The Price of Money Is Becoming the Market’s Biggest Test
Earnings and growth are holding up. Rates, oil, and inflation are driving a more cautious macro view. The bull market is still standing on solid ground with decent growth and great earnings. However, the macro view has shifted in the last month. It’s no longer really a question of whether growth holds up. It’s a question of how much pain stocks can take from higher rates, pricier oil, and inflation that won’t quite go away.
The 10-year Treasury has pushed past 4.95%, close to 5%. Oil is back above $100. Meanwhile, the August jobs report came in stronger than expected, and inflation is still above the Fed’s 2% target.
None of that says the economy is in immediate distress. It shows that the price of money has gotten expensive, and it’s staying that way.
Earnings are still carrying this market
Corporate profits remain the primary support for equities. It’s getting harder to justify paying up for a stock when the 10-year Treasury is nearly 5%. To justify premium multiples, companies need to give investors something real in return: growing profits, guidance for more growth, free cash flow, and a business that earns back its capital. Selecting the right stocks matters in this market. Names that can grow earnings and generate cash can still do well here; names whose whole story is about growing the PE will have a much harder case.
The 10-year is the thing to watch
The issue this past month is the bond market. Yields above 4.95% on 10-year Treasuries raise borrowing costs everywhere while giving investors a safe place to put money without buying stocks. It’s not just a U.S. story: the ECB raised rates in September on inflation worries, pushing yields higher globally. At these levels, what you pay to borrow starts to matter almost as much as what a company earns.
The labor market didn’t crack—it held
A month ago, the labor market looked like the weak link. August put that worry to rest: 162,000 jobs added, well above expectations, unemployment steady at 4.1%, and prior months revised up. That’s good news on its face; it supports spending and the consumer. It takes recession risk off the table for now. But it also gives the Fed room to keep leaning on inflation instead of worrying about the economy and jobs, giving the Fed more time to keep rates where they are, or higher.
Oil and inflation are moving higher again
Inflation had been heading in the right direction; that trend is now being tested with the current PPI and CPI data. Headline consumer inflation remains elevated. Oil above $100 is driven largely by the conflict in the Middle East. Energy costs are starting to filter into shipping, manufacturing, and consumer prices. August producer prices didn’t help, coming in at 5.4% year over year. This means the Fed has less room to maneuver to bring inflation down, and the market expects it to address it in the next FOMC meeting.
Stocks have shrugged off quite a bit this year — oil back over $100, yields flirting with 5%, fighting overseas, a Fed that keeps changing its tune. That’s real resilience, but it’s also starting to look complacent. Treasuries near 5% give investors additional options, and stock prices haven’t reflected that. Volatility is still low, which is odd given what’s going on underneath. The market has stopped paying investors a premium for risky valuations.
Looking forward
We’re still constructive on the economy and the market. Earnings and growth are the two things we watch most, and both are fine — the labor market’s holding, companies are still growing profits. But the ground under that has gotten more fragile: yields near 5%, oil above $100, sticky inflation, rate hikes in Europe, and valuations priced for perfection.
Earnings remain the primary support for this bull market, but valuations are becoming increasingly difficult to ignore. The S&P 500 is trading at roughly 19.3× forward earnings, implying a forward earnings yield of about 5.18%. With the 10-year Treasury around 4.95%, this leaves only about a 23-basis-point spread between the S&P 500’s earnings yield and the risk-free Treasury yield. Stocks are riskier, with very little reward overall. If we are entering a higher-for-longer environment and the cost of capital continues to rise, earnings durability and financial strength matter more. Companies with durable earnings, sustainable growth, expanding margins, strong free cash flow, and solid balance sheets are positioned to absorb higher financing costs and a more challenging economic environment.
Opportunities are still in the market. We emphasize earnings quality and financial strength rather than simply following price momentum and the crowd. When money is cheap, the market can be forgiving. When money gets expensive, companies increasingly must earn their valuations. We continue to favor quality/cash-flow names in portfolios over high-multiple stocks without sustainable growth.
Earnings are keeping the bull market intact, but the price of money is making those earnings more expensive to own.
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