📊 Yardeni Research — Intelligence Hub

Central banks in the US, Europe, and Japan all raised their policy rates over the last two weeks. Bond yields are rising nearly everywhere. Neither development has broken the global stock bull market, as earnings forecasts keep getting marked up.

The Stay Home and Go Global investment strategies have been tracking each other fairly closely in recent months, with limited dispersion between the two. The divergence instead has been across individual markets.

Here's more:

I. Stay Home vs Go Global

The ratios of the US MSCI to the All Country World (ACW) ex-US MSCI in dollars and in local currencies remain on downtrends relative to their early-2025 highs (charts). However, they have been relatively flat so far this year.

The major stock market index performances show the same. The US MSCI is up 11.7% ytd in dollars versus 12.9% for the ACW ex-US MSCI (chart).

Among country MSCIs, Brazil leads the mtd rankings at 3.6% in dollar terms, with Taiwan at 2.8% and South Korea at 1.0% (chart). The US is down 0.5%, ahead of the ACW ex-US at -2.0%. Germany and Switzerland trail at -6.0% and -5.0%.

II. Earnings & Valuation

Consensus EPS estimates outside the US are getting revised up across the board. The ACW ex-US MSCI's 2026 consensus earnings growth estimate is now 38.2%, up from 13.3% at the start of the year (chart). The 2027 estimate is 15.7%. South Korea leads at 335.6% for 2026, with the emerging markets aggregate at 74.6%.

The US MSCI trades at a 19.4 forward P/E versus 12.6 for the ACW ex-US, 15.6 for Japan, 14.2 for the European Monetary Union (EMU), 9.7 for Emerging Markets, and 5.0 for South Korea (chart). Korea is at a 14.4-point discount to the US.

Profit margins explain the US valuation premium. The US MSCI's forward profit margin is 16.6% versus 13.4% for Emerging Markets, 12.6% for ACW ex-US, 10.5% for the EMU, and 10.1% for Japan (chart). Every one of them has been rising.

III. Global Bonds

Yields are still climbing, and equities seem to be reading it as a sign of economic growth, alongside other less bullish developments such as higher-for-longer bond yields and fiscal excesses. The UK's 10-year government bond yield is 5.30%, the US's is 5.01%, France's is 4.57%, Germany's is 3.52%, and Japan's is 2.98% (chart). The US is at the top of the 4.00%-5.00% range we call the "old normal." China remains the exception, at 1.72% and still drifting lower. Its bond market continues to reflect deflation expectations while all others reflect the opposite.

IV. Japan

The Bank of Japan (BOJ) raised its policy rate by 25bps to 1.25% on Friday, the highest since 1995 (chart). The yen weakened on the decision, largely due to two dissents by board members appointed by Prime Minister Sanae Takaichi. Governor Kazuo Ueda said monetary policy has entered a new stage and declined to rule out more consecutive rate increases and larger rate increases.

The inflation data explain the caution. Headline CPI was 1.9% y/y in August, with the core rate at 2.0%, while the PPI was 7.6% (chart). The BOJ is tightening in response to a cost shock, not a demand boom.

Japanese rates have moved regardless. The 2-year government bond yield is 1.84%, well above the 1.25% policy rate, and the markets expect the policy rate to reach as high as 2.00% by the end of 2027 (chart).

Meanwhile, Topix Banks closed near recent record highs (chart). Both have gone nearly vertical over the past two years.

The Financials sector is up 38.9% ytd in the Japan MSCI, second only to Information Technology at 44.3% (chart).

V. Gold

Gold has been weak recently as major central banks have been raising policy rates (chart). However, it found support at an uptrend line that started in 2023. We are still targeting $5,000 by the end of this year.

Two shocks hit the stock market last week. On Monday, the heads of the major AI labs called for slowing the development of frontier models, and chip stocks sold off hard. On Wednesday, the FOMC raised the federal funds rate by 25bps to 3.75%-4.00%, the first hike since July 2023, and the updated Dot Plot points to one more this year. The S&P 500 fell 0.1%, with eight of the 11 sectors declining.

The Health Care sector (OW) rose 1.8%, and Communication Services (MW) was close behind at 1.2%. Utilities (OW) fell the most, down 3.0%, while Financials (OW) and Real Estate (UW) both fell 2.3%.

Let's take a closer look at Financials, Communication Services, and Industrials:

(1) Financials. Financials was the second-worst performer this week, but the Fed wasn't the main reason. On Monday, Bank of America CEO Brian Moynihan told the Barclays Global Financial Services Conference that Q3 investment banking fees will come in between $1.6 billion and $1.8 billion, down from $2.0 billion a year earlier.

Moynihan cited Dealogic data showing investment banking fees across the market down about 10%. The IPO window has not helped, with OpenAI ruling out a 2026 listing. Bank of America fell 5.1%, and the group fell with it. Investment Banking & Brokerage declined 4.4% this week, the second-worst industry in the sector, while Regional Banks fell 4.8% and Diversified Banks fell 4.0% (chart).

Analysts also expect the deal boom to fade. They just put it a year out. Their consensus estimates represent earnings growth for Investment Banking & Brokerage companies of 30.7% this year but just 9.7% in 2027 (chart). Moynihan says the fade is happening now.

None of that has dented the fundamentals. Forward earnings is up 12.5% ytd, but the price is up just 1.8% because the forward P/E is down 9.5% (chart).

The Financials sector’s companies collectively trade at 14.7 times forward earnings versus 18.9 for the S&P 500, a discount the sector has carried since 2010 (chart). The sector's forward profit margin is at a record 22.1%. We are retaining our overweight rating on Financials.

(2) Communication Services. Within Communication Services, up 1.2% this week, Interactive Media Services did the work, rising 2.9% (chart).

Monday's selloff ran on fears that a slower AI LLM training race means less demand for compute, as the SOXX gave back 5.5%. Nevertheless, there is a large backlog in the demand for compute as measured by remaining performance obligations of the hyperscalers (chart).

Alphabet and Meta account for 78.4% of the sector's market capitalization and 70.0% of its forward earnings. Interactive Media has a 29.4% forward profit margin versus 21.7% for Communication Services as a whole, and analysts expect earnings to grow 73.0% this year versus 55.9% for the sector (chart).

The sector trades at a forward P/E of 18.4 even though analysts collectively expect an earnings decline in 2027 of 11.3% (chart). Google and Meta represent 70% of the sector’s earnings and the entire growth story. Remove them, and the fundamentals do not support the multiple. We are retaining our market-weight rating on Communication Services.

(3) Industrials. Industrials is down 3.1% mtd and still up 9.2% ytd. Last week's selloff hit its best performers. Construction Machinery & Heavy Trucks and Rail Transportation lead the sector ytd at 29.7% and 20.2%, and last week they were the sector's two worst industries, down 2.1% and 2.4% (chart).

Construction Machinery's 2026 earnings forecast has doubled to 40.1% from 18% in January. A pause in frontier AI model training does not cancel orders already placed. Rail revenue growth for 2026 has jumped to 8.8% from 2.9% in March.

We flagged the sector’s valuation risk in April, and it has resolved in our favor. The sector's forward P/E was 25.5 back then versus 20.9 for the broader S&P 500 index. It is now 22.4 against 18.9 (chart). Electrical Components has been devalued, with its forward P/E dropping from 28.7 to 24.4, even as its forward profit margin has risen to 18.2%.

Industrials still trades at a premium to the S&P 500 multiple on slower earnings growth expectations. The analysts’ consensus for long-term earnings growth is 18.0% compared with 26.6% for the S&P 500. We are retaining our overweight rating on Industrials.

I. Credit

Last week's events confirm our "Proceed With Caution" call in September 15's QuickTakes. The main event was the jump in the 10-year US Treasury yield above 5.00% to an intraday high of 5.22% on Friday (chart). At the end of the day, it closed lower, at 5.18%, after news that Iran proposed reopening the Strait of Hormuz and ending fighting in the Middle East war. The Wall Street Journal subsequently reported that President Donald Trump has told his staff privately that he’s skeptical that Iran will meet his demands and that the US likely will launch a renewed bombing campaign after the November midterm elections.

We suspect that the bond market has been hacked by Bond Vigilante algorithms. They respond to news headlines with huge trades that exacerbate bond market volatility (chart). The US Treasury bond volatility index (a.k.a. MOVE) jumped sharply higher on Friday.

We also suspect that the unwinding of the yen-carry trade might explain the worldwide uptrend in bond yields. Of course, central banks have also been tightening in response to the inflation shock from the Middle East war.

The credit market always sees trouble coming before the stock market does—for example, the news Friday that a big data center project is being halted.

Oracle, SoftBank, and OpenAI are tied together in the $500 billion “Stargate” alliance; OpenAI provides the model demand, SoftBank arranges the massive capital, and Oracle provides the cloud infrastructure to train the next generation of frontier AI models. On Friday, Oracle issued a force majeure notice on Project Jupiter, the flagship 2.45 GW New Mexico data center, because the state denied the 17-mile gas pipeline permit to power its Bloom Energy fuel cells. The banks that funded the construction are stuck with more loans than they planned to hold for now.

II. Performance

So far, the stock market hasn't been troubled by these developments in the credit market. Indeed, the Nasdaq rose to a new record high on Tuesday of last week (chart).

The S&P 500 closed on Friday at 7743.41, only 0.7% below its August 13 record high (chart). Less reassuring, the equal-weight S&P 500 is down 5.2% over the same period. But it remains just above its 200-day moving average.

Concerns about market concentration are back, as the Magnificent-7 have outperformed the Impressive-493 since mid-August (chart).

The Russell 2000 is also down 7.6% from its record high on August 14, though it is still above its 200-day moving average (chart). The index is sensitive to interest rates and recession odds.

III. Earnings

Better-than-expected economic growth has also pushed bond yields higher. Of course, a strong economy generates strong corporate earnings. The forward EPS of the S&P 500 edged down last week from its record high the week before (chart). We expect the uptrend to resume as companies report Q3 earnings in October. The quarter's real GDP is tracking at 5.0% saar, according to the Federal Reserve Bank of Atlanta’s GDPNow model.

Industry analysts slightly lowered their EPS growth estimates for Q3 and Q4 last week (chart). That's typical as a reporting season approaches.

Nevertheless, the uptrends in the forward EPS of the S&P 500, S&P 400, and S&P 600 remain intact.

IV. Valuation

While S&P 500 forward earnings is up 28.3% ytd, the forward P/E is down 12.3% (chart). The index has gotten cheaper as earnings growth outpaced the stock price index.

While the earnings outlook remains very strong, the valuation multiple may continue to fall in response to the concerns we reviewed on September 15 when we advised proceeding with caution (chart). That's why we pushed our 8400 target for the S&P 500 from the end of this year to the middle of next year. We are now targeting 7900 by the end of this year.

V. Sentiment

The bull-bear ratios we follow are mixed (chart). In tandem, they are not providing either a buy or a sell signal.

Consumer spending resilience increasingly has become a balance-sheet story rather than an income-statement story. The personal saving rate has been falling since January 2024 as consumer outlays have outpaced disposable personal income (chart). Many economists believe that this is unsustainable. Not us.

We think that the saving rate will turn negative by the end of the decade as retiring Baby Boomers finance their spending with their sizeable net worth. Indeed, there is a clear inverse correlation between the personal saving rate and the ratio of household net worth to disposable personal income (DPI). As household net worth increases relative to DPI, consumers tend to save less of their DPI.

Inflation-adjusted consumer spending rose at a 3.2% annualized rate in Q2, the strongest pace since Q3-2025, even as real disposable personal income fell at a 1.5% annualized rate, the largest decline since Q2-2022. On a monthly basis, the former has been rising.

If current trends continue, inflation-adjusted consumer spending will exceed total disposable income by 2030 (chart). In this scenario, the personal saving rate would turn negative. This prospect is already prompting the economy’s naysayers to say a negative personal saving rate isn’t sustainable. They conclude that diminishing savings will force consumers to retrench.

However, there are no compelling signs yet that America’s shoppers are about to slow down. August's retail sales report showed a strong rebound in consumer spending, beating consensus expectations and erasing July's pullback. Many of the major components of retail sales rose to record highs in August (chart).

So what helps explain consumers' ongoing strength? A closer look at Baby Boomers' balance sheets provides the answer. Consider the following:

(1) Almost all Baby Boomers are seniors. After World War II, 76 million Baby Boomers were born between 1946 and 1964 (chart). They are currently 62 to 80 years old. They will all be seniors (aged 65 and older) by the end of the decade in 2029.

As a result, the number of households headed by a senior rose to a record 39.3 million last year, the largest of all the other age cohorts (chart).

Households headed by a senior now account for almost a third of all households (chart).

(2) They have most of the wealth. Baby Boomers own an extraordinary share of total household net worth. As of Q2-2026, they held $97.4 trillion of net worth, or a bit more than half of the total (chart). The Silent Generation held another $19.8 trillion, much of which will eventually pass to Boomer households. Together, the total is $117.2 trillion, making the senior cohort the wealthiest in world history!

To be exact, Baby Boomers currently account for 53.0% of total US household net worth (chart). Together with the Silent Generation, they account for 64.0% of household net worth.

(3) They hold lots of assets. Baby Boomers also own a disproportionate share of the assets that have appreciated in value, such as stocks and real estate. They hold $35.2 trillion, or 55.0%, of household corporate equities and mutual fund shares (charts).

Baby Boomers also own $20.6 trillion, or 41.0%, of all household real estate wealth, the largest share of any generation (charts).

In other words, Baby Boomers are heavily exposed to the assets that have generated some of the most positive wealth effects on consumption in recent years.

(4) They are less sensitive to higher interest rates. Higher interest rates are bad news for young households. For most Baby Boomers, however, they are a boon. Baby Boomers currently hold roughly $9.6 trillion in deposits and money market funds (chart). The Silent Generation holds another $2.3 trillion. Higher short-term interest rates have boosted interest income for many older households.

(5) They've paid down much of their debt. They've reduced their debt burdens. Baby Boomers account for only 21.0% of total household liabilities, down from 58.0% in 1990 (chart).

Disaggregating these liabilities reveals that the Baby Boomers account for 20.0% of consumer credit and 18.0% of household mortgage loans (charts). Both of these percentages have declined sharply in recent years.

Many Baby Boomers either paid off their mortgages or locked in historically low mortgage rates during the pandemic. As a result, many have little incentive to sell their homes or downsize in retirement. By staying put, they limit the supply of existing homes for sale, boosting house prices and increasing their homeowners' equity (chart)!

The important point is that higher interest rates are not experienced the same way across generations. For younger households, higher rates are mostly a borrowing cost. For many older households, higher rates can also be a source of income, while locked-in low-rate mortgages and limited debt exposure reduce the drag from tighter credit conditions.

(6) They are less dependent on the labor market. Unlike younger households, many Baby Boomers are already retired or approaching retirement, so their spending decisions are less directly tied to monthly changes in wage growth, hiring conditions, or job security. Some may be indirectly affected if their adult children struggle to find jobs or earn enough income to support themselves. However, Baby Boomers' overall financial position is increasingly tied to their balance sheets rather than their paychecks.

Taken together, these factors put Baby Boomers in a unique position to keep spending. They hold much of the wealth, benefit from higher interest rates, and depend less on the labor market than younger generations. In other words, they will remain an important driver of consumer spending for years to come.

Bond yields have risen for many reasons this year (chart). The war in the Middle East and the war between Russia and Ukraine have pushed up crude oil and refined petroleum product prices. Rising interest rates in Japan are forcing hedge funds to unwind their carry trades. They are paying back their yen loans by selling the higher-yielding government bonds of the US and other countries that they purchased with the proceeds. The surge in the supply of AI-related corporate bonds and the widening US federal budget deficit have also been cited as explanations for the bear market in bonds.

Today, however, the main reason that bond yields rose sharply is that the US economy is booming. Purchasing managers' indexes typically are not huge market movers, but this morning's readings from S&P Global caught the market by surprise. The services PMI jumped to 58.7 in September, its highest level in nearly five years, from 56.5 in August. Its manufacturing counterpart soared to 57.0, a level not seen in more than four years (chart).

September's regional business surveys from the New York and Philadelphia Feds confirmed the S&P Global manufacturing data and suggest that the national ISM M-PMI also rose sharply in September (chart).

This suggests that the economy's increasing strength this year may be one of the more important explanations for the rise in bond yields. In combination with the inflationary impact of the wars mentioned above, the Fed has been forced to pivot from thinking about more rate cuts at the beginning of this year to a rate hike in September, with another one or two hikes likely before the end of this year.

Interestingly, most of this year's increase in the 10-year Treasury bond yield is attributable to the comparable Treasury Inflation-Protected Securities (chart). The former rose 94bps, while the latter rose 84bps. The spread between the two is widely used as a proxy for the 10-year expected inflation rate. It has been range-bound between 2.0% and 2.5% since 2022.

Since 2023, the TIPS yield has closely tracked the Weekly Economic Index compiled by the Federal Reserve Bank of New York as a weekly indicator of real GDP growth on a y/y basis (chart).

We expected the 10-year bond yield to remain in the 4.00%-5.00% range this year. We aren't giving up on that range just yet; it mirrors the range during the five years before the Great Financial Crisis (chart). Nevertheless, the risks now clearly point to more upside in yields. A relief rally in bond prices would probably require a resolution of the war in the Middle East that would lower oil prices. Another possibility is that US Treasury Secretary Scott Bessent will act to bring bond yields down by buying back more Treasury bonds and issuing more Treasury bills.

As a result of today's news, the federal funds futures market is now predicting three to four 25bps rate hikes over the next 12 months (chart). Two of them are expected within the next six months.

The 2-year US Treasury note yield is predicting four rate hikes over the next 12-24 months (chart).

So far, the bond yield remains below the growth rate of nominal GDP, which was 6.6% y/y during Q2-2024 and will probably be even higher during Q3-2024 (chart). In the past, especially during the 1980s, the Bond Vigilantes pushed the bond yield above nominal GDP to slow the economy. They haven't done that so far. The risk is that they will do that if the Fed fails to subdue inflation.

And what about the federal deficit and debt? Better-than-expected economic growth might help to reduce the federal deficit by boosting tax revenues. However, higher interest rates will increase the debt's net interest costs. The only somewhat comforting development is that the rise in the federal debt relative to GDP since 2009 from about 25% to 100% currently has been partially offset by a drop in private nonfinancial private debt relative to GDP from 200% to 166% over the same period (chart).

I. The Silver Tsunami

The “silver tsunami” refers to the large wave of Baby Boomers moving into retirement and the rise in the number of older households. That demographic shift is increasingly reshaping America’s consumer economy, as older households account for a growing share of income and spending power.

The scale of that shift becomes clearer when viewed against the broader expansion of the household sector. The US had 137.1 million households in 2025, more than twice as many as in the late 1960s (chart). That expanding household base has created a much larger pool of consumers earning and spending income.

Just as important is the change in the age composition of those households. The number headed by someone 65 or older has climbed to 41.9 million, far above any other age group (chart). Most younger cohorts have grown much more slowly. That's because by 2029, everyone in the large Baby Boomer cohort will be 65 years old or older, and they are living longer.

As a result, the 65+ group now accounts for 30.6% of all US households, up from roughly one-fifth around the turn of the century (chart). Nearly one in three households is now headed by a senior.

Over time, the 65+ cohort has taken up a steadily larger share of the household sector, while the shares represented by several younger age groups have declined (chart).

Income follows a clear life-cycle pattern. Household income generally rises through the working years, peaks in middle age, and then falls after retirement. Mean income was $163,600 for households headed by 45- to 54-year-olds in 2025, compared with $92,400 for the 65+ group (chart).

Median income tells the same basic story. It is highest among households headed by 45- to 54-year-olds and lowest among households headed by seniors, confirming that the pattern is not simply being driven by a small number of high-income households distorting the mean (chart).

But here is where the silver tsunami starts to matter for aggregate spending power. Seniors earn less per household, but there are a lot more of them. Multiplying mean income by the number of households shows that the 65+ group collectively received $3.87 trillion in money income in 2025, more than any other age cohort (chart).

That has pushed the senior share of household income sharply higher. Households headed by someone 65 or older accounted for 22.3% of aggregate household income in 2025, roughly double their share in the late 1960s and now the largest of any age group (chart).

The overall household income pool has also become enormous. Total money income reached a record $17.37 trillion in 2025, up substantially over the past decade (chart). This provides a large base of purchasing power to support consumer spending.

But that income is not evenly distributed. The highest-income fifth of households received 52.4% of aggregate income in 2025, while the top 5% alone received 23.5% (chart). The lowest two fifths together received just over one-tenth.

Mean income was $331,800 for the highest quintile and $594,500 for the top 5%, compared with just $19,100 for the lowest quintile (chart).

Taken together, the story is straightforward. America has more households, those households are increasingly older, and a growing share of income is attributable to older and higher-income consumers. That helps explain why aggregate spending remains resilient even as younger and lower-income households face more financial pressure. It also fits our “G-shaped” economy thesis: Consumer strength is increasingly supported by generational wealth, not current income alone.

Baby Boomers have accumulated enormous wealth over their working lives and can continue to spend out of those balance sheets in retirement. Indeed, household net worth reached $185.6 trillion in Q2-2026, with Baby Boomers alone holding $97.4 trillion (chart). That wealth is a key reason the silver tsunami remains a key driver of consumer spending.

II. The Golden Economy

The latest economic data suggest that the US economy remains on a solid growth path. Consumer spending remains strong, hiring is picking up, manufacturing activity is improving, and expected Q3 GDP growth is running at a robust pace. Let's take a closer look:

(1) Consumer spending. Redbook same-store retail sales rose 8.2% y/y during the week ended September 18, remaining well above the pace seen through much of the past several years (chart).

(2) Hiring activity. The latest ADP weekly data suggest that labor demand remains strong. Private employers added an average of 20,000 jobs per week during the four weeks through September 5, the most since June 20 and the third consecutive weekly increase (chart).

(3) Manufacturing activity. The average of the New York and Philadelphia Fed manufacturing indexes remained elevated at 22.7 in September, suggesting that manufacturing activity continued to expand during the month (chart).

(4) GDP. The Atlanta Fed’s GDPNow model currently estimates 5.1% real GDP growth (saas) in Q3 (chart). Real final sales to private domestic purchasers are expected to rise 4.7%, the strongest since Q2-2021. Consumer spending is expected to increase 4.1%, the strongest since Q1-2023, while business investment is on track for its strongest three-quarter stretch since 2021.

There was lots worrying investors last week, and there still is. But the stock market has a habit of climbing a wall of worry. It seems to be doing so now.

Investors have been watching analysts raising their earnings expectations faster than stock prices have been rising (chart). As a result, stocks have gotten cheaper, assuming that analysts' exuberant earnings expectations are rational. Investors may be coming around, gaining more confidence in FEMO (i.e., fabulous earnings momentum).

If the forward P/E of the S&P 500 has bottomed and starts moving higher again, it will be because the price index is rising faster than forward earnings.

In particular, investors may be rethinking the valuation of the S&P 500 Information Technology and Communication Services sectors, especially the Magnificent-7 and the S&P 500 Semiconductor industry. They've all gotten cheaper on a forward P/E basis, as analysts' earnings expectations have outpaced their stock prices (charts).

Let's have a closer look at related recent developments:

(1) The price of Brent crude oil fell below $100 a barrel today. The 10-year Treasury bond yield stabilized just below 5.00%. So the path of least resistance was higher for the S&P 500, which closed at 7,764.70, just 0.4% below its record high of 7,798.99 on August 13. The Information Technology and Communication Services sectors led the S&P 500 higher today (charts). The Nasdaq rose to a record high.

The Magnificent-7 ETF was down ytd through late July (chart). It has rebounded to a record high and is up 10.6% ytd.

(2) That's impressive given all the recent commotion about AI, with plenty of bad press about how AI will kill humans. Investors clearly are betting that AI is here to stay, that it will be a very profitable business, and that it won't kill them. Rather than trying to pick the winners and losers in the AI race, investors are probably buying ETFs that offer diversified portfolios of companies exposed to the AI business.

(3) Information Technology and Communications Services together account for a near-record 48.1% of the S&P 500's market capitalization (chart). And they account for nearly as great a share of the S&P 500’s forward earnings, at a record 46.5%!

Their aggregate forward earnings rose to a record $1.6 trillion during the week of September 18 (chart).

Fears of another 1999 Tech Bubble followed by a Tech Wreck have been blown away by the drop in the two sectors' combined forward P/E from 29.0 late last year to 19.5 currently, as earnings expectations rose faster than the sectors' stock price index (third chart above). In other words, the sectors are relatively cheap, especially given their rapid earnings growth.

(4) We are sticking with our recommendation to market-weight the two sectors simply because they already account for almost half of the S&P 500's market cap and earnings.

(5) What about our new year-end targets of 7,900 by the end of the year and 8,400 by the middle of next year? We will stick with them for now. Our message hasn’t changed: It's a bull market. Our Roaring 2020s target of 10,000 by the end of 2029 remains intact. It could arrive ahead of schedule if investors decide to pay higher valuation multiples for FEMO. Nevertheless, we will continue to update our worry list, as we did last week.

I. Yen-Carry Trade Unwinding?

The “yen‑carry trade” has been a key feature of global financial markets since roughly 2012. It rested on two pillars: ultra-low Japanese interest rates and either a weak or relatively stable yen. Hedge funds could borrow funds cheaply in yen, convert the proceeds to other currencies, and buy government bonds in those currencies. The beauty of this trade is that it increased downward pressure on the yen as long as the Bank of Japan (BOJ) kept its official policy rate near zero (chart).

Today, both pillars are cracking. Since early 2024, after years of near-zero and even negative rates, the BOJ has raised its official policy rate to 1.0%, the highest since 1995, with another 25bps hike expected tomorrow morning. Meanwhile, the yen has become more volatile and is expected to strengthen in response to tighter monetary policy. After weakening to around ¥163 per dollar, near a four-decade low, it has rallied since late July following joint Japan-US intervention in the forex market.

Higher Japanese interest rates and likely further yen appreciation have been forcing traders to unwind their yen-carry trades. This might explain the rout in the global bond market since 2024.

Japan’s bond market confirms the BOJ has more tightening to do. JGB yields have risen sharply alongside the policy rate but remain well above it across the curve (chart). Japan’s Bond Vigilantes are signaling that monetary policy remains too accommodative. Higher Japanese bond yields also encourage Japanese bond investors to return home and reduce their exposure to foreign bonds, especially if the yen continues to rally.

The surge in the 10-year JGB yield has occurred alongside a broad rise in global government bond yields (chart). In our view, the unwinding of yen-funded positions may be a key contributor to the synchronized rise in these bond yields.

Japan is leading the global bond selloff. Its 10-year yield is up 93bps this year, one of the largest increases globally (chart). We will be interested to see how the BOJ's rate decision affects global yields tomorrow.

II. US Capital Flows

Holdings of US Treasuries by all Japanese accounts (both private and official) have declined recently and appear to be trending lower (chart). The Japanese may be unwinding their overseas positions in global bonds too, as domestic yields rise, making JGBs more attractive again.

Total private foreign purchases of US Treasury notes and bonds fell to $263.4 billion over the past 12 months, the lowest since 2022. Purchases of US corporate bonds totaled $392.3 billion over the past 12 months, as foreign investors increasingly favor investment-grade debt tied to the AI buildout (chart).

The shift in the composition of foreign demand for US assets is also clear over the past three months through July. Equities attracted the largest inflows, followed by corporate bonds, while purchases of Treasury notes and bonds were much smaller (chart).

Now get this: Over the past 12 months, foreigners purchased a record $941.9 billion in US equities (chart)! This includes $139.6 billion in US equity purchases by foreign official accounts over the past 12 months.

In aggregate, private net foreign capital inflows into the US remained elevated at around $1.2 trillion over the past 12 months (chart). Net inflows from foreign official accounts totaled just $31.7 billion.

III. US Economic Indicators

The strength of the US economy remains the key reason private foreign inflows into US equities and corporate bonds are so strong. Here is a look:

(1) Jobless claims. The US labor market remains in good shape. Initial jobless claims fell to 196,000 during the week of September 11 and have now come in below 200,000 five times this year, versus just once in 2025 (chart). Meanwhile, the four-week moving average of continuing claims fell to its lowest level since January 2024 and has declined for four consecutive weeks.

(2) Consumer spending. After the August retail sales report showed consumer spending remained robust, Redbook data suggest that strength has carried into September. Same-store sales rose 8.4% y/y during the week of September 11, well above the 5.8% average in 2025 (chart).

Bank of America’s August Consumer Checkpoint Survey also points to robust spending. Card spending per household rose 0.9% m/m and 4.5% y/y, more than four times the 2025 average. Excluding gasoline, spending rose 3.7% y/y, more than 2.5 times the 2025 pace.

(3) Manufacturing. Economic activity in manufacturing also remains remarkably robust. The average of the New York and Philadelphia Fed manufacturing indexes remained elevated at 22.7 in September, suggesting the national M-PMI likely remained comfortably in expansion territory (chart).

The regional prices-paid and prices-received indexes remained high, suggesting that inflation pressures remain troublesome (chart).

I. The Fed

Today marked the conclusion of the September 15-16 FOMC meeting. The Fed's monetary policy committee delivered a widely anticipated 25bps increase in the federal funds rate (FFR), raising the target range to 3.75%-4.00%. Here are five key takeaways from today’s decision:

(1) The decision was unanimous. The FOMC voted 12-0 to raise the FFR by 25bps, showing unanimous agreement that tighter monetary policy is warranted. During his press conference today, Fed Chair Kevin Warsh said the vote “shows our resolve to achieve price stability on a timelier basis.” He pointed to three developments since July that brought the Committee together: stronger economic growth, insufficient improvement in inflation, and increased geopolitical risks. We reckon that the re-escalation of the war in the Middle East and the resulting prospect of more inflationary pressures from higher-for-longer oil prices was the deciding factor.

(2) Inflation remains the Fed’s predominant concern. Warsh said “inflation is too high and has been for too long” and that the Fed’s “predominant focus is on the price stability side of our mandate.” He added that this summer’s inflation readings “do not tell me that underlying trends have meaningfully improved,” with several key measures still running above 3.0% y/y. The Summary of Economic Projections (SEP) reinforced that message, with 2026 headline and core PCED forecasts revised slightly higher and inflation not forecast to return fully to the Fed’s target of 2.0% y/y until 2029 (chart).

(3) The economy is stronger than the Fed thought in June. Warsh repeatedly emphasized that the “American economy appears to be strengthening,” pointing to improving hiring, private-sector earnings, business capital investment, and robust credit flows. He also said he would be “hard-pressed to describe broad financial conditions as restrictive,” a view widely shared across the Committee. The SEP similarly revised growth modestly higher and unemployment lower to 4.1% through 2028 (chart). Warsh also characterized the labor market as essentially at full employment, saying the “labor side of the Fed’s congressional remit is in good shape.” That gives the Fed more room to focus on the inflation side of its dual mandate.

(4) The bar for another rate hike is low. The median of the 19 participants now expects another 25bps hike this year, no cuts in 2027, and only gradual easing thereafter, suggesting that today’s move was not intended as a one-and-done increase (chart). Four participants expect a third rate hike this year, while eight expect it in 2027.

Warsh refused to pre-commit, saying “I’m not in the forward guidance business,” but his reaction function was clear. Underlying inflation must move toward 2.0% “clearly and at sufficient speed,” and he said today that “this standard has not been satisfied.” He also stressed that the Committee had merely “removed a dose of accommodation” and remains “hard-pressed” to describe financial conditions as “restrictive.” Unless inflation moderates clearly, the case for another hike remains intact while economic growth is strong, the labor market is near full employment, and financial conditions are not restrictive.

II. US Economy

As the Fed delivered a hawkish rate hike, the latest economic data reinforced both the remarkable strength of the economy and the persistence of inflation. Here’s a look:

(1) Retail sales. August retail sales rose 1.2% m/m, above the 0.8% expected and the strongest gain since March 2026 (chart). Control-group sales, used in calculating GDP, surged 1.4% versus 0.5% expected. That was the strongest increase in nearly two years. The strength was broad-based, with 12 of 13 categories rising. Gasoline-station receipts jumped 3.1% as prices at the pump averaged about $4.06 per gallon in August, yet discretionary spending remained strong: food services & drinking places rose 1.2%, the most since May, while sporting goods also increased 1.2%.

Nonstore retail sales jumped 2.6% m/m to a record high (chart).

(2) GDP. The Atlanta Fed’s GDPNow tracking model revised its Q3 real GDP growth estimate up from 4.4% to 5.1% (saar). The upgrade was driven largely by stronger consumer spending, with real PCE growth now tracking at 4.1%, up from 3.6% (chart). That would mark the strongest quarterly increase in consumer spending since Q1-2023. Business spending also remains robust, reinforcing the picture of an economy supported by both resilient consumers and strong capital spending.

(3) ADP. A key reason for the resilience in consumer spending is the strength of the labor market. US private employers added an average of 16,250 jobs per week in the four weeks ending August 29, the most since early July (chart). That is consistent with a monthly pace of roughly 65,000 jobs, suggesting that the economy continues to operate at full employment.

(4) Import prices. August's data on import prices point to persistent inflation pressures. The import price index rose 7.0% y/y in last month, the fastest pace since August 2022. Petroleum import prices rose 27.3%. But even excluding petroleum, import prices rose 5.5%, the highest increase since May 2022 (chart).

Import prices from the newly industrialized Asian countries surged 12.6% y/y in August, reflecting AI-related demand for semiconductors, servers, memory, and other electronics outstripping supply (chart). That suggests the AI buildout will remain inflationary for now, before AI brings the fruits of disinflationary productivity growth.

I. Lowering S&P 500 Target

On Saturday, we lowered the subjective odds of our Roaring 2020s base-case scenario from 80% to 70%. We raised the odds of a bearish outcome from 20% to 30%. Today, we are moving our S&P 500 target of 8,400 for year-end to mid-2027. Our new target for the end of 2026 is 7,900. Our end-of-decade target remains at 10,000.

We still anticipate that the economy will grow without a recession through the end of the decade. But the risks of a downturn have increased over the next three to six months, as reflected in the higher odds we assign to a bearish scenario. We are not changing our optimistic 2027 EPS target of $425. Industry analysts are currently projecting $419.53, which should rise to match our forecast by year-end (chart).

Given the recent backup in bond yields, we are lowering our estimate for the forward P/E of the S&P 500 at year-end from 19.8 to 18.6, which lowers our year-end target from 8,400 to 7,900. That’s still within this year’s target range of 7,225 to 8,500 based on 2027 EPS of $425 multiplied by forward P/Es of 17.0 and 20.0 (chart). (For more, see our YRI Earnings Outlook.)

II. Bonds Breaking Bad

The re-escalation of the war in the Middle East has pushed oil prices back above $100 a barrel (chart). The Islamic Revolutionary Guard Corps (IRGC) remains in control of Iran and continues to fight. The IRGC also continues to coordinate the attacks of its proxies on the US and US allies in the Middle East. The IRGC is aiming to push oil prices higher before the US midterm elections by attacking critical oil facilities in the region. Its goal is to cause Republicans to lose their majorities in Congress and weaken the Trump administration.

The risk is that higher-for-longer oil prices continue to push bond yields higher. Elevated oil prices would also imply that a federal funds rate (FFR) hike tomorrow won't be a one-and-done event, but rather the beginning of a rate-hiking cycle. The longer oil prices remain elevated, the greater the risk that inflation becomes entrenched, especially given the economy's resilience.

We had previously argued that a Fed rate hike in July would have pushed the 10-year yield lower by bolstering the Fed's inflation-fighting credibility. That is still possible in response to tomorrow's expected rate hike. But much will depend on the Summary of Economic Projections (especially the Dot Plot), the number of dissenters, and how Fed Chair Kevin Warsh communicates the latest policy decision during his press conference tomorrow.

We've said it before, and will say it again: We will worry about a debt crisis when the bond market worries about a debt crisis. We are starting to worry now that the 10-year US Treasury bond yield may be on the verge of breaking out above 5.00% (chart). We've argued that the "normal" range for this yield should be 4.00% to 5.00%. North of this range reflects a recent combination of "abnormal" developments, including the attack on the Saudi east-west oil pipeline, the Houthi advances toward the Bab al-Mandab Strait, the Treasury's recent lame attempts to tamp down yields, and the Trump administration's deficit-bloating fiscal policies (including $5,000 for every adult US citizen if the Republicans hold onto both their congressional majorities).

The good news is that the increase in bond yields also reflects better-than-expected economic growth. That's how we interpret the surge in the 10-year TIPS yield in recent weeks (chart).

Also comforting is that the bond yield remains well below the growth rate of nominal GDP (currently at 6.6% y/y) (chart). To slow the economy down, the former would probably have to rise above the latter. The bad news is that's what would happen in a debt crisis.

III. Unwinding the Carry Trade

A potentially more ominous possibility is that the global bond market selloff reflects the unwinding of carry trades in response to Japan's tightening monetary policy, which began in 2024, and the yen's recent strength (chart). For years, near-zero interest rates and a weakening yen gave hedge funds an incentive to borrow in Japan's money markets and convert yen loans into other currencies to buy higher-yielding government bonds worldwide. In this way, Japan's reckless easy monetary policy partially financed the fiscal borrowing excesses of lots of governments, including Japan's.

In his congressional testimony today, US Treasury Secretary Scott Bessent said that "global issues" explain why US bond yields have surged recently. He may be acknowledging that there isn't much he can do to offset the bearish impact on bonds of the global unwinding of the carry trade. Nevertheless, we won't be surprised if he pulls out his bazooka to stop any serious rampage by the Bond Vigilantes. In this scenario, the Treasury would significantly increase bond buybacks financed by issuing more Treasury bills.

IV. Bessent's House

On September 8, Bessent famously declared, “I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do. Bet against me if you want.”

Bessent intervened to boost the yen so that the Japanese government wouldn't be forced to sell some of its holdings of US Treasury securities to support its currency. The yen has strengthened a bit recently on expectations that the Bank of Japan will hike its policy rate on Friday by 25bps to 1.25%. That could be more consequential than the Fed's rate hike tomorrow if it triggers more carry-trade unwinding in the bond market (chart).

V. Warsh's Guidance

Fed Chair Kevin Warsh repeatedly has emphasized that he isn't going to say much. He doesn't want the Fed to provide forward guidance. Instead, he wants the Fed to listen to the fixed-income market, which is sending a clear message. The spread between the 2-year Treasury yield and the FFR has widened to roughly 100 basis points, the widest since 2022. That suggests the bond market views the rate increase expected tomorrow as the beginning of a tightening cycle rather than a one-and-done rate hike (chart).

The Federal Reserve raised the federal funds rate (FFR) by 25bps on Wednesday, lifting the target range to 3.75%-4.00%. The vote was unanimous. Fed Chair Kevin Warsh cited stronger growth, insufficient progress on inflation, and rising geopolitical risk as reasons for the move. The Fed's updated projections show inflation not returning fully to target until 2029, while growth and employment forecasts improved. Global bond yields eased a bit.

President Trump hosts Chinese President Xi Jinping in Washington this week, with markets watching for progress on the export-control truce, the countries' new trade and investment boards, and the long-delayed Taiwan arms package. Attention also turns to Fedspeak, with nine officials set to hit the tape. Goolsbee, Williams, Jefferson, Barkin, Barr, Hammack, Paulson, Bowman, and Schmid are all on the calendar.

It's a light week for economic data. Unemployment claims (Thu) and regional business surveys from Richmond (Tue) and Kansas City (Thu) round out the domestic calendar. Flash PMIs (Wed) will offer an early read on September activity, both domestically and overseas. Overseas, the Swiss National Bank meets Thursday.

Here's more:

(1) FedSpeak. Fed funds futures now imply 3.1 rate increases over the next 12 months and 1.8 over the next six (chart). The odds of an October hike stand at roughly 58%, against 42% for a hold. The odds of hikes at both the October and December meetings are at 44%. With October hike odds still close to a coin flip, this week's remarks by the various talking Fed heads carry real weight for a potential revision of those numbers.

Kansas City Fed President Jeffrey Schmid, speaking Friday, supported this week's hike, saying elevated inflation reflects more than just oil prices, with a broad range of goods and services also running hot. He described the labor market as balanced and growth as solid. He is not a voter on the FOMC this year.

The 2-year Treasury yield climbed to 4.75% by Friday's close, up from 4.67% a day earlier, and remains well above the FFR (chart).

(2) Unemployment Claims. Initial jobless claims (Thu), covering the week ended September 18, follow last week's 196,000 print, the lowest since July and a break from five straight weeks above the 200,000 mark. That reading came in below the four-week average of 203,200 (chart). Continuing claims eased to 1,730,000 for the week ended September 4, with the four-week average at 1,774,000 (chart).

(3) Regional Business Surveys. The Federal Reserve banks of Richmond and Kansas City release their districts’ September business surveys this week. The regional M-PMI business activity index continues to track the national M-PMI, which eased to 54.6 in August from July's 55.6 (chart).

(4) Flash PMIs. According to S&P Global's survey, August's final manufacturing PMI came in at 53.9, up from a flash reading of 53.2. Services eased to a final 56.5, down from its flash print of 56.8 (chart). September's flash PMIs (Wed) are expected to ease slightly from those levels.

Global flash and final manufacturing readings tracked closely in August. Japan's flash reading led at 55.1, while France's lagged at 48.0 (chart).

(5) Durable Goods Orders. August's new orders for durable goods (Fri) likely rose to yet another record high as a result of the AI capital spending boom. Most of the major durable goods industries are benefiting from the AI buildout (chart).

(6) Global Interest Rates. The Swiss National Bank (Thu) is expected to hold its policy rate at 0.00% (chart).

We’re still strong believers in our Roaring 2020s scenario, hinging on a productivity boom that strengthens economic growth even as it contains inflation. However, we’ve shaved the subjective odds that we ascribe to that scenario from 80% to 70% and now see a 30% chance that rising geopolitical and other risks could derail it. Today, Ed and Elias update our deepened worry list, detailing the concerning prospects, as well as reiterate the reasons that we remain bullish. We still believe that strong earnings growth will lift the S&P 500 to our 8400 price target by year-end.