies, whether you’re on the semiconductor side and even hyperscaler side or cloud business side, uh, continues to be very strong. Demand continues to outpace supply. So all of that together leads us to the kind of the conclusion that um the AI story is probably maturing, not yet rolling over, not yet showing signs of even decelerating. The pace of growth may be coming in a bit, but um certainly we’re not seeing negative growth rates. And so, you know, for us though, what we’re really looking at is when it how it plays out in the stock market and and financial markets in general. Um, certainly those first few years, there has been a huge focus on the infrastructure players of AI, whether it’s the semiconductors, whether it’s the hyperscalers, whether it’s the data center players, the building blocks of AI, they have really benefited. Um, but what we have not yet seen is a real meaningful increase in the sectors that may gain from productivity. And so uh the productivity gainers we think include sectors like industrials when you think about manufacturing or healthcare, when you think about some of the AI potential there. Even our field, financial services, uh, should benefit over time. So when we look at the world today, would we say we’re in the post-AI world, or is there still a long runway ahead of us of what the world may look like, especially in the next three to five years? So we’d say we’re not in a post-AI world yet. Um, from a market perspective, we’ve the gains have been felt by the building blocks and those players in AI, but we think the next three to five years, we may see a broadening of that to those sectors that benefit from the productivity gains. In particular, right now, we like industrials and we like communication services. So it’s kind of a balance between a cyclical broadening theme in industrials and communication services, which happens to have uh Google and Meta in there as well. Um, a balance between both of those. We don’t want to give up on the AI trade uh wholesale, but we want to make sure we have exposure to the next generation as well.

Kenneth E. Bentsen Jr.: So that’s interesting. I mean, it I I interpret that as I mean, we’re really looking right now at the capital investment side of uh lag, if you will, of the trade and not the output, uh the you know, the product output, uh the finished product output, maybe uh a better way to say it, of the trade, which was where to your point was would be where you’d see the real productivity gains uh uh have an impact again against a broader uh group of sectors, if you will. Um and and as we noted, um I I one actually one question I I I’m curious about, um and maybe we don’t know the answer to this, uh thinking about the capital investment, uh and this may be more abstract, but you know, there’s a big debate in many states across the country about you know uh you know public concerns about the X uh uh the uh growth of um of or uh or development of data centers and whether or not that leads to um uh a curtailment in the development of data centers. Is that something the market’s thinking about at all, that you could have a uh a capacity squeeze or something at some point, or is that too is that too abstract at this point in time?

Mona Mahajan: You know, hard to put numbers around it now. Certainly um an issue we’re seeing, and of course, we’re heading into midterm elections, so it could be an issue that becomes more prominent in certain parts of the country in particular. Uh, but probably part of that theme of AI is maturing. You know, this this probably all makes sense here as you’re getting towards those end um stages of building out AI. Uh, that’s when you start really thinking about what are the ramifications, what type of regulations do we need, what type of boundaries do we need to put on this technology. And keep in mind, we went through similar phases when we went through the industrial revolution or the internet revolution as well. And so um establishing those guardrails, establishing those regulations, and establishing, you know, where are the boundaries in terms of where can this, you know, how does this impact households on the ground versus um, you know, the benefit of the broader technology. And so I think we’ll see a lot of that play out, maybe it’s this election cycle, but certainly over the next six to 12 months, those questions will need to be answered. And um we think it’s a healthy sign that it’s you know parts the narrative now. And and Hani.

Heidi Learner: Yeah, I was gonna add that it really goes back to the in inflation question that you raise. I think it’s something like 15 state legislatures have um introduced bills um to impose moratoriums on data center construction. And I think the concern there is back to the consumer pocketbook. You know, is this going to result in elevated energy costs that have already been increasing at a rapid rate? Um so at a certain point, there could definitely be a supply constraint, but at least for now, uh the demand for new data construction um is still there.

Kenneth E. Bentsen Jr.: Yeah, I mean, arguably it could be a it could uh could be a supply or a demand issue in some respects, right? Because you, you know, uh it it are are you developing enough supply or you’re overdeveloping supply? We don’t really know, I guess, at this time. And I’m I’m just curious in in in in terms of you know what you’re seeing in the data with respect to the CapEx spending and it how that’s at least at this point flowing over into the broader economic data like GDP and productivity and cap and capital spending.

Heidi Learner: Yep, we’re definitely seeing it in the GDP uh data, and that’s through the pass-through from capital spending and investment to date. And in fact, the Fed put together a paper uh back in July looking at this exact question, and they found that even adjusting for the high import content that a lot of the equipment underlying the AI build-out has, but the net contribution from spending on software and data centers and power facilities and computer and peripheral equipment amounted to nearly three-quarters of a percentage point positive contribution to GDP in Q1 2026, and that’s up from half a point in Q1 2025 and just a quarter point in Q1 2024. So we’re definitely seeing it through the investment channel. Um, I think the bigger question is on the productivity side. And here the same Fed paper uh looked at that question, and they said that there’s a lot of evidence to in some of these what they call micro-level experiments, showing that there are productivity gains from AI tools, but this hasn’t necessarily translated into aggregate productivity gains, you know, for the US as a whole, yet, and one reason could be that it’s very easy to measure how much AI has saved a programmer time in terms of generating code or how much more code he can generate in a given time frame. But that doesn’t necessarily mean it translates into proportional gains for the firm as a whole, especially if there are still bottlenecks elsewhere in the firm. Um but there is some uh evidence that uh measured productivity gains really lag investment by several years. So we may not know the answer to this question for some time to come. Elsewhere, I think Mona alluded to the impact in employment. Employment has been strong, but if you look at certain sectors that maybe have high exposure to AI, and I’ll point to professional and business services as one such sector, um, we’re seeing that employment is not back to peak levels that we’ve reached even one, two years ago. Um, so professional and business services, for example, is 1.4% uh lower today than it was more than two years ago. And that’s in light of an economy that’s still been growing. Clearly, we’re not in recession. Um, so I think the employment sector is maybe where we’re gonna see some of the impact first prior to seeing it in the productivity data.

Kenneth E. Bentsen Jr.: So let’s turn to equities in the broader market um picture. Mona, emerging markets have been one of the strongest performing areas this year, but Korea and Taiwan uh now make emerging markets increasingly technology and AI heavy. Are investors really getting diversification when they’re buying these markets, or are they buying just another version of the AI trade?

Mona Mahajan: Yeah, um, you know, it’s a fair question. And look, it’s it’s not only um Korea and Taiwan make up a huge part of EM, three companies alone make up about a third of the EM basket. And those are three semiconductor companies. And so uh this concentration risk we’ve been seeing in in US markets certainly has now also been very notable in emerging markets, equities in particular. Uh all that being said, for those investors that want an alternative to the US tech trade, uh, EM is there and it’s growing rapidly and it’s um becoming highly competitive with a lot of the US players, US models, US large language models, et cetera, uh, that are emerging from the EM space. In addition, valuations, of course, relatively, um, if you even look back historically at the relative discounts, are relatively lower, and they have the same earnings trend and earnings uptick uh, you know, over the next 12 to 18 months as well. And so, yes, it is an alternative to the US tech story, another way to probably play AI, uh, but it is a diversifier, we think, um, still in this uh in this backdrop. And so uh the other part of the story we’d say is um when as we think about how to play equities broadly, we look at it from kind of three different lenses. One is the market cap lens. And so we continue to like US large and US mid. So the large cap space will give you that exposure still to the tech AI story for the large part. But the mid-cap is where you’re gonna start to see some of that catch-up potential and broadening of market leadership. Uh, we then do look at it from a regional perspective. Uh, we continue to like US. We do like EM, although we’re monitoring that. We’re gonna see if if that story may be heading towards you know near-term uh peak, but we also like international value parts of the market. So uh when you think developed non-US, uh, I think Europe, Japan, there’s value parts of those markets that we think remain compelling. And then the third layer we look at is sector. And we talked a little bit about sector earlier, um, but in the US, we do like the industrials and comp services. And so different ways to um diversify portfolios, think about portfolio positioning. If you are a balanced investor and like equities and balance it with some of the bond markets uh that we talked about earlier, an interesting stat, you know, one of the best predictors of long-term uh investment grade bond returns is where its starting yield is at. And so we’re at a starting yield that is back towards a nice, you know, elevated level that could have an outcome that is uh positive for your total return profile as well.

Kenneth E. Bentsen Jr.: And and you’ve done some interesting research based on data from uh 1990 to 2025 shows that shows higher long-term equity returns, three year, five year when investing is at all-time highs versus any other day, which is kind of counterintuitive. Can you explain your methodology of how investors should react to these types of findings?

Mona Mahajan: Yeah, absolutely. You know, look, I one of the questions that we would get a lot, um, especially over the last few years, but certainly over the last six or 12 months, we’re back at all-time highs, despite you know, some of the noise, the volatility, uh, we’re back at all-time highs. Should we continue to invest at these levels or should we wait for that pullback? And so that really compelled us to take a look at this data. You know, I know other um think tanks have done similar research, but what we found was pretty compelling between 1990 to 2025, as you noted, um, if you invested at all-time highs versus any other day in the market, uh, your one, three, and five-year returns were actually higher investing at an all-time high than um investing any other day in the market. And three-month returns, we will say, so if you think shorter term, yes, investing at a high would yield a lower return. But otherwise, investing at all-time highs is not a bad thing. In recent years, in particular, we have seen a really nice momentum play in markets as well. So probably you’d be investing at a period of higher momentum as well. Um, but all that to say if you have a strategy in place where you are dollar cost averaging or investing every year, every month, every quarter, um, no need to alter that strategy for back at all-time highs. The history and the data does not support it. And so that’s what we want to make sure that we’re communicating. Don’t play, you know, no, your investors are notoriously not great at timing market bottoms and market tops, and nor do they need to. So that was the punchline of that data.

Kenneth E. Bentsen Jr.: I’m just curious, though, you know, um, because it’s interesting. I mean, it’s really interesting. I mean, I mean, they were sort of saying that sure there’s some really short-term periods, three months, five months, but but when you’re looking you know, when you’re thinking long-term, uh not no such thing. But what what would be the longest stretch of time uh since 1990 where the market did fail to reach a new high?

Mona Mahajan: Yeah, yeah. So there was a stretch of time um between 2000 and 2007. So it was after the 99, 90, 2000 dot com crash where there were no all-time highs reached. And then there was another period, I believe it was 08 to 2013. So after the um after the financial crisis, where there was no all-time high reached. But over this night, you know, what is it, I guess, 35-year period, there was over 700 days of all-time highs. So, you know, every time you hit a new eye along the way, uh, that does count. But um, to your point, you know, if we do hit a period that is deep prolonged bear market, that is recessionary, uh, there could be uh a big stretch of time before you recover back to all-time highs. And on average, it does take two to three years to recover many of those losses. But um, the good news is from our perspective, history shows us that those recessionary periods or deep prolonged bear markets tend to happen when you’re in a recession or entering a recession, or the Fed is raising rates aggressively. So, or there’s a unknown unknown like the pandemic, but uh, we don’t see a recession on the horizon. We’re hopeful the Fed doesn’t have to raise rates aggressively, maybe you know, once or twice. And the unknown unknowns are harder to handicap. But for the most part, um, this is an economy that’s been positive growing, positive earnings growing, and uh the Fed has been largely on the sidelines. And so um we’re hopeful that the backdrop remains favorable. Uh, and if not, you know, use those periods of volatility as an opportunity too, is what the data is showing us.

Kenneth E. Bentsen Jr.: And and what would you say are the you know biggest risks that markets are underpricing today and you know what might cause you to become less uh you know constructive or positive on equities?

Mona Mahajan: Yeah, it’s a good question. You know, I think I’d say first and foremost is the inflation risk. Um, and as I mentioned earlier, uh inflation, the headline inflation has been above 3%. And we know why energy prices are elevated and even food and energy broadly are elevated. It hasn’t quite seeped into core inflation. We are watching core inflation closely because that’s really what the Fed can impact as well. They can’t control oil supply, et cetera. But raising rates um can dampen demand and impact the core part of the inflation story. So if core inflation were to show meaningful rate acceleration, we think that would be a big risk. And the other one is inflation expectations. If inflation expectations start to run away and become unanchored, we think that would be a cause for the Fed to really step in and uh make some more dramatic moves in its rate policy. Uh, you know, third one I’ll point to is the geopolitics. It’s very hard to handicap, but the uncertainty continues to be an overhang on the markets. And so we’re hopeful it moves in the right direction, um, but it’s it’s a risk that’s outstanding.

Kenneth E. Bentsen Jr.: So let’s let’s let’s close uh with what our audience maybe should watch for uh this month. Mono, I’ll start with you. Um you know we have midterm elections coming up uh in a little less than two months, I guess, at this point. Um markets have you know fared fair fared well during this period. Are there any market shifts that investors should be on the lookout for?

Mona Mahajan: Yeah, um, good question. So first and foremost, we’ll we’ll watch the Fed meeting uh on September 16th, but after that, all eyes will start to shift towards that midterm election period. What history shows us, and actually this history is pretty consistent if you go back, I think, from uh through the 1930s, period before elections, which is November 3rd this year, tends to be volatile. You know, there is uncertainty on how this uh, you know, how this will play out, who wins in the House, who wins in the Senate, et cetera. But the period after midterm elections, especially those last couple of months, uh, markets tend to rally. And it may be partly because the uncertainty is lifted. Um, but also keep in mind the incumbent party tends to lose seats in the House and Senate, uh, regardless of what party the incumbent is. Um, and that creates an atmosphere of gridlock in Congress. And so why do you know markets actually favor that gridlock? Well, because you know, it means less risk of or less chance of new regulation, new legislation, a little bit more operating transparency. So markets certainly welcome a period of gridlock. We may be heading in in that direction after this midterm election season, we’ll we’ll watch closely. Uh, but from a market perspective, uh, we wouldn’t be surprised, especially after a nice run, you know, through the first half of the year, to see some volatility ahead of midterms, uh, which we may be getting already, and then perhaps uh a better year end. Now, history doesn’t always repeat itself, but maybe it’ll run.

Kenneth E. Bentsen Jr.: And and Heidi, you know, looking at uh at what to watch for uh from a market data perspective, maybe tell us what about what you covered in the latest edition of the SIFMA Insights uh market metrics and trends report.

Heidi Learner: Sure. Um, this month we actually looked at corporate issuance. I mentioned that we’re up uh more than 26% year to date. And this is especially notable given uh the backdrop of rising interest rates and all the talk that we’ve been hearing about growing hyperscaler issuance. So, what we did is we looked at debt ratios and we found that even with accelerating capex, free cash flow per share and returns on capital were higher for the information technology subsector of the SP 500 than for the SP 500 as a whole. And obviously, this information technology sector includes the likes of Microsoft and NVIDIA and Sandusk and all the usual players. Um we found that even with rising net debt to EBITDA in this sector, uh, the sector’s median cash flow, uh free cash flow coverage ratio uh stands at nearly 15 times. Um, so we think there’s substantial capacity to meet obligations based on internally generated cash flow, and we’re comfortable with the abilities of uh these firms to service their current debt loads. So um, at least for now, um the high level of hyperscaler debt issuance doesn’t uh raise too many concerns for us.

Kenneth E. Bentsen Jr.: Well, that wraps up our discussion for today. Mona and Heidi, I want to thank you all very much for being with us today and for your thoughtful insights and discussion. And I want to thank all of our listeners for joining us uh to learn more about SIFMA and our work to promote effective and resilient markets, please visit SIFMA.org. And we’ll look forward to seeing everyone uh in October for our next market uh snapshot. Thank you.